Mullen Group Ltd. T.MTL

RBC 2

[retiredcf]

Current and upside scenario targets are $14 and $18. GLTA

Mullen Group Ltd.

Highlights from our meetings with MTL senior management

Our view: The update provided by MTL management during our RBC hosted mgmt meetings focused on: 1) 2022 financial guidance; 2) M&A; and 3) shareholder returns. Overall, we took a positive view on what we believe is embedded conservatism in the financial guidance as well as on mgmt's strategy for acquisitions, which we continue to view as a key catalyst for the shares. These trends are consistent with solid EBITDA growth we have in our estimates, and we continue to see value in the shares at current levels. Reiterate Outperform rating.

Key points:

RBC hosted mgmt meetings. We had the opportunity to host MTL management for (virtual) meetings yesterday. In attendance were Murray Mullen (CEO) and Richard Maloney (SVP). 

Guidance predicated on conservative assumptions; upside likely in our view. Key from yesterday's meetings in our view was commentary surrounding the 2022 guide, which mgmt noted was based on the assumption that the operating environment remains unchanged into next year. We however see upside to guidance resulting from 1) higher pricing; 2) strong energy prices; and 3) M&A (more on that below). We view  capacity conditions as tight and expect a continued economic recovery into next year to drive pricing higher, which mgmt noted was consistent with what they are seeing in current negotiations. Moreover, we see upside in 2020

the OFS segment reflecting strong energy prices, which we expect to drive higher capital spending in the energy patch. Overall, we view the $260MM EBITDA guide as conservative, and have kept our 2022 estimate unchanged at $266MM.

M&A - we expect mgmt to remain opportunistic. We view MTL mgmt as prudent stewards of capital and note that during our meetings they highlighted that target valuations remain stretched. Mgmt did note however that they will remain opportunistic if strategic assets come up for sale. We view CNR's intermodal assets as potentially up for sale, and we would consider MTL as a solid strategic fit. Mgmt noted that they will look at any and all opportunities that are presented, and our view is that this could be one of those.

Shareholder returns. Mgmt reiterated their commitment to shareholder returns during the meetings, and highlighted that they expect to continue to repurchase shares with excess cash. They emphasized that they view their shares as undervalued, and that repurchases therefore remain an effective way to return capital.

Estimates. Our 2022 EBITDA estimate remains unchanged at $266MM, and above guidance for EBITDA of $260MM reflecting our view that guidance is a touch conservative as discussed above. We did however adjust our 2022 dividend estimate to $0.60 (from $0.48) and our capex estimate to $70MM (from $61MM) to align with MTL's 2022 Business Plan. See Exhibit 1