Alaris Equity Partners Income 6 25 Senior Unsecured Debentures T.AD.DB.A

Scotia-At this point I'll take the fvcking $21 target c'mon

[SunsetGrill]

Closing 2021 with Record Levels of Capital Deployment and Solid Investment Portfolio

OUR TAKE: Positive. Alaris ended 2021 with a solid fourth-quarter that came in a touch ahead of expectations, and was characterized by the continued improvement of the overall health of the portfolio and the high pace of deal activity.

Looking ahead, management provided a positive outlook for 2022 and expects another record year. The team sees a very favourable environment, as the rising interest rate environment advantages Alaris ahead of its main competitors, private equity firms, that are highly levered. That said, Alaris also noted that the industry currently remains highly competitive with significant levels of uninvested liquidity from market participants. Management continues to explore the potential to launch a fund to manage third-party AUM, and noted it has received interest from investors. Although still in its early stages, we view this initiative quite constructively.

The company's weighted average Earnings Coverage Ratio (ECR) has now reached a new high, ending the year in excess of 1.8x (up from 1.7x in Q3/21). Management noted that none of its investments has exposure to Russia, and that the portfolio has very little exposure to increases in commodity prices.

Maintaining TP of $21.00 and Sector Perform rating.

KEY POINTS

Q4/21 estimated normalized EBITDA/sh of $0.71 came in slightly ahead of the Street at $0.68 but in line with our expectations. This was down 4% sequentially and year-over-year. Net Cash from Operating Activities per share of $0.61 came in ahead of our expectations and was up just under 3% over last year but down 7% sequentially.

Of the 19 partners, two have an ECR in the 1.0x to 1.2x range, two are in the 1.2x to 1.5x range, three are in the 1.5x to 2.0x range, and twelve have an ECR greater than 2.0x. This quarter, 15 investments had no change in their ECR, three (3E, Accscient, and D&M) experienced an increase in their ECR, while SCR was the only investment to experience deterioration.

Alaris expects a net positive reset of roughly 2.4% for preferred distributions that are scheduled to reset in 2022 and also anticipates the Trust’s payout ratio to be within a range of 60% and 65% based on its current run-rate revenue and expense outlook.

• Quarterly Financials
• Yearly Financials

Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Qtly CFPS from Ops  (FD)	Q1	Q2	Q3	Q4	Year	Price/Cash Flow Ops
2020A	$0.72	$0.38	$0.28	$0.59	$1.98	7.6x
2021A	$0.66	$0.45	$0.66	$0.61	$2.37	7.9x
2022E	$0.53	$0.54	$0.56	$0.58	$2.21	8.6x
2023E	$0.58	$0.60	$0.60	$0.61	$2.38	8.0x

The overall health of the portfolio continues to improve and achieved record level of ECR. AD’s weighted average Earnings Coverage Ratio (ECR) was in excess of 1.8x, the highest it has ever been, and improving from 1.7x in Q3/21. Of the 19 partners, two have an ECR in the 1.0x to 1.2x range, two are in the 1.2x to 1.5x range, three are in the 1.5x to 2.0x range, and twelve have an ECR greater than 2.0x. This quarter, 15 investments had no change in their ECR, three (3E, Accscient, and D&M) experienced an increase in their ECR, while SCR was the only investment to experience deterioration (see Exhibit 1).

 

Exhibit 1 - Health of Overall Portfolio is in Great Shape and Continues to Improve

Source: Company reports; Scotiabank GBM.

 

Q4/21 saw the continuation of an upward trend in Fair Value of Investments per unit despite the redemption of FED in the quarter. The sequential increase was largely driven by a number of follow-on contributions in GWN, BCC, Fleet, D&M and 3E, as well positive fair value adjustments, most notably to PFGP (US$6.7M), FNC (US$4.8M), D&M (USD$3.4M), Brown & Settle (US$1.8M), DNT (USD$1.6M), Accscient (US$1.5M) and Amur (CAD$1.8M). This was partially offset by a decline of US$2.2M in the Edgewater investment and the redemption of FED (see Exhibit 2).

 

Exhibit 2 - Fair Value of Investments per Units Continues Upward Trajectory

Source: Company Reports; Scotiabank GBM.

 

The pace of capital deployment reached a record in 2021 with $358M invested in the year. During the year, Alaris also deployed $51M of investments in common equity positions in certain of its partners. Management noted that it continues to see strong deal activity and that the pipeline remains very strong. That said, the company also mentioned that the industry remains highly competitive with significant levels of uninvested liquidity sitting at the private equity firms. We expect the Kimco redemption likely in 1H/22 and the recent issuance of the hybrid debenture will help fund investments in 2022E, albeit at a lower pace than 2021. We expect capital deployment to slow in 2023E as the company comes up against capacity limits pending additional financing or redemptions.

 

Exhibit 3 - Alaris Capital Deployment History

Source: Company reports; Scotiabank GBM estimates.

 

Modest revisions to our estimates. We have made some largely offsetting changes to our forecasts, which include: 1) updating our royalties and distributions expectations; 2) increasing our capital deployment assumption reflecting the additional capacity following the issuance of the most recent $65M hybrid debentures, and 3) raising our opex forecast in line with the most recent guidance.

Maintaining target price of $21.00 and Sector Perform rating. With relatively modest changes to our forecast, we are maintaining our target price and rating. Our target price is derived from an equal weighting of a 9.5x EV/EBITDA (2023E) and 7.7% NCOA/EV Yield (2023E).

 

Exhibit 4 - Estimate Revision Summary

Source: Scotiabank GBM estimates.

 

AD is currently trading at 8.8% our NCOA/EV (NTM) Yield, almost 1 standard deviation above its three-year average but is trading relatively in line with its three-year average on an EV/EBITDA (NTM) basis at 8.7x. Continued demonstration of the health of its investment portfolio through a complex operating environment and managing its capital prudently to navigate the next phase of expansion is likely to help support the next leg up in valuation (see Exhibit 5).

 

Exhibit 5 - Alaris Valuation – EV/EBITDA (NTM) and NCOA/EV (NTM) Yield

Source: Bloomberg; Company Reports; Scotiabank GBM.

 

Q4/21 results were a touch ahead of the Street but in line with our expectations. Estimated Normalized EBITDA/sh of $0.71 came in slightly ahead of the Street at $0.68 but in line with our expectations. This was down 4% sequentially and year-over-year (see Exhibit 6). Net Cash from Operating Activities per share of $0.61 came in ahead of our expectations and was up just under 3% over last year but down 7% sequentially.

 

Exhibit 6 - Quarterly Summary

Source: Company Reports; Scotiabank GBM estimates.

 

Exhibit 7 - Investment Portfolio Summary

Source: Company Reports; Scotiabank GBM.

 

Exhibit 8 - Company Snapshot

Source: Company Reports; Bloomberg; Scotiabank GBM estimates.

Company Overview

Company Description

Alaris Equity Partners Income Trust is a Calgary-based investment management company that uses innovative financing structures to invest primarily in the preferred equity of well-managed private companies. Alaris looks for companies that have a history of growth, low cyclicality, sustainable free cash flow, and future growth opportunities. As at December 31, 2021, Alaris had investments in 19 companies with a cumulative fair value of almost $1.2 billion.

 

Key Risks

Financial and operational health of existing partners, risks associated with investing in new partners, dependence on stock price to make attractive acquisition, FX, competition with other investment entities, key personnel, private company-specific risk.