Mullen Group Ltd.
(MTL-T) C$13.50
Assuming Coverage; Q1/22 Review: A Strong Start to 2022 Event
Mullen Group reported Q1/22 results after market close on April 20. EBITDA of $60.3 million was ahead of consensus estimate of $58.3 million. Adjusted EPS of $0.21 was ahead of the consensus estimate of $0.17. With this report, Tim James is assuming primary coverage of Mullen Group Ltd.
Impact: MIXED
We are maintaining our BUY recommendation and adjusting our target price to $16.50 from $17.00. Our view is that sector valuations will remain under pressure through our 12-month target horizon. Historical trucking sector valuation precedents suggest that multiple weakness of the magnitude observed over the last 6-12 months results in multiples that remain below historical averages for a period of at least 12-18 months. In addition, we believe that the current inflationary environment increases the uncertainty in our forecasts related to Mullen's own operating expenses and the impact on volume as consumers adjust to a higher cost of living.
Regardless of the headwinds to sector sentiment, we believe that Q1/22 results, which include 28% y/y EBITDA growth in the face of what we believe will be temporary external challenges, is an impressive outcome that supports additional upside over 12 months. Surpassing consensus expectations in the quarter and demonstrating confidence in full-year guidance reflects the strength and diversity of Mullen's business, along with management's commitment to expanding margins despite potential volume and pricing headwinds. Although high fuel prices represent a significant industry challenge, they could also be a catalyst for the accelerated retirement of less efficient equipment and opportunities for well- capitalized companies.
Mullen is navigating the challenges of equipment and shortages, cost inflation, and a potential softening in consumer demand by focusing on improving efficiencies, raising prices, and maintaining an opportunistic approach to potential tuck-in acquisitions.
TD Investment Conclusion
We are assuming coverage of Mullen Group and maintaining our BUY rating. We believe that the company's limited exposure to TL pricing, commitment to raising rates to offset inflation, improving efficiencies as supply-chain congestion moderates, recent M&A activity, attractive dividend, and valuation support a higher share price over the next 12 months. We are factoring in our estimate of the downside risk to pricing through 2022 and beyond, but believe that the impact on Mullen's earnings will be limited.