Key points:
Results ahead of our expectations. Revenue of $359MM was 1% above our estimate of $355MM and Street of $344MM. Adj. EBITDA of $128MM compared to Street/RBC estimates of $115/118MM. Secure has realized 71% of the $75MM forecast merger integration cost savings. Capital spending of $13MM was below our estimate of $25MM, though the company reiterated its $100MM target for FY22.
Results lead estimates in both business segments. Midstream Infrastructure generated service revenue of $158MM and adj. EBITDA of $92MM, versus our estimates of $150MM and $82MM, respectively. Facility volumes declined q/q, though the company rationalized four facilities which increased overall utilization. Environmental & Fluid Management generated revenue of $201MM and adj. EBITDA of $47MM, versus our estimates of $204MM and $45MM, respectively.
Leading free cash flow margins. We expect Secure to generate $255MM of pre-dividend FCF in FY22 for a peer-leading 18% margin and 12% yield. Given strong FCF generation, we see the company reducing its net debt/EBITDA leverage to 2.0x by YE22 and 1.2x in YE23E (excluding lease liabilities). Secure repaid $90MM debt in the first quarter of 2022, partially aided by a $22MM non-core divestiture.
Estimate changes. We increase our 2022/23 EBITDA estimates by 4/1% to $473/523MM, versus the Street consensus of $452/486MM.
Remains primed for revaluation. Secure trades at 6.5x and 5.9x in 2022 and 2023 EV/EBITDA, respectively, versus its long-term FY1 and FY2 averages of 10.2x and 6.9x. We continue to believe the company is primed for revaluation due to: 1) Favorable free cash flow margin profile; 2) Improving balance sheet which should enable higher shareholder returns; and 3) Eventual removal of Competition Tribunal overhang.
Maintain Outperform rating with a $9.00 price target ($8.50 prior).
Our $9.00 price target is based on a 7.5x multiple (unchanged) of our revised 2023E EBITDA of $523 million and modestly lower net debt. We apply a multiple above OFS peers of 6.4x based on our analysis of stock- specific factors within our valuation framework. We believe Secure is well positioned given its exposure to recurring revenue and increasing mix of longer-term revenue contracts, strong corporate EBITDA and FCF margins