CIBC UpgradeEQUITY RESEARCH
July 21, 2022 Earnings Update
MULLEN GROUP LTD.
Pricing-led Growth
Our Conclusion
MTL’s Q2 results reflect the company’s pricing-led growth strategy, which is
driving a step up in earnings and margins. We view this as a positive given
the Canadian freight market has generally been characterized as having
structurally weaker pricing than the U.S. We see MTL as being in a position
to continue to offset inflationary pressures. Our price target goes to $15.50
from $14.00. MTL is Neutral rated.
Key Points
MTL reported a big Q2 beat and raised its outlook. For context, Q2 EBITDA
came in at $94MM versus our estimate of $66MM (which was in line with
consensus), up 59.2% Y/Y. With these strong results, MTL raised its outlook
and expects to achieve $2.0B in consolidated revenues and $300MM in
EBITDA this year. This compares to its December outlook for $1.6B-$1.7B in
revenue and ~$260MM in EBITDA. While MTL is cognizant of the risk facing
the broader economy, which in turn is causing the company to take a pause
on M&A, it remains optimistic on the freight environment. Demand for its
services continues to outstrip supply.
The best evidence of this is MTL’s pricing initiative with the company noting
that pricing was up ~10% in Q2. It also expects pricing to continue to keep
pace with inflation. As such, we saw the company benefit from a strong
sequential and Y/Y improvement in margins across its segments in the
second quarter. For example, LTL margins expanded 690 bps Y/Y and 160
bps Q/Q, L&W margins expanded 620 bps Y/Y and contracted slightly by 20
bps Q/Q, and S&I margins expanded 440 bps Y/Y and contracted by 230 bps
Q/Q. The significance of this is the Canadian freight market has generally
been characterized by structurally weaker pricing, especially when compared
to the U.S. For example, in Q1, TFII reported Canadian LTL revenue per
shipment (ex. fuel) of US$244.00 versus in the U.S. at US$315.48. MTL’s Q2
results and pricing commentary also reconfirms our view that despite the
significant correction in U.S. spot TL pricing YTD, this is not necessarily
bleeding over into subsegments within the freight market.
We see the benefits of this stronger pricing environment as twofold. First, we
view pricing led growth as being higher quality given this drives stronger
incremental margins, as evidenced this past quarter. Second, for MTL this is
driving a step function increase in its core earnings. Taking Q2 results
suggests an annualized EBITDA in the mid-$300MM range. For reference,
consensus 2023 EBITDA prior to Q2 results was $280MM. Net-net, we
increase our 2022E and 2023E EBITDA for MTL to $317MM (from $264MM)
and $343M (from $280M) to reflect the better pricing environmen