Exchange Income Corp.
(EIF-T) C$48.93
Q2/22: Record Results Beat Expectations; Guidance Increased Event
After market close on August 11, Exchange reported Q2/22 EBITDA of $115.1 million vs. TD/consensus of $94.2 million/$102.7 million. Adjusted diluted EPS was $0.90 vs. TD/consensus of $0.60/$0.68.
Impact: POSITIVE
We are maintaining our BUY recommendation and increasing our target price to $67.00 from $59.00. The increased target price reflects the net impact of our higher forecast EBITDA, a shift forward in our valuation period by one quarter, and an increase in estimated net debt. We are increasing our forecasts due to the carry- forward of a portion of the difference relative to our expectations in Q2/22, the company's increased 2022 guidance, and other modelling updates.
The stronger-than-expected Q2/22 results continue to demonstrate the resiliency of Exchange's diversified business and management's ability to make accretive acquisitions in a variety of industries. We believe that Exchange's acquisitive business model that requires external capital while paying out an attractive dividend requires an observation of per-share metrics, leverage, and returns on capital to confirm its value. Exhibit 2 shows that over the past 10 years, Exchange has increased its earnings and normalized-cash-flow power on a per-share basis while maintaining prudent financial leverage and generating returns on capital that are above our estimate of 5-6% for its cost of capital. We estimate that Exchange will have increased its operating cash flow between 2013 and 2023 by an amount that is equal to approximately 11-12% of its total capex, working capital investments, and acquisitions through the end of 2022.
Aviation growth is expected to continue as passenger and cargo volume trends continue, Regional One remains strong, and new medevac and other government- sponsored revenue sources expand. Manufacturing growth is expected due to the recent Northern Mat acquisition and the eventual recovery at Quest, which is being supported by a record backlog.
TD Investment Conclusion
We believe Exchange's overall business diversification positions it better than its less-diversified peers to navigate the challenges presented by the pandemic. We also believe Exchange represents a good investment for yield-focused investors based on its forecast FCF and management's track record of maintaining a disciplined approach to investments at accretive valuations.