CIBC ReportEQUITY RESEARCH
August 12, 2022 Earnings Update
EXCHANGE INCOME CORPORATION
Expecting More Upside
Our Conclusion
Q2 was a solid quarter for EIF with results coming in better than we and the
Street had anticipated. In addition to the solid operating results, EIF took up
its 2022 guidance as well as its dividend. EIF’s acquisition of Northern Mat in
the quarter is already exceeding expectations and we expect it will continue
to drive strong growth for the manufacturing division. The dividend raise was
the second consecutive raise demonstrating EIF’s commitment to returning
cash to shareholders. We maintain our Outperformer rating and raise our
price target to $59.00 from $56.50.
Key Points
More Upside To Come: EIF’s Manufacturing division performed well in the
second quarter with strong revenue and margin growth (up 42% and ~620
bps, respectively). Management indicated that demand remained strong
throughout the segment: Alberta operations benefited from the stronger oil
and gas sector; WesTower continued to benefit from the rollout of 5G
systems; and the backlog remains strong in EIF’s precision metal and
stainless tank businesses. The strength in the Manufacturing division – when
combined with the better-than-expected performance from the recently
acquired Northern Mat – led EIF to take up its 2022 guide. EIF is now calling
for EBITDA of $435MM-$445MM, up from $410MM-$430MM. At this time,
the company hasn’t taken up its 2023 guidance, which sits at $500MM-
$530MM; however, the company indicated it will provide an update with Q3
results. We suspect EIF will take up its 2023 guide and we are modelling
2023 EBITDA of $545MM, which infers ~24% Y/Y growth.
Returning Cash To Shareholders Remains A Priority: Returning cash to
shareholders remains a top priority for EIF as was demonstrated throughout
the pandemic with the company maintaining its dividend in the face of
uncertainty, and more recently with two consecutive dividend hikes. While
two consecutive dividend hikes is rare (only the second time in the
company’s 18-year history) management noted that the results this quarter
clearly warranted it. We expect the company to return to a more normalized
schedule of raising its dividend once a year.
Growth Pipeline Remains Robust: EIF has been active on the M&A front
having completed eight acquisitions since the beginning of the pandemic,
and most recently the acquisition of Northern Mat, and noted that its M&A
pipeline remains robust. When commenting on the current M&A environment,
EIF suggested that it is seeing some easing of competition as interest rates
rise particularly on the larger targets that it is evaluating ($100MM+). The
company added that going forward, a large number of the transactions it is
contemplating would be in the $100MM+ range, as well as noting that current
targets being evaluated are almost all tied to one of EIF’s current businesses.