CIBCEQUITY RESEARCH
November 9, 2022 Earnings Update
ALARIS EQUITY PARTNERS INCOME
TRUST
A Variety Of Small Positive Takeaways From Q3 Results
Our Conclusion
Alaris reported a modest top-line beat on common equity dividends and
positive FX impact. The company also indicated that it expects an average positive reset of 3.1% in 2023, which will further enhance the payout ratio. The portfolio continues to perform well, evidenced by a weighted average ECR near an all-time high and no partners below 1.2x. Alaris also announced a small transaction and an unexpected increase in the distribution (albeit a modest one at +3%). We rate Alaris Outperformer with a $19.25 price target.
Key Points
Revenues exceed prior guidance. Excluding gains and losses on
investments, revenue came in at $43MM, above prior guidance of $39MM owing to a stronger USD and additional common equity dividends from Fleet and Amur. Our estimate stood at $42MM (we were above guidance owing to the impact of a stronger USD). G&A expenses came in at $5.4MM, down sequentially and broadly in line with our estimate. The company once again edged up its run-rate G&A expense estimate to $17MM versus $14MM at the outset of the year.
No meaningful change in the performance of private company partners.
As of Q3/22, the weighted average ECR remains greater than 1.75x, which was unchanged sequentially and only slightly lower than the highest level ever. In total, four private company partners experienced a change to the ECR range in Q3. Accscient, D&M Leasing and GWM moved down a band, whereas SCR moved up. Positively, all partners continue to have an ECR above 1.2x. The quarterly distribution/dividend was increased 3.0% and now reflects a yield of 8.4%, supported by a run-rate payout ratio of ~66%.
New investment announced. Earlier this month, Alaris made a US$24MM
investment in Sagamore Plumbing and Heating (consisting of a US$20MM preferred equity investment and US$4MM in common equity). The preferred equity investment was priced at a pre-tax yield of 15%. The business offers a range of commercial plumbing, HVAC and facilities maintenance services in New England. This transaction partly redeploys proceeds from the FNC redemption at an attractive yield.
Valuation looks compelling. Alaris’ run-rate cash flow of $93MM implies a
free cash flow yield of 12.7%. Furthermore, the company’s revenue streams are contractual in nature, and Alaris arguably has the best earnings visibility of any company in our coverage universe. If we were to rank our covered companies on the basis of risk-adjusted free cash flow yield, we suspect that units of AD.UN would be a standout. The company also trades at 0.83x P/B, which is a level it has only traded below for 6% of the time over the past ten years