Our view: Secure reported in-line 4Q22 results featuring 51% y/y revenue growth, 57% discretionary FCF growth, and $38MM of total shareholder returns. We continue to believe the company is primed for revaluation given its strong FCF metrics and relatively stable production-based revenue streams. Our 2023/24 EBITDA estimates remain broadly unchanged. We maintain our Outperform rating and $11 price target.
Key points:
Results ahead of our expectations. Revenue was 4/2% ($15/8MM) below Street/RBC estimates, while adj. EBITDA was 3/1% ($4/2MM) above Street/ RBC estimates. Results were driven by slightly higher adj. EBITDA margins of 37.4% (Street 35.2%, RBC 36.1%), from high processing, recovery, terminalling and pipeline volumes. EPS of $0.10 was $0.08 below our estimate due to higher interest, other and taxes. SES also repaid US$58MM of principal its 2025 11% senior secured notes in the quarter.
Segment results. Midstream Infrastructure generated service revenue of $169MM and EBITDA of $103MM, versus our estimates of $174MM and $104MM, respectively. Segment EBITDA increased 41% y/y. Environmental & Fluid Management generated revenue of $232MM and EBITDA of $52MM, versus our estimates of $236MM and $58MM, respectively. Segment EBITDA increased 13% y/y.
Free cash flow increasing. Secure generated $315MM of FCF in 2022 (CFO- capex) and ended the year with a net debt/EBITDA ratio of 1.6x. In 2023, we see $280MM in FCF, mapping to a 17% margin of revenue and 11% yield. On the call, Secure noted it sees discretionary FCF (adj. EBITDA - Lease Payments - ARO/Other - Cash Interest) increasing y/y. We have slightly adjusted our 2023/24 EBITDA estimates to $593/618MM ($595/618MM prior). Our revised EPS estimates are $0.78/0.88 versus current Street estimates of $0.68/0.77.
Positioned for valuation accretion. Secure is trading at 2023E and 2024E EV/EBITDA multiples of 5.9x and 5.7x, respectively. Our price target of $11 is based on a 7.0x multiple of consolidated EBITDA as we believe the company is well positioned for valuation accretion from its high FCF margins and relatively stable production based revenue growth.
Valuation versus broader peer set. On a sum-of-the-parts basis, our valuation breaks down into an EV/EBITDA multiple of about 5.5x for Environmental and Fluid Management and 8.0x for the Midstream infrastructure segment. For broader context, Canadian Pipeline and Midstream peers trade at an average FY23E EV/EBITDA multiple of 9.9x