TD Report $5.50 TargetEvent CES reported Q4/22 results.
Impact: POSITIVE
Q4/22 Results: CES reported Q4/22 EBITDAS of $80.2 million, 6.2% above our estimate of $75.5 million and consensus of $75.8 million, driven by stronger-thanexpected revenue performance in Canada (+17%) due to higher-than-expected drilling fluids market share (38% vs. our estimate of 35%), and treatment points (+5%). Details on page 2.
Free-cash-flow Generation Off to a Strong Start in 2023: CES is a workingcapital-intensive business and its cash flows have been consumed by increasing investments in inventory and meaningful growth in receivables since the lows in 2020. In this context, we note that CES has reduced the drawn balance on its credit facility by $50.5 million year-to-date, highlighting that its working-capital needs may have peaked.
2023 Capital Spending Guidance: CES will continue to limit organic growth capital spending in 2023 with a disclosed capital program of $55.0 million (2022 guidance: $50.0 million), split evenly between maintenance and growth. We note that the yearover-year increase in spending (+10%) is below our forecast year-over-year increase in revenue (+17%) and EBITDAS (+21%).
Estimate Changes: Our 2023 and 2024 EBITDAS estimates increase by 4% and 2%, respectively, as a result of modest increases in our revenue forecast. Our 2023 capital-spending estimate is now in line with management's guidance (previously $50.0 million). Details on page 3. Conference Call: 11.00 a.m. ET; dial: 1-800-319-4610.
TD Investment Conclusion With Q4/22 results modestly exceeding our estimates, we continue to maintain our high conviction in the company, including its ability to defend the strong marketshare gains it made during the 2020 downturn, while maintaining strong margin performance in an inflationary environment.
From a valuation perspective, CES' 2023E EV/EBITDAS multiple is relatively in line with the peer group; however, the company features an above-average 2023E FCF yield, highlighting that the business converts more EBITDAS into free cash flow compared with its peers. As a result, we are maintaining our BUY rating and $5.50 target price