Alaris Equity Partners Income 6 25 Senior Unsecured Debentures T.AD.DB.A

CIBC

[retiredcf]

Have a $22.00 target. GLTA

EQUITY RESEARCH
March 10, 2023 Earnings Update
ALARIS EQUITY PARTNERS INCOME
TRUST

Mixed Takeaways From Q4 Results
Our Conclusion

In our view, Q4 results were somewhat mixed but contained nothing that was
thesis-changing in general. Revenues exceeded prior guidance on an
unexpected catch-up payment from PFGP (with more to come), but the
weighted average earnings coverage ratio (ECR) dipped slightly. LMS
dragged the ECR down as the company continues to contend with elevated
steel prices. Fortunately, the impact is greatly mitigated by the diversification
of Alaris’ portfolio. The dividend yield of 7.5% is well supported by a 70%
payout ratio and a stable stream of contractual revenues.

Key Points
Revenues exceed prior guidance on catch-up payments. Excluding gains
and losses, revenue came in at $51 million, above prior guidance of $47
million owing to $4 million of catch-up payments received from PFGP related
to distributions from prior years that were deferred as a result of the impact of
COVID-19. Alaris expects an additional US$2.4 million from PFGP in 2023.

Guidance on positive resets lowered slightly. Alaris is now guiding to an
overall positive reset of +1.2%, which is down slightly from the previous
guidance. However, the company indicated that the modest downward
revision was largely related to the BCC transaction announced subsequent to
quarter-end which converted preferred equity to convertible preferred equity.

Average earnings coverage ratio dips slightly. The weighted average
ECR decreased from 1.75x in the prior quarter to 1.60x in Q4. LMS stood out
in the quarter as the company’s ECR dropped below 1.0x (down from 1.5x-
2.0x in the prior period). LMS continues to experience margin compression
as a consequence of elevated steel prices. The company has started to build
steel price escalators into new contracts but continues to work through lower-
margin contracts that have been adversely impacted. Gross margins are
expected to improve in the second half of 2023. LMS also happens to be
Alaris’ only uncollared investment with a negative 25% reset expected in
2023. Fortunately, LMS accounts for only 3% of run-rate distributions and
Alaris expects a positive aggregate rate reset for the portfolio overall despite
the challenges experienced by LMS.

A few other partial redemptions. In Q4, Unify provided proceeds of US$17
million to redeem a portion of Alaris’ investment (with US$11 million
remaining). Fleet also redeemed US$7 million (US$28 million remaining).
Revising our estimates. We have made some minor adjustments to our
earnings estimates including the impact of recent redemption activity.
However, the most influential factor driving the reduction in our 2023 EPS
estimate was the removal of an assumed gain on the BCC transaction in Q1
(which was pulled forward into Q4).