Enerflex Ltd.
1Q23 – Feeling the force
Our view: 1Q23 results were above our expectations as the company built momentum in all three business segments. As noted when we upgraded Enerflex shares to Outperform in March, the company looks on-track to deliver on three key objectives which should allow for an eventual re-rating in the stock. We increase our 2023 EBITDA estimates by 4% and maintain our Outperform rating and $16 price target.
Key points:
Feeling the force: Momentum building across business segments. Adj. EBITDA of $123MM was 9/20% above Street/RBC. Stronger revenue and cash gross margins in Engineered Systems and Service divisions were the key drivers of positive variation to our numbers. Energy Infrastructure revenue was essentially in line, but margins of 54.7% were below our 61% expectation.
Keys to re-rating remain on-track, in our view: We believe the keys to re-rating for Enerflex’s shares are: 1) execution on its near-term BOOM project build-out; 2) Strong backdrop for Engineered Systems bookings; and 3) achievement of financial leverage targets.
• Energy Infrastructure (EI): Capital projects substantially complete. Given 1Q23 completion of its remaining BOOM projects, organic capital spending should decline significantly q/q from $61MM the first quarter to about $32MM/qtr for the remainder of the year. Work has recommenced on its cryogenic natural gas processing facility which is expected to be completed in 2024.
• Strong Engineered Systems bookings. Bookings of $517MM increased 24% sequentially, mapping to a book-to-bill ratio of 1.1x. On the call, Enerflex noted bookings substantially relate to associated gas (i.e., Permian) and liquids-rich (i.e., Montney) plays, with less direct exposure to direct dry natural gas.
• 2.5x net debt/EBITDA target looks achievable. As previously signalled, net debt levels increased q/q to $1.2bn. We expect net debt to trend downward in 2H23, ending the year at roughly $1bn. Enerflex's net debt/ EBITDA reaches 1.9x at YE23 on our numbers.
Adjusting longer-term estimates. We adjust our 2023/24 EBITDA estimates to $538MM/588MM (from $517MM/586MM). We have increased our ES revenue and margins given strong bookings trends. Our EI margin decreases as Enerflex folds in some Exterran assets that were margin dilutive. Our revised 2023/24 EPS estimates are $0.84/1.29 (previously $1.02/1.57).
Maintain Outperform rating and $16 price target. Our price target is based on a 5.5x multiple of our 2024 EBITDA estimate. We believe Enerflex's improved business fundamentals should support an improved valuation vs. current 2023/24 levels of 4.0/3.6x.