RBC raises Mullen Group's target from $14 to $15Share price reaction to solid results was puzzling
Our view: MTL posted a better than expected Q2 result - and we were therefore surprised by the sharply negative reaction on the open - and even after having recovered to flat on the day we remain somewhat perplexed. Mgmt also noted that acquisition multiples are moving lower - which we believe could drive a pickup in activity and act as a key catalyst for the shares. While we see value in the shares at current levels (13% FCF yield on our 2023 estimate), we continue to expect an uncertain macro environment to weigh on sentiment and therefore maintain SP.
Key points: Q2 above expectations. MTL reported adjusted EBITDA of $83MM, above consensus $78MM (RBCe: $75MM). Revenue of $494MM was in line to a touch below consensus $498MM (RBCe: $478MM) but margin came in well above on effective cost control and lower pass-through fuel s/c revenue. On a segmented basis, the higher-than-expected results were mostly driven by Logistics & Warehousing (L&W). See Exhibit 1. Overall, a strong Q2 result, especially compared to recent read-throughs from US transportation peers.
2023 guidance unchanged, but admitted it was below trend. Management reiterated 2023 guidance of $300MM; however, suggested that H1 would imply something closer to $320MM (which we are interpreting as the new (albeit unofficial) guide. The macro remains the wildcard; however, we have taken our estimates higher (more inline with the $320MM) to better reflect current trends and point to constructive commentary from the call highlighting that mining and energy demand is solid as well as that warehouses are emptying quickly suggesting de-stocking trends are moderating.
Management sees opportunity for M&A in the S&I segment. Overall, we continue to view M&A as a key catalyst for the shares, with our view being that smaller trucking companies are likely getting stretched in the current environment due to declines in volumes and rates, and that this puts MTL in a favourable position to acquire. We saw this with the recent acquisition of B&R, which management noted on the call they acquired at roughly 2-3x normalized EBITDA. We continue to expect management to leverage MTL’s strong balance sheet (leverage at 2.4x) to execute on deals.
Estimates higher. Our 2023 estimate increases to $325MM (from $306MM) ahead of guidance for the official $300MM guide. Our 2024 estimate increases to $339MM (from $324MM).
Price target increases to $15 (from $14); maintain Sector Perform. Our target price increases to $15, from $14, reflecting our higher 2024 EBITDA estimate. We continue to build into our valuation a pickup in M&A activity. Our target multiple remains unchanged at 6x and is in line with US trucking comparables. Maintain Sector Perform.