CIBC ReportThis analyst wasn't the biggest fan to begin with. GLTA
EQUITY RESEARCH
August 10, 2023 Earnings Update
ENERFLEX LTD.
Q2/23 Recap: EBITDA Outlook Intact, But Reduced Free Cash
Flow Profile Keeps Us On The Sidelines
Our Conclusion
We have fine-tuned our model following the release of Enerflex’s financial
statements and its conference call. We regard the negative reaction in the
shares as being driven primarily by the reduced free cash flow expectation
for 2023 and by a longer-than-expected path to deleveraging. We do expect
Enerflex will achieve its target of 2.5x debt/EBITDA by year-end 2023. We
see management’s focus on further debt reduction after achieving this metric
as also being appropriate, although it does delay the potential for increasing
cash returns to shareholders, likely until later in 2024. While our EBITDA
revisions are relatively minor, we believe a greater demonstration of an
operational tailwind is needed before the shares regain momentum. Given
our more subdued outlook for natural gas-directed drilling in H2/23 for North
American producers however, we believe this tailwind is more likely to occur
in 2024. We reduce our price target from $12 to $11.25 based on 4.5x 2024E
EV/EBITDA.
Key Points
Reduced facility footprint could drive incremental operating synergies
in 2024: Enerflex reiterated its intention to close its manufacturing facilities in
the United Arab Emirates and Singapore. Management indicated this could
drive $10MM to $20MM in sustained cost savings, along with potential
synergies in shifting manufacturing to its remaining facilities; however, it
likely comes at an equivalent upfront cost. While we expect Enerflex will
incur some of these costs in 2023, we believe the operating cost savings are
more likely to be a 2024 event.