Enerflex Ltd T.EFX

From RBC... CHEAP

[BERationale]

Our view: Enerflex's 3Q23 results allayed near-term market concerns with the company generating FCF, recording strong bookings, and reaffirming FY23 guidance range. We remain constructive on the stock given potential for FCF inflection on strong fundamentals and merger integration progress. We maintain our Outperform rating with a $12 price target ($14 prior).

 

Key points:

Quarter allays near-term market concern. Enerflex recorded strong Engineered Systems bookings of $560MM, generated $45MM of FCF (CFO-capex), and reaffirmed FY23 guidance. On the flip side, adj. EBITDA of $122MM was below Consensus of $130MM, f/x losses/fluctuations led to flat q/q net debt levels, and FY23 EBITDA guidance moved to the low end of the range. We believe Thursday's positive stock price move confirms the results were better than the stock's trailing 3-month performance would have predicted.
4Q23 FCF outlook. Enerflex reiterated its FY23 guidance ranges, but expects adj. EBITDA to hit the low end of its US$380-420MM range (inc. f/x losses). We have adjusted our 4Q23 EBITDA estimate to $127MM (Street $133MM) to align with implied guidance levels. Starting at $127MM EBITDA, we see $29-69MM FCF using the mid and high end of annual guidance cost ranges, respectively. Our revised estimate is $47MM.
We see strong FCF metrics in FY24. We see $163MM of FCF generation in FY24E as merger costs decrease, working capital normalizes, and its Engineered Systems backlog is converted. Our FY24 FCF estimate maps to a 25% FCF yield, versus our coverage group average of 16%. To enhance through-cycle FCF stability, we would like to see Energy Infrastructure cash gross margins improve from 3Q23 levels of 54.3% toward (at least) the midpoint of its 55-65% target range.
Discounted valuation ripens the stock for patient money. Enerflex is trading at 2023/24E EV/EBITDA multiples of 3.8x and 3.5x, significantly below its long-term average of 5.0x. We believe the keys to re-rating for Enerflex’s shares remain: 1) Execution on merger integration; 2) Conversion of Engineered Systems bookings; and 3) Achievement of leverage and debt reduction targets.
Adjusting estimates. Our 2023/24 EBITDA estimates are $500/540MM ($525/$575 prior). Our 2023/24 FCF estimates change to $-9MM/163MM (from $-30MM/193MM). Our revised 2023/24 EPS estimates are $0.20/0.69 (previously $0.16/0.87).
Maintaining Outperform rating, with a $12 price target ($14 prior) . Our price target is based on 5.0x (unchanged) our new 2024E EBITDA of $540MM. ...