Enerflex Ltd T.EFX

RBC Note - Stupid Cheap

[BERationale]

Our view: RBC hosted Investor meetings with Enerflex’s CEO, Marc Rossiter, Interim CFO, Preet Dhindsa, and VP Corporate Development and Investor Relations, Jeff Fetterly in Toronto and Montreal this week. The meetings focused on merger integration, near-term capital allocation priorities, and free cash flow profile. We remain constructive on EFX shares and believe the stock is positioned for valuation accretion given share price underperformance and improving FCF profile. We maintain our Outperform and $12.00 price target.

 

Key points:

Addressing CFO departure head-on. Enerflex reiterated the recent CFO departure was not due to issues with accounting policies, practices, or financial statement integrity. Looking ahead, the company is searching for a CFO with experience with merger integration and international finance operations. In time, the market will likely look through the hiring misstep but – at the risk of stating the obvious – the next hire has to be successful.
Exterran Integration: Synergy execution and business optimization is top of mind. Enerflex has realized US$50MM of its US$60MM stated synergies target. Importantly, integration of office staff and international sales forces are complete and integration costs should drop to about $25MM next year. Enerflex is consolidating its manufacturing footprint from five facilities to three with the closure of its Singapore and Sharjah (UAE) facilities.
Debt reduction is not far behind in the priority list. EFX will prioritize debt reduction through sharper operational focus and disciplined FY24 capital program. Debt reduction will likely be its priority through the majority of FY24. As for longer-term priorities, we think share repurchases should be considered as it supports future dividend compounding.
Exterran brings new business opportunities to the table. The Exterran acquisition has on-boarded two distinct product lines that expand Enerflex’s market reach in Water Solutions and Cryogenic Gas Processing. Like most of Enerflex’s products, both can be sold or rented.
Improving FCF outlook; but still some moving parts. We see FY24 FCF of $161MM (CFO-capex) as merger integration costs decrease, working capital normalizes, and its $1.6bn Engineered Systems backlog is converted to revenue and cash. Our FY24e FCF maps to a 23% FCF yield (coverage group avg. of 17%). Our FY24/25E EPS adjust by $0.20/0.15 on higher taxes.
Valuation: Eventual sum of the parts opportunity. EFX is trading at 3.5x FY24E EBITDA, a discount to its long-term average and contract gas compression and energy manufacturing peers.