Upgrades & TP Hikes - G&M Russel Metals Inc.’s (
) $225-million deal to acquire seven service centres from Samuel, Son & Co. Ltd. “noticeably” diversifies its revenue base, according to National Bank Financial analyst Maxim Sytchev, touting a “significant” expansion in the footprint of its Metals Service Centers vertical in Western Canada and the United States as well as long-term margin expansion opportunities through synergies.
In a research report reviewing Monday’s transaction, he raised his recommendation for the Toronto-based company to “outperform” from “sector perform” previously, pointing its strategy of deploying its net cash position “amid rising commodities prices.”
“Russel is a well-managed company that historically has timed capital deployment well (as well as exits),” said Mr. Sytchev. “While we are not privy to the exact state of the acquired assets, we have full confidence in RUS management doing the right thing by shareholders. Samuel has historically focused on auto OEM clients (market that RUS does not touch), making the deal a net-net positive for both parties. Deploying a net cash balance sheet amid spiking HRC and plate pricing makes sense to us from a cyclical/timing perspective, if one subscribes to infra spending in North America staying stronger for longer. We have been neutral on RUS shares since the launch as the steel commodity backdrop has stayed relatively lumpy, although we are upgrading now given the acquisition and cyclical dynamic of steel pricing; for tactically minded investors, buying into likely strong H1/24E would make sense (as higher pricing works through the revenue and COGS of metal players – both producers and distributors, and the acquisition should provide a bump after synergies flow through in 12 months timeframe).”
The analyst emphasized the deal with Oakville, Ont.-based Samuel, a metals distributor and industrial products manufacturer, emphasized the deal will be immediately accretive on an earnings basis and combines “$5 to $7-million of integration costs expected to be incurred in H2/24; real estate and working capital optimization should be realized 12 to 24 months after closing, with synergies significantly outweighing one-time costs.”
“The assets generated $704-million in revenue and $33-million in EBITDA in 2022, providing a 6-per-cent lift to consolidated 2022 EBITDA (year-to-date margin of 4.2 per cent vs. RUS at 9.5 per cent in 2023 — caveat being future synergies and 2022 being a volatile commodity year — recall RUS’ own EBITDA margin stepped down to 11.4 per cent from 2021 level of 15.8 per cent), which implies a 6.8 times EV/EBITDA multiple for 2022 which is in line with historic acquisitions by RUS, although the valuation metric would be lower once low-hanging fruit cost synergies flow through,” said Mr. Sytchev.
The analyst raised his target price for Russel shares to $45 from $42, “presenting 20-per-cent potential upside (due to adding [Monday’s] M&A + dividends), a fair risk-adjusted return, in our view relative to the market.” The average target on the Street is $44.31.
Elsewhere, others making changes include:
* Raymond James’ Frederic Bastien to $47 from $44 with an “outperform” rating.
“Management is acting on opportunities to enhance returns and compound shareholder value,” he said. “The good news is that with a liquidity position of $740-million pro-forma Samuel, Russel still has significant capacity to attack a range of capital deployment options. So stay tuned, the fun may not be over yet.”
* Scotia Capital’s Michael Doumet to $46.50 from $43 with a “sector perform” rating.
“We expect the deal to be $0.35 to $0.40 accretive to EPS on a full year basis. Using our mid-cycle estimate (equivalent to our 2025E), RUS trades at 6.7 times EV/EBITDA and 11 times P/E,” he said. “The deal uses 20 per cent of RUS’s available capital, but we estimate RUS will be able to rebuild its available capital/liquidity to more than $1 billion by the end of 2024, providing it with ample room to ramp its capital deployment strategy.”