Scotia & RBC Upgrades to Outperform ,Hikes TP - G&M * Mullen Group Ltd. (MTL-T, “sector outperform”) to $19.50 from $19. Average: $17.06.
Analyst: “MTL is one of our top picks this year. Shares were down in 2023 and have also underperformed since the market troughed on October 27, 2023. We believe investors typically discount MTL’s valuation due to its slower growth profile relative to TFII and exposure to the trucking and energy markets at the same time. However, we think the company has proven to be more resilient than its competitors during uncertain times, due to its well-diversified portfolio of businesses by operations and geography. In addition to diversification, we are attracted to MTL’s valuation, low double-digit FCF yield, high dividend yield (5.1 per cent) with a low payout ratio, continued share buybacks, and potential for growth through acquisitions. MTL is one of the most undervalued stocks in our coverage universe with forward valuation at the historical trough.”
While seeing the macro environment remaining “uncertain,” RBC Dominion Securities analyst Walter Spracklin upgraded Mullen Group Ltd. (MTL-T) to “outperform” from “sector perform” on Monday, believing that risk is “fully reflected in the company’s valuation.”
“We are upgrading Mullen shares .... reflecting our view that the company is trading on trough earnings on trough valuation as well as operating in an attractive M&A environment,” he said. “The shares yield mid-teen FCF on our 2024 estimates representing a solid value opportunity with recent M&A in our view being executed at discounted valuations - creating a solid investment opportunity at current levels. Looking ahead, we see current weakness in the trucking space as a meaningful opportunity for Mullen to acquire struggling carriers and see the company as well positioned for when pricing eventually inflects.”
As mentioned, Mr. Spracklin emphasized a pair of factors in justifying his change:
* An “attractive” M&A environment
“We see acquisition multiples as discounted in the current environment and point to Mullen’s acquisition of B&R last year,” he said. “Mullen acquired B&R, a company generating $85-million in revenue, for $21-million, which implies (assuming management drives margins consistent with Mullen’s) an EV/EBITDA acquisition multiple below 2 times. While the purchase price of Mullen’s acquisition of ContainerWorld last week was not disclosed, our view is that current truck pricing weakness is creating an attractive opportunity to acquire struggling carriers at discounted valuations, representing a compelling opportunity for Mullen.”
* A valuation at 10-year lows.
“Mullen shares trade at approximately 6 times NTM [next 12-month] EV/EBITDA or at a mid-teen FCF yield,” he said. “This represents the company’s most discounted valuation in the last 10-years (excluding the initial COVID related market sell-off). Moreover, it is our view that street expectations already reflect current truckload weakness. Key is that our investment thesis is not predicated on an uptick in valuation, although each 0.5 times increase in our target multiple represents $2.50 of upside to our target price. We view an inflection in truck pricing and/or a pickup in M&A as catalysts for a higher multiple (and upside to our base case).”
The analyst increased his target for Mullen shares to $17 from $15. The average on the Street is $17.03.