Exchange Income Corp T.EIF

RBC 2

[retiredcf]

Their upside scenario target is $75.00. GLTA

February 23, 2024

Outperform

TSX: EIF; CAD 46.79

Price Target CAD 65.00

Exchange Income Corporation

Q4 in line and 2024 guide maintained; no change to our very positive view on the shares

Our view: There is no change to our high conviction recommendation post Q4, with the quarter in line and the 2024 guide maintained. We flag solid FCF generation though as a likely driver of today's positive share price reaction. We continue to really like EIF shares here due to a trailing double-digit FCF yield and what we see as a significant upcoming growth opportunity related to recent contract wins (BC, Manitoba, and AC) and potential contract wins (UK government and SkyAlyne), in addition to positive secular trends, which we expect to favourably affect Northern Mat and the Window business longer-term.

Key points:

Q4/23 results ahead of consensus. EIF reported Q4/23 adjusted EBITDA of $144MM, in line with consensus $143M (RBCe: $141MM). See Exhibit 1. We caught up with management last night with highlights below.

• 2024 guidance maintained; represents +11% growth at the midpoint. Management maintained 2024 guidance of $600MM to $635MM, which compared to consensus $625MM and our $624MM coming into the quarter. Important from the call was commentary that the guidance is underpinned by no improvement in macro and only includes items the company has line of sight to. We view this positively and as reducing downside risk, important given the uncertain macro-outlook.

• Where we see near-term upside. While our 2026 EBITDA estimate implies ~10% CAGR (off 2023) on the back of recent contract wins, we still see upside in the medium-term. Specially, we point to new opportunities with the UK government and the SkyAlyne military training contract, with announcements related to both expected (according to management) by the end of the year. 

• Where we see long-term upside. We see upside longer-term related to positive trends at Northern Mat and in Windows. At Northern Mat we see opportunities for further geographic expansion on the back of expansion of the electrical grid and in Windows we believe secular trends associated with the shortage in housing provides significant upside. Neither of these opportunities is built into our estimates, but we nevertheless see these as material longer-term.

Estimates. Our 2024 estimate remains at $624MM and is toward the mid to high-end of guidance provided by management. Our 2025 EBITDA estimate remains at $689MM.

Price target remains at $65; maintain OP. We apply a blended 7.5x EV/ EBITDA multiple to our unchanged $728MM 2026 EBITDA estimate. Our blended multiple of 7.5x is ahead of current consensus NTM valuation of 6.5x but in line with the trailing 5-year average of 7.5x. Taken together, our blended multiple applied to our 2026 EBITDA estimate and discounted back one year at 10% results in our $65 price target.