RBC Feb 28th "Strong FCF highlights operational momentum"RBC update Feb 28th - RBC Dominion Securities Inc. Keith Mackey, CFA (Analyst)
Price Target: $12.00
OUTPERFORM
Our view: We believe Enerflex's 4Q23 results generally support our constructive thesis on the stock in 2024. While some key financial metrics (e.g., gross debt repayment) were pre-released, positive FCF generation of $186MM in the quarter clearly shows the company is gaining operational momentum while making progress on normalizing its working capital. We see the results as broadly neutral to the stock in tomorrow's trading; however, given current FY24E EV/EBITDA multiple of 3.8x, we believe market expectations are sufficiently below where 2024 fundamentals would suggest.
• In-line results. EFX reported adjusted EBITDA of $126MM (including $39MM f/x losses) was 5% ahead of the Street, and inline with RBCe. Notably, cash gross margin rates in Engineered Systems and Service of 18% and 23%, respectively exceeded our expectations, while Energy Infrastructure was below our estimate, as noted in Exhibit 1. Other notable financial items include 1) US$62MM merger synergy run rate (US$60MM target), 2) $87MM non-cash impairment in LATAM related to Argentina currency devaluation and goodwill write down, and 3) $327MM Engineered Systems bookings (RBC $392MM).
• Significant working capital harvest boosts FCF generation. EFX generated about $186MM of FCF (CFO+dispositions-capex), versus our $142MM estimate. Positive variances were lower capex spend and working capital harvest. We do not believe this level of working capital harvest will repeat, but shows a move toward normalization after a large build in early 2023. As previously announced, Enerflex repaid $167MM long-term debt, though net debt decreased $151MM to $1.09bn on f/x fluctuations. Headline net debt/EBITDA of 2.3x was below the company's targeted 2.5x.
• FY24 guidance targets maintained. Enerflex maintained its high-level expectations for 2024, including 1) Total capex spend of US $90-110MM (RBC US$100MM) including US$70MM of maintenance/PP&E, 2) Energy Infrastructure and After-market services to contribute 55-65% of the company’s gross margins before D&A (RBC 59%), 3) Its $1.5bn Engineered Systems backlog to mostly convert to revenue over the next 12 months, 4) Primary focus on net debt repayment with FCF.