RBC Lower Price Target to $16 Maintained OutperformQ1 below expectations; growth takes a step back.
Our view: The Q1 miss and negative trends coming out of the quarter are perhaps surprising in that they came from the S&IS division - opposed to the LTL division (which is where we believe most had been bracing for weakness). As a result, the share price impact is probably a little more pronounced today for that reason. Nevertheless, the MTL shares continue to screen as very interesting value, with continued upside from M&A. Reiterate OP.
Key points:
Q1 results below. MTL reported adjusted EBITDA of $66MM, which was below consensus $78MM (RBC: $79MM). Revenue of $463MM was below consensus $501MM (RBCe: $498MM) as was margin at 14.3% vs consensus 15.5% (RBCe: 15.8%). Key variance in the quarter was in the company's S&IS segment, where although revenue was in-line, the company had a higher degree of lower margin revenue and also incurred preparatory expenses for work expected later in the year. See Exhibit 1.
Mgmt. more cautious on 2024 guide. Management indicated that a number of factors have been at play that impact its outlook vs. when the guide was set in their 2024 Business Plan, namely that the push back of interest rate cuts and lack of project spending has had a negative impact on growth and demand. As a result, the company (while able to achieve its revenue target) is likely going to see EBITDA as more challenged. Accordingly, we are taking down our EBITDA estimates, however note that M&A may lead to an upward revision if indeed it occurs.
M&A the saving grace. By its tone on the call, mgmt is of the view that M&A will likely make up the difference for the lack of organic growth to meet its targets if need be (as opposed to being additive). Nevertheless, we do get the sense that mgmt. is more incentivized to execute on a (perhaps) larger M&A campaign than what otherwise might have been the case - which we think is an incremental positive.
Lowering estimates. We are adjusting downward our 2024 EBITDA estimate to $323MM (from $338MM) reflective of the more negative trends that developed in Q1 noted above. Our estimate now closer aligns with 2024 guidance for EBITDA of $325MM, which previously contemplated M&A to be additive to the $325MM, we now view it to be dependent on M&A to be achieved. Our 2025 EBITDA estimate comes down as well, to $351MM (from $360MM).
Price target decreases to $16 (from $17); maintain Outperform. Our price target decreases to $16 (from $17) reflecting our lower 2025 EBITDA estimate. We continue to build into our valuation a pickup in M&A activity, which was consistent with commentary on the call. Our target multiple remains unchanged at 6x and is in line with US trucking comparables. Maintain Outperform.