National Bank/Scotiabank National Bank Financial analyst Zachary Evershed thinks it is “no surprise” that Adentra Inc.plans to use the proceeds of its $100.1-million bought deal public offering to solidify its balance sheet ahead of strategic acquisitions.
“With management highlighting a strong pipeline of targets, we anticipate that the proceeds will be deployed on a large acquisition or several smaller ones in short order,” he said after coming off research restriction.
“We note that the offering was not concurrent with an acquisition (as many investors would have preferred) as it remains impractical for ADEN to do so: U.S. targets, often privately-owned, are not keen on a Canadian bought deal process accompanied by audited/reviewed financial statements and instead prefer a cash buyer. Pre-raising the funds positions ADEN to be competitive against other buyers down south, and we note that the company has done this play before, raising $101-million in November 2021, 2.5 months prior to announcing the accretive acquisition of Mid-Am.”
Following Wednesday announcement by the Langley B.C.-based company, known as Hardwoods Distribution Inc. prior to a late 2022 rebrand, Mr. Evershed thinks it now can “handle $350-700 million in incremental revenue from M&A whilst remaining below management’s leverage comfort of 3.0 times, even before counting on FCF generation.”
“With clear intentions and the capacity to execute fully on 2028 goals, we reintroduce our M&A growth premium at 1 times EPS, representing $250 million of incremental sales acquired annually, not baked into our estimates,” he said.
Reiterating an “outperform” rating for Adentra shares, the analyst raised his target to $53 from $51.50, believing earnings per share dilution is likely to be “entirely temporary.” The average target on the Street is $50.93.
“We update our modeling to reflect the equity issuance, seeing Net Debt/EBITDA fall to 2.1 times in Q2/24,” he said. “The 11-per-cent increase in share count is partially offset by the reduction in interest costs on lower debt levels, reducing EPS dilution to 6 per cent in our model. This acts mainly as a placeholder as while we do not bake unannounced acquisitions into our model, we firmly believe that the funds will be rapidly deployed in one or more accretive transactions in the coming months. Historically, ADEN has made tuck-in acquisitions for 4-6 times trailing EBITDA, with larger platforms commanding multiples in the 6-8 times range. While ADEN’s own LTM [last 12-month] multiple of 6.7 times would be crowded at the upper end of the range, we remain confident in management’s capital allocation discipline and would expect day-1 EPS accretion on any consummated transaction, with additional upside as the acquisition is integrated and synergies are unlocked.”
Elsewhere, Scotia’s Jonathan Goldman resumed coverage with a “sector outperform” rating and $51 target.
“Investors are getting a deal on ADEN shares trading at 6 times EV/EBITDA on our 2025E vs. historicals of 7.3 times,” he said. “Our estimates do not include unannounced M&A and represent near-trough earnings as the distribution industry contends with near-term demand softness in R&R due to the lock-in effect of lower mortgage rates and deferral of larger home renos. Moreover, we think the market is underappreciating structural margin enhancements supported by reduced exposure to more commodity-type hardwood lumber/plywood and increased exposure to Pro and Home Center channels. ADEN remains our top small cap pick.”