Medevac, surveillance, and windows opportunities point to upside into 2025 and 2026
Our view: Q2 results came in ahead of street expectations, with management also tightening its guidance range pointing to upside to 2024 consensus expectations coming into the quarter. Despite that the shares are down -4% today which we view as unwarranted. We were positive on the quarter and highlight a recent uptick in manufacturing orders which we view as providing momentum into next year. Exchange also highlighted potential medevac contracts in Newfoundland and in the North and various surveillance opportunities. We do not believe this opportunity set is appropriately reflected in valuation, and reiterate Exchange as a top idea.
Key points:
Q2/24 results above consensus. EIF reported Q2 adjusted EBITDA of $157MM, ahead of consensus $154M (RBCe: $156MM). See Exhibit 1. We caught up with management last night with highlights below.
• 2024 guidance points to upside to consensus estimates. Management now expects guidance to come in at the high-end of its 2024 guidance of $600MM to $635MM, which compared to consensus $615MM and our $624MM coming into the quarter. This highlights in our view EIF's diversified business model, with the company tightening/increasing guidance on the back of robust demand trends in Aviation, despite meaningful headwinds to manufacturing in the quarter.
• Upside opportunities numerous. Management today reiterated a number of opportunities that would represent upside to our estimates in 2025 and 2026. The biggest being an Australian ISR contract that Exchange is bidding on that would represent investment of >$0.5B and in our view could generate >20% annual EBITDA returns. Moreover, the company is bidding on medevac contracts in Newfoundland and in the North. Given PAL’s leadership position, we view Exchange as well positioned on each opportunity, especially the two Canadian ones.
• Manufacturing outlook robust (despite near-term weakness). Key from the conference call in our view was indication that the Windows segment is seeing a pickup in demand, especially during the past six weeks following recent interest rate cuts. Management noted it is carrying extra employee costs in anticipation of a potential ramp in production, and we therefore see the Windows business as well positioned to drive meaningful operating leverage as demand picks up.
Our view on the stock. Our 2024E remains at $624MM and our 2025E at ~$689MM, and our PT is unchanged at $65. We apply a blended 7.6x EV/EBITDA multiple to our unchanged ~$728MM 2026E EBITDA, which represents >40% implied return to target. We continue to believe the market is not appreciating the meaningful growth opportunity at Exchange over the coming years. Maintain OP.