Multiple Raised Targets Secure Energy Services Inc. (
) is “continuing to surprise to the upside,” said Raymond James analyst Michael Barth in response to better-than-expected third-quarter results.
The Calgary-based company’s shares soared 9.8 per cent on Wednesday after it reported adjusted EBITDA of $127-million, topping the analyst’s expectation by 8 per cent ($118-milion) and the Street’s forecast by 6 per cent ($120-million). The beat was driven by gains in both its Waste Management and Energy Infrastructure segments.
“In our view, the biggest standout within Waste Management this quarter was industrial landfill volume, which was up 1 per cent year-over-year despite the lost volumes from six divested landfills earlier this year,” he said. “While the MD&A attributed that volume growth to a combination of strength from ‘remediation and drilling’ activity, our conversation with the company suggests that the bulk of higher volumes was coming from remediation work. That should be more permanent in nature (although lumpy) than we first thought, and drives both our near-term and long-term estimates slightly higher.”
While Secure reaffirmed its full-year 2024 guidance, Mr. Barth said management is indicating that adjusted EBITDA should come in at the high end of the previous $470-$490-million range.
“The less cyclical parts of the business are continuing to show positive same-store-sales (like produced water and waste volumes), and its worth noting SES also indicated that they would be increasing prices by 5 per cent again starting near the end of 2024 (similar to what we saw in 4Q23,” he said “The cyclical part of the business, while less impactful today, is also likely experiencing tailwinds with a pick-up in drilling activity following the TMX in-service and ramp-up at LNG Canada.
“As such, our FY2024 Adj. EBITDA estimates are revised higher to $495-million ($482-million prior); recall that initial guidance at the beginning of the year called for FY2024 Adj. EBITDA of $440-$465-milllion, so we’re essentially modeling a 10-per-cent positive revision versus those initial estimates. Given the strength we’re seeing across the business, we’ve also revised our 2025+ estimates higher in tandem.”
Also seeing “excess” liquidity persisting and emphasizing “that comes with lots of optionality,” Mr. Barth raised his target for Secure shares to $15.75 from $14.25, reaffirming an “outperform” recommendation The average is $17.18.
“Our return-to-target has compressed meaningfully from when we initiated in January with SES up 60 per cent year-to-date (vs. the TSX at up 17 per cent), but we still see reasonable value today,” he said. “The under-levered balance sheet, relative stability in cash flows, organic volume tailwinds, M&A roll-up opportunity, and organic capital deployment initiatives all support that view. SES is far from our highest-return idea, and we also see some better risk-adjusted returns elsewhere in our coverage universe, but on a stand-alone basis we still believe SES offers a decent risk-adjusted return at these levels and reiterate our Outperform rating.”
Elsewhere, others making changes include:
* ATB Capital Markets’ Nate Heywood to $18 from $17 with an “outperform” rating.
“SES continues to see the benefits and relief following the alleviation of the overhang tied to the TEV acquisition and related Competition Tribunal decision. With roughly two-thirds of the acquired TEV business remaining with SES, the pro forma entity continues to offer a resilient cash flow base and attractive returns to shareholders. In the near term, Secure is proceeding with modest growth initiatives, largely directed at contracted/production-based cash flows. This follows a recent emphasis on free cash flow generation, returns to shareholders and the repayment of current indebtedness. With the new-found flexibility following the $1.1-billion asset sale, SES has prioritized the repayment of debt and has been actively repurchasing shares with its NCIB, the $150-milion repurchase agreement, and the completion of a $250-million SIB (tender: $11.40 | range: $11.40-$13.00). Going forward, we expect SES to maintain a healthy balance sheet (targeting 2.0-2.5 times total debt/EBITDA ATBe 2024: 0.9 times ) while evaluating growth opportunities across the basin, including M&A opportunities around predictable and stable cash flow generating assets.”
* Eight Capital’s Jamie Somerville to $22 from $20 with a “buy” rating.
“SES remains our top pick in the sector due to its attractive relative valuation, with re-rating potential, as well as balance sheet strength, operating margins, technical factors, and growth potential,” he said.
* National Bank’s Patrick Kenny to $17 from $14 with an “outperform” rating.
“Of note, with an established leverage target of 2.0-2.5 times, we highlight ample dry powder of more than $500-milllion to pursue further organic growth and M&A opportunities as well as incremental share repurchases,” he said.
* Scotia’s Konark Gupta to $18 from $16 with a “sector outperform” rating.
“Although EBITDA has been declining year-over-year this year due to prior divestitures, the underlying trends are solid, recent tuck-ins are contributing nicely and SES is wisely deploying capital for future growth,” said Mr. Gupta. “This sets the stage well for 2025 when the company not only starts lapping divestitures but also likely deploys incremental capital on organic and inorganic opportunities. In the near term, it remains focused on creating shareholder value through buybacks with its conservative balance sheet. Despite a significant year-to-date gain, SES is attractively trading at 7.6 times EV/EBITDA on 2025 estimates vs. Big4 peers at 14.5 times and niche peers at 10 times, along with a stronger FCF yield of 6.5 per cent.”
* BMO’s John Gibson to $20 from $17 with an “outperform” rating.
“Secure’s Q3/24 results were once again strong, with higher landfill volumes and Clearwater growth driving the financial beat. The company continues to aggressively repurchase its shares, while we await its upcoming 2025 guide in December. In our view, this strategy is largely working, with investors beginning to realize the significant valuation disconnect vs. waste/energy infrastructure peers,” said Mr. Gibson.
* CIBC’s Jamie Kubik to $16 from $15 with a “neutral” rating.