Q3/24; RECORD RESULTS WITH & MORE GROWTH AHEAD
THE TD COWEN INSIGHT
Increasing target to $68 from $67 and maintaining BUY. Higher target reflects forecast update, unch multiple (7.5x EBITDA), and shift-forward in val-period to 4Q ending Q3/26 (from Q2/26), partially offset by higher net debt. Our bullish thesis is unch. Strong Q3 results, organic and new contract driven A&A growth along with Q4 acquisition and potential for others in 2025 to drive growth.
Impact: SLIGHTLY POSITIVE
Our higher forecast reflects the carry-forward impact of Q3/24 results, Spartan acquisition (revenue and financing), Newfoundland fixed and rotary-wing contract, and other minor modelling updates. Q3 adj. EBITDA of $193mm (TD/cons: $183mm/ $186mm). Adj. diluted EPS was $1.18 (TD/cons: $1.07/$1.21). Exchange reported strong results, with consolidated EBITDA and EPS above our forecast. The strong results were primarily due to 25% y/y growth in A&A segment (EBITDA stronger-than-forecast) driven entirely by organic growth (BC, Manitoba, Nunavat medevac, Air Canada contract, leasing revenue).
Project delays at Window Solutions (MSWS) and Precision continue to pressure Manufacturing EBITDA (higher-than-forecast but down 5% y/y). Although disappointing, management noted booking momentum from Q2 continued into Q3 ($100 million MSWS orders in past 6 weeks) with expectations for further strength as macro and geopolitical uncertainty is reduced . We estimate y/y growth in Manufacturing EBITDA inflects positively mid-2025 as bookings come into production.
We think investors should focus on the strength in A&A (>80% of 2024E EBITDA). The lagging Manufacturing and MSWS results are requiring investor patience, but we believe upside potential/valuation more than offsets the risk/uncertainty.
Management outlook remains unchanged. 2025 guide implies 15% y/y growth in EBITDA based on A&A organic growth and Manufacturing M&A. The potential award of the FAcT, Northwest Territories medevac, and Australian ISR contract could provide incremental upside to guide/forecast (13%/13% adj. EBITDA growth in 2024/2025).
We continue to view Exchange as an excellent opportunity for yield-focused investors who also appreciate its diversification, prudent leverage, and M&A-driven growth potential. At 7.0x fwd consensus adj EBITDA, it is below trailing 5-year average of 7.3x, yet we view its growth outlook, b/s, financial performance and other factors as supporting higher than historical valuations.