CIBC Raises TargetEQUITY RESEARCH
November 10, 2024 Earnings Update
EXCHANGE INCOME CORPORATION
Building Out A Competitive Matting Business
Our Conclusion
In addition to solid earnings and operating results, EIF announced the
acquisition of Spartan Mat. We view the acquisition positively as it gives EIF
a foothold in the U.S. and expands its offering to include composite mats.
Below we discuss how the addition of Spartan will help EIF build a
competitive North American matting business. Please refer to our first pass
note for specific acquisition details (link). We maintain our Outperformer
rating and raise our price target from $62.50 to $66.
Key Points
Building Out A Competitive Matting Business: For anyone who follows
EIF closely, the acquisition of Spartan Mat should not come as a surprise.
Since acquiring Northern Mat, EIF had made clear its intention to expand the
business into Eastern Canada, the U.S., as well as add composite mats to
the business. With the acquisition of Duhamel this past summer, EIF
bolstered its Eastern Canada exposure, and now with Spartan, EIF has a
solid foothold in the U.S. market, and access to composite matting
manufacturing.
Composite Versus Wooden Mats: The acquisition of Spartan brings the
offering of composite mats. The key differences between wooden and
composite mats are lifespan and weight. The average lifespan of a
composite mat is over 10 years, while wooden mats tend to have a lifespan
of four to seven years. Composite mats also tend to be about half the weight
of a wooden mat. A lighter mat could have a material impact on the cost of
transporting mats over the lifetime a mat. With that all said, there is a greater
upfront investment needed for composite mats versus wooden mats. At this
time, composite mats are not very common in Canada, and EIF will look to
expand Spartan’s business in Canada. It is also worth noting that at this time,
Spartan mostly sells its mats, and does not have a major rental business,
compared to Northern Mat that has a focus on renting. We suspect there will
be an opportunity for Spartan to learn from some of Northern Mat’s best
practices and enter the rental mat market.
Balancing Out The Matting Business: There has been some lumpiness in
the earnings profile of Northern Mat as a result of mat industry dynamics,
weather, and the rolling off of certain contracts. We believe that the addition
of Spartan should at a minimum not add to the lumpiness, but if anything
modestly smooth out the earnings profile. We believe this for the following
reasons: 1) composite matting is not exposed to the commodity prices wood
mats are, which can impact the supply and cost of wood mats; 2) Northern
Mat is more exposed to the oil and gas industry given its work on pipelines,
Spartan is less exposed to the oil and gas industry and sees its mats more
often used for transmission and distribution work; and 3) the exposure to the
southern U.S. will likely result in fewer weather-related issues with which
Northern Mat currently contends.