Alaris Royalty Corp. (AD-T) now possesses a “compelling” risk-reward profile and valuation for investors, according to Desjardins Securities analyst Gary Ho, leading him to raise his rating for its stock to “buy”from “hold.”
“With the restart of the partial distributions at Kimco announced earlier in April, this essentially resolves the five underperforming files in AD’s 16 portfolio companies,” he said. “We currently believe AD’s book value has been conservatively written down. We also think net capital deployment could pick up later this year, particularly given the recent hike in interest rates, which increases the appeal of AD’s royalty structure.”
In justifying his upgrade, Mr. Ho pointed to five factors:
1. The resolution of five underperforming files, noting: “We view AD’s book value as having been conservatively written down. While there remains some risk relating to its promissory notes, the amounts are manageable, in our view.”
2. The view that net capital deployment could be poised to pick up in the near term, acting as a stock catalyst. Mr. Ho said: “The rate hikes have caused an increase in the cost of borrowing for PE transactions. Management foresees a robust pipeline for the royalty structure. This is key for the AD story as new capital deployment should reduce the payout ratio.”
3. The benefits of U.S. tax changes. With Alaris currently derives nearly 80 per cent of its revenue from the U.S., Mr. Ho feels changes should improve earnings and cash coverage ratios.
4. A dividend cut has already been priced into the stock. He noted: “Given the 9.6-per-cent dividend yield, the market is essentially pricing in a dividend cut, which we are not modelling in.”
5. The fact that Alaris stock is currently trading a 1.0 times price-to-book value per share, which is an eight year low.
Mr. Ho maintained a price target for Alaris shares of $20.50. The average is $22.21.
“AD has a diverse portfolio, strong capital deployment since inception and a solid track record of growing dividends,” the analyst said.