Target price/base case
Our $26 price target is based on 14x our forecast 2019 ACFFO/
share. Our base case assumes that attrition levels in the water
heater division will continue to moderately improve, and the
revenue run-rate from the segment begins to increase. We
have also assumed that the rental penetration rate at Service
Experts is on track to achieve 10% penetration rate in 2019.
Upside scenario
Our upside scenario valuation of $28 is based on a 15x
multiple applied to our forecast 2019 ACFFO/share. Our
upside scenario assumes that Enercare is able to substantially
grow its rental portfolio and achieve positive free cash flow in
its sub-metering business. This scenario would reflect a rental
penetration at Service Experts that is materially higher than
10%.
Downside scenario
Our downside valuation of $18 is based on 12x our downside
2019 ACFFO/share scenario, which assumes no EBITDA growth
from our expected 2017 levels, as higher attrition rates in the
water heater division (due to increased competition) would
offset the growth in rental rates. Additionally, we assume that
Enercare is unsuccessful in gaining further penetration from
the rental model into the Service Experts business due to an
unfavorable regulatory environment in the U.S.
Investment summary
We believe shares of Enercare will outperform its peer group
for the following reasons:
• Predictable and mostly contracted cash flows. The water
heater and sub-metering businesses generate stable and
predictable cash flows. Enercare has over 1.1 million rental
water heaters and HVAC units that generate stable cash
flows. In addition, the sub-metering division, which also
generates predictable cash flows, has a significant growth
backlog that would double the net revenue base even if the
company does not actively pursue growth.
• Rental rollout at Service Experts should drive growth in
rental portfolio. Enercare is at the early stages of rolling
out its rental platform into the Service Experts business. We
believe the rental rollout will be successful, which would
grow the company's base of contracted revenues.
• Attractive return on capital investment. Enercare is
investing significant capital in its rental and sub-metering
portfolio. Management expects the rentals and sub-
metering portfolio to generate after tax unlevered returns
in the ranges of 13–21%, and 10–16%, respectively.
• Implementation of Bill 59 expected to improve attrition.
The Ontario government recently passed a bill that
would ban unsolicited door-to-door sales of certain home
appliances such as water heaters, furnaces, air conditioners,
and water filters. We expect the bill to support a modest
improvement in attrition rates.