March 6, 2018
Enercare Inc.
Q4 a little light; rentals still lagging in the U.S.
Our view: We are reiterating our Outperform rating and believe the company generates predictable cash flows, particularly on its rental portfolio. However, the rental mix in the U.S. has remained at a sluggish 3% in 2017. We are lowering our price target to $25 (from $26) to reflect a moderation in our U.S. rental mix expectation.
Key points:
Service Experts rental mix improves in Canada, but still lagging in the U.S. With respect to the roll-out of the HVAC rental program at Service Experts, the company saw some incremental improvement in Canada. The preliminary rental mix for 2017 was 3% (vs. 3% in YTD Q3/17) in the U.S., 10% (vs. 8% YTD Q3/17) in Western Canada, and 15% (vs. 14% YTD Q3/17) in Ontario. Services Experts currently offers HVAC rentals in 7 of the 29 states in which it operates. Management plans to roll out rentals to the remaining 22 states in 2018 and will also focus on increasing the rental mix.
Tuck-ins continue at a fast pace. Enercare completed three tuck-in acquisitions in 2017 for an aggregate purchase price of $37 million. In Q1/18, Enercare closed two additional acquisitions in Texas and Florida for $29 million. Management is very comfortable closing 4-6 tuck-ins per year, and indicated that they see 1-2 opportunities a week. Management confirmed that the acquired companies were purchased at 5-7x EBITDA, which is consistent with previous guidance.
Regulatory changes in sub-metering may not be material for Enercare.
In December, the Ontario Ministry of Energy gave the Ontario Energy Board (OEB) the authority to regulate charges of sub-metering providers. The OEB commenced consultations with various stakeholders, and management expects that the OEB will finalize a pricing mechanism this year. Management does not expect to see a material reduction in sub- metering revenues, but believes some fees could be constrained. We believe that even if revenues decline due to regulation, the company will not be materially impacted, as the sub-metering business only contributed 4% of Enercare's 2017 EBITDA.
Modestly reducing our estimates. We are reducing our 2018 and 2019 ACFFO/share estimates to $1.61 and $1.75, respectively (from $1.66 and $1.81, respectively). The revisions reflect the recent tuck-in acquisitions, which were more than offset by the divestment of four businesses in Ontario and higher maintenance capex. Please refer to Exhibit 3 for our financial forecast.
Lowering PT to $25 (from $26). We have modestly lowered our price target to $25 (from $26) to reflect our view that it will take longer to improve the Service Experts U.S. rental mix. Our price target is based on 14x (unchanged) our 2019 ACFFO/share estimate