Monday’s TSX breakouts: A trust yielding 7.4% with a forecast price return of 26% and 7 buy calls Jennifer Dowty Published 2 hours ago Updated July 5, 2021
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Discussed today is a trust that may surface on the positive breakouts list if analysts’ expectations are correct: –
Alaris Equity Partners Income Trust (AD-UN-T). The average one-year target price implies a potential price return of 26 per cent over the next year, not including the attractive 7 per cent yield (potential total return of over 33 per cent including the 7 per cent yield). The trust’s payout ratio is nearing a historical low. The trust has multiple potential catalysts, which may lift the unit price back to pre-COVID levels. Alaris has seven buy recommendations and one “sector perform” recommendation.
A brief outline on Alaris is provided below that may serve as a springboard for further fundamental analysis when conducting your own due diligence.
The trust Calgary-based Alaris provides capital to private companies, referred to as “Partners”, in exchange for income including royalties, dividends, and interest. Distributions received are based on measures such as a partner’s percentage change in revenue, percentage change in same-store sales, and percentage change in gross profit. Distributions are adjusted annually based on a partner’s top line performance in its underlying operations (i.e. organic or internal growth) with specified limitations in many cases (e.g. distribution collar of plus or minus 6 per cent per year).
Alaris currently has 21 partners that operate across four sectors (consumer products and services, consumer financial services, business services, and industrial).
In terms of total annualized partner revenue, no individual partner accounts for more than 12 per cent of Alaris’ total revenue. There are three partners that account for more than 10 per cent of total revenue. Overall, Alaris’ revenue is well diversified.
As of May, Alaris had roughly 85 per cent of its fair value of investments in U.S. companies. As a result, investors should be aware of currency risk. A weaker U.S. dollar negatively impacts Alaris’ revenue. On the first quarter earnings call, the chief financial officer Darren Driscoll indicated that Alaris has forward contracts over the next 12 months, “So you’ll see some realized FX [foreign exchange] gains over the next few quarters that will offset a good chunk of that softness [in the U.S. dollar] that we’re seeing today.”
Alaris operates a lean business with just 16 employees according to their investor presentation released in May.
To fund its investments, Alaris has announced two equity offerings over the past year. Most recently, in March 2021, Alarais completed a $85-million bought deal financing, issuing over 5.3-million trust units at a price of $16 per unit. Prior to that, in Dec. 2020, Alaris completed a $46-million bought deal offering, issuing over 3.3-million units at a price of $13.75 per unit.
Investment thesis ·
Attractive yield. Payout ratio nearing a historical low.
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Revenue growth. Opportunities to deploy capital and enter into new partnerships.
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Diversified investments.
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Potential catalyst: Resumption of distribution growth as organic revenue growth recovers from the coronavirus pandemic. Historical organic (internal) annual revenue growth from its partners is between 1 per cent and 6 per cent.
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Potential catalyst: Due to COVID-19, distributions from PFGP (Planet Fitness Growth Partners) were deferred in the second quarter of 2020. Partial distributions, 40 per cent, are currently being received. In July 2021, the resumption of full distributions is anticipated, which would reduce the payout ratio by approximately 4 to 5 per cent. Planet Fitness was severely hit by COVID-19 with fitness gyms forced to close.
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Potential catalyst: Potential redemption or repurchase of its investments in Kimco Holdings LLC and Federal Resources Supply Company netting Alaris attractive gains above book value. Proceeds could be redeployed into other businesses.
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Ownership aligned with unitholders. Management executives and trustees own approximately 10 per cent of the trust units outstanding.
Quarterly earnings On May 6, the company reported first-quarter financial results that were in-line with the expectations. Revenue came in at $32.2-million, down 5 per cent year-over-year, in-line with management’s guidance. Normalized EBITDA (earnings before interest, taxes, depreciation, and amortization) was $28.8-million, just above the consensus estimate of $28.3-million. Earnings per unit was 56 cents.
Looking ahead, management is guiding to revenue of $33.8-million in the second quarter. The consensus estimate is currently $33.1-million.
Alaris will be releasing its second quarter financial results after the close on Wed. July 28 and hosting an earnings call the following day at 11 a.m. (ET). To listen to the conference call, investors can dial 1-866-475-5449.
Distribution policy Alaris pays its unitholders a quarterly distribution of 31 cents per unit or $1.24 per unit yearly, equating to a current annualized yield of 7.4 per cent.
Management expects the payout ratio to decline to below 65 per cent – its lowest historical level – if full distributions from Planet Fitness restart in July.
The distribution used to be much higher. In May 2020, management announced a 30 per cent distribution cut, slashing its annualized distribution to $1.16 per unit from $1.65 per unit due to impacts from COVID-19.
Analysts’ recommendations There are eight analysts who cover Alaris, of which seven analysts have buy recommendations and one analyst (Scotiabank’s Phil Hardie) has a “sector perform” recommendation.
The firms providing research coverage on the trust are as follows in alphabetical order: Acumen Capital, CIBC Capital Markets, Cormark Securities, Desjardins Securities, National Bank Financial, RBC Capital Markets, Scotiabank, and Stifel Canada.
Revised recommendations In June, two analysts tweaked their target price slightly higher.
· Acumen’s Trevor Reynolds raised his target price to $23 from $22.50.
· National Bank’s Zachary Evershed lifted his target price to $23.50 from $22.50.
Financial forecasts According to Bloomberg, the Street is anticipating revenue of $140-million in 2021, rising 11 per cent to $155-million in 2022. The consensus EBITDA estimates are $121.8-million in 2021, increasing over 12 per cent to $137-million in 2022.
Financial forecasts have been rising. For instance, four months ago, the Street was forecasting revenue of $125-million in 2021 and $143-million in 2022. The consensus EBITDA estimates were $111-million in 2021 and $128-million for 2022.
Valuation According to Bloomberg, Alaris is trading at an enterprise value-to-EBITDA multiple of 8.3 times the consensus 2022 estimate, in-line with its five year average of 8.2 times.
The average one-year target price is $21.19, suggesting the unit price has 26 per cent upside potential. Individual target prices are as follows in numerical order: $18 (from Stifel’s Anoop Prihar), two at $20, $20.50, $21, $23, and two at $23.50.
Insider transaction activity Over the past year, there has not been any trading activity in the public market reported by insiders.