Post by
retiredcf on Dec 11, 2024 10:32am
CIBC Raises Target
EQUITY RESEARCH
December 10, 2024 Earnings Update
ALARIS EQUITY PARTNERS INCOME
TRUST
Realizations On Common: A Key Catalyst Drawing Closer
Our Conclusion
Third-quarter results were characterized by a substantial earnings beat,
driven by an unexpectedly large common dividend from Fleet. The
magnitude of the payout made it increasingly clear that this investment may
have significant upside that is not priced into the stock. We present some
basic back-of-the-envelope math to illustrate the magnitude of potential
accretion from an exit event, and are raising our price target to reflect what
we believe is growing upside from the common equity portfolio.
Key Points
Common equity investments beginning to demonstrate significant
upside potential: When Alaris announced third-quarter results, it reported a
sizeable earnings beat of a magnitude larger than we can remember in our
time covering the name. Revenue came in significantly above prior guidance
($66 million versus $39 million, respectively) driven by some unexpectedly
large common equity distributions. In particular, the common dividend from
Fleet was 2.5x larger than the prior year. The scale of Fleet’s dividend
surprised us, and management indicated that it was funded entirely from
earnings (as opposed to asset sales or divestitures). Despite the scale of the
beat, Alaris has underperformed the S&P/TSX Composite Index by ~3%
since reporting results.
Potential for double-digit accretion to book value and earnings:
Considering the magnitude of recent earnings growth, we believe that Fleet
stands out as a potential monetization candidate. We present some very
crude back-of-the-envelope math to illustrate how an exit event could result
in double-digit accretion to book value and free cash flow (the latter from the
reinvestment of proceeds). These forecasts are not meant to be construed
as a precise point estimate, but rather a general illustration of the magnitude
of upside that could be crystallized from a monetization event.
Realizations may also inspire a re-rating: Since Alaris began investing in
the common equity of portfolio companies approximately five years ago,
there have been no major realizations. Crystallizing value on an investment
like Fleet (which is almost certain to produce an extraordinarily high multiple
of capital and internal rate of return) could draw a lot of attention and interest
from investors who had previously overlooked this name. We believe that the
stock could conceivably trade above book value again, and suspect that the
monetization of common equity interests is the key catalyst to inspire a re-
rating back to the levels at which Alaris traded in the pre-pandemic era.
Raising our price target: We are increasing our price target to $27.00 (from
$24.00) to reflect this growing upside. Our revised price target is based on a
1.15x P/B multiple. This is consistent with Alaris’ average P/B in the pre-
pandemic period, but it is worth noting that our book value estimate does not
include any upside crystallized as a result of a monetization event.