Post by
SunsetGrill on Mar 11, 2021 9:40am
Scotia Analysis - Post C.Call - Ups to $19.00
Rating Sector Perform
1-Yr. Target C$19.00
AD.UN-T C$16.20
1-Yr. Return 24.9%
Div. (NTM) $1.24
Div. (Curr.) $1.24
Yield (Curr.) 7.7%
OUR TAKE: Mixed. Underlying Q4/20 results were solid. Alaris closed out a year that likely demonstrated the resilience of its investment portfolio, which performed much better than investors had anticipated through the pandemic. Fourth-quarter results were ahead of expectations, with portfolio metrics improving and looking healthy amid positive adjustments to fair value estimates and an upward revision to estimates. As part of an early press release, management had indicated the likelihood of an early redemption in 2021; however, the combined value and distribution of the two investments, which are actively evaluating a full or partial redemption, was notably higher than our forecast. Management noted that nothing was imminent, and we believe that a healthy deal environment is likely to mitigate re-investment risk. We have lowered our forecast reflecting a revised outlook for distributions in 2021E and 2022E given the larger-than-expected redemptions. That said, we have raised our target price given a reduced debt forecast from higher-than-expected proceeds from the redemption. Increasing target price to $19.00 (was $18.50), but maintaining our SP rating.
KEY POINTS Normalized EBITDA/sh of $0.74 came in ahead of our estimate of $0.70 and the Street at $0.69. The beat was largely driven by a slightly higher-than-expected top-line, and modestly lower operating expenses. Positive developments included: 1) upward revisions to guidance; 2) $23.2M increase in FV of investments; and 3) estimated weighted-average increase in annual distributions of ~1% in 2021, despite the on-going pandemic. The portfolio remained in good health. Of its 20 investments, 75% of AD's partners have an ECR of over 1.5x (including six over 2.0x) compared to 56% just a year ago. Compared to Q3/20, 11 partners experienced no change in their ECR, three showed improvement, and two deteriorated. Management noted that Federal Resources (FED; 10.5% of run-rate revenue guidance) and Kimco (4.2% of run-rate revenue guidance) are actively evaluating full or partial redemptions. Although not imminent, FED's redemption value is estimated at ~US$86M, while Kimco's is between US$53M-US$75M.
Health of Portfolio Remains In Great Shape AD’s investment portfolio has proven its durability through this COVID-19 pandemic, with its partners remaining in solid shape. Management noted that of its 20 investments, 75% of AD's partners have an ECR of over 1.5x (including six over 2.0x) compared to 56% just a year ago. Compared to Q3/20, 11 partners experienced no change in their ECR, three showed improvement, and two deteriorated. SCR and BCC saw their ECRs improve a notch to greater than 2.0x, while GWM Holdings improved to 1.5x to 2.0x (from 1.2x to 1.5x). Expectedly, Planet Fitness saw its ECR decline to the 1.0x to 1.2x range (from 1.2x to 1.5x), while Heritage slipped from greater than 2.0x to 1.5x to 2.0x, but still remaining healthy. Since Q4/20, the company has added four new investments (see Exhibits 1 and 6).
After a robust first couple of months of capital deployment, management flagged a couple of potential upcoming redemptions. The strong start to the year for Alaris has garnered much of the attention on the capital deployment front, with the company deploying nearly $175M in 2021, already surpassing its five-year average of ~$167M (see Exhibit 2). That said, with the fourth-quarter results, management flagged a couple of potential redemptions on the horizon. The company noted that Federal Resources (FED) and Kimco are actively evaluating the possibility of a full, or partial, redemption of AD’s investment. While nothing is imminent, nor is any redemption assured, the redemption value for FED is ~US$86M, while Kimco is estimated to be between US$53M to US$75M. As part of an early press release, management had indicated the likelihood of an early redemption in 2021; however, the combined value and distribution of the two investments was notably higher than our forecast. The tworedemptions are not necessarily imminent; however, for now, we have taken a bit of a conservative approach and are forecasting a full redemption of Kimco in Q3/21 (using the mid-point of the range) and FED in Q4/21. We believe that a healthy deal environment is likely to help mitigate re-investment risk, especially given how active the company has been on the deal front this year. Management attributes ability to include common equity into investment mix as key contributor to the record level of capital deployed over the past twelve months. Over the past twelve months, Alaris has deployed over $350M of capital into new investments. This is by far the highest level of activity in the company’s history. Management noted that there were a number of factors that likely contributed to this activity, which included more constrained lending from banks that limited capacity from competing private equity investors, along with entrepreneurs looking for additional funding to seize on growth opportunities emerging from the pandemic. That said, management attributed its ability to include common equity into the investment mix as likely the most significant contributor to the record-setting levels. The team sees the additional benefits of the common equity investments as better aligning its risk profile with its investments, allowing Alaris to participate in upside during good times and helping balance out the times when investments struggle. The team believes the common shares are also likely to enhance overall portfolio returns that also include cash dividends on the common shares.
Downward Revision to Forecast, but Raising Target Price on Reduced Debt Forecast Our estimates move down as we incorporate a couple of large redemptions over our forecast period. Coming out of the quarter, we have made a number of estimate revisions to reflect the recent developments. Our revisions include the following: 1) incorporating the potential redemptions for Kimco and FED in our forecast, which are much larger than our initial expectations, and likely a bit earlier-than-anticipated; 2) revisions to the collar resets during our forecast period; 3) adjusting G&A costs to be more in line with management’s expectations; and 4) updates to the f/x assumptions. On balance, our estimates move down, mainly due to the large redemptions this year, with redeployment likely to be steady over the course of the next year (see Exhibit 3).
Modestly increasing target price to $19.00 (was $18.50), but maintaining our Sector Perform rating. Despite some downward revisions to our forecast, we are raising our target price given reduced debt. As a result, we have bumped our target price to $19.00 (was $18.50). Our target is derived from equal weighting of an 8.0x EV/EBITDA (2022E) and 8.3% NCOA/EV Yield (2022E). The stock is currently trading at 8.0% our NCOA/EV (NTM) Yield and 8.8x EV/EBITDA (NTM; see Exhibit 4).