Post by
SunsetGrill on Jun 29, 2021 10:33am
Scotia Analysis
Alaris Equity Partners Income Trust Record Pace of Deal Flow Continues with Another US$70M Investment OUR TAKE: Slightly Positive. Following a robust start to capital deployment in the first quarter, Alaris maintained its record pace of investing, having announced a US$70M investment in D&M - the largest independent direct-to-consumer provider of vehicle sourcing and leasing services in the U.S. The new investment brings the YTD tally to a record $260M, with six months still left in the year to add to the total. Over the past twelve months, AD has deployed $400M of capital. Given the context of the current economic landscape, we expect Alaris to remain active on the deal front given the potentially large pipeline of some smaller businesses with solid fundamentals requiring capital injection. That said, we believe the company may have likely "pre-spent" its pending redemption capital from a couple of sizeable investments later this year that will mitigate any reinvestment risk. Maintaining our $20.00 target price and SP rating. KEY POINTS The D&M investment consists of: 1) US$62.5M of preferred equity, providing AD an annualized distribution of US$8.75M (14% pre-tax yield on preferred equity), and 2) US $7.5M for a minority common equity ownership. This represents a net yield of 12.5% on the total capital deployed. D&M has the option to defer the distribution up to 4% ($2.5M in the first full year), with deferred distributions compounding at the current yield. The investment is subject to a 7% collar, commencing on January 1, 2023, and management estimates its earnings coverage ratio to be between 1.5x and 2.0x. Founded in 1976, D&M is a key player in the Texas market, with operations in FortWorth, Dallas, Grand Prairie, Austin, and Houston, along with a prevalent online business. The company has been providing online leasing and sales for over 25 years. The stock is trading at 8.9x EV/EBITDA (NTM) and 8.0% NCOA/EV (NTM). To drive multiple expansion over the next twelve months, we would look for: (1) continued deployment of capital; (2) further demonstration of resilience and good health across the existing portfolio; (3) improvements in the operating environment for smaller businesses; and (4) progress in de-leveraging.