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November 11, 2021
Outperform
TSX: AND; CAD 47.50
Price Target CAD 56.00 ↑ 55.00
Andlauer Healthcare Group Inc.
Q3 results in line; remain constructive on underlying trends
Our view: Q3 was in line, but we highlight three key takeaways that support our positive view on the shares. 1) Organic growth trends remain intact, which supports our high-single digit organic growth assumptions; 2) margins continue to impress reflecting the Skelton acquisition and operating leverage; and 3) the M&A pipeline remains robust with opportunity both in Canada and in the US going forward. Today's results, while in line with expectations, further support our positive view on the shares. Reiterate OP.
Key points:
Q3/21 in line. Adj. EBITDA of $28MM (excl. CEWS) was in line with our $27MM and consensus $29MM. Revenue of $104MM (RBC: $103MM) was in line and benefited by $2.6MM from vaccine distribution during the quarter. EBITDA margins of 26.7% (RBC: 26.1%) were better than expected due to lower SG&A expenses as a percentage of revenue. Overall, a good quarter for AND.
Margins better than expected in Q3. Adjusted EBITDA margins came in better in Q3 reflecting lower SG&A expenses. Management also noted that the Skelton business in Canada has a margin profile at the high end of the specialized transportation segment margin range, which positively impacts AND’s overall margin. We therefore view recent margin trends as sustainable and, as such, our 2022 EBITDA margin estimate increases to 26.4%, from 26.0%, and our 2023 estimate to 26.7%, from 26.2%. Revenue estimates up slightly on Dedicated and Last Mile. Revenue came in above expectations in Q3. While we expect Ground Transportation to come off Q3 levels as vaccine distribution slows, we believe that organic growth in Dedicated and Last Mile is sustainable into 2022 and 2023. Accordingly, our 2022 revenue estimate increases to $521MM (from $519MM) and our 2023 estimate to $553MM (from $550MM). Importantly, commentary from the call supports our out year assumptions for high-single digit organic revenue growth.
M&A remains key to our thesis. We continue to view M&A as key to our investment thesis on AND. On the call, management noted that they still see opportunity for M&A in Canada and our view is that AND's US platform will be used to support M&A in the US going forward. We continue to build M&A into our valuation and expect management to remain active in 2022, which was supported in our view by commentary on the call. We also note that the balance sheet with 1.7x leverage remains well positioned for further deals, and implies, assuming leverage of 3x, approximately $180MM of dry powder.
Price target increases to $56, from $55; maintain Outperform. We remain positive on AND shares and Q3 results largely reinforced that view. Our estimates are up slightly and our target multiple remains unchanged at 16x. We estimate intrinsic value by applying our 16x multiple to our 2023 EBITDA estimate, which we adjust for M&A. This results in our $56 share price. Maintain OP.
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