Bullboard - Stock Discussion Forum CES Energy Solutions Corp T.CEU

Alternate Symbol(s): CESDF

CES Energy Solutions Corp. is a Canada-based provider of consumable chemical solutions throughout the lifecycle of the oilfield. This includes solutions at the drill-bit, at the point of completion and stimulation, at the wellhead and pump-jack, and finally through to the pipeline and midstream market. Its core businesses include drilling fluids and production and specialty chemicals. Its... see more

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TSX:CEU - Post Discussion

CES Energy Solutions Corp > RBC Raise Target

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Post by retiredcf on Aug 12, 2022 11:23am

RBC Raise Target

August 11, 2022

CES Energy Solutions Corp.
Strong growth leads to negative near-term FCF

Outperform

TSX: CEU; CAD 2.79

Price Target CAD 4.00 ↑ 3.50

Our view: CES's 2Q22 results exceeded Street expectations on higher revenue combined with G&A cost management. Given sharp revenue growth, CES should generate negative FCF in 2022 before turning positive in 2023 as growth moderates and margins improve. We increase our 2022/23 EBITDAC estimates by 15/16%. We maintain our Outperform rating with an increased $4.00 price target ($3.50 prior).

Key points:

Results ahead of Street on higher revenue and G&A management. CES reported revenue and adjusted EBIDTAC of $434M and $61M respectively. Results were ashead of our estimates of $402/$49M (Street $381M/$46M). Annual EBITDAC margin expansion of 268bps is encouraging,although the improvement was driven by G&A management versus gross margin expansion, as adjusted gross margins declined 40bps y/y on sales mix and relative input cost inflation.

Revenue growth ahead of expectations. In the US, CEU generated $300MM revenue (RBC $296MM), up 71% y/y versus the industry rig count improvement of 60%. Canada revenue of $133MM (RBC $106MM) increased 70% y/y, relative to industry rig counts of 50%, for a 33% drilling fluids market share. In 2023, we expect the WCSB rig count to increase 11% y/y, with CEU's revenue rising by 17%.

Senior note indenture amendment. CES amended its Senior Note indenture, increasing its maximum credit facility balance to $400MM or 30% of consolidated tangible assets (prior: $265MM or 1.5x consolidated cash flow). The change reflects the company's larger scale since commencement of the indenture and current working capital requirements.

Working capital growth in line with guidelines. CES's working capital surplus of $575MM has increased by $104MM YTD and remains within its 30-35% of annualized revenue guideline. Given 51% revenue growth in FY22, we expect CES to generate negative FCF in 2022, but positive $102MM in 2023, for a 14% yield. The company has $195MM drawn on its $315MM credit facility.

Increasing estimates. Our 2022/23 EBITDAC estimates increase by 15/16% on higher revenue and increasing margins. We have increased our 2022/23 margin estimates to 13.3/14.4% from 12.1/13.3%. CES also increased its 2022 capex outlook to $50MM from $40MM.

Maintain Outperform rating with a $4.00 price target ($3.50 prior). Our $4.00 price target is based on a 5.0x multiple of our revised 2023 EBITDA estimate. Key factors driving our valuation are CES’s underlying FCF generation capability, offset by lower relative EBITDA margins and stock liquidity.