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August 5, 2021
Outperform
Price Target CAD 43.00 ↑ 42.00
Exchange Income Corporation
Q2/21 Preview: ROne recovery and Provincial to drive Q2 performance, offset margin softness at Quest
Our view: Exchange has done a commendable job managing through the pandemic, generating sufficient FCF to fund its capital allocation priorities and execute on strategic acquisitions. While it is expected that Q2 will face similar headwinds to those experienced during Q1, we see reasons for optimism (easing of travel restrictions at the territories, recovery in domestic air travel etc.) that the recovery in key segments is poised to gain steam as we head into 2H/21. We continue to see EIF representing an enticing blend of yield and re-opening upside to investors. Target multiples unchanged; raising PT to $43 (from $42).
Key points:
Moving Q2/21 estimates higher. Our Q2 estimates move higher to reflect the impact of easing travel restrictions in Nunavut and the Northwest Territories towards the end of the quarter, and also the impact from accelerating recovery trends in US domestic air travel at Regional One.As such, we are looking for EIF to deliver consolidated EBITDA of $76MM (from $68MM; consensus $74MM) on total revenues of $309MM (from $302MM; consensus $313MM), with adj. EBITDA margins of 24.5% (from 22.5%; consensus 23.7%). We see further upside to our estimates stemming from accelerating Canadian recovery momentum and increased asset utilization at Regional One.
Headwinds at Quest to weigh on Manufacturing margins in Q2. As previously indicated by management, project-related headwinds and elevated healthy & safety costs are expected to weigh on margins at Quest and impact the Manufacturing segment as a whole. We note that we have already reflected this dynamic in our Manufacturing EBITDA margin forecasts for Q2 (down 500bps Y/Y), and see these headwinds (which we view as transitory) abating as economies within NA continue to re-open.
Recent acquisitions to drive healthy accretion in 2022. Assuming transaction multiples consistent with historical averages, we estimate that the recently announced acquisitions of Carson Air and the three unrelated business will drive EBITDA accretion (on our 2022 estimate) of 6% at the cost of only 1% dilution. Consistent with its planned acquisition strategy, we see the announced transactions as further diversifying EIF's revenue and cash flow streams while further improving the company's competitive position in the Canadian market via Carson Air.
Longer-term estimates increased to reflect new acquisitions. Our longer- term forecast/recovery assumptions remain unchanged, however we have updated our estimates for anticipated contribution from the recently announced acquisitions (more details on page 3 & 4) and convertible debt refinancing transaction. With that, our 2021E EBITDA goes to $326MM (from $310MM) and our 2022E EBITDA increases to $403MM (from $382MM). Keeping our target multiples unchanged at 7.0x, our price target moves to $43 (from $42).
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