Mullen Group Ltd. T.MTL

RBC raises Mullen Group's target from $15 to $17

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July 21, 2022 Mullen Group Ltd. Significant beat and raise; strong pricing and tight capacity sets stage for robust H2

Our view: MTL posted a Q2 result that came in significantly above expectations. Guidance was also raised meaningfully, well ahead of our and consensus estimates coming into the quarter. Overall, we are very positive on the print, and point to an attractive value opportunity with a mid-teen FCF yield on our 2023 estimate. While mgmt pointed to a slowdown in M&A reflecting macro uncertainty, we expect cash generation to provide good optionality into 2023. We continue to see value in MTL at these levels, and reiterate OP rating.

Key points: Q2 results well ahead. Adj. EBITDA of $94MM was significantly above consensus $66MM (RBC: $64MM). Revenue of $522MM was also well ahead of consensus $456MM (RBCe: $449MM). Margins came in at 18% (RBCe: 14.3%). Overall a very solid quarter for MTL. 2022 guidance up meaningfully, with further upside likely in our view. Management raised their 2022 EBITDA guidance to $300MM, from $260MM, on the back of solid pricing, tight transport capacity and a robust capital outlook. This compared to our and consensus estimates coming into the quarter of $266MM and $264MM, respectively, and we are therefore taking a positive view on the guide. Key however is that despite Q2 EBITDA coming $30MM above our expectations, the implied H2 guide only suggests $5MM of upside versus our prior estimates, and given solid Q2 exit trends, we therefore view the guide as a touch conservative. Management taking a cautious approach to further M&A. Management highlighted on the call that the M&A market is full of opportunity, with potential deals trending above historical trends. However, management is taking a cautious approach, which we view a prudent given macro uncertainty. Management therefore expects to utilize free cash as dry powder, a strategy we view as prudent. Post Q2 however, we therefore reduced the amount of M&A we build into our valuation methodology. Estimates higher.

We are bringing higher our 2022 EBITDA estimate to reflect robust Q2 exit trends. Our 2022 estimate increases to $316MM (from $266MM) and above guidance for $300MM. Our 2023 EBITDA estimate also increases to $330MM (from $274MM). Price target to $17 (from $15); maintain Outperform. We remain positive on MTL shares post Q2 results reflecting a >15% FCF yield on our 2023 estimate. Our target price increases to $17 (from $15) reflecting our higher 2023 estimate applied to our target multiple of 7x (from 7.5x), which we brought lower to reflect macro uncertainty. We reiterate our positive view on the shares and maintain our Outperform rating.

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Their upside scenario target is also raised to $23.00. GLTA