Post by
retiredcf on Oct 21, 2022 8:52am
CIBC 2
Maintain their $15.00 target. GLTA
EQUITY RESEARCH
October 20, 2022 Earnings Update
MULLEN GROUP LTD.
Weakening Freight Outlook Overshadows A Strong Q3 Print
Our Conclusion
MTL reported better-than-expected Q3 results and pointed to Q4 results
ahead of expectations. Nonetheless, the stock is down over 8% on fears of a recession next year. While MTL and the broader freight industry face an uncertain outlook, we do believe the company is positioned to weather the storm given its strong balance sheet position, better pricing dynamics in Canada, and M&A/FCF optionality. MTL is Neutral rated with a $15.00 price target.
Key Points
As we get through Q3 earnings season, a number of freight/logistics
companies have either indicated they are not seeing a slowdown in demand or that conditions have been weaker exiting the summer with expectations of a softer peak season. MTL is in the former camp as the company is calling out a strong Q4 with EBITDA potentially reaching $90MM. For context, prior to the Q3 release we were modeling $77MM in EBITDA and consensus was $77MM. MTL does acknowledge though that activity could moderate in 2023 and so while not all freight companies are facing a slowdown today, it is a question of when not if. With that in mind, we do view MTL as well positioned to weather a potential economic slowdown.
1) Its S&I division, which contributes 23% to total earnings in 2022E, should continue to benefit from a healthy energy market. Our Energy team is forecasting a WTI price of $95 in 2022 and $81 in 2023 while Canadian rig counts are up over 30% versus the Q4/21 average.
2) History has shown that MTL can hold onto margins during an economic slowdown. Back during the Great Financial Crisis, recognizing MTL’s business mix has changed, its EBITDA margins did not fall more than 150 bps Y/Y from 2007 to 2010. We expect the company to adjust its cost structure quickly in the event of a slowdown. Third, the underlying
yield environment in Canada looks to be stronger than in the U.S.. While
U.S. freight rates have been falling for much of this year, in Canada, we
continue to see upward momentum. For example, MTL noted general
rate increases have added $11.5MM in LTL revenue YTD and $57.1MM
in L&W revenue YTD. We also continue to see the Canadian General
Freight Index grind higher, up 1.6% M/M in July.
3) MTL noted its debt to operating cash flow covenant under the private
debt agreement is down to 1.98:1, which is the lowest level since 2014.
While MTL is not actively pursuing any M&A, its FCF generation and
balance sheet provide investors optionality around inorganic growth
opportunities or accelerating shareholder returns.