October 21, 2022
Mullen Group Ltd.
Downgrading Mullen on macro concerns; lack of M&A catalysts
Our view: We are downgrading the MTL shares to Sector Perform (from Outperform) on the expectation for a softening economy in 2023 and the lack of catalysts from an M&A perspective to backstop slower growth. We continue to view the company as well managed and would revisit our rating should macro concerns abate and/or mgmt takes an opportunistic stance on M&A growth.
Key points:
Strong Q3. MTL reported adjusted EBITDA of $98MM, above consensus $90MM (RBCe: $93MM). Revenue of $518MM was mostly in line with our and consensus $525MM; with margins coming in above (18.9% vs. our 17.7%). On a segmented basis, the better than expected results was driven mainly by Specialized and Industrial Services, which saw EBITDA contribution of $25MM (vs. our $20MM).
Guidance increased. On the back of the strong YTD results, the company's higher than expected margin performance prompted mgmt. to point to $90MM in EBITDA on $500MM in revenue in Q4. This results in revenue coming in-line with prior 2022 guidance of $2B, but the implied EBITDA guide of ~$342MM for 2022 is well above the prior $300MM guide, our prior estimate of $316MM and consensus of $320MM.
So why the downgrade? Despite what was very strong Q3 results and increased guide for 2022, we are downgrading the stock for the following reasons: 1) with the current positive trends now announced, we see valuation downside, particularly if we see recessionary weakness emerge in 2023 (which we are now factoring in); and 2) we believe the market will react negatively to mgmt's indication of dialling back on M&A (which in our view was the main driver for the share price weakness yesterday).
Reducing 2023 estimates. While we are increasing our 2022 estimates to factor in the current momentum (going to $342MM in EBITDA for 2022E (from $316MM), consistent with the updated guidance), we are factoring in a recessionary slow-down in 2023. As a result, our 2023 goes to $320MM (from $330MM). We are also adjusting our valuation to attribute less value from acquisitions and shaving 1x off our target multiple to reflect heightened risk associated with macro uncertainty. As a result, our target goes to $13 (from $17) and we are reducing our rating to Sector Perform, from Outperform.