Mullen Group Ltd. T.MTL

TD

[retiredcf]

EARNINGS UPDATE

FORECAST UPDATE; SIGNIFICANT MULTIPLE EXPANSION POTENTIAL

THE TD COWEN INSIGHT

We are making adjustments to our forecast to reflect updated macroeconomic, FX, interest rate, and other minor modelling assumptions. We continue to believe the 6.0% dividend yield, prudent capital allocation, solid Q2/24 results and historically low valuation should attract both income and value seeking investors.

Impact: NEUTRAL

We are decreasing our target to $21.00 from $22.00 and maintaining our BUY recommendation. The decline in our target reflects lower forecast EBITDA and EPS, and higher valuation-period net debt. The bias lower to our forecast reflects refined Q3/24 modeling assumptions based on recent industry data, and other minor adjustments. Our Q3/24 adjusted EBITDA forecast is slightly below consensus, and implies a slight y/y decline in EBITDA. We don't believe that the risk of below consensus Q3 results is material enough to justify waiting for reporting, but would recommend buying the stock for numerous other reasons that we believe are more important drivers of a 12-month return.

Mullen generated Q2/24 EBITDA growth of 3% despite a 5% decline in organic revenue, and a backdrop of challenging retail inventory and capital spending trends. Mullen's LTL segment generated a 20% Q2/24 EBITDA margin compared to its much higher multiple LTL comps (ex-outlier) which generated average EBITDA margins of 14.3%. We forecast 70 bps of LTL EBITDA margin expansion in 2024 driven by cost control and M&A-driven lane density improvements (vs. consensus margin expansion of 40 bps for its LTL comps ex- outlier).

Management remains cautiously optimistic regarding H2/24, while not assuming meaningful economic growth, and viewing original 2024 EBITDA guidance as achievable (TD: in-line with guidance). At 9.9x fwd consensus EPS and 6.3x EBITDA, Mullen is trading at a historically large discount to its weighted-average comp group at 21.2x EPS, and 12.1x EBITDA. We believe that a portion of the discount could be related to its exposure to the Canadian consumer and investors' concern about the consumer outlook heading into 2025. However, as outlined in our recent note Growing Concern Over Cdn Consumer Supports Risk/Return Scenarios, we believe the share price downside risk is limited primarily due to its overly punitive valuation discount. We believe the valuation fails to reflect management's track record, the company's strong b/s, M&A execution/potential, expected return to EPS growth in 2025, and shareholder friendly capital return program.