TSX:SES - Post Discussion
Post by
retiredcf on Mar 04, 2022 9:00am
RBC
Their upside scenario target is now $10.00. GLTA
Secure Energy
4Q21 - Fundamentals remain sound; Capex discipline key to re-rating
Our view: Secure's 4Q21 results were slightly ahead of Street expectations, but the stock sold off by 10.5%. We believe the selloff was overdone given the lion’s share of 2022 FCF remains earmarked for debt repayment, despite higher growth capex spend. In our minds, execution of the company’s absolute debt reduction targets remains the clearest path to multiple expansion and lowering its cost of capital, thereby increasing competitiveness when negotiating larger projects in the future. We maintain our Outperform rating and $8.50 price target. Our 2022/23 EBITDA estimates increase by 5/4%, respectively. Secure is on our Global Energy Best Ideas list.
Key points:
Solid results. Revenue of $327MM was above our estimate of $322MM and Street of $316MM. Adj. EBITDA of $111MM compared to RBC/Street estimates of $107/107MM. Secure has realized 53% of the $75MM forecast merger integration cost savings. Capital spending of $17MM was above Street consensus of $10MM.
Capex discipline key to multiple expansion, in our minds. Secure plans to spend $100MM capex in 2022, including $45MM growth. Growth capital expenditures map to 15% of our pre-growth free cash flow estimate, leaving the lion's share available for debt repayment. Execution on debt reduction targets remains the key to multiple expansion and lowering its future cost of capital, in our minds.
Leading free cash flow margins. We expect Secure to generate $257MM of pre-dividend FCF in FY22 for a 15% yield. Given strong FCF generation, we see the company reducing its net debt/EBITDA leverage to 2.1x by YE22E and 1.3x in YE23E (excluding lease liabilities). Secure repaid $47MM debt through the first two months of 2022.
Estimate changes. We increase our 2022/23 EBITDA estimates by 5/4% to $453/506MM, versus the Street consensus of $453/482MM. Our 2022/23 EBITDA margin assumptions increase modestly to 33/34% on higher Midstream Infrastructure revenue mix.
Valuation compelling. Secure is trading at a 2023E EV/EBITDA of 5.7x. We continue to believe the company is primed for revaluation due to: 1) Favorable free cash flow margin characteristics; 2) Improving balance sheet and eventual shareholder returns; and 3) Eventual removal of Competition Tribunal overhang.
Maintain Outperform rating and $8.50 price target. Our $8.50 price target is based on a 7.5x multiple of our 2023E EBITDA of $506 million. We apply a multiple above OFS peers of 6.5x based on our analysis of stock- specific factors within our valuation framework. We believe Secure is well positioned given its exposure to recurring revenue and increasing mix of longer-term revenue contracts, strong corporate EBITDA and FCF margins
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