After Step Energy Services Ltd. released better-than-expected financial guidance late Monday, Raymond James analyst Andrew Bradford raised his rating for its shares to “strong buy” from “outperform.”
The Calgary-based company is now projecting earnings before interest, taxes, depreciation and amortization between $42-million and $50-million. The Street had expected $28-million.
“This will be a first-ever 2Q sequential EBITDA increase for any Canadian-listed pressure pumper,” he said, “The fact that STEP’s share price has dropped 24 per cent over the last two weeks (TSX Comp down 8 per cent) makes the investment opportunity all that much more attractive.
“From our viewpoint, STEP was already fundamentally undervalued even before the guidance was issued. At last night’s close, we estimate STEP is priced at 3.1 times current year EBITDA and 2.5x 2023E. STEP’s closest comps are averaging 6.0x current year and 4.1x 2023E. We appreciate STEP’s small market float impacts its value multiples (STEP has a $296-million market cap but only $155-million float capital); but we also believe this multiple disparity is too wide considering its improved U.S. positioning and performance. Further, we believe there is potential upside with STEP’s coiled tubing businesses.”
Mr. Bradford raised his target to $7.75 from $6. The average target on the Street is $7.93.
“Sharp revenue and EBITDA growth also means STEP will be diverting the majority of its discretionary cash flow to working capital; we’re envisioning just $18-million of free cash generation in 2022 – a 10-per-cent conversion rate from EBITDA,” he said. “But as the pace of growth moderates, so will the pace of working capital investment. We envision as much as $96-million of free cash in 2023, equating to a 28-per-cent yield today and a net debt ratio exiting 2023 at approximately 0.5 times.”
Elsewhere, BMO Nesbitt Burns’ John Gibson raised his target to $11 from $7.50 with an “outperform” rating, while Stifel’s Cole Pereira bumped his target to $10 from $7 with a “buy” recommendation.
“The company remains our top pick of the Canadian pressure pumpers given its inexpensive valuation relative to Trican and significant earnings upside as pricing moves higher,” said Mr. Gibson.