TSX:TCW - Post Discussion
Post by
retiredcf on Aug 12, 2023 8:19am
RBC
Their upside scenario target is $7.00. GLTA August 2, 2023
Trican Well Service Ltd.
2Q23 - Compounding benefits accrue
Outperform
TSX: TCW; CAD 4.19
Price Target CAD 5.50
Our view: We update our models for Trican's recent 2Q23 results, which were solid and contained relatively few surprises. We believe the company's strong FCF performance and share repurchases are beginning to show in its ability to potentially increase its dividend on a cash-neutral basis over the next year. We adjust our 2023/24 EBITDA estimates by 1/7% and maintain our Outperform rating and $5.50 price target.
Key points:
Compounding is the 8th wonder of the world. At our forecast of $60MM share repurchases over the next 12 months, Trican can effectively raise its quarterly dividend by 9% to $0.045/share in mid-2024 on a cash-neutral basis. This rough math is based on the current share price, though we're happy to be wrong if the stock appreciates. For context, Trican repurchased 8% ($57MM) of its outstanding shares in 1H23 and 41% of outstanding shares since 2017.
Differentiation strategy is an evolution.
Trican has upgraded 5 of its 7 active fleets to Tier 4 DGB in recent years and has begun electrifying its blenders and data vans. When the company started its Tier 4 program, the equipment was considered differentiated in Canada, but the bar for differentiation has moved as competitors performed similar upgrades. As the Tier 4 program slows down, we think it makes sense for some of that capital to be effectively transferred to new efficiency and margin enhancing projects, such as sand handling. We model $100MM capex for FY24.
Solid results. Adj. EBITDA of $31.9MM ($32.9MM before Stock-based comp) was $6.0MM (23%) above our estimate, driven by 391 bps better margins. Effective pumping horsepower utilization for TCW's 7 active fleets was 35%, below 2Q22 at 43%. TCW had 20 cementing crews active (15 in 2Q22) and 7 coiled tubing crews (6 in 2Q22) On a Yr/yr basis, Trican's proportion of pressure pumping pressure decreased to 68% (73% 2Q/22) of total, while cementing increased 23%.
Increasing near-term estimates; continues to trade at a premium to frac peers. We increase our 2023/24 EBITDA estimates by 1/7% to $246/262MM, versus the Street consensus of $248/264MM. Our 2025 calls for an EBITDA of $275MM. We expect TCW to generate approximately $102MM in pre-dividend FCF in 2024, mapping to a 10% margin of revenue (pressure pumper peer average: 7%). TCW is trading at 2023E/24E EV/ EBITDA multiples of 3.6/3.4x (3.2/3.0x frac peers). We believe a premium multiple is justified given the company's clean balance sheet and higher stock liquidity.
Maintaining Outperform rating and $5.50 price target. Our price target is based on a rounded 4.5x multiple (unchanged) of our revised 2024 EBITDA estimate. We assign a premium multiple to frac peers, reflecting Trican’s low-debt capital structure, strong FCF margins, and higher stock liquidity.
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