TFI International Inc T.TFII

TD Upgrade

[retiredcf]

TFI International Inc.

(TFII-T) C$132.16

Industry Conditions Facilitate TFI Strategy & Profit Growth Event

TFI reported Q4/21 results after market close on February 7. Adjusted diluted EPS of $1.57 was ahead of our forecast of $1.24 and consensus of $1.23. Adjusted EBITDA of $319 million was ahead of TD/consensus at $271 million/$268 million.

Impact: POSITIVE

We are upgrading our recommendation to BUY from Hold and increasing our target price to C$160.00 from C$145.00. Our target-price change is due to higher valuation-period forecast Adjusted EBITDA and a shift forward of our valuation period by one quarter. Our higher forecasts are due to carrying forward a portion of the stronger-than-expected margins in Q4/21, updated assumptions regarding the OR improvement opportunity in U.S. LTL, in particular, and other modelling adjustments. The strong pricing environment is expected to continue offsetting labour shortages, expense inflation, and new equipment delays in the short term while network efficiency improvements, new rolling stock, contract repricing, and a further recovery in B2C volume are expected to prevent margin contraction when pricing tailwinds become headwinds as we expect will happen in 2022.

Management introduced guidance for 2022, with full-year adjusted EPS in the range of $6.25-$6.50 and FCF expected to be greater than $700 million. Guidance assumes no M&A or share buybacks. We believe that guidance could prove conservative, assuming the current industry supply/demand imbalance remains relatively unchanged and fosters strong freight pricing.

TFI is navigating the challenges of supply-chain disruptions, labour and equipment shortages, and cost inflation by improving efficiencies, passing on higher costs to customers, and remaining focused on profitability and returns on capital. Sector valuation multiples began to pull back in 2021 and early-2022. We believe that this healthy correction has created another excellent entry point for an investment in TFI. We believe that TFI's discounted valuation relative to comps, superior growth potential, track-record of shareholder value creation and FCF yield will result in attractive risk-adjusted share-price upside over the next 12 months.

TD Investment Conclusion

We believe that TFI's above-average historical and forecast growth, prudent financial leverage, and track-record of shareholder value creation, together with the strong pricing environment and demand outlook, support a higher share price and our BUY recommendation.