(UNS-T) C$29.20
Impressive Start to 2022; M&A Potentially on the Horizon Event
Q1/22 adj. EBITDA of $45.2mm was 22.1% above TD's estimate of $37.1mm and 28.8% above consensus ($35.1mm), reflecting stronger adjusted EBITDA margins of 11.0% (TD: 9.3%) and stronger-than-expected revenue across all segments.
Impact: POSITIVE
Q1/22 results were very impressive, particularly given the significant supply- chain and labour headwinds. Revenue increased 10.7% y/y to $409.6mm (TD: $397.7mm). Organic growth of 11.6% was above our estimate of 7.7%, reflecting significantly stronger-than-anticipated results from both aftermarket auto parts divisions. Management noted that it saw solid market demand and volume growth, but that organic growth was slightly tilted towards price, reflecting the inflation pass- through. In terms of the supply chain, management noted that its ability to source auto parts has remained relatively static with no material improvement or deterioration in recent weeks.
Adjusted EBITDA margins of 11.0% (TD: 9.3%) continue to be a highlight,
reflecting the benefits of the significant restructuring initiatives during the pandemic, a resumption of vendor rebates, and operating leverage. Importantly, management noted that the current margins are not being materially affected by one-time items that could normalize; specifically, it noted that the upside from inflationary pricing pass-through is not as significant as might be expected based on headlines (i.e., paint raw material inflation of >25%), given UNS' focus on tight inventory management and higher-turnover, combined with added labour and logistics cost impacts. Looking forward, management believes the TTM EBITDA margin of ~9.8% is sustainable.
Leverage declined to 1.8x (ND/EBITDA, excl. leases/converts) and management indicated that it is now positioned to pursue growth initiatives, including greenfield store openings and investments in customer incentives. On the M&A front, management noted that it is in active conversations with various parties and that it is hopeful it will be able to complete acquisitions this year.
TD Investment Conclusion
We are maintaining our BUY recommendation and increasing our target price to C$36.00, reflecting our updated estimates. Although the operating environment remains challenging, given supply-chain and labour headwinds, UNS' new team is delivering strong results in its turnaround strategy. In our view, the business is back on solid footing and ready to execute on growth, with potential to unlock significant value through M&A.