Aveda Transportation and Energy Services Inc. (AVE-V)

Transcription

1 Aveda Transportation and Energy Services Inc. (AVE-V) Strong Q3 Results Driven by Impressive US Growth November 5, 2013 Michael Mills, CFA (902) Aveda reported inline Q3 results, with sales of $23.4 million, up 17% y/y. Growth continues to be driven exclusively by US expansion. US sales, which comprised 74% of total Q3 sales, were up 39% to $17.4 million. Meanwhile Canadian sales were down 20% to $6.0 million as the WCSB continues to experience lumpy demand for rig moving and rentals. Adjusted EBITDA was $3.55 million, up 24% y/y. This matched our Street high forecast. EBITDA margin grew by 80 bps y/y to 15.2%. Reported EPS was $0.25, but backing out onetime items, adjusted EPS came in at $0.07, just below our $0.08 estimate. We do expect the Canadian marketplace to stabilize, but the growth engine will remain south of the border. Texas operations have room to grow (market share gains) and Pennsylvania should begin to benefit from the newly established satellite branch in West Virginia. We also continue to look for management to evaluate opportunities to grow via acquisition into new regions or with new service offerings (e.g. cranes). In terms of our forecast, we are making only minor changes. Our near-term outlook remains largely unchanged, with US market penetration driving improved results. We now model EPS of $0.31 in F2013 (was $0.32) and $0.40 in F2014 (was $0.38). We are reiterating our BUY rating and increasing our 12-month price target to $4.75. We have increased our valuation multiple to 4.5x (from 4.25x) and use a forward net debt figure of $19 million. Our target equates to <12x F2014 EPS. We view Aveda as a potential dividend candidate in 2014 as cash flow generation increases. However, funding growth opportunities remains the top priority of management. Q3 Results BUY (unch) $4.75 target (was $4.00) Previous Close $ month Target Price $4.75 Potential Return 40% 52 Week Price Range $1.42-$3.65 Estimates YE: Dec 31 FY12A FY13E FY14E Revenue ($000s) $83,331 $92,248 $101,991 Adj. EBITDA ($000s) $9,761 $14,298 $16,677 Adj. FD EPS $0.07 $0.31 $0.40 Valuation FY12A FY13E FY14E EV/Revenue 0.7x 0.6x 0.6x EV/EBITDA 5.9x 4.0x 3.4x P/E 48.6x 11.0x 8.5x Stock Data Shares O/S 9,955 (ex. debenture dilution) Market Cap. $33,847 Enterprise Value $57,175 Net Debt $23,328 Tangible BV/share $2.67 About the Company Aveda Transportation and Energy Services is an oilfield hauling and rentals company serving customers rig moving, oilfield services, specialized transportation and oilfield rentals needs across North America. Headquartered in Calgary, Alberta, the company operates from ten locations. Founded in 1994, the Company went public in Stock Performance Volume (Thousands) Price (CAD) Nov Jan Mar May Jul Sep $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 Volume Aveda Transportation & Energy Services, Inc. Source: FactSet Prices Beacon Securities Ltd. 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H

2 Financial Results Aveda reported strong Q3 results, coming inline with our Street high estimates and above consensus expectations. Sales were $23.4 million, up 17% over last year. We had forecast $23.4 million. US revenues grew 39%, more than offsetting the 20% decline in Canadian sales. US revenues accounted for 74% of total sales in Q3, up from 62% one year ago. The new terminals in Midland and Pleasanton, Texas continue to be big contributors, adding $5.2 million in revenue year-over-year. We also saw growth from the Pennsylvania branch, despite lower rig counts (AVE market share gains). The new satellite branch in West Virginia (launched in early Q3) has gotten off to a slow start, but management believes this is still an opportunity for growth. Mineral Wells, Texas has seen revenues decline due to less activity in the Barnett shale, and AVE has decided to move its head office from there to Houston, to be closer to their customers. Exhibit 1: Geographic Revenue Split By Quarter $25,000 $20,000 $15,000 $10,000 United States Canada $5,000 $0 Source: Company reports, Beacon Securities Adjusted gross margin in Q3 was 18.0% (vs 17.5% last year). Adjusted EBITDA was $3.55 million, up 24% from one year ago and inline with our $3.57 million estimate. EBITDA margins improved 80 bps to 15.2%. The use of third party subcontractors increased versus one year ago, due to the uneven activity levels during the quarter, with August representing 46% of total revenues. This had a negative impact on margins. The Company reported Q3 diluted EPS of $0.25, but this included $2.3 million in investment tax credits related to fisal year It also included nearly $0.6 million gain on disposal of equipment. We back these items out, and add back $0.2 million related to accelerated debenture interest payments, to get an adjusted (normalized) EPS figure of $0.07. We had forecast $0.08 and Street consensus was $0.05. November 5, 2013 Page 2

3 Exhibit 2: Historical Quarterly Adjusted EBITDA Margin Performance 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Source: Company reports, Beacon Securities Balance Sheet & Capital Structure Aveda ended Q3 with net debt of $23.3 million, down $11.8 million year-overyear. Debt includes a $4.7 million convertible debenture that is held by WCC (David Werklund), but that is expected to be converted into 1.85 million shares by year-end. The Company has access to a $49.5 million operating facility with PNC Bank Canada at Prime %, with $19.7 million drawn. Cash on hand at quarter-end was $0.7 million. The Company generated cash from operations of $2.3 million in Q3 and spent $1.6 million on capex. Full year capex is expected to come in around $5 million, but the Company could spend another $1.5 million if it decides to proceed with crane purchases (would buy the two cranes being used in the trial). Outlook and Forecast Expansion of US operations, primarily due to market share capture in the Texas market, is expected to continue to drive growth at Aveda. While the early results out of the satellite branch in West Virginia (piggy-backing on Pennsylvania operation) have been slow, we look for activity levels to pick-up with clients in the Utica basin. We expect the Company to examine other such satellite opportunities in areas such as Oklahoma. The outlook for Canada is more subdued, with industry organizations expecting rig activity to be relatively flat in We remain conservative in our expectations from the Canadian operations, but AVE is well positioned should activity improve. We believe it is likely that AVE will go ahead with some crane purchases after a successful trial run with two rented cranes out of the Pleasanton branch. The Company has allocated $1.5 million in capex toward crane purchases in Q4 should it proceed to acquire those two cranes. The Company targets a crane fleet of 6-8 units in Texas. We believe this initiative will help propel sales and margins in 2014, as less use of third party contractors will be required. This, coupled with the ERP roll-out, should help drive margin improvements next year. We also continue to look for management to evaluate opportunities to grow via acquisition into new regions or with new service offerings. November 5, 2013 Page 3

4 Exhibit 3: Beacon Securities Forecast ($ millions, except EPS) Dec. Year End F2013E - New F2013E - Old F2014E - New *New forecast using FD share count of 11.4 million in F2013 and 11.9 million in F2014 Source: Beacon Securities, Company reports Recommendation and Valuation F2014E - Old Revenues $92.2 $92.8 $102.0 $101.3 Gross Margins 19.5% 18.9% 19.6% 20.1% Adjusted EBITDA $14.3 $14.2 $16.7 $16.6 EBITDA Margin 15.5% 15.3% 16.4% 16.3% Net Earnings $3.5 $3.3 $4.8 $4.5 FD EPS* $0.31 $0.32 $0.40 $0.38 We are reiterating our BUY rating and increasing our 12-month target to $4.75 (from $4.00). We have adjusted our valuation multiple to 4.5x forward EBITDA (up from 4.25x) to achieve our new target. This equates to 11.9x F2014 EPS. Our EBITDA valuation assumes a forward net debt position of $19 million (down from $23 million) with 11.9 million shares outstanding. We believe a dividend initiation in F2014 remains a possibility, but will depend upon growth opportunities at hand for the Company. A $0.10/share dividend would cost just $1.2 million annually and generate a 2.9% yield at today s prices. But growth remains the priority. Key Risks Oil & Gas Industry Dynamics Aveda is significantly levered to the general health of the oil and gas industry in North America. Activity levels are driven by global energy pricing, with individual basins impacted differently. Competitive Pressures The Company faces competition, from firms big and small, for contracts. Safety, reputation, and pricing are key components to success. There is also competition for skilled labour. Interest Rate Exposure Aveda is exposed to rising interest rates on its credit facility with interest based on Prime %. Weather and Seasonal Factors Poor weather conditions (extreme cold & wet conditions) can negatively impact operations in any given quarter, but is especially apparent in Canada during Q2 spring break-up. Customer Contracts This is a contract based business, typically booked on short notice (few days to a few weeks in advance). Acquisition Integration and Strategy Aveda has aggressive growth targets in place and is likely to pursue a consolidation strategy. Foreign Exchange - With a significant shift towards US-based revenues, there will be increased FX translation risk. November 5, 2013 Page 4

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