Mackie Research Capital analyst Afzaal increases target price on NewAlta

Mackie Research Capital analyst Raveel Afzaal says NewAlta trades at a discount to its peer group, but could tighten the gap if it can consistently deliver 20% Adjusted EBITDA growth

Mackie Research Capital analyst Raveel Afzaal says NewAlta (TSX:NAL) was able to deliver fiscal 2013 results that were decent despite real weakness in drilling activity in the early part of last year.

Last Friday, NewAlta reported its fourth quarter and fiscal 2013 results. For the year, the company generated EBITDA of $156-million on revenue of $783.4-million.

CEO Al Cadotte summarized a 2013 that started slowly.

“Our start to the year was weak, weighed down by reduced market demand and lower prices for our products; however, performance improved as the year progressed,” he said. “In the final three quarters of 2013, before non-recurring items, adjusted EBITDA grew by 20 per cent over the prior year. The last three quarters are indicative of the results we expect from our business plan.

Afzaal notes that, excluding non-recurring charges, NewAlta was able to grow its Adjusted EBITDA by 10% over fiscal 2012 to $156mm. He expects that the company will be able to double that, to 20% growth in fiscal 2014, because of investments the company has made in its Oilfield and New Markets divisions.

In a research update to clients this morning, Afzaal maintained his BUY recommendation, but increased his target price to $21.00, up from his previous target of $18.30.

The Mackie Research Capital analyst says the reason for the increased target is that he has rolled his valuation period from fiscal 2014 to 2015. He thinks the company will generate EBITDA of $213.3-million on revenue of $961.8-million in 2015, and his price target is based on a EV/EBITDA valuation multiple of 7.5x. This number is a discount to NewAlta’s peer group average of 8.9x EV/EBITDA, he notes, but thinks the company could tighten this gap if it can consistently deliver 20% Adjusted EBITDA growth.

Shares of NewAlta closed today up 6.9% to $18.50.