Exchange Income Corp wins a target raise from iA Capital

Organic and inorganic growth as well as higher margins look to be in the cards for Exchange Income Corp (Exchange Income Stock Quote, Charts, News, Analysts, Financials TSX:EIF), according to iA Capital Markets analyst Matthew Weekes. In a Thursday review of fourth quarter numbers from EIF, Weekes reiterated a “Buy” rating and nudged his target up from $56 to $57 per share, which at press time represented a projected one-year return including distribution of 13 per cent.

Winnipeg-headquartered Exchange Income Corp, a diversified company focused on acquisitions in the aviation, aerospace and manufacturing sectors, announced on Wednesday its fourth quarter 2022 financials, featuring revenue up 39 per cent year-over-year to $543 million and adjusted EBITDA of $124 million, also up 39 per cent.

“Our long-held strategy of acquiring proven companies with excellent management teams in defensible, niche markets and then investing in and nurturing these companies has proven once again to be a formula for success,” said CEO Mike Pyle in a press release.

“In spite of supply chain challenges, prolonged high inflation rates and interest rates that continue to rise, we have generated annual bests in Revenue, Adjusted EBITDA, Net Earnings, Adjusted Net Earnings and Free Cash Flow less Maintenance Capital Expenditures, increased the dividend rate twice during the year and improved our payout ratios to near all-time bests,” he said.

Exchange Income Corp’s Q4 topline of $543 million was above both the iA Capital forecast at $540 million as well as the consensus at $520 million, while adjusted EBITDA at $124 million was in line with the iA estimate at $124 million and above the Street’s $119 million. 

Weekes noted that EIF’s free cash flow after maintenance was $0.88 per diluted share, which was down about 14 per cent year-over-year. Weekes said the drop was due to shares issued over 2022, along with higher interest rates and taxes and higher maintenance capex.

“We are slightly trimming our 2023 estimates as we take a more cautious approach to some of EIF’s commentary, namely: (a) lower demand anticipated for whole aircraft and engines at R1, and (b) likely some softening of market dynamics for Northern Mat on increased market supply expectations. We continue to build a degree of tuck-in M&A into our model,” Weekes wrote.

The analyst noted management’s reiterated guidance as well as its robust pipeline of M&A opportunities, with management saying the higher interest rates will bring down multiples and increase EIF’s ability to compete with private buyers.

“We reiterate our Buy rating based on (a) EIF’s diversified operations, which mainly consist of essential products and services, serving niche markets and with demonstrated resilience to challenging market conditions; (b) projected double-digit FCF/share growth and continued ROIC improvement in 2023 and 2024 driven by a combination of organic growth, accretive M&A, and margin improvement (primarily in A&A); and (c) reasonable valuation, with the stock currently trading ~7.4x on consensus 2023 estimates and ~6.7x on 2024E,” Weekes wrote.