On today’s Breakouts report, there are 49 stocks on the positive breakouts list (stocks with positive price momentum), and 11 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a trust that may surface on the positive breakouts list if analysts’ expectations are correct: – Alaris Equity Partners Income Trust (AD-UN-T). The average one-year target price implies a potential price return of 26 per cent over the next year, not including the attractive 7 per cent yield (potential total return of over 33 per cent including the 7 per cent yield). The trust’s payout ratio is nearing a historical low. The trust has multiple potential catalysts, which may lift the unit price back to pre-COVID levels. Alaris has seven buy recommendations and one “sector perform” recommendation.
A brief outline on Alaris is provided below that may serve as a springboard for further fundamental analysis when conducting your own due diligence.
Calgary-based Alaris provides capital to private companies, referred to as “Partners”, in exchange for income including royalties, dividends, and interest. Distributions received are based on measures such as a partner’s percentage change in revenue, percentage change in same-store sales, and percentage change in gross profit. Distributions are adjusted annually based on a partner’s top line performance in its underlying operations (i.e. organic or internal growth) with specified limitations in many cases (e.g. distribution collar of plus or minus 6 per cent per year).
Alaris currently has 21 partners that operate across four sectors (consumer products and services, consumer financial services, business services, and industrial).
In terms of total annualized partner revenue, no individual partner accounts for more than 12 per cent of Alaris’ total revenue. There are three partners that account for more than 10 per cent of total revenue. Overall, Alaris’ revenue is well diversified.
As of May, Alaris had roughly 85 per cent of its fair value of investments in U.S. companies. As a result, investors should be aware of currency risk. A weaker U.S. dollar negatively impacts Alaris’ revenue. On the first quarter earnings call, the chief financial officer Darren Driscoll indicated that Alaris has forward contracts over the next 12 months, “So you’ll see some realized FX [foreign exchange] gains over the next few quarters that will offset a good chunk of that softness [in the U.S. dollar] that we’re seeing today.”
Alaris operates a lean business with just 16 employees according to their investor presentation released in May.
To fund its investments, Alaris has announced two equity offerings over the past year. Most recently, in March 2021, Alarais completed a $85-million bought deal financing, issuing over 5.3-million trust units at a price of $16 per unit. Prior to that, in Dec. 2020, Alaris completed a $46-million bought deal offering, issuing over 3.3-million units at a price of $13.75 per unit.
· Attractive yield. Payout ratio nearing a historical low.
· Revenue growth. Opportunities to deploy capital and enter into new partnerships.
· Diversified investments.
· Potential catalyst: Resumption of distribution growth as organic revenue growth recovers from the coronavirus pandemic. Historical organic (internal) annual revenue growth from its partners is between 1 per cent and 6 per cent.
· Potential catalyst: Due to COVID-19, distributions from PFGP (Planet Fitness Growth Partners) were deferred in the second quarter of 2020. Partial distributions, 40 per cent, are currently being received. In July 2021, the resumption of full distributions is anticipated, which would reduce the payout ratio by approximately 4 to 5 per cent. Planet Fitness was severely hit by COVID-19 with fitness gyms forced to close.
· Potential catalyst: Potential redemption or repurchase of its investments in Kimco Holdings LLC and Federal Resources Supply Company netting Alaris attractive gains above book value. Proceeds could be redeployed into other businesses.
· Ownership aligned with unitholders. Management executives and trustees own approximately 10 per cent of the trust units outstanding.
On May 6, the company reported first-quarter financial results that were in-line with the expectations. Revenue came in at $32.2-million, down 5 per cent year-over-year, in-line with management’s guidance. Normalized EBITDA (earnings before interest, taxes, depreciation, and amortization) was $28.8-million, just above the consensus estimate of $28.3-million. Earnings per unit was 56 cents.
Looking ahead, management is guiding to revenue of $33.8-million in the second quarter. The consensus estimate is currently $33.1-million.
Alaris will be releasing its second quarter financial results after the close on Wed. July 28 and hosting an earnings call the following day at 11 a.m. (ET). To listen to the conference call, investors can dial 1-866-475-5449.
Alaris pays its unitholders a quarterly distribution of 31 cents per unit or $1.24 per unit yearly, equating to a current annualized yield of 7.4 per cent.
Management expects the payout ratio to decline to below 65 per cent – its lowest historical level – if full distributions from Planet Fitness restart in July.
The distribution used to be much higher. In May 2020, management announced a 30 per cent distribution cut, slashing its annualized distribution to $1.16 per unit from $1.65 per unit due to impacts from COVID-19.
There are eight analysts who cover Alaris, of which seven analysts have buy recommendations and one analyst (Scotiabank’s Phil Hardie) has a “sector perform” recommendation.
The firms providing research coverage on the trust are as follows in alphabetical order: Acumen Capital, CIBC Capital Markets, Cormark Securities, Desjardins Securities, National Bank Financial, RBC Capital Markets, Scotiabank, and Stifel Canada.
In June, two analysts tweaked their target price slightly higher.
· Acumen’s Trevor Reynolds raised his target price to $23 from $22.50.
· National Bank’s Zachary Evershed lifted his target price to $23.50 from $22.50.
According to Bloomberg, the Street is anticipating revenue of $140-million in 2021, rising 11 per cent to $155-million in 2022. The consensus EBITDA estimates are $121.8-million in 2021, increasing over 12 per cent to $137-million in 2022.
Financial forecasts have been rising. For instance, four months ago, the Street was forecasting revenue of $125-million in 2021 and $143-million in 2022. The consensus EBITDA estimates were $111-million in 2021 and $128-million for 2022.
According to Bloomberg, Alaris is trading at an enterprise value-to-EBITDA multiple of 8.3 times the consensus 2022 estimate, in-line with its five year average of 8.2 times.
The average one-year target price is $21.19, suggesting the unit price has 26 per cent upside potential. Individual target prices are as follows in numerical order: $18 (from Stifel’s Anoop Prihar), two at $20, $20.50, $21, $23, and two at $23.50.
Insider transaction activity
Over the past year, there has not been any trading activity in the public market reported by insiders.
Last year, uncertainties surrounding the coronavirus crushed the unit price. The unit price closed at $23.33 on Feb. 6, 2020 and closed at $6.25 just weeks later on March 23, 2020. The unit price has yet to return to pre-COVID levels.
Year-to-date, the unit price is up 11 per cent.
Right now, the unit price is consolidating, or trading sideways. Since the beginning of the year, the unit price has trading largely between $15 and $17. The unit price is currently at the upper end of this trading band.
Should the unit price break above $17, the next major resistance level is around $20. Looking at the downside, the unit price has strong technical support around $15, near its 200-day moving average (at $15.21).
Please note that this report is not an investment recommendation. The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indices that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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