CFL - Canadian Equipment Rentals

[InspireByReason]

Canadian Equipment Rentals Corp is engaged in equipment rentals, equipment sales and service, and waste management services based out of Alberta.

 

The CEO owns 18% of the company's stock.

 

This is a cyclical play that is protected by its more predictable income from it's landfill waste management operations. Currently selling at a P/B of 0.2 it started losing money when the oil industry took a hit. The company has been diversifying by purchasing rental companies that service the oil industry and general contractors using stock.

 

Any thoughts?

[rb]

Not familiar with the company. Of course price matters, but generally doing acquisitions with stock when it 0.2 P/B doesn't strike me as a good idea.

[Uccmal]

I had a (brief) look.  The debt load is very high.  I like the business the company is in, but not the situation. 

 

comments:

 

Debt: debt is 43 million; 13 million higher than last year.  I cant believe someone is buying notes from them in the past year - Insiders? Anyway, huge debt.  Its bleeding cash and someone is financing it. 

 

Stock Options: issued in May after the two acquisitions - Really? 

 

I get the acquisitions - basically equipment from broken competitors. 

 

I dont believe the headline book value number, or maybe to rephrase: I think at the moment the company is worth less than zero dollars after the debt is paid out.

 

If you invest like Ben Graham, or Walter Schloss, this company would fit nicely.  If you invest like me then it wont fit.  Oddballstocks might like this one. 

[InspireByReason]

Not familiar with the company. Of course price matters, but generally doing acquisitions with stock when it 0.2 P/B doesn't strike me as a good idea.

 

Thanks for your response. I have been reading primarily Ben Graham which is why I've turned up this rock. Would you mind explaining the stock options part? Just comes off as greedy?

[Uccmal]

Not familiar with the company. Of course price matters, but generally doing acquisitions with stock when it 0.2 P/B doesn't strike me as a good idea.

 

Thanks for your response. I have been reading primarily Ben Graham which is why I've turned up this rock. Would you mind explaining the stock options part? Just comes off as greedy?

 

Who are you asking, me, or rb?  If your asking me:  This company issued stock options in May 2016 to senior staff while the company is struggling on every front.  You be the judge. 

[wachtwoord]

Rb was saying that paying for acquisitions with stock doesn't seem like good capital allocation if the stock is objectively cheap (0.2 p/b). Either that or book is overstated and they know it.

[InspireByReason]

Rb was saying that paying for acquisitions with stock doesn't seem like good capital allocation if the stock is objectively cheap (0.2 p/b). Either that or book is overstated and they know it.

 

Most of their acquisitions were completed prior to the drop in price and the last one was done at .70 cents nearly 3x its current price. The largest shareholder owned a large amount of shares in the last acquisition completed. I have a difficult time analyzing a situation like that. He wouldn't want to screw himself out of money, would he?

[Uccmal]

InspireByReason,

 

It is generally polite to acknowledge that someone assisted you on an investment idea thread.  Unlike the other two posters on this thread I actually put in some effort and looked at the companies reports and you ignored my posts.  Definitely wont be helping you again!

 

 

[InspireByReason]

Oh hey! Sorry Uccmal I'm a newbie at posting in forums. I didn't understand what was going on, part of my response to RB was supposed to be directed towards you. I'll keep that in mind in the future for when I use the quote function! I even messaged oddballstocks like you suggested so thank you! and sorry for the mixup.  :-\ :)

 

What I was thinking is that the debt load is very high because of the nature of the business, they finance equipment then rent it out and business has been really good until the oil crash but the equipment is still good. How good I guess is the question.

[Uccmal]

Oh hey! Sorry Uccmal I'm a newbie at posting in forums. I didn't understand what was going on, part of my response to RB was supposed to be directed towards you. I'll keep that in mind in the future for when I use the quote function! I even messaged oddballstocks like you suggested so thank you! and sorry for the mixup.  :-\ :)

 

What I was thinking is that the debt load is very high because of the nature of the business, they finance equipment then rent it out and business has been really good until the oil crash but the equipment is still good. How good I guess is the question.

 

Yeah, Im sorry as well.  I was pretty grumpy last night. 

 

Cheers Al

[sculpin]

Canadian Equipment Rentals Corp. (CFL; C$0.37) Aaron MacNeil, CA.403-539-8625

CFL: Transferring Coverage - Potential for Positive Momentum

Rating: Speculative Buy; C$0.60 target

 

 

·        Investment Thesis: In our view, Canadian Equipment Rentals is a call on the new management team’s ability to execute a downturn growth via acquisition strategy and to manage its costs throughout the downturn such that investors see improving relative performance from the existing asset base. The waste management segment provides the company with a baseline of revenue and cash flow that features several long term contracts with strong contract renewal rates. Leverage ratios are clearly a near-term risk for the company, with our forecast implying covenant breaches as early as Q3/16. Ultimately, we are encouraged by the new management team and note that Canadian Equipment Rentals is a much different looking company than it was a year ago, however, we want to see an answer to the debt issue and positive momentum from the new management team in print (see page 6) before we consider it as an Outperform.

 

·        Transferring Coverage with a Speculative Buy: We are transferring coverage on Canadian Equipment Rentals with a Speculative Buy rating and a target price of $0.60 per share. Our target is based on our Sum of the Parts valuation methodology and equates to an EBITDAS multiple of 5.2 times and our 2017 estimates.

 

·        Business of the Company: Canadian Equipment Rentals has three reportable segments, including:

 

·        Energy Services: A provider of wellsite accommodations (58% of assets), surface rentals (34% of assets), and downhole equipment including heavy weight drill pipe (8% of assets).

 

·        General Rentals: Also a rental business focus with heaters (20% of assets), generators (16% of assets), compaction (10% of assets), compressors (9% of assets, and other tools that have exposure to industrial, commercial and residential construction applications in Alberta

 

·        Waste Management: this division operates 6 landfills and 2 transfer stations on behalf of local governments under long term contracts

 

·        As such, the company has direct exposure to WCSB activity levels through its Energy Services segment as well as indirect exposure, given the Alberta economy’s weighting to the oil and gas sector that typically follows a similar but lower magnitude and lagging revenue pattern.

 

Strengths & Weaknesses

 

Strengths:

 

 Energized New Management Team Focused on Growth – The company has refreshed its entire senior management team, including the additions of Artie Kos (Chairman and CEO) and Austin Fraser (President) in December 2015, as well as Todd Ziniuk (COO) in March 2016 in conjunction with the Zedcor acquisition and Ken Olson (CFO) in May 2016. These four individuals have ~85 years of combined industry experience and the company has also made changes at the divisional level. This, along with a handful of meaningful recent acquisitions makes Canadian Equipment Rentals a much different company than it was a year ago. The company has historically had low relative returns on invested capital and, based on discussions with management, we are constructive on its relative improvement going forward. We’re encouraged by the company’s potential but want to see this energy manifest itself as improved financial performance (see page 5).

 

 Stability of the Waste Management Division – We believe that both oilfield service and general industrial equipment rentals businesses in Alberta will continue to be challenged as oil and natural gas commodity prices have immobilized capital spending in both the energy industry and the Alberta economy more broadly. As such, we believe that the company’s Waste Management segment is such a critical differentiator for the company relative to its peers as it brings a baseline of stable cash flow and reduces Canadian Equipment Rental’s entity specific risk. Alternatively, this division could address the company’s elephant in the room, $46.6 MM of net debt and growing leverage ratios amid deteriorating industry conditions. While certainly not the only lever that the company has at its disposal, we would view the monetization of this business as positive, given that managements expertise is weighted to the oilfield services space as well as the multiple that this business could attract. Specifically, several of its larger peers trade in a multiple range between 6.0x and 10.0x EBITDAS.

 

Weaknesses:

 

Leverage – At the end of the first quarter, the company had $44.2 MM drawn on $55.0 MM in credit facilities and a $5.0 MM face value, 5% note payable due in 2021. In April 2016, the company reached an agreement with its syndicate that relaxed its covenants, however, we still forecast covenant breaches beginning in Q3/16. The company continues to work on a solution and has multiple levers that it can pull to stay onside of its covenants (targeted asset sales, sales of divisions, equity, etc.).

 

Low Barrier to Entry and Meaningful Overcapacity – While this is certainly not unique to Canadian Equipment Rentals, we would characterize the oilfield services and general industrial equipment rentals businesses as ones with low barriers to entry (capital, intellectual property, brand loyalty), that currently feature significant overcapacity of equipment for current activity levels with a large number of competitors. While Canadian Equipment Rentals continues to backfill market contraction with acquisitions, including Zedcor in February 2016 ($21.4 MM) and Summit Star in May 2016 ($0.75 MM), our 2016, 2017, and longer term estimates do not presume a recovery to 2014 levels in the rig count over the medium term. Therefore, equipment attrition must occur and our view remains that while competitors may go bankrupt, the equipment will not necessarily go away, as recapitalization often occurs and contributes to a longer term trend of underperformance with respect to pricing tension.

 

Introducing our 2016 and 2017 Estimates

 

Our industry activity level estimates are based on AltaCorp’s commodity price deck and we forecast activity levels based on a relative discount or premium to industry activity. Pricing assumptions are largely based on activity and our assumptions on supply and demand. We also rely heavily on discussions with companies and other industry experts.

 

Albeit by varying degrees, all three of the company’s divisions have exposure to drilling activity levels in the WCSB, either directly (Energy Services) or indirectly (General Rentals, Waste Management) given the Alberta economy’s weighting to oil and gas. We estimate that 3,500 wells will be drilled in 2016 and 5,500 wells will be drilled in 2017, resulting in total industry drilling days of ~42,600 and ~68,200 respectively. Importantly, 2016 drilling days are expected to drop by 35% over 2015 levels, as E&P’s reign in spending to better approximate cash flow and focus on debt repayment. Our Q2/16 Preview report published on July 11, 2016 (link) and our Drilling Cycle Initiation Document published on May 16, 2016 (link) provide more details on our activity level assumptions.

In 2016, we are forecasting EBITDAS of $4.2 MM, down 65% from 2015. This decrease is a combination of decreased revenue across rental business segments in Canada and the US. In 2017, we do forecast a meaningful recovery in EBITDAS, with an estimate of $11.7 MM. We are also modelling capital programs in 2016 and 2017 of $3.5 MM and $3.5 MM, respectively, both of which are well within its cash flow.

[InspireByReason]

I don't understand why people use EBITDA multiples to value businesses it seems nonsensical to me. The analyst seems to have a relatively positive outlook for the company. I agree and my initial thinking was the reason it's a good buy is because of the waste management segment. New management for a different kind of game! Cutting costs, we will see I suppose.

[InspireByReason]

Just a quick update if anyone is interested. Management decided to sell off the Waste Management segment for a little above book value @ @12m to pay down existing debt. Oil prices have been slowly recovering to just hovering above $50 a barrel at the moment. Stay tuned!