Enerflex Ltd. (TSX: EFX) engineers, designs, develops, and delivers aftermarket support for equipment, systems and turnkey services, which are primarily used for natural gas from the wellhead to the pipeline. The Group’s wide in-house resources offer the capability to engineer, design, manufacture, construct, commission, and service hydrocarbon handling systems.

Key Updates:

• Bullish Marcos: As per the estimates, global demand for natural gas is likely to grow due to the increased industrial activity, natural gas-fired electricity generation, and transportation fueled by compressed and liquefied natural gas. Notably, consumption of natural gas is expected to by ~30% in 2050. This provides ample opportunities for EFX to expand its business due to an increase demand for services like turnkey facilities used to process and move natural gas from its source.

Source: Company Presentation

• Higher Recurring Revenue enhances income stability: Over the years, the company reported a consistent growth in recurring revenues, which is a key positive and indicates income stability. Notably, recurring revenue grew by ~7% on CAGR basis since 2011. Moreover, the group has reported a better revenue mix, which resulted in an increased contribution from higher-margin recurring revenue product offerings. The above is favorable for the company’s margin improvement.

Source: Company Presentation

• Healthy Balance sheet: At the end of Q1FY22, the company reported a lower D/E ratio of 0.29x, as compared to the industry median of 0.41x. This is a key positive for the group as it leads to lower finance costs along with an improved profitability for the firm. Moreover, a higher D/E would lead to better financial flexibility for the firm.
  

• Dividend Announcement: The company declared a quarterly dividend of CAD 0.025 per share with a payment date of July 07, 2022.

Risk associated with the Investment:

The company offers equipment services to the oil & gas industry, and hence falling crude oil prices coupled with lower oil demand are likely to hit the company’s order book due to lower capital investments from its clients.  

  Q1 FY22 Financial Highlights:

  Q1FY22 Financial Highlights (Source: Company Presentation)

• EFX announced its first-quarter result, wherein the company posted its revenue of CAD 323.0 million, surged from CAD 203.2 million in pcp. The surge was primarily attributed to strong momentum from Engineered Systems and Service segments.
• Gross margin stood at CAD 53.6 million, increased from CAD 45.4 million in pcp, primarily attributed to higher income, partially offset by a higher cost of goods sold.
• The quarter was marked by a higher selling and administrative expenses and reported a significantly lower net finance cost. Hence, earnings before income taxes stood lower at CAD 3.2 million, as compared to CAD 1.5 million in pcp.
• The group posted an income tax expense of CAD 3.6 million as compared to an income from income taxes of CAD 1.4 million in pcp which resulted to a net loss of CAD 0.3 million v/s a net profit of CAD 3.00 million in pcp.

Valuation Methodology (Illustrative): EV to Sales Based

Analysis by Kalkine Group

Stock Recommendation:

The outlook for Exploration & Production capital spending has been steadily improving since mid-2020 when budgets were reset during the COVID-19 pandemic. Commodity prices have risen on strengthening supply/demand fundamentals and a renewed focus on energy security on account of the ongoing geo-political turmoil. This is expected to improve the company’s balance sheets and free-cash-flow positions which is a key positive.

We valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a single-digit upside potential (in % terms). For the said purpose, we have considered peers like Total Energy Services Inc, Shawcor Ltd and Ensign Energy Services Inc. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of EFX at the last closing price of CAD 8.20 on June 07, 2022.

One-Year Technical Price Chart (as on June 07, 2021). Source: REFINITIV, Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITIV

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