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

• Growth in Bookings: For FY21, the company reported a massive growth in bookings of CAD 768.7 million, which is significantly higher than CAD 273.8 million in FY20. This rally in bookings is supported by robust demand for natural gas, natural gas liquids, and crude oil coupled which subsequently supported the Engineered Systems business.

• 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

• Result Update: The company will disclose its Q1FY22 results on May 04, 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. 

FY21 Financial Highlights:

• EFX announced its full-year results, wherein the company posted its revenue of CAD 960.1 million, declined from CAD 1,217.0 million in FY20. The decline was primarily attributed to lower income from Engineered Systems and Energy Infrastructure segments.
• Gross margin stood at CAD 219.5 million, as compared to CAD 298.1 million in FY20, primarily attributed to lower income coupled, partially offset by a decline in cost of goods sold.
• The quarter was marked by lower selling and administrative expenses and reported a significantly lower net finance cost. Despite lower expenses, earnings before income taxes stood lower at CAD 38.1 million in FY21, as compared to CAD 95.5 million in FY20.
• The group posted a higher income tax expense of CAD 56.5 million as compared to CAD 7.3 million in FY20 which resulted to a net loss of CAD 18.4 million v/s a net profit of CAD 88.2 million in FY20.

FY21 Income Statement Highlights (Source: Company Report)

Valuation Methodology (Illustrative): EV to Sales Based

Analysis by Kalkine Group

Stock Recommendation:

The company reported a lower cash conversion period of 213.5 days in FY21 as compared to 220.7 days in FY20. A lower cash conversion period indicates that the company is taking lower time to convert its investments to cash flows. The outlook for Exploration & Production capital spending has been steadily improving since mid-2020 and is likely to grow in FY22 due to revival in demand dynamics for natural gas. 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 CES Energy Solutions Corp, Shawcor Ltd etc. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of EFX at the last closing market price of CAD 9.54 on April 19, 2022.

One-Year Technical Price Chart (as on April 19, 2022). Source: REFINITIV, Analysis by Kalkine Group

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