Enerflex Ltd.

Enerflex Ltd. (TSX: EFX) is a supplier of natural gas compression, oil and gas processing, refrigeration systems, and electric power production equipment based in Canada. The company is divided into three segments: the United States, Europe, and Asia.

Key highlights

• Capital Expenditure: The company put CAD 9 million into rental assets, the majority of which was utilized to fuel the organic growth of the contract compression fleet in the United States. Enerflex maintains its capital discipline and prioritizes capital expenditures connected to completed client contracts. In addition, the Company has invested CAD 9 million in the building of a natural gas infrastructure asset, which will be recorded as a financing lease.

• Adequate Balance Sheet: By controlling working capital, decreasing debt, and maintaining capital discipline, the Company was able to keep its balance sheet strong. With a bank-adjusted net debt to EBITDA ratio of 1.38:1, third-quarter financially strong, compared to a maximum ratio of 3:1. non-recourse debt is not included in this leverage ratio.
  

• Good prospects for the future: The Company was awarded a new 10-year USD 165 million natural gas infrastructure contract beyond September 30, 2021, which will contribute to the successful fleet of assets in Middle East operations.

• Valuation in a Nutshell: EFX shares are available at the NTM EV/Sales multiple of 0.9x compared to the industry (Oil and Gas related equipment and service) average of 2.8x. While on the NTM Price/Cash flow multiple it trades on 4.1 against the industry average of 5.6x. The matrix below reflects that the company is undervalued against the industry on many multiples.

• Price Action Analysis (on the Weekly Chart: On the daily chart, EFX prices are sustaining above the horizontal trend line support zone and taking the support of the same. Moreover, the momentum oscillator RSI (14-period) is trading at ~52.90 level, reversing from the lower levels. On the weekly charts the prices are trading above the trend-following indicators 21-period and 50- period SMA, which may act as a support level for the stock.              

Financial overview of Q3 2021 (Expressed in 000 of CAD)

Source: Company

• Operating income was lower than the previous year, owing to lower contributions from certain large, high margin Engineered Systems projects that were largely completed by the third quarter of 2020, competitive margin pressures on recently booked Engineered Systems projects, and negative foreign exchange impacts due to a weaker US dollar.
• Engineered Systems Bookings totaled CAD 191 million, up from CAD 23 million in the same quarter last year, indicating that Engineered Systems business is improving.
• The Company's long-term debt is made up of CAD 304 million in recourse debt and CAD 42 million in non-recourse debt.
  

Risks associated with investment

Enerflex's industry is highly competitive, with minimal barriers to entry, particularly in the natural gas compression services, contract compression, and compression fabrication industries. Several competitors compete with Enerflex for the same customers in markets where margins are thin and contract negotiations are difficult.

Valuation Methodology (Illustrative): EV/ Sales

Stock recommendation

Since budgets were reset following the COVID-19 epidemic, the outlook for Exploration & Production ("E&P") capital spending has been steadily improving. Commodity prices have risen, and the balance sheets and free cash flow positions of E&P and Midstream companies have improved. Despite the ongoing effects of the COVID-19 pandemic and evolving regulatory issues connected with hydrocarbon curtailment at the regional, national, and international levels, oil and gas demand has been rebounding. As a result, Enerflex expects client capex to rise in 2022 as fundamentals improve. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the “EFX” stock at the closing price of CAD 7.79 on February 16, 2022. (For Valuation we consider peers like Oil States International Inc, Trican Well Service Ltd, Newpark Resources Inc).

One-Year Technical Price Chart (as on February 16, 2022). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Technical Analysis Summary

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

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