Divestiture And New Contracts Will Simplify Business Model And Expand Government Services

Key Takeaways

• Divesting the Modular business and acquiring CMI are refining Dexterra's focus and expanding opportunities, enhancing margins and earnings.
  
• Strong balance sheet supports dividends and share buybacks, facilitating EPS growth and strategic acquisitions for accretive growth.
  
• Despite strategic adjustments and growth efforts, Dexterra faces earnings pressure from decreased EBITDA, revenue stream shifts, inflationary costs, and dependency on long-term contracts.

Catalysts

Engages in the provision of support services for the creation, management, and operation of infrastructure in Canada.

• Strong organic growth is expected in both the Integrated Facilities Management (IFM) and Workforce Accommodations, Forestry, and Energy Services (WAFES) with new long-term contracts in place, improving revenue projections.
  
• The divestiture of the Modular business allows a focus on a simpler, capital-light business model, enhancing reliability and predictability of operating results, and likely improving net margins.
  
• The acquisition of CMI in the IFM segment is expanding government service opportunities and contributing to improved adjusted EBITDA margins, thus positively impacting earnings.
  
• A robust share buyback program and the maintenance of dividends are priorities, backed by a solid balance sheet, which can enhance earnings per share (EPS) as shares are reduced in circulation.
  
• Prudent financial management with significant unused debt capacity provides flexibility for strategic acquisitions, potentially leading to accretive growth and further boost in revenue and earnings.

Dexterra Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dexterra Group's revenue will decrease by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 6.6% in 3 years time.
• Analysts expect earnings to reach CA$73.9 million (and earnings per share of CA$1.12) by about February 2028, up from CA$29.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.2x on those 2028 earnings, down from 17.3x today. This future PE is lower than the current PE for the CA Commercial Services industry at 22.3x.
• Analysts expect the number of shares outstanding to decline by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.85%, as per the Simply Wall St company report.

Dexterra Group Future Earnings Per Share Growth

Risks

• Despite the increased organic growth and improving margins, Dexterra's adjusted EBITDA for Q3 2024 decreased from $38.2 million in Q3 2023 to $32 million, indicating pressure on earnings which may persist if not addressed with further efficiencies or growth.
  
• The sale of the Modular Solutions business, while simplifying the business model, could lead to lost revenue streams which might impact future earnings if not compensated by growth in other segments.
  
• Challenges remain in managing inflationary labor costs and effectively integrating acquisitions like CMI, which if not handled well, could compress net margins and hinder earnings growth.
  
• The reliance on achieving long-term, stable contracts in the IFM space for continued profitability and market share gains may face uncertainties, potentially impacting revenue if these contracts do not materialize as expected.
  
• Although managing a strong balance sheet, Dexterra's dependency on continued market activity and long-term contracts in sectors like WAFES may be vulnerable to economic cycles and pressures, which could affect future revenues and earnings stability.

Valuation

• The analysts have a consensus price target of CA$10.158 for Dexterra Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$11.0, and the most bearish reporting a price target of just CA$8.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.1 billion, earnings will come to CA$73.9 million, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of CA$7.97, the analyst price target of CA$10.16 is 21.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.