New Contracts In Natural Resources, Aviation, And Education Will Drive Future Organic Expansion

Key Takeaways

• Strategic U.S. expansion and reorganization enhance scalability and efficiency, boosting revenue and net margins in Support Services and Asset Based Services.
  
• Strong balance sheet and pipeline, supported by new contracts and prudent financial management, drive sustained revenue growth and improved margins.
  
• Dexterra faces risks from sector-specific dependencies, reorganization challenges, revenue volatility, market reliance, and economic pressures impacting costs and margins.

Catalysts

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

• The acquisition of CMI Management, which positions Dexterra Group to expand into the U.S., is expected to drive strong revenue growth in the Support Services segment. This expansion enhances scalability and operational efficiency, likely leading to increased revenues and improved net margins.
  
• The strategic reorganization into two segments—Support Services and Asset Based Services—provides clear direction, aiding in business scalability and operational efficiency, which is expected to improve net margins and earnings over the long term.
  
• Strong organic growth, particularly in the Support Services segment, is being driven by new larger contracts in sectors such as natural resources, aviation, and education. This is expected to lead to sustained revenue growth and improvement in EBITDA margins due to a better business mix.
  
• The healthy pipeline of new sales opportunities, including integrated facility management (IFM) contracts across North America, signals continued growth in revenue and improved EBITDA margins in the future, supported by investments in pursuit teams and leveraging the CMI platform.
  
• Dexterra's prudent financial management, including a strong balance sheet and significant unused debt capacity, supports strategic acquisitions and share buybacks, which are expected to increase earnings per share (EPS) and return on equity over time.

Dexterra Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dexterra Group's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.7% today to 5.0% in 3 years time.
• Analysts expect earnings to reach CA$57.4 million (and earnings per share of CA$0.87) by about March 2028, up from CA$37.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, up from 12.6x today. This future PE is lower than the current PE for the CA Commercial Services industry at 20.6x.
• Analysts expect the number of shares outstanding to decline by 2.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.71%, as per the Simply Wall St company report.

Dexterra Group Future Earnings Per Share Growth

Risks

• The reorganization and segmentation of Dexterra’s business could introduce integration challenges, impacting operational efficiency and financial reporting, potentially affecting net margins and overall earnings.
  
• Dependence on a strong performance in the natural resource sector and infrastructure projects introduces sector-specific risks; fluctuations in these industries could impact Dexterra’s Asset Based Services revenue and EBITDA.
  
• The impact of the unprecedented wildfire activity in 2023 highlights an inherent unpredictability in revenue sources; reliance on such one-off events can lead to revenue volatility in the Asset Based Services segment.
  
• The company's expectation of organic growth relies heavily on strong market conditions and successful new contract acquisitions; any downturn in market conditions or failure to secure new contracts could adversely affect revenue.
  
• Economic risks, such as potential tariffs and inflationary pressures, could impact cross-border supply commodities and general economic conditions, potentially increasing costs and squeezing net margins if mitigation measures prove insufficient.

Valuation

• The analysts have a consensus price target of CA$10.833 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$12.5, and the most bearish reporting a price target of just CA$9.25.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.2 billion, earnings will come to CA$57.4 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 6.7%.
• Given the current share price of CA$7.48, the analyst price target of CA$10.83 is 31.0% 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.