James Telfser on
BNN-Bloomberg’s Market Call – Dec 9, 2019
Market Outlook
We believe the current investing
environment is more balanced from a risk/return standpoint versus a couple
months ago. While financial conditions, breadth and credit metrics continue to
improve and many recent geopolitical risks have receded, we’re more cautious
about valuations at current market levels. We continue to hold modest amounts
of cash in our private client accounts to take advantage of any short-term
volatility. However, given the bottoming of global economic data, the fact that
the U.S. Federal Reserve has started expanding its balance sheet again and that
there’s favourable comparative periods to next year, we’re more invested now
than at any point during 2019.
Our private client accounts have been taking advantage of
valuation discounts with small-cap non-resource equities in Canada and have increased their U.S.
Top Picks
Akumin Inc (AKU)
Akumin has been executing
well on their business plan of acquiring and operating diagnostic imaging
clinics primarily focusing on MRI and CT Scans in the U.S. North America
behind RadNet, with 130 centres. Their business has several strong
macroeconomic tailwinds, most notably demographics. Akumin should also benefit
from operating leverage as they continue to scale. We expect strong volume growth as insurance companies encourage
patients to utilize independent clinics versus the more expensive hospital centres. While
growth has been robust (more than 50 per cent on revenue in the last 12
months), we’re even more impressed with the
margin profile at more than 20 per cent on EBTIDA and their ability to
integrate new acquisitions. Given their execution to date, we believe that the current multiple of 5.5
times EV/EBITDA is far too low and remains out of line with the peer group and
other consolidators. We consider this level to be an excellent entry point
as the next phase of their business plan unfolds, resulting in enhanced organic
growth and free cash flow.
Firstservice Corp (FSV)
FirstService is the largest
property management company in North America
and is also a leading provider of property services. The management team has a long history of impressive capital
allocation. We particularly like the fact that FirstService has several
levers to pull for growth, both organically and through acquisitions. Given the
stock price weakness following their Q3/19 results, we believe it is an
attractive time to add FirstService to portfolios. The recent share price weakness was driven by difficult year-over-year
comps from storm-related restoration work in the U.S.
Heroux-Devtek (HRX)
Heroux-Devtek
specializes in the design, development, manufacture, repair and overhaul of
systems and components used in aerospace and industrial sectors. A large part
of their business is focused on aircraft landing gear for both the commercial
and military segments. The company is
the no. 3 player globally by market share, but no. 1 by profitability. It
is now an appropriate time to own the shares, as the company has recently completed a large capex program to support
a major new contract and is integrating recent acquisitions (Beaver and CESA).
We believe the company will now begin to realize the benefit of additional free
cash flow, revenue and earnings. Expectations
are currently very low and as a result we should see earnings beats and
guidance raises, which have historically rewarded equity holders. The
current valuation (8 times EV/EBTIDA) is at a discount to history and peers, a
gap we expect it will close in the next few quarters.
James Telfser,
Aventine Asset Management
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