- The acquisition of Parts Alliance provides an excellent platform to grow and diversify the business.
- Uni-Select offers a well-supported regular dividend with a current yield of 1.4%, as well as an impressive free cash flow yield.
- Valuation is attractive at current levels, with potential upside of 37% to our target price.
Uni-Select Inc. is a Boucherville-based, leading North American automotive paint, body & equipment (PBE) distributor and the largest automotive replacement parts distributor in Canada. The acquisition of Parts Alliance (a UK leader in the distribution of automotive aftermarket parts) for US$265m provides an excellent platform to grow in a new geography; the UK also offers attractive consolidation opportunities given it is one of the most fragmented markets in Europe. Uni-Select serves more than 1,155 independent replacement parts wholesalers, owns more than 275 corporate stores in North America and operates a total of 171 corporate stores in England.
From an industry perspective, Amazon's entry into the automotive aftermarket parts business via its e-commerce platform in the US has created some uncertainties around potential pricing compression and market share loss (average performance of North American peers of -14% in 2017). However, Uni-Select is well-positioned versus its peers against this new player given its strong exposure to the DIFM ('do it for me') business (~93%). Amazon is unlikely to compete with DIFM retailers in the short term due to the significant physical resources required to supply garages and repairs in the required 30-minute timeframe. In addition, the DIFM business is expected to outpace the DIY ('do it yourself') business in terms of growth prospects given an ageing population and the fact that cars are becoming more complex to repair.
Uni-Select's share price is down 25% from its 52-week high—notably after the company reported weaker-than-expected 3Q17 results on November 8 due to an unexpected seasonality effect on margins at Parts Alliance and weaker-than-expected organic growth in the paint division. We view the share price decline as an overreaction as we believe the growth of the paint division should recover in 2018 (we expect 2.5%) and management remains confident in its ability to generate EBITDA margins of 7.5% at Parts Alliance in 2018 (we expect 6.7%). In the meantime, we expect Uni-Select's growth to be driven by tuck-in acquisitions—a key lever for value creation.
Uni-Select's current operations are expected to continue to generate sizeable free cash flow (FCF)—we expect US$92.5m in 2017, translating into an attractive 10.3% FCF yield. This should provide ample opportunity to continue deleveraging its balance sheet, as well as the flexibility to pursue further tuck-in acquisitions.
Uni-Select currently pays a quarterly dividend of C$0.0925, which equates to a dividend yield of 1.4%. Based on the company's decent outlook and strong FCF profile, we expect management to be in a position to increase the dividend in the coming year.
From a valuation standpoint, we believe Uni-Select's shares are currently undervalued. The stock is trading at 17.1x our 2018 adjusted EPS forecast and 11.4x EV/EBITDA based on 2018 numbers, below the peer average of 21.0x and 12.1x, respectively. Moreover, US aftermarket peers have outperformed the market since the beginning of the year due to the freezing start of winter, a key lever for part replacements. Despite strong market enthusiasm for the industry, UNS has significantly underperformed its peers in the year to date—an unjustified reaction, in our view, given its strong exposure to regions severely impacted by the cold temperatures. Consequently, we recently upgraded our rating to Top Pick–Average Risk with a target price of C$37.00, which is based on an average of three valuation methods.
- Solid improvement expected in retail and institutional net flows should improve both sentiment and valuation on the stock over the next
- Over the next 3–5 years, AGF targets C$5b in assets under management in each exchange-traded funds (ETFs) and alternative investments—a significant growth driver in the near term.
- Attractive valuation currently, with a 4.1% dividend yield.
AGF Management Limited is a global asset management firm with C$36.9b in assets under management (AUM). It has a diversified mix of assets, including retail (~C$18b), institutional (~C$11b), high-net-worth (~C$5b) and alternative investments (~C$1b) businesses. AGF has an outsized exposure to global investment, with 65% of retail and institutional AUM invested in foreign securities, which bodes well with the industry trend of higher allocation for global/international products.
Our positive view is based on a few near- and medium-term positive catalysts. First, improving fund performance leading to 60% of AUM above the industry median over three years. Management has demonstrated an improving trend over the past few years. Second, we expect net retail flows to turn positive in 2018, following a number of years with net outflows. Third, the company's C$5b AUM target for each ETFs and alternative investments could generate an extra C$20m wealth management (WM) EBITDA combined (vs our 2017 estimate of C$75.2m in WM EBITDA). Fourth, the company resolved a long-standing dispute with the Canada Revenue Agency—we estimate it could be refunded C$15–30m (C$0.20–0.40/share)—and a court battle with a former employee (who received C$10m in settlement). Lastly, the company has a 32.7% stake in Smith & Williamson, a private UK wealth manager with GBP20.0b in AUM (~C$34.4b). Under an initial public offering or a sale scenario, the potential valuation could be above our current C$267m valuation.
We have a Buy–Above-average Risk rating on the shares and derive our target price of C$9.00 by applying a 6x multiple to our four-quarter-forward adjusted WM EBITDA estimate. We recommend AGF for value investors. First, we believe there is room for multiple expansion given asset management peers trade at 7.7x on average. Second, if we apply 4.1% EV/AUM to AGF's retail assets (ie what CI Investments paid for Sentry Investments), we derive a potential target price north of C$13. Lastly, AGF shares also offer a 4.1% dividend yield.
|Company||Ticker||Price ($)||Market cap ($m)||Ratingfootnote 1||Target price ($)||Dividend yield (%)||Total expected return (%)||Sector|
|Manulife Financial Corporation||MFC||27.22||53,941||Buy-AAR||30.00||3.0%||13%||Life Insurance|
|Alimentation Couche-Tard Inc.||ATD.B||65.49||36,958||Buy-AR||78.00||0.5%||20%||Consumer Staples|
|Sun Life Financial Inc.||SLF||54.24||33,158||Buy-AAR||58.00||3.4%||10%||Life Insurance|
|TELUS Corporation||T||46.81||27,831||Buy-AR||52.00||4.3%||15%||Telecom, Media & Tech|
|Algonquin Power & Utilities Corp||AQN||13.78||5,948||Buy-AR||16.00||4.3%||20%||Power & Utilities|
|Uni-Select Inc.||UNS||27.20||1,150||Top Pick–AR||37.00||1.4%||37%||Consumer Discretionary|
|Transat A.T. Inc.||TRZ||11.08||428||Buy-AR||20.00||–||81%||Transportation & Aerospace|
- Target price change: SLF to $58 (from $56); T to $52 (from $51).
- Adding UNS: Benoit Poirier, Transportation, Aerospace and Industrials analyst, is adding Uni-Select (UNS) to the list.
- AR: Average Risk, AAR: Above-average Risk
Source: Desjardins Capital Markets, Bloomberg, FactSet