For Horizon North Logistics (TSE:HNL), we are off restriction following the completion of its $80.6 million bought deal, which includes 15% overallotment option at $3.75 per share. We are reiterating our 12 months price target of $4.00 and maintain “Sector Outperform” rating as of now.
We see company financing in expectation of LNG opportunities. Following the equity increase, we model 2015 estimate total debt/EBITDA of 1.2 times (down from 1.9 times). We project $119 million available on its $200 million lines at YE2015, which includes an extra $20 million of capex. The added flexibility gives HNL further capacity to capitalize on possible LNG opportunities, specifically the PNWLNG (Petronas-led) and the Canada LNG (Shellled) projects. The LNG possible is notable and not baked into our estimates. Per project, demand is potentially in the 12k to 14k bed range (larger than HNL’s recent fleet). Per 1k beds we see $9 million to $16 million of incremental annual EBITDA; see page 15 of our current LNG Watch
If 3k beds were to be awarded, EBITDA could be up 50%. Second quarter could be soft but FY2015 essentially consistent. We anticipate the camps and catering to post strong results while matting should show decent counter-cyclical support. As HNL finishes their latest manufacturing project, we could see profitability challenged as it was done under the previous tender structure. Despite a likely soft second quarter, management is optimistic about its restructuring efforts and we interpret the equity increase as a signal that guidance for new work is improving.
Our 12 months target price is predicated on 7.5 times our 2016 Enterprise value/EBITDA forecast and is backed up by comparative valuation. Our price target is not comparable to our historical trading band of 4.6 times to 6.2 times as we place a premium on LNG as a meaningful catalyst for the stock. With that said, the stock does have downside possible if both PNWLNG and Canada LNG get postponed or cancelled. Our perspective is that the risk-reward proposition is eye-catching at recent levels.
Commodity prices, labour supply, access to supplies, weather, contract risk, and FX are potential risks to be considered while investing.