Enerflex Ltd. (EFXT) was up more than 45% year-to-date recently. But there is a lot going on beyond the movement in the share price. With its financial situation headed in the right direction, the stock is a Buy, advises Philip MacKellar, editor of Contra the Heard.
In the second quarter, sales rose from $579 million to $614 million, and the bottom line swung to a modest profit of $5 million. Bookings and backlog were higher, and cash flows improved slightly. Bank-adjusted net debt to EBITDA was unchanged from the last quarter, at 2.2 times, and net debt clocked in at $763 million.
Staff extended the debt maturities on the revolving credit facility by a year to October 2026. Credit available through this facility grew from $700 million to $800 million to provide more flexibility and breathing room.
Enerflex Ltd. (EFXT)
The most significant recent event occurred in Kurdistan, when a facility near the organization’s EH Cryo gas project was attacked by a drone, resulting in several deaths. In response, the company suspended activity at the site and declared a force majeure.
The client subsequently cancelled its contract with Enerflex, a development that EFXT’s team views as an attempt to violate its right to suspend work in an unsafe environment. It looks like both sides are lawyering up. The project was 85% complete and work that EFXT had yet to bill for had a net value of $161 million. Ouch.
In more positive news, April also saw Enerflex win its appeal of a ruling by the state labor board in Tabasco, Mexico, awarding Mex$2.152 billion (currently about US$111 million) in severance related to an employment dispute dating back to 2015.
The court set aside the judgment and called for the board to issue a new one. It is unclear when the board will comply, but it is safe to assume the award will be whittled down to an immaterial or even non-existent sum. Meanwhile, the legal system in Mexico does not move quickly.
The company expects the vast majority of the $1.25 billion backlog to be worked off over the next 12 months. In the current year, the C-suite projects annual capex of $90 million to $110 million, and a year-end, adjusted-net-debt to EBITDA ratio between 1.5 times and 2 times.
Recommended Action: Buy EFXT.
