Investing in undervalued TSX stocks generally allows long-term shareholders to outpace the broader markets. Typically, value stocks are those companies trading below their intrinsic values.
One such value stock trading on the TSX is Enerflex (TSX:EFX), which is priced at a market cap of $1.3 billion. Let’s see why.
Is Enerflex stock a good buy?
Enerflex is an integrated provider of energy infrastructure and transition solutions. It aims to invest in assets that provide recurring revenue, which in turn drives organic growth and earnings stability.
The energy solutions provider’s recurring sales are derived from energy infrastructure investments and its after-market services platform. Enerflex’s energy infrastructure platform consists of a highly utilized fleet of gas compression and processing applications that are leased to customers. Its services business provides solutions such as parts distribution and long-term maintenance services.
Enerflex has technical expertise in modular energy solutions across product lines in the energy value chain. Despite a sluggish macro environment, Enerflex reported record sales of $825 million in Q1 of 2023. The company emphasized sales increased across business lines as it continued to focus on expanding gross margins and lowering its cost structure.
Compared to Q4 2022, Enerflex improved gross margins by 27% to $161 million and reported an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $123 million in the March quarter.
It ended Q1 with a distributable cash flow of $55 million, which was used to fund two large infrastructure projects. The company will now prioritize deleveraging its balance sheet with excess cash flows in the next few quarters. Its adjusted net debt-to-EBITDA multiple stood at 2.9 times in Q1, which is not too high.
What is the price target for Enerflex stock?
Enerflex is also deploying free cash flow to productive assets and strategic acquisitions, which should drive future cash flows higher. In the last 10 years, it has allocated $3 billion toward acquisitions enabling it to enhance shareholder wealth over time.
Enerflex’s Engineered Systems backlog ended Q1 with a backlog of $1.5 billion. It expects to maintain a net-debt-adjusted EBITDA multiple of 2.9 times in 2023 due to robust cash flows originating from multiple business lines.
Fueled by inorganic growth, Enerflex is on track to increase sales by 72% year over year to $3.1 billion in 2023. Comparatively, its earnings are forecast to improve to $0.83 per share this year from a loss of $1.04 per share in 2022.
Due to a focus on cost optimization, Enerflex is on track to benefit from cost synergies of $60 million in 2023. It is also forecast to report an adjusted EBITDA of $400 million this year.
Enerflex pays shareholders an annual dividend of $0.10 per share, translating to a forward yield of 1%. These payouts have increased by 25% in the last three years.
EFX stock is priced at 0.35 times forward sales and 13 times forward earnings, which is very cheap. Analysts tracking the TSX stock expect shares to surge by 31% in the next 12 months, given consensus price target estimates.
