Spark Power Group is an integrated provider of low and medium-high electrical services throughout North America. It offers a sustainable growth story for patient investors.
Oakville, Ontario-based Spark Power Group’s (TSX—SPG) success is a function of a combination of significant organic and acquisitive growth, as well as the company’s position as an “early consolidator in the highly fragmented electrical services and solutions sector”, says Vancouver-based Raymond James analyst David Quezada. He began coverage with an “outperform” recommendation and $2 per-share target price.
The analyst comments: “With an emerging Power Advisory and Sustainability (green energy) segment, we also believe Spark is optimally positioned to capitalize on durable trends toward renewable power, the ‘electrification of everything’ and advanced manufacturing, among others. While shares have been under pressure of late, we see a road map to addressing this weakness.
“We first address pronounced weakness in the name of late, as well as our thoughts on how it is reversed. Notably, SPG stock is down about 54 per cent year-to-date as compared to the TSX which is up about 17 per cent (due to market concerns over leverage and constrained liquidity).
M&A, branch expansion will drive growth
“We believe increasing sophistication of modern electrical systems and disruption of the industry’s status quo on several fronts, makes the industry amenable to a roll-up business model as smaller ‘mom-and-pop’ players find it increasingly difficult to compete. Accordingly, we see a sizable opportunity for Spark to grow via multiple avenues including mergers and acquisitions where the company has already had some early success. There is also potential from organic growth, where Spark leverages its branch expansion model.
“Operating in a large, fragmented market we believe there exists a significant opportunity for Spark to play a consolidation role in the North American electrical services sector. With 10 acquisitions thus far, the company has seen good success and we note management’s background in M&A is well suited to this strategy.
“Among the most important element of these (growth forecasts) is organic growth within the company’s large commercial customer base, which comes via geographical expansion with new branches, deeper customer penetration, and cross-selling opportunities.
EDITDA forecast at 26% CAGR
“With contributions from both organic and M&A related growth, we forecast Spark growing EBITDA (earnings before interest, taxes, depreciation and amortization) at a 26 per cent compounded annual growth rate (CAGR) between 2018 to 2021. Meanwhile, we also expect free cash flow will reach an inflection point imminently, rising from $6.4 million in 2019 to $16.2 million in 2020 and $21.7 million in 2021 (a 44 per cent three-year CAGR) with EBITDA growth of over 50 per cent in 2020 and 2021.”
Some of Spark Power’s subsidiaries include Bullfrog Power, Rondar Inc., New Electric Enterprises Inc., Northwind Solutions Group Inc., Lizco Sales & Rentals Group Inc., Pelikan Inc., Orbis Engineering Field Services Ltd., and Tal Trees Power Services Corp.
Bullfrog Power is its most renowned subsidiary. It offers its customers power from renewable energy sources, such as wind, low-impact hydro and green natural gas, a renewable biogas product that serves as an alternative to fossil fuel-based natural gas.
This is an edited version of an article that was originally published for subscribers in the November 1, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
Investor’s Digest of Canada, MPL Communications Inc.
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