Alaris Royalty Corp. forms partnerships with and invests in private companies where owners want to maintain control of their business. Typically, this financial services provider participates in the form of preferred limited partnership interests, preferred interest in limited liability corporations in North America, or long-term license and royalty arrangements.
Alaris Royalty Corp. (TSX─AD) recently gave the markets a heads-up about its new partner contribution, its follow-on partner contribution and its receipt from Centric of an $8.4-million note repayment.
In an Acumen Capital report by Brian Pow and Oliver Shao, the Calgary-based analysts maintain their ‘buy’ recommendation and their 12-month share price target of $35 for this financial services stock.
The company announced it had paid out an investment contribution of US$30 million ($39.6 million) to M-Rhino Holdings, operating as men’s and boys’ work clothing retailer Providence Industries, and garment manufacturer MyDyer.
Alaris also announced that it made a US$4.35-million ($5.8-million) contribution to LMS Limited Partnership, a provider of reinforced steel for the residential construction industry.
Alaris funded the contributions to Providence and LMS with proceeds from the Centric note as well as funds taken from its $200-million credit facility.
According to the Acumen Capital stock analysts, in return for its investment in Providence, Alaris will receive a distribution (akin to a dividend) of US$4.5 million ($5.9 million) annually, which will work out to a yield of 15 per cent.
Drilling down further, they note that the Providence contribution will make up six per cent of financial stock Alaris’ annual revenue and will tack on $0.08 per share to the company’s net cash from operations.
Moving on to the LMS situation, Messrs. Pow and Shao say that the follow-on contribution will enable Alaris to receive an annual distribution of US$622,000 ($818,000) which translates to a 14 per cent yield.
The initial reset is slated for Jan. 1, 2018, and it will be subject to a six per cent collar, a term that refers to a risk management strategy. The analysts add: “LMS had an earnings coverage ratio between 1.5 times and two times.”
Messrs. Pow and Shao assert that Alaris will have a fairly active first half of 2016 as far as making new credit services investments are concerned. They are also confident that the company will be able to maintain the investment pace it set last year.
Alaris does not, they continue, seem to be overly aggressive when it comes to “forcing the deployment of capital” and the financial services provider also looks to be taking tangible measures to incorporate sector diversification into its royalty stream strategy.
The company has been paying a monthly dividend of $0.135 since July, 2015, the equivalent of $1.62 a year or about 5.5 per cent at recent share-trading prices.
In order for there to potentially be another dividend hike and more upwards momentum for the stock, the analysts say that Alaris needs to resolve issues it has with diagnostic imaging company KMH Cardiology and SM Group International, an integrated scientific, engineering and IT solutions provider.
“Both of these items provide some near-term risks to investor sentiment,” they add.
Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846