Tiptree posts solid 4Q 2023 (and full year) results, again driven by Fortegra; increases quarterly dividend by 20% to $0.06 per share; no incremental commentary on the IPO withdrawal or its private capital options was provided on this morning’s conference call; maintain fair value of $24.50 per share

• Last night, after the market close, Tiptree posted consolidated 4Q 2023 top-line growth of 20.8% to $446.4 million with 43.1% growth in adj. net income to $13.9 million.  Consolidated return on equity (ROE) rose 370 basis points to 13.6%.  For the full year 2023, consolidated sales rose 18% to ~$1.6 billion with adj. net income growth of 16.7% to $61.9 million and ROE up 160 bps to 15.2%
• At Fortegra, the company’s primary operating business, 4Q 2023 sales increased 25.4% to ~$433.2 million with a 37.5% rise in gross written premiums and equivalents (GWPE) while adj. net income advanced ~36.2% to $32.6 million. The combined ratio was flat at 89.8% and Fortegra’s return on equity improved 160 bps to 30.9%, largely driven by continued growth in the company’s capital-light warranty business.  For full year 2023, Fortegra’s sales rose ~27.5% to $1.59 billion with a 21.4% jump in GWPE while net income has increased 38.0% to $115.7 million.  The combined ratio improved 10 bps to 90.3% while ROE improved 310 bps to 29.2%.
• The book yield on Fortegra’s $1.33 billion investment portfolio rose to 3.3% in 4Q 2023 (from 2.7% 4Q 2022) while the overall rating of its holdings was AA.  The average duration is 2.5 years (compared with ~2.1 years in the previous quarter).
• 4Q 2023 sales at Tiptree Capital fell ~45% to $13.2 million, in part driven by the sale of the company’s shipping assets in 2022, while net income was $(407K) compared with $(787K) in 4Q 2022).  For the full year 2023, segment sales fell ~62.5% to ~$56 million net income of $(159K) versus $8.96 million in 2022.
• Corporate expenses were essentially flat at $12.1 million in 4Q 2023 (versus $12.5 million in the prior year quarter) and down to $40.2 million for the full year 2023 (versus $46.4 million in 2022) primarily due to the repayment of TIPT’s corporate level debt.
• In conjunction with 4Q 2023 results, the company declared a $0.06 dividend, which represents a 20% increase from the prior payout of $0.05.
• On this morning’s conference call, TIPT did specifically address the recent withdrawal of its planned initial public offering (IPO) of Fortegra, particularly in regards to the potential private capital options (i.e., Warburg’s investment in October 2021), other than to say, “although the recent market environment has been unconducive for a public offering we firmly believe Fortegra is strategically well positioned to maintain the trajectory of consistent growth and sustained underwriting profitability over the long term”.
• Our base case fair value for TIPT remains $24.50 per share based on a 12.5x multiple of projected 2024E net income at Fortegra (pro-rated for TIPT’s ultimate 68.6% ownership as well as a ~$41 million deferred tax liability) and a 0.5x multiple of book value, ex-NCI, at Tiptree Capital (see Exhibit #1 on page 2).

APG posts roughly in-line 4Q 2023 results and issues modestly above consensus 2024E adjusted EBITDA guidance; plans to retire all of the Series B Perpetual Convertible Preferred Stock (owned by Blackstone & Viking); fair value increased to $35 per share (from $31 per share)

• This morning, before the market open, APG announced 4Q 2023 consolidated sales up 3.3% (1.5% organically) to $1.759 billion (versus consensus of $1.763 billion) with adjusted EBITDA up nearly 14% to $208 million (compared with consensus of $206.6 million).  Adj. EPS were up ~22% to $0.44 (versus $0.43 per share) while adj.  free cash flow (FCF) increased 14% to $300 million.
• By segment, Safety Services sales increased ~3% (~1% organically) to $1.238 billion with a nearly 20% advance in adj. segment EBITDA to $189 million (on a 190 bps of margin expansion to 15.3%) while Specialty Services sales increased 2.9% (1.8% organically) to $525 million with an ~11.5% rise in adj. segment EBITDA to $59 million (on 80 bps of margin expansion to 11.2%).
• For full year 2023, the company posted consolidated sales growth of 5.6% (5.4% organically) to $6.928 billion (versus consensus of $6.932 billion) with a 16% increase in adj. EBITDA to $782 million (compared with consensus of $778.9 million).  Adj. EPS rose ~19% to $1.58 (versus consensus of $1.57 per share) while adj. FCF increased ~16% to $782 million (implying a ~69% conversion rate).
• By segment, Safety Services sales increased 6.5% 96.0% organically) to $4.871 billion with a 19% increase in adj. segment EBITDA to $664 million (on a 140 bps of margin expansion to 13.6%) while Specialty Services sales rose ~2.5% (all organic) to $2.079 billion with a ~14% increase in adj. segment EBITDA to $239 million (on a 120 bps of margin expansion to 11.5%).
• The company ended 2023 with net debt of ~$1.85 billion and a leverage ratio of 2.3x (compared with ~$2.2 billion and 4.0x at the end of 2022).  That said, the company plans to convert all of its Series B Preferred Stock (issued to Blackstone & Viking as part of the Chubb deal), which will result in the issuance of ~32.5 million common shares, of which the company expects to re-purchase 16.3 million for ~$600 million (at ~$36.90 per share) in a transaction funded by a new $300 million term loan facility and existing cash & credit.  Following the conversion Blackstone & Viking plan to list 8.1 million shares in a coordinated secondary offering (with the remaining stakes being subject to a 90-day lockup).  Anecdotally, management expects the transaction to temporarily flex its leverage ratio back up to 3.0x (with the longer-term comfort range still being 2.5x) and its pro forma share count to be ~270 million.
• For 2024, the company has guided to full-year consolidated sales $7.05-$7.250 billion (versus consensus of $7.2 billion), implying 2%-5% organic growth, with adj. EBITDA of $855-$905 million (compared with consensus of $878 million), implying year over year growth of 6%-16%.  Adj. FCF conversion is expected to be ~70% (see Exhibit #1 on page 2).
• For 1Q 2024, management forecasts consolidated sales of $1.56-$1.61 billion, implying a flat to down 3% comparison, with adj. EBITDA of $165-$180 million, implying quarter over quarter growth of 13%-24% 9see Exhibit #1 on page 2).
• Anecdotally, the company has maintained its long-term (i.e., 2025) financial goals, which target generating ~60% of its sales from inspections, services & monitoring as well as a consolidated adjusted EBITDA margin of 13%. Free cash flow conversion is targeted to be 80% (relative to adj. EBITDA and up from ~69% in 2023).
• Our base case fair value estimate for Api Group Corporation (APG) is revised to ~$35 per share (previously $31 per share), reflecting a blended multiple of ~12x on F2025E adjusted EBITDA of ~$925 million along with projected net debt of ~$1.5 billion (see Exhibit #2 on page 2).

MASI tops consensus (and guidance) in 4Q 2023; maintains previous 2024E outlook; fair value increased to $129 per share (from $124 per share)  

• Last night, after the market close, MASI posted 4Q 2023 consolidated sales down ~11% to $548.9 million (compared with consensus of $545.75 million and guidance of $541-$551 million) with adjusted EPS of $1.25 (compared with consensus of $0.88, guidance of $0.74-$0.94 and $1.42 per share in the prior year period).
• By segment, Healthcare segment sales fell 3% to $333.9 million (versus guidance of $336-$341 million) while Non-Healthcare segment sales declined ~21% to $209 million (compared with guidance of $205-$210 million)
• For full-year 2023, consolidated sales rose 1% (albeit down 10% of a normalized constant currency basis) to $2.048 (compared with consensus of $2.0445 billion and guidance of $2.041-$2.051 billion) while adj. EPS were $3.79 (compared with consensus of $3.29, guidance of $2.85-$3.05 and $4.87 per share in the prior year period).
• By segment, Healthcare segment sales fell 5% to $1.2755 billion (versus guidance of $1.272-$1.277 billion) while Non-Healthcare segment sales rose 11% (but down 18% on a normalized constant currency basis) to $772.6 million (compared with guidance of $769-$774 million).
• For 2024E, the company maintained the previous guidance issued in January 2024, which we note now excludes all expenses related to its on-going litigation with Apple (NASDAQ: APPL) as opposed to just those related to the International Trade Commission (ITC) proceedings. To that end, the company forecasts consolidated GAAP and non-GAAP sales of $2.045-$2.165 billion (compared with consensus of $2.103 billion and our $2.105 billion projection), including Healthcare and Non-Healthcare revenue of $1.345-$1.385 billion and $700-$800 million (compared with our forecasts of $1.363 billion and $742 million), respectively.  Non-GAAP operating income and EPS are expected to be $307-$322 million and $3.44-$3.60 (versus $275-$290 and $3.00-$3.15 based on management’s prior calculation), respectively (see Exhibit #2 on page 2).
• For 1Q 2024, management expects consolidated sales of $476-$501 million (down 11%-16%), reflecting Healthcare sales of $331-$341 million (down 2%-5%) and Non-Healthcare sales of $145-$160 million (down 27%-34%) with adj. operating income of $63-$69 million and adj. EPS of $0.67-$0.74 (see Exhibit #2 on page 2).
• Our fair value estimate for MASI is revised to $129 per share (previously $124 per share), reflecting multiples of 19.5x and 7.0x, respectively, to our 2025E forecasts for the core Healthcare and Non-Healthcare segments and incorporates projected net debt (see Exhibit #3 on page 3).

AIN tops consensus forecasts (and guidance) in 4Q 2023; full-year 2024 adj. EBITDA guidance, at the mid-point, is modestly ahead of our initial forecast and roughly in-line with prior consensus; fair value revised to $105.50 per share (from $104 per share)

• Last evening, after the market close, AIN posted 4Q 2023 sales up 20.4% (or 19.6% on a constant currency basis) to $323.6 million (compared with consensus of ~$298.5 million) with adjusted EBITDA growth of ~28% to $75 million (versus consensus of ~$61million).  Adjusted EPS advanced ~63% to $1.22 (versus the consensus forecast of $0.82).
• By segment, Machine Clothing (MC) segment sales increased 28% (or 26.8% in constant currency) to $191.7 million, primarily driven by the Heimbach acquisition, while adj. EBITDA improved 18% to ~$61.5 million (on a margin of 32.1%).  At Engineered Composites (AEC), segment sales increased ~11% (or 10.6% in constant currency) to $131.8 million with adj. EBITDA grew ~21% to $27 million (on a margin of 20.5%).
• For full year 2023, AIN posted consolidated sales up 11% to $1.15 billion (compared with most recent guidance of $1.1-$1.13 billion) while adj. EBITDA grew ~5% to $2.65 billion (compared with guidance of $238-$254 million).  Adj. EPS were $4.06 (versus guidance of $3.35-$3.70) while full-year free cash flow (FCF) was $64 million (versus $32 million in the prior year period).
• The company ended 2023 with net debt of ~$283.5 million, including ~$173.5 million of cash and $457 million of debt, and a leverage ratio of ~1.1x (a sequential improvement from 1.3x at the end of 3Q 2023).
• For 2024, the company is guiding to consolidated sales of $1.26-$1.33 billion (compared with consensus of $1.286 billion and our ~$1.27 billion forecast) with total company adjusted EBITDA of $260-$290 million (versus consensus of $278 million and our forecast of $274 million).  Notably, projected adj. EPS of $3.55-$4.05, which compares with consensus of $4.06 and our $4.00 forecast, includes pension, depreciation & amortization (D&A) and interest headwinds of $0.09, $0.08 and $0.06 per share, respectively. The company’s effective tax rate is expected to be 29-31% in 2024 while consolidated capital expenditures and D&A expenses are projected to be $90-$95 million and $85-$95 million, respectively (see Exhibit #1 on page 2).
• By segment, AIN expects MC segment sales and adj. EBITDA of $760-$790 million and $230-$250 million, respectively, in 2024 while AEC is forecast to post full-year revenue of $500-$540 million with adj. EBITDA of $97-$107 million (see Exhibit #1 on page 2).
• Our base case fair value estimate for Albany International (AIN) is revised to remains $104 per share, reflecting a ~9x on F2025E adjusted EBITDA at the MC segment and a 15x multiple on 2026E adj. EBITDA at AEC, which we discount back to 2025E at 5%, along with projected net debt (see Exhibit #2 on page 2).

Drop Coverage of Medtronic plc. Effective Immediately

• Medtronic plc (NYSE: MDT) has announced that it is exiting its increasingly unprofitable ventilator business and will retain the patient monitoring and respiratory interventions (PMRI) business, thus cancelling the planned spin-off.
• As such, we DROP coverage of Medtronic effective immediately.
• Our prior estimates and fair values for MDT should no longer be relied on.

NR posts mixed 4Q 2023 segment results albeit with notably better-than-expected FCF generation; 2024 guidance for Industrial Solutions is in-line with our forecast (at the high-end) while the strategic review for Fluid Systems remains ongoing with expected completion in “mid-2024”

• Last night, after the market close, Newpark posted 4Q 2023 consolidated sales of $167.8 million (compared with consensus of $171 million) with adj. EBITDA of $16.2 million (compared with guidance of $17-$21 million and consensus of $19 million).  Free cash flow (FCF) was $27.8 million (versus guidance of $12-$20 million, consensus of $12.4 million and a $6.6 million outflow in 4Q 2022).
• By segment, Fluid Systems posted 4Q 2023 sales of $121.4 million (compared with guidance of $110-$120 million) with adj. segment EBITDA of $4.7 million (compared with $7.4 million in the year ago period) while Industrial Solutions generated December-quarter sales of $46.5 million, below guidance of $54-$60 million as several (i.e., 2) projects slated to begin in 4Q 2023 got pushed out to 2024 (one due to a lack of steel availability and the other to a local permitting issue), with adj. segment EBITDA of $16.8 million (compared with $23.3 million in the year ago period).
• For full-year 2023, consolidated sales were $749.6 million (versus consensus of $753 million and our forecast of $756 million) while adj. EBITDA advanced ~21% to $80.1 million (versus consensus of $82 million and our $84 million forecast).  Free cash flow was ~$74.5 million (versus consensus of $59 million and a $50 million outflow in 2022).
• By segment, Fluid Systems generated full-year segment sales and adj. EBITDA of $542 and $32.4 million, respectively, while Industrial Solutions posted top-line growth of ~7.5% to $207.6 million with a 13% advance in adj. EBITDA to ~$74.5 million.
• On the capital allocation front, NR repurchased an additional 0.9 million shares for ~$6 million in 4Q 2023 (bringing the total buyback in 2023 to 6.5 million shares, or ~7% of the total) and earlier this month the Board replaced the current share repurchase authorization with a new $50 million program.  Additionally, the company repaid ~$54 million of debt in 2023, including $13 million in 4Q 2023, and ended the year with a net leverage ratio of 0.5x (compared with 1.4x at the end of 2022).
• In terms of 2024 guidance, NR expects Industrial Solutions segment sales of $230-$240 million, implying growth of ~11%-16%, with adj. segment EBITDA of $80-$85 million, suggesting growth of 7.5%-14%.  (For context, our initial 2024E forecast for the Industrial Solutions segment called for sales of ~$240 million and adj. EBITDA of $85 million.)  Total Industrial Solutions segment capital expenditures are expected to be $30-$35 million in 2024E (of which ~75% is anecdotally expected to be deployed towards growth in the rental fleet).
• For 1Q 2024 management anecdotally expects Industrial Solutions rental & service revenue, which comprise ~75% of segment sales, will see “modest sequential growth”.
• On the Fluid Systems front, management did not provide explicit financial guidance given the on-going strategic review process (managed by Lazard), which is indicated to be “proceeding according to plan” with expected completion “in mid-2024”.  (Anecdotally, management noted that the due diligence process is “time intensive” given the scope/global nature of the business.)
• For our part, aside from the incremental financial flexibility/opportunity for capital returns provided by a successful transaction for Fluid Systems we estimate a deal would precipitate a significant re-rating of NR shares toward a valuation more in-line with specialty rental & services peers as opposed to a legacy oilfield services provider (i.e., high single-digit to low double-digit multiples versus low- to mid-single digit-type valuations).
• In terms of color on 1Q 2024 results, management indicated on this morning’s conference call that overall Fluid Systems revenue is expected to “improve modestly on a sequential basis in the first quarter, with international growth somewhat offset by continued US softness” while adjusted segment EBITDA margins are expected “to improve toward the mid-single digits benefitting from international operations”.
• Our base case fair value for NR remains ~$10 per share based on an 8.5x blended multiple on 2025E adjusted EBITDA of $98.1 million (previously ~$100.1 million), reflecting a 5.5x multiple at Fluid Systems and 9.5x at Industrial Solutions, while accounting for corporate costs and projected net debt (see Exhibit #1 on page 2).

Drop Coverage of Lithium Argentina Corp. and Lithium Americas Corp. Effective Immediately

• On October 3, 2023, Lithium Argentina Corp. (TSX: LAAC, NYSE: LAAC). completed the spin-off of Lithium Americas Corp. (TSX: LAC, NYSE: LAC).
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Lithium Argentina Corp. and Lithium Americas Corp. effective immediately.
• Our prior estimates and fair values for LAAC and LAC should no longer be relied on.

Drop Coverage of Danaher Corp. and Veralto Corp. Effective Immediately

• On September 30, 2023, Danaher Corp. (NYSE: DHR). completed the spin-off of Veralto Corp. (NYSE: VLTO).
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Danaher Corp. and Veralto Corp. effective immediately.

Our prior estimates and fair values for DHR and VLTO should no longer be relied on.

GE Vernova Files Public Form-10; Maintain Pre-Spin NEUTRAL Rating; Update Pre-Spin FVE to $146

• On February 15, 2024, after the market close, GE Vernova filed a public Form-10 with the SEC in connection with the planned spin-off of General Electric Co.’s (NYSE: GE) Renewable Energy business.
• It is expected that following the spin-off, GE Vernova will trade on the NYSE under the ticker “GEV”, while the parent company, which will change its name to GE Aerospace, will continue to trade on the NYSE under the ticker “GE”.
• In the Form-10, the planned separation date and share distribution ratios were not supplied, however it is expected that GE will complete the spin-off in 2Q 2024.
• GE Vernova will hold an investor day on March 6, 2024, and GE Aerospace will hold an investor day on March 7, 2024.
• Following the spin-off GE Vernova will carry a cash balance of $4.2 billion ($603 million of which will be classified in assets held for sale), and the company will assume pension liabilities with a net deficit of $1.6 billion.
• Management estimates that the company would have incurred $410 million of total expenses in 2023 ($200 million of which would be considered recurring) if the spin-off would have occurred on January 1, 2023.
• On an adjusted basis, it was disclosed that GEV, on a pro-forma basis, generated $33.2 billion in revenue and operated with a 2.4% adjusted EBITDA margin in 2023 (or 3.1% on an “organic” basis, which excludes FX, acquisitions, and dispositions).
• GEV will operate under three segments: Power (~52% of revenue), Wind (~29% of revenue), and Electrification (~19% of revenue). In terms of profitability, the Power segment, which designs, manufactures, and services gas, nuclear, hydro, and steam technologies, is the main driver of earnings operating with an EBITDA margin of 9.9%.
• The Wind segment, controlling the on- and off-shore wind operations, continues to operate at a loss, albeit those losses are narrowing. Wind generated a loss before interest, taxes, depreciation and amortization of $1 billion in 2023 versus a loss of $1.7 billion in 2022.
• Electrification, which includes grid solutions, power conversion, digital technologies, and electrification software, operated with a 1.9% EBITDA margin in 2023 as compared to historically operating at a loss.
• GEV will benefit from the current high margin profitability from its Power segment, secular demand for its Electrification products as major grid investments will be required to meet growing energy demand (resulting in margin expansion), and eventual profitability at Wind as the company works through unprofitable current projects and is more selective in future Wind endeavors.
• We update our pre-spin fair value estimate for General Electric to $146 per share (reflecting the increase in GEHC share price) and update our post-spin fair value estimates to reflect the disclosed capital structures. We now fairly value shares of GE Vernova at $26 per share (10.0x our 2025 EBITDA estimate of $2.7 billion) and shares of GE Aerospace at $120 per share (16.0x our 2025 EBITDA estimate of ~$9.0 billion plus GEHC ownership). We note that our post-spin fair value estimates will be updated prior to the spin-off on further disclosures, most notably the final share distribution ratio.
• We remain NEUTRAL on shares of GE given a lack of upside from the current valuation versus our fair value estimate. However, we continue to posit that the current valuation (at 11.3x the consensus 2025 EBITDA estimate) likely is valuing the Aerospace business at or above our valuation, which would imply that post-spin shares of GE Vernova may be mispriced as a standalone company.
• For more details, please refer to The Spin-Off Report dated January 30, 2024.

GTX reports 4Q 2023 and full-year results broadly toward the high-end of guidance; initial 2024E FCF guidance implies a yield of 11%-15% and the company will continue to deploy capital toward aggressive share repurchases and debt repayment; fair value remains $11 per share

This morning, before the market open, GTX reported 4Q 2023 sales up ~5% (or 3% on a constant currency basis) to $945 million with ~3.5% growth in adjusted EBITDA to $145 million (reflecting 30bps of margin degradation).  Net income and adj. free cash flow (FCF) were $52 million and $137 million, respectively (versus $112 million and $132 million in the prior year period).

• For full year 2023, GTX posted 8% top-line growth (same on a constant currency basis) to $3.886 billion along with an ~11.5% advance in adj. EBITDA (compared with guidance of $3.83-$3.9 billion and $615-$645 million, respectively).  Net income was $261 million (versus guidance of $252-$272 million and $390 million in the prior year period) while adj. FCF increased ~35% to $422 million (compared with guidance of $350-$400 million).
• On the capital allocation front, management repurchased an additional 4.7 million shares (at ~$7.41 per share) in 4Q 2024 and ended the year with a net leverage ratio of 2.2x.  All told, in addition to the $200 million debt pre-payment made in 3Q 2023, GTX repurchased roughly 10% of its shares in 2H 2023 alone.
• For full-year 2024, management’s initial guidance, which assumes an overall operating environment that is “flat to down” compared to 2023, calls for sales of $3.8-$3.95 billion, adj. EBITDA of $590-$650 million, net income of $230-$275 million and adj. FCF of $325-$425 million (see Exhibit #1 on page 2).  Underlying assumptions include a Euro/Dollar exchange rate of 1.08 to 1, RD&E investments and capital expenditures at 4.5% and 2.2% of sales, respectively (of which ~60% and 30% will be focused on zero emission technology).
• On the latter electric vehicle (EV) or zero-emission vehicle (ZEV) front, GTX continues to garner pre-development projects for its E-Powertrain, E-Cooling Compressor and H2 Fuel Cell solutions/systems and it continues to target ~$1 billion of EV/ZEV sales (at or above the company’s existing margin profile) by 2030.
• In terms of capital allocation looking in 2024, GTX’s Board authorized a new $350 million share repurchase program this week (roughly 11.5% of the shares outstanding at current prices) and management anecdotally indicated on this morning’s conference call that similar to 2023 the company intends to deploy FCF toward a mix of de-leveraging and buybacks.
• In terms of the longer-term outlook, on which we note that management has solid visibility considering ~80% of sales over the next 5-years have already been award by its OEM customers, we concur with management’s contention that the core turbocharger business will be bigger in 2030 than it is today and that GTX will generate free cash that equals or exceeds the company’s current market capitalization over the next five years. (As well, in terms of allocating that capital, management will continue to repurchase shares, reduce leverage and may ultimately instate a dividend.)
• Our base case fair value estimate for GTX remains ~$11 per share, reflecting an 8.0x multiple on our 2025E adjusted net income forecast of ~$314.5 million and a fully diluted share count of ~240 million (see Exhibit #2 on page 2).

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