Going Once, Going Twice, Massive Return! Analyst Sees Double Digit Upside For This Auction House

Zinger Key Points
  • Ritchie Bros. is a B2B and B2C which helps customers buy and sell used and unused equipment for construction and other industries.
  • The default rate in construction is 2.5%, more than double the default rate of other sectors.

While Ritchie Bros Auctioneers Inc RBA is not a large cap stock, it has seen 39.6% gains in the past six months and has extremely strong support along the $50 levels.

RBA is an asset management and disposition company, largely for industrial equipment and durable assets. Headquartered in Vancouver, British Columbia, Canada, RBA is a B2B and B2C which helps customers buy and sell a wide range of used and unused equipment for construction, mining, transportation, energy and multiple other industries.

“RBA is in a unique position to capitalize on a potential sustained economic downturn,” said analyst Gianni Di Poce in his weekly “Benzinga Pro Insider Report.”

“If construction companies are forced to dispose of assets from not being able to service debt payments, they could turn to companies like Ritchie Bros for guidance in the process.”

The Call:  A 33% return potential: “I am bullish on RBA so long as the stock remains above $62.50-$63.50,” Di Poce said. “Upside target $94-$96.”

During the COVID-19 pandemic, around 97,000 construction businesses in the U.K. were awarded loans through the British Coronavirus Business Interruption Loan Scheme. The businesses were given a 12-month window to repay the loans, and more than 2,000 have already defaulted on repayments in the first few months.

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The default rate in construction is 2.5%, more than double the default rate of other sectors, such as arts and entertainment (1.3%) and healthcare (0.8%). Ritchie Bros can benefit from liquidating the used assets of some defaulted companies as the price of used commercial vehicles continue to rise in the current inflationary economic environment.

The asset management company booked $1.42 billion last year, generating $151.87 million in profits. The stock is fairly valued with a P/E of 26.89, a Price-to-Sales of 5.03, and EV to EBITDA of 15.27. Its free quarterly cash flow is a solid $262.46 million, “which is strong in proportion to its revenue,” the analyst wrote.

From a technical perspective, the stock is skewing bullish as “we observe a multi-month saucer pattern, and prices are holding above resistance after recently breaking out,” Di Poce said. “The duration of this saucer renders it into the category of, the bigger the base, the higher the space.”

The company raised its dividend to $0.27 from $0.25 in 2021. Despite the low dividend payout, its EPS has risen for the last five years at a rate of 42% per year. “This high growth/low dividend development suggests they’ve effectively reinvested in their business,” the analyst mentioned.

Other analyst ratings: RBC Capital analyst Sabahat Khan maintained an Outperform rating and raised the price target from $67 to $73.

Photo: Courtesy Ritchie Bros.

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