Bull List Report – Alaris Equity Partners – TSE:AD.UN

Alaris Equity Partners – AD.UN.TO

Alaris Equity Partners Income Trust is an open-ended trust. The Trust, through its subsidiaries, indirectly provides alternative financing to private companies (Partners) in exchange for distributions with the principal objective of generating stable and predictable cash flows for payment of distributions to unitholders of the Trust. Distributions from the Partners are adjusted each year based on the percentage change of a top-line financial performance measure such as gross margin and same-store sales and rank in priority to the owner’s common equity position.

Focus area	Score
Valuation	71
Profitability	91
Risk	50
Returns	28
Dividend	52
Outlook	0
Debt	35
Growth	55
Overall	53

Finchat does not track KPIs or Segments for Alaris

Pros

Strong earnings coverage ratio
Provides excellent value at today’s prices
Starting yield of over 7%, the distribution is well-covered
Company has reduced debt by notable amounts over the last year
The company is reporting strong results from its partners despite a rough economy
Consistent double-digit returns on equity and invested capital
The company deployed $139M in new capital in 2024, and is trending to new highs in 2025
80%+ of the businesses Alaris is involved with operate solely in the US, mitigating tariff risk

Cons

Asset management companies are starting to struggle again amidst economic uncertainty
A single partner accounts for a double-digit percentage of revenue
The company’s large US exposure heightens currency risk
As a small-cap asset manager, the company is highly volatile
One of its partners was hit by reductions in government spending from DOGE and cannot pay its distribution to Alaris

With Alaris, I decided to add a company with a higher-than-average starting yield (7%), which should appeal to those looking for income today. I never advocate for yield chasing, but there are times when you can find a nice sustainable high-yielding stock that can also provide investors with additional growth – Alaris fits this description.

The dividend is well covered, and while investors can’t expect hyper growth out of the company, there is the potential for outsized capital appreciation. First, there is a decent organic opportunity for gains if the company were to close the valuation gap between current and historical valuations. That alone makes it an attractive option.

The second is that the company is well-positioned for continued growth. The company took advantage of expanding the business in Fiscal 2021, deploying $358M in new capital, leading to higher forward run rates. That slowed extensively in 2022 to just over $155M, and in 2023, it slowed even further. However, this was to be expected. The added bonus is that the capital deployed by Alaris over the last year (around $139M) is at much higher yields than during the pandemic., and with recent deals, it should be rolling out quite a bit of capital in 2025 at high yields as well.

The company is also in an excellent financial position and has delivered double-digit ROIC (16.35%) and ROE (19.9%). Analysts expect revenue growth in the low teens over the next couple of years. The company’s Earnings Coverage Ratio (ECR) – a measure of assessing their partners’ continued ability to make their contracted distributions, sits at 1.5x, which is in line with last quarter.

I won’t go into depth on the ECR ratio; just know that the higher this ratio is, the better. The strong ECR ratio is one of the primary reasons the company is able to increase the dividend even amid a difficult operating environment.

It is also worth noting that Alaris runs a lean operation with little overhead, and most expenses come from taxes on distributions received. Finally, don’t be scared if the company announces capital raises through share issues. This is how the company raises cash to deploy into new income streams. Likely, if the company issues a raise, it has additional income streams it is targeting.

Beta	1.3
Best monthly return	21.1%
Worst monthly return	-12.3%
Max drawdown	42.6%

Alaris’s success depends on its partners’ performance, and so do the dividend payments. Disruptions in partner operations could impact the dividend as it is their only source of cash flow. This is a royalty business, and if the partners struggle, so will Alaris. We’re witnessing this right now with one of its partners who was materially impacted by Elon Musk’s DOGE cuts in government spending.

The ECR is a ratio that Alaris uses to judge the likelihood of a partner being able to pay payments. The higher the number, the better. Currently, the majority of its partners have healthy earnings coverage ratios. However, considering the economic environment, this could change quickly, and investors will need to monitor these coverage ratios on a quarterly basis.

Additionally, Alaris does not typically have voting rights with their partners, so if a partner business goes sideways, Alaris has little ability to influence the affected operations. Each business partner will have its own risks, so it is nearly impossible to list them all. Suffice it to say that most businesses were impacted by the pandemic and will be impacted in some way by a weakening economy in the United States and higher than average interest rates. Case in point, one of its struggling companies is a rebar/steel manufacturer that got hit hard by rising commodity prices. It has since recovered, but this is just an example of the risks with the partners.

For its part, the rate of interest on its debentures is likely to tick upwards and impact margins. There is also some diversity and currency risk here as one partner accounts for ~12% of revenue and there is a +/- $0.02 per unit cash flow run rate swing for every $0.01 USD to CAD change.

Overall, this is going to be a company that is always sensitive to economic conditions, as it depends solely on its partners, who are highly susceptible to economic conditions themselves, to pay Alaris its distributions.

	TTM	Historical average	Forward numbers
P/E	6.7	6.0	–
EV/EBITDA	4.6	6.3	–
Free cash flow yield	-3.2%	–	–
P/FCF	–	8.3	–
P/B	0.8	0.8	–

Because Alaris has few analysts covering it, it doesn’t have a PEG ratio. Remember, PEG ratios are formulated based on analysts’ forward earnings expectations.

Alaris is currently trading at attractive valuations yet again. At $19~ per share, it is still trading at a discount to pre-covid levels and, as of writing, is trading at a double-digit discount to historical valuations and scores a perfect 10 based on Ycharts value metrics. The company’s book value now sits at over $24.50~, highlighting the deep discount this company is trading at on a price-to-book basis.

In late 2023, I sold my Alaris shares when it traded around 0.9x book, which is what I feel would be fair value for the company. Donald Trump shaking up the economy with tariffs has now left the company at attractive valuations again, and one of its partners not being able to make its distribution payments is instilling some fear.

Because of the overall uncertainty, asset management companies have struggled recently and are now trading at deeper discounts. At this point in time, the asset management business is volatile. In my opinion, it is only a matter of time before Alaris’ valuation rebounds yet again.

As rates continue to decline, we’re seeing a runup in Alaris’s price. As I’ve mentioned numerous times, the company is especially sensitive to the overall economy. This is primarily due to the underlying businesses it finances. If rates continue to come down and economic activity picks back up, Alaris should be able to realize tailwinds in terms of share price and get back to its typical price-to-book ratio, which is around 0.9~. This still implies double-digit upside from today’s share price.

The only difficulty will be if Donald Trump’s policies will send the US economy into a recession. If it does, we could see some short-term pressure on its price.

Alaris has no single major competitor. That being said, it operates in a highly competitive environment. Asset managers like the aforementioned BAM, ONEX, EIT.UN, and POW are competitors, as are private equity funds, royalty companies, and other institutional and strategic investors, including the public and private capital markets and senior debt providers. According to the company, the competition in the US is much larger and has “considerably greater financial resources and more diverse funding structures than Alaris.”

This only considers the competition Alaris faces in securing deals with partners. Each of their partners also has a slew of competitors that could inadvertently impact Alaris if they lose ground. There is also the added element that Alaris is unique in that it finances small to medium-sized businesses that are primarily economically sensitive. A company like Brookfield Asset Management has a much broader base and a much more diverse portfolio, so you will often see it trade at large premiums to Alaris.

Overall, Alaris trading at a discount to major asset managers is likely due to its small-cap nature and the highly competitive environment. I view this as a strong opportunity to grab an excellent company at a discounted price.

Yield	6.9%
Payout ratio (EPS)	26.4%
5-year dividend growth %	-3.8%
Money Spent/Received on Buybacks and Share Issuances	6.7M

Alaris is a high-yielding company that primarily aims to pay out a solid chunk of the distributions it collects from its partners back to shareholders. The company aims to pay out around 60% of its cash flows generated from these investments. Due to some strong recent results, that payout ratio has come in at around 45%. What you will see above in the table is the earnings payout ratio, which is also well covered.

Alaris has raised its distribution by 9%, its first meaningful bump in a couple of years, which signals confidence in the underlying portfolio. While the company had made a few increases post-pandemic, it had held steady more recently, likely a reflection of management’s caution amid rising interest rates and the inflation shock of 2022.

Now, looking ahead to 2025, uncertainty looms again. With the potential return of a Trump administration and the prospect of renewed tariffs and inward-looking economic policy, the risk of a recession tied to trade friction is very real. Against that backdrop, I wouldn’t expect Alaris to commit to aggressive distribution growth going forward. Management is likely to remain prudent, choosing flexibility over growth, and I’m perfectly fine with that.

What I’d rather see is faster capital deployment. The trust has a proven ability to generate high risk-adjusted returns, and with the Optimus SBR deal already showing they’re ready to move when the opportunity is right, that’s where the real value creation lies.

Alaris Equity Partners delivered a strong third quarter. The kind of quarter that reinforces why investors trust its model and why it exhibits lower volatility despite being a small cap asset manager.

Revenue increased by low-single digits to sit at $44.1 million, with distributable cash flow per unit climbing to $0.88, despite a 6% increase in units outstanding. As mentioned earlier in the report, this company often issues new units when it finances new deals. So, shareholders should get used to increasing share counts. For the most part, they’re a net benefit to shareholders.

The trust maintained its annualized distribution of $1.80 per unit, which works out to a very comfortable 71% payout ratio. This is after the company’s decision to raise the distribution by 9%.

While the quarter itself was operationally quiet, the big news broke shortly after. Alaris announced a $115.5 million investment in Optimus SBR, a Toronto-based consultancy firm. The deal includes $100 million in preferred equity, which will yield $9.25 million annually, and $15.5 million in common equity, signaling not just income generation for Alaris, but equity upside. This new partner not only fits Alaris’ playbook of non-cyclical, cash-generative businesses, but immediately boosts run-rate revenue and supports future cash flow growth.

In terms of all the partners, the portfolio continues to show resilience. Three partners, including Accscient and Amur, saw increases in their annual distributions, while two (GWM Holdings and Fleet Advantage) reset slightly lower. The rest were stable, which considering the current economic environment, is outstanding. We do have to remember, the bulk of this company’s partners are service based businesses south of the border. They have significant exposure to the US economy.

The impression I got from management on the conference call was confidence. They aren’t chasing yield or volume. Instead, they continue to focus on high-quality, pain-tested businesses with recurring revenue and strong teams running them. Remember, this is even more important with Alaris, as it gets no voting rights with its partners. A bad management team can turn an investment ugly very quickly.

The Optimus investment is a case in point. This is a well-structured, high-return deal that reflects what management wants more of. Looking ahead, Alaris expects to deploy another $100–$200 million in 2026. So, it’s fairly clear that the deal environment is improving.

This quarter adds up to another vote of confidence in the thesis for Alaris. Predictable income, low volatility, and now, a fresh high-return partner in Optimus SBR to help drive the next leg of growth. Alaris is staying in its lane and doing it well. And if it keeps executing like this, the rewards should keep compounding.

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