DBRS Confirms Toromont Industries Ltd. at BBB (high), Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Toromont Industries Ltd. (Toromont or the Company) at BBB (high) with Stable trends. The confirmation is based on Toromont’s solid last 12 months (LTM) ended June 30, 2018, operating performance post the acquisition of the Hewitt Group of companies (the Acquisition). The ratings are underpinned by Toromont’s sound business risk profile as an exclusive Caterpillar equipment dealer in all of eastern Canada and robust market share in its sales territories. While the Company’s profitability was significantly bolstered by the addition of the acquired Hewitt operations (Toromont QM), its credit metrics weakened as the Acquisition was substantially debt financed, which resulted in a material increase in the Company’s leverage ratio. Nonetheless, Toromont’s financial risk profile remains strong for its current ratings as at the LTM ended June 30, 2018.

Toromont delivered outstanding operating performance in 2017 and during the first six months of 2018. Toromont’s legacy businesses (defined as all continuing businesses operating prior to the acquisition) continued to grow revenues and earnings, reflecting generally favourable market conditions in its sales territories. On a combined basis, revenues increased 26% or $438.1 million to $2.35 billion in 2017, of which $242.6 million was contributed by Toromont QM. During the LTM ended June 30, 2018, revenues reached $3.1 billion, of which $590.1 million was attributable to Toromont QM. EBITDA in 2017 and the LTM ended June 30, 2018, was $329 million and $424 million, respectively, compared with $288 million in 2016.

Going forward, DBRS expects Toromont to continue to focus on integrating the legacy businesses and Toromont QM and to benefit from the synergies of integration. Further, revenue growth is anticipated to be driven by infrastructure spending, strong construction markets and an improving mining sector in the Company’s main territories. DBRS also expects Toromont to actively expand its presence in the equipment rental sector in Québec and the Maritime provinces over the next few years as the rental business at Toromont QM is currently very modest compared with its legacy businesses. Accordingly, net investments in rental fleet and facilities are anticipated to increase substantially over the next several years but should be able to be funded from the Company’s strong operating cash flow. While the Company has not been adversely affected, headwinds from recently imposed U.S. tariffs on steel, aluminum and Chinese imports may pressure future profitability; however, DBRS notes that Toromont’s strong financial profile can absorb a moderate deterioration in earnings.

Given that Toromont’s current ratings are well commensurate with its business risk profile, a positive rating action could take place if the Company can improve its financial risk profile to the higher end of the “A” rating range. Conversely, a sharp deterioration in the Company’s operating performance could warrant a negative rating action.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Companies in the Capital Goods Dealership Industry, which can be found on dbrs.com under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Research below or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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