Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Vishal Shreedhar expects to see signs of “steady execution” from Loblaw Companies Ltd. (L-T) when it reports first-quarter 2024 financial results on May 1, benefitting from a “moderation” food store inflation and a “resilient” performance from Shoppers Drug Mart.
He’s currently projecting earnings per share of $1.67, which is 3 cents below the consensus forecast on the Street but up 12 cents from the same period a year ago. He attributes the 7.3-per-cent year-over-year increase to “positive Food Retail (FR) same-store sales growth (sssg), continued momentum in Shoppers Drug Mart (SC), benefits from Loblaw’s ongoing growth/efficiency programs, and share repurchases.”
“We calculate Q1/24 inflation of 2.9 per cent versus 4.9 per cent last quarter,” said Mr. Shreedhar. “In February 2024, Statistics Canada reported that food store inflation moderated to 2.4 per cent. Management also indicated that inflation was stabilizing; the company expects Q1/24 inflation to be lower than Q4/23 although it continues to be positive.
“Our analysis of share performance since 2008 (of Canada’s large grocers) suggests relative strength during periods of rising food store inflation. Share returns have on average exceeded the TSX by 3,394 basis points. Similarly, historical data indicates underperformance versus the TSX during periods of food store disinflation; share returns have on average lagged the TSX by 762 bps over this time period, although underperformance was not noted in every period. In addition, select grocers (such as Loblaw) have expanded beyond food retail via acquisitions. Specifically, we estimate that 45 per cent of Loblaw’s 2023 Retail EBITDA is from pharmacy – this diversification insulates Loblaw during periods of food store disinflation. Accordingly, we don’t expect food store disinflation to be as impactful on L’s share price performance as it has been in the past. We note that L’s share price has appreciated by 14 per cent over the last 14 months, which coincides with food store inflation decelerating from a peak of 11.4 per cent (January 2023) to 2.4 per cent currently.”
The analyst also emphasized the impact of a strong Shopper performance. He’s projecting positive same-store sales gains, “reflecting solid growth in services (expanded cope of care), continued strength in specialty drugs, as well as higher year-over-year influenza cases (delayed cough and cold season relative to the prior year).”
“In addition, management suggested last quarter, despite a pressured macroeconomic backdrop, consumer behaviour pointed to less price sensitivity when purchasing beauty products,” he said.
Maintaining his “outperform” recommendation, Mr. Shreedhar raised his target to $156 from $153 to reflect higher estimates for both fiscal 2024 and 2025 and an advancement of his valuation period. The average on the Street is $155.22, according to LSEG data.
“We continue to maintain a favourable view on Loblaw and recommend it as our preferred grocer supported by several key themes: (1) Benefits from management’s improvement initiatives; (2) Ongoing stable EPS growth, and (3) Favourable trends in discount and drug store (where Loblaw over-indexes),” he said.
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While National Bank Financial analyst Adam Shine noted Corus Entertainment Inc. (CJR.B-T) is “optimistic” that the macroeconomic environment will improve and fiscal 2025 will see return to a normal television season, he thinks its cost reductions are not “deep/fast enough” and the television advertising outlook “may continue to disappoint.”
Accordingly, after “materially” reducing his forecast following Friday’s release of in-line second quarter results and concerning comments about the remainder of the year, he lowered his recommendation for the Toronto-based media company by two levels to “underperform” from “outperform” previously.
“Corus sees TV ad sales and program amortization declining 10 per cent to negative 15 per cent in Q3,” he said. “Given an easy comp of negative 12.1 per cent last year and the fullness of the belated TV schedule finally coming together, we had expected TV advertising to return to modest growth of 2 per cent in Q3 and 8 per cent in Q4 (down 9.5 per cent Q4/23, down 14.2 per cent Q4/22). In light of evolving cyclical pressures exacerbating secular challenges and management’s weaker guidance, we need to materially temper our H2 expectations. Ongoing cost-cutting efforts and lower than anticipated program amortization help offset some of the top-line reductions we had to make, but this is looking increasingly structural and disconcerting.”
On Friday, shares of Corus plummeted over 26 per cent after it reported revenue of $299.5-million for the quarter, in line with Mr. Shine’s $299.8-million estimate but below the consensus expectation of $306.4-million. An adjusted earnings per share loss of 3 cents was a penny better than anticipated by both the analyst and Street.
“Ad sales fell 11.9 per cent (telegraphed to be down by high single to low double digits) due to macro backdrop, lower audiences & Hollywood strikes which resulted in the delay of the TV season, which slowly came together from late January to early March,” he said. “Subscriber revs fell 5.5 per cent also due to strikes & issues with a distributor in the Maritimes. Other revs down 58.4 per cent but PF down 43.5 per cent when adjusting for sale of Toon Boom Animation, as a result of fewer deliveries, less service work, and a multi-year licensing deal in prior year for Corus Studios properties. Amortization of TV program rights fell 17 per cent (drop was telegraphed to be similar to TV ad sales) with this and other cost-saving efforts (employee expenses down 7 per cent, G&A down 16 per cent) mitigating some of the top-line pressure.”
With his new forecast, Mr. Shine dropped his target for Corus shares to 40 cents from $1.30. The average target on the Street is 85 cents.
Elsewhere, expecting headwinds will persist, TD Cowen’s Vince Valentini lowered Corus to “hold” from “buy” with a 70-cent target, down from $2.50.
“Q3 was the worst quarter of fiscal 2023 for TV advertising revenue, with macro headwinds plus the start of Hollywood strike impacts causing a 12.2-per-cent year-over-year decline. With regular programming now coming back on air, and with this easy Y/Y comp, we had expected down 5 per cent for TV ad revenue in Q3/24. Management’s guidance for down 10-15 per cent is thus a negative shock. We have lowered our estimates, which lowered our target NAV to $1.75 from $2.50.
“Given that Corus bonds continue to trade at levels that imply distress (14-per-cent yield ), and given that management has no near-term visibility into either CRTC relief or non-core asset sales, we are attaching a 60-per-cent risk/uncertainty discount to this NAV to get a 12-month target price of $0.70. If things improve on either advertising, regulations, or asset sales, then we believe this stock has the potential to recover to at least our NAV of $1.75. However, if negative trends persist, we cannot rule out zero for the equity. Thus, until we see the bond yield closer to 10 per cent , we believe the risk-reward for investors is better in the bonds, and we do not believe a buy rating is prudent on the equity.”
Mr. Valentiniu added: “We are heavily discounting our NAV until we see positive occurrences in at least one of the following: 1) Timely regulatory reform; 2) Asset sales at multiples in excess of 4.5x; 3) Recovery in TV advertising revenue; 4) Lower Corus bond yields.”
Meanwhile, analysts making target adjustments include:
* Scotia’s Maher Yaghi to 90 cents from $1.10 with a “sector perform” rating.
“Pressure on traditional media in Canada is unrelenting as advertising spend continues to favor digital platforms,” said Mr. Yaghi. “Corus is working on improving its digital platforms but the bulk of the company’s ad revenues remain linked to a shrinking pie. ... We believe the industry will likely continue to feel significant downward pressure. Regulatory relief is highly needed in allowing for more consolidation and content spending requirements flexibility. Until we see a steady improvement in the secular decline affecting subscribers and ad spending in the TV industry, or material regulatory relief, we recommend investors remain cautious. Our target has been reduced due to lowered forecasts while keeping our EV/EBITDA multiple unchanged at 4 times.”
* RBC’s Drew McReynolds to $1.25 from $1.50 with a “sector perform” rating.
“Q2/24 results were in line while the Q3/24 outlook for television advertising was disappointing. Following minor changes to our margin assumptions and a trimming of our television advertising growth trajectory, our price target decreases,” he said.
* CIBC’s Scott Fletcher to 85 cents from $1.15 with a “neutral” rating.
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Desjardins Securities analyst Jerome Dubreuil thinks “efficiency will be key” for Cogeco Communications Inc. (CCA-T), pointing to notable long-term competitive headwinds domestically and uncertainty surrounding the launch of its wireless services south of the border through its Breezeline cable operator.
While its second-quarter 2024 results, released after the bell on Thursday, met his expectations, he expects the Montreal-based company will “face sustained competition for several years as BCE is looking to build market share on its FTTH footprint.”
“In the U.S., we believe AT&T’s FWA [Fixed Wireless Access] could limit the nearterm cableco upside created by the expected deceleration of Verizon’s and T-Mobile’s FWA efforts,” he added. “We also expect FTTH overbuild to continue to affect cable subscriber net additions in the U.S..”
“Breezeline Mobile completed its initial testing and is now soft launching in one state, with plans for expansion to other states. The wireless business aims to reduce Internet churn and broaden CCA’s eligible pool of potential subscribers, as customers increasingly prefer having all of their telecom services with one provider. Despite management’s optimism in relation to profitability in the medium to long term, we are still uncertain as to what advantage CCA has over larger cableco peers, which are still grappling with turning a profit in their wireless business several years after their respective launches.
Mr. Dubreuil noted management now expects capex at the lower end of the guided range. He thinks that lower investment could be linked to higher competition in the U.S..
“Moreover, it may be prudent for CCA to prioritize deleveraging ahead of the BEAD program, which could allow for better returns,” he added. “However, we note that CCA’s growth is already under pressure and that financial benefits from the BEAD program are still several years away.”
“President and CEO Frédéric Perron highlighted the company’s commitment to accelerating digitization efforts throughout its operations, leveraging advanced analytics to enhance revenue and reduce costs. He outlined plans for CCA to enhance its self-serve capabilities for customers while ensuring the harmonization of technologies between Canada and the U.S. platforms. We view this development positively as we believe cost reduction is crucial for driving EBITDA growth in the highly competitive and regulated telecom industry.”
Reiterating his “hold” recommendation for Cogeco Communications shares, Mr. Dubreuil cut his target to $64 from $68 after reducing his earnings expectations for fiscal 2024 and 2025. The average on the Street is $70.40.
Elsewhere, other analysts making adjustments include:
* Scotia’s Maher Yaghi to $73.50 from $77 with a “sector perform” rating.
“CCA continues to operate in a competitive environment, both in Canada and the U.S., putting pressure on the company’s growth potential,” he said. “While the stock is trading at a low valuation multiple, given the low level of earnings growth the company is seeing at this stage compared to other companies in the sector, we are not anticipating a multiple expansion at this point ... Until we see a clearer path to recovery in subscriber loading in the U.S., we are maintaining our Sector Perform rating. Our target has been reduced as we’ve incorporated a higher long-term interest cost assumption in our DCF, reflecting recent increases in long-term interest rates.”
* Canaccord Genuity’s Aravinda Galappatthige to $60 from $63 with a “hold” rating.
“From our standpoint, it is difficult to place a value on the prospect of the wireless opportunities being pursued, but we believe investors should recognize the potential upside upon effective execution, particularly in Canada. Considering the still challenged backdrop in the U.S., we are maintaining our HOLD rating. However, we recognize the attractive 18-per-cent (F2025 esitmated) FCF yield profile,” he said.
* RBC’s Drew McReynolds to $79 from $76 with a “sector perform” rating.
“Q2/24 results were largely in-line with our expectations while F2024 guidance was reiterated. Following modest upward revisions to our American Broadband forecast, our price target increases,” he said.
* TD’s Vince Valentini to $90 (Street high) from $93 with a “buy” rating.
“With no negative surprises in the results/guidance, we are surprised CCA still trades below $60 and below 5.1 times EBITDA (on 2024E and 2025E),” he said. “Upcoming catalysts on MVNO or asset sales could ignite a big upward move in our view, so we like the risk-reward at these levels and reiterate BUY. We believe dividend yield/growth/quality is also attractive and should protect downside risk.”
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In a research report titled Missed the Boat? Not Yet! Dive In, the Water’s Fine, Echelon Partners analyst Amr Ezzat said recent investor meetings with Sylogist Ltd. (SYZ-T) “further solidified” his positive outlook for the Calgary-based software as a service company, emphasizing his “conviction in its strategic direction, market positioning, and the effectiveness of its leadership team in executing its growth strategy.”
“The resurgence in growth is not a transient phenomenon but a well-orchestrated outcome of strategic decisions, particularly under the leadership of a revitalized management team and board ... Significant investments in sales and marketing, as well as research and development, have enabled Sylogist’s products to leapfrog those of its competitors and have laid a solid foundation for continued growth,” he said.
Mr. Ezzat pointed to four factors in explaining his stance on the sustainability of its top-line growth:
- “The lacklustre investment by competitors into their tech stacks has left them reliant on outdated on-premise solutions, which have become increasingly untenable in the face of rising cybersecurity threats.”
- “Competitors have failed to prioritize investments in technology while simultaneously implementing aggressive pricing strategies, leaving clients more open to change.”
- “Sylogist stands to significantly benefit from the push for U.S. public sector digital transformation post-COVID.”
- “Sylogist is aggressively expanding its partner delivery channel, aiming to transition a significant portion of project service deliveries to partners. This move is designed to significantly enhance project delivery capacity and cultivate a robust partner ecosystem, critical for expanding go-to-market reach without the need to grow.”
Believing margins have “bottomed out and are set to expand,” Mr. Ezzat raised his target for Sylogist shares to $12.50 from $11, keeping a “buy” recommendation. The average is $12.21.
“Under the leadership of a revitalized management team and board, Sylogist has shifted gears, leaving behind its old modus operandi of a ‘Steady Eddie’ operator with outsized margins, to one seeking to capitalize on growth more aggressively.” he said. “From an investor’s perspective, we believe the management and BOD refresh was a much-needed stepping stone to revitalize a stagnant business model. The embers of sales growth have been rekindled, igniting a new flame within the Company. But aggressive top-line growth is not without its growing pains. Margins compressed (as expected) as the Company invested to grow, however, we believe they currently sit at trough (or close to trough) levels. We thus believe focusing too narrowly on short-term earnings significantly (and incorrectly) undervalues SYZ shares as they give no recognition to the Company’s evolving margin profile. As such, we derive our $12.50/shr price target using a DCF analysis. We also highlight that Sylogist recently solidified a nomination agreement with its largest shareholder, PenderFund Capital Management (10.8 per cent of shares outstanding) with the appointment of Mr. Errol Olsen as an independent director. Sylogist’s newly defined growth trajectory and aptitude for strategic M&A stand poised to act as key catalysts in driving valuation. With a scope extending from technology-focused to client-focused tuck-ins, the Company is laying the groundwork for continued value creation.”
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Seeing PetroTal Corp. (TAL-T) “leading the rebirth of the Peruvian oil industry,” Canaccord Genuity analyst Roman Rossi initiated coverage with a “buy” recommendation, touting its “impressive” operational track record and seeing upside to its core assets.
“PetroTal has grown from zero production in 2017 to an average production of over 14.2kbl/d [thousand barrels per day] in 2023, showing an impressive 72-per-cent CAGR [compound annual growth rate] since 2018,” he said. Over the same period, 2P Reserves have grown at a 21-per-cent CAGR, sitting at 100MMbls. Current production is 18.5kbl/d, pointing to a 2P RLI (reserve life index) of 16 years. We estimate FY24E average output of 17.6kbl/d, up 21 per cent year-over-year.”
“Within Block 95, PetroTal has identified other interesting prospects and is now launching a US$30-million 3D seismic campaign to further delineate them. The first exploratory well at the Iberia prospect is expected by 2026. Additionally, the company has identified other interesting prospects and leads in Block 107 for which PetroTal is looking for a partner.”
Also emphasizing its “attractive” shareholder returns with a base quarterly dividend of 1.5 US cents per share, Mr. Rossi set a target of $1.20 for shares of the Calgary-based company. The average is $1.48.
“PetroTal is currently trading at 1.8 times 2024 estimated EV/EBITDA, at a discount vs. LatAm peers that trade at 2.4 times 2024 estimated EV/EBITDA. Furthermore, it is trading at just 0.54 times P/NAV. In our view, the company could trade at a premium given the growth perspectives, strong balance sheet, and operational trackrecord, but the social and political situation in Peru will be the main headwind before a multiple expansion materializes. Potential catalysts include the drilling campaign, enhanced shareholders’ distributions, a rainier season in H2/24, and Block 107 farm-out,” he said.
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In other analyst actions:
* Evercore ISI’s Chris McNally downgraded Magna International Inc. (MGA-N, MG-T) to “in line” from “outperform” with a US$62 target, down from US$75. The average target on the Street is US$62.21.
* Bernstein’s David Vernon increased his target for Canadian National Railway Co. (CNR-T) to $195 from $191 with an “outperform” rating and Canadian Pacific Kansas City Ltd. (CP-T) to $118 from $117 with a “hold” rating. The averages are $180.15 and $124.04, respectively.
* Acumen Capital’s Nick Corcoran, currently the lone analyst covering Firan Technology Group Corp. (FTG-T), raised his target to $7 from $6. with a “buy” rating.
“With the short-term impact of the strike at Aerospace Toronto out of the way, we expect operational momentum to build through the remainder of FY/24,” he said.
* Following its latest resource update, Desjardins Securities’ Frederic Tremblay raised his Lithium Ionic Corp. (LTH-X) target to $3.75 from $3.50 with a “buy” rating. The average is $4.65.
“We view valuation as compelling, especially considering LTH’s quick path to production, low costs, proximity to producers and infrastructure, and further resource growth potential,” he said.
* RBC’s Tom Callaghan cut his MTY Food Group Inc. (MTY-T) target to $51 from $58 with a “sector perform” rating. Others making changes include: Scotia’s George Doumet to $50 from $55 with a “sector perform” rating, TD Cowen’s Derek Lessard to $49 from $58 with a “hold” rating, National Bank’s Vishal Shreedhar to $57 from $59 with an “outperform” rating, Acumen Capital’s Nick Corcoran to $65 from $75 with a “buy” rating and CIBC’s John Zamparo to $53 from $62 with an “outperformer” rating. The average is $56.43.
“MTY reported another soft quarter driven by persisting weak macro and exasperated by poor weather across the U.S. (impacting newly acquired U.S. concepts and Coldstone) and Canada (to a lesser extent),” said Mr. Doumet. “We expect SSS to remain pressured over the NTM [next 12 months], but to recover sequentially. Cost containment was notable - with more initiatives expected in the near to longer-term. Net store closures remain modest and the pipeline for openings seems healthy (for now), despite the higher interest rate environment.
“All in all, MTY shares are screening (very) cheap (25-per-cent EV/EBITDA discount vs. historical average; 13-per-cent FCF yield on 24) - but need to see improved SSSG performance and B/S deleveraging, before moving materially higher.”
David Leeder