Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst James McGarragle warns pricing normalization and cost headwinds are likely to weigh on Air Canada’s (AC-T) 2024 results.
“Our non-consensus view on AC is predicated on a normalizing demand environment in 2024 and higher capacity in the domestic market, the combination of which we believe will pressure load factors and pricing,” he said. “Moreover, we see upside risk to costs due to the pilot contract negotiation. Our estimates are very sensitive to these metrics and our 2024E EBITDA represents the Street low. We also see FCF as challenged, which we expect to limit shareholder return opportunities. We believe these risks are appropriately reflected in the shares at current levels.”
In a research report released before the bell on Thursday, Mr. McGarragle assumed coverage of the company with a “sector perform” recommendation, seeing the “sustainability of higher fares at risk” moving forward and seeing higher costs weighing on profitability.
“We expect a normalization of demand following a surge in travel emerging from the pandemic,” he said. “We also see risk to household spending resulting from higher interest costs and elevated debt levels, which we note is consistent with recent data from RBC Economics. In our view, a weaker demand backdrop, combined with growing and less rational competition, introduces significant downside risk to airline pricing in the near term and therefore to 2024 consensus EBITDA estimates (RBC estimate $3.4-billion; consensus. $3.9-billion).
“Costs at AC are up 20 per cent compared to 2019, reflecting meaningful inflation across a number of expense categories. Looking ahead, we flag risk from pilot contract negotiations that could increase wages significantly. In addition, we see a changing regulatory environment and flight attendant contract negotiations as further potential headwinds going forward. Overall, we see these factors as pointing to upside risk to costs and adding more uncertainty to the near-term outlook for AC.
Also seeing Air Canada’s capital expenditure program limiting positive free cash flow, which he called “an important driver of sentiment,” in the medium term and pushing out an inflection to 2027, Mr. McGarragle set a Street-low target of $18 for its shares. The average target on the Street is $27.99, according to LSEG data.
“Our cautious view is predicated on weakening demand as well as increased capacity, both of which we see pressuring pricing in the near term,” he said. “We also see upside risk to costs, and our 2025 EBITDA estimate, upon which we value AC shares, is the Street low. Our target multiple is in line with AC’s 5-year average multiple of 3.5 times, excluding the pandemic. While we believe AC will benefit from secular immigration tailwinds and the rationalization of the competitive environment, we remain cautious on the lack of positive catalysts in the near term and therefore assume coverage at Sector Perform.”
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In separate reports released Thursday, Mr. McGarragle assumed coverage of both Bombardier Inc. (BBD.B-T) and Chorus Aviation Inc. (CHR-T) with “outperform” recommendations.
On Bombardier, he said: “We see Bombardier as benefiting from several key drivers in both the near-term and the long-term, including existing and new areas of revenue growth, margin improvement through continued production ramp and improved mix, as well as lower debt levels from higher sustainable FCF. We expect these drivers to result in a re-rate higher in the shares. Longer-term, we see Defense, Services, and Certified Pre-Owned (CPO) as GDP-plus drivers of growth out to 2030. We assume primary coverage of Bombardier and continue to see a significant investment opportunity in the shares.”
His target of $95 is a new high on the Street. The average is $75.53.
“Bombardier has changed but sentiment on the stock has not; why we believe the shares should re-rate higher,” said Mr. McGarragle. “The operational improvements and impressive deleveraging from 7.7 times to 3.3 times (’21 to ‘23), as well as upside levers discussed above, makes us question whether the 45-per-cent valuation discount to peers is entirely appropriate. We believe shares are primed for a re-rating given solid execution, debt reduction, and FCF growth, all of which we expect to erase the historical valuation overhang over time.”
For Chorus, the analyst said: “We see Chorus as benefiting from solid FCF generation in 2024, which we expect to drive lower debt levels. Longer-term, we see the eventual launch of Fund III as providing an avenue for growth. We expect decreased leverage to give management optionality for increased shareholder returns, regional aircraft focused M&A, and continued fund launches, all of which we would view as important catalysts for the shares and as drivers of higher valuation.”
His $3.50 target exceeds the average on the Street of $3.08.
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Seeing “clear and obvious” synergies from Alamos Gold Inc.’s (AGI-T) acquisition of Canadian competitor Argonaut Gold Inc. (AR-T) and its Magino mine in northern Ontario, Desjardins Securities analyst Jonathan Egilo thinks there is “strong” net asset value per share accretion and touts “even more significant” gains on near-term free cash flow per share.
“We model our NAVPS for AGI lifting to $17.71 from $16.75 (or 5.8 per cent) on the back of the acquisition,” he said in a research note. “We value the combined Island and Magino operation at $4.328-billion, or $10.33/share. Our prior value for only Island was $3.261-billion ($8.18/share). Our FCF estimates for 2025 and 2026 grew from approximately nil in both years to US$151-million and US$230-million, respectively, which drives FCF yields of 2.5 per cent and 3.8 per cent. The higher cash flow comes from a combination of Magino production and Island synergies — particularly the elimination of the need to expand the plant to 2,400 tpd [tons per day] from 1,200tpd and lower per-ton operating costs for processing Island’s ore.”
“Our plan matches that presented by management at the time of the acquisition, which will see Island’s ore fed at 1,200tpd to the Magino mill starting at the beginning of 2025. We had previously modelled Island’s processing costs at US$49/ton for 2025, representing opex of US$23-million. At our lower Magino processing cost of US$13/ton, this represents immediate annual cost savings of US$17-million. We model savings on G&A at Island at US$12-million for 2025, with the combination of the two largely matching AGI management’s statements of US$25-million in annual opex savings. The 2022 Island PEA had future tailings lifts costing US$32-million over the LOM. The remainder of Island’s planned capex savings from the deal come from upgrades that were expected to cost US$100-million and spent over 2024 and 2025 to upgrade the plant to 2,400tpd from 1,200tpd. We model these costs savings, which deliver the aforementioned significant near-term FCF boost.”
As well as increases to his production, cash flow per share and free cash flow projections, Mr. Egilo raised his 2024 adjusted earnings per share estimate by 1 US cent to 55 US cents and his 2025 forecast by 2 US cents to 64 US cents. That led him to bump his target for Alamos shares to $21.75 (Canadian) from $19.75, keeping a “hold” recommendation. The average target on the Street is $22.39.
“We continue to ascribe a Hold rating to AGI due to its current valuation relative to peers,” he said.
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Ahead of the April 29 release of its first-quarter 2024 financial results, Desjardins Securities analyst Gary Ho remains “confident” Ag Growth International Inc. (AFN-T) can achieve its full-year EBITDA guidance of $310-milllion, which is a gain of 5 per cent year-over-year.
However, Mr. Ho warned the quarter is the “seasonally softest” for the Winnipeg-based agricultural equipment maker and thinks “growth is more weighted toward 2Q–4Q (delivery of Commercial projects are more 2H-weighted).” After a modest reduction to his near-term forecast, he’s projecting EBITDA of $52-million for the quarter, up 17 per cent year-over-year but below the $56-million consensus, which he thinks is high.
“We expect growth in the order book vs a year ago, but it could be lumpy sequentially given the timing of commercial projects (completions vs new wins),” he said. “The order book has a strong base of Commercial projects expected to ship in 2H. For 2024, we expect a steady year for North America, continued softness but a 2H recovery in Brazil, softness in Australia (improving throughout the year), robust performance in India and green shoots in Africa/Middle East commercial projects for EMEA. Overall, the mix should normalize given a stronger Commercial contribution vs Farm.
“We remain confident in 2024 EBITDA guidance of $310-million-plus (we model $318-million) and a flattish margin vs 2023 at 19.3 per cent, given order book visibility. This implies 5-per-cent-plus year-over-year growth, which should be weighted to 2Q–4Q given seasonality (stronger Farm in 2Q/3Q) and Commercial projects skewed toward 2H. AFN has easy comps in 1Q24 (some one-time items in 1Q23), but it is seasonally the weakest quarter, plus softness continued in Brazil/Australia.”
Reiterating his “positive” outlook and “buy” recommendation for Ag Growth shares despite lower revenue expectations for fiscal 2024 and 2025, Mr. Ho increased his target to $86 from $85. The current average is $81.56.
“Our positive investment thesis is predicated on: (1) broad-based growth across segments and regions; (2) margin expansion through operational excellence; (3) deleveraging; and (4) a proactive approach to driving organic growth through product transfers and other initiatives,” he said.
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In a research report released Thursday titled A Competitive Start To The Year, CIBC World Markets analyst Stephanie Price reduced her forecast Canadian telecommunications companies “amid a more promotional wireless environment.”
“The Canadian telecom space underperformed the broader market in Q1 amid aggressive promotional activity and a shift by investors out of the more defensive sectors,” she said. “The telecom space was down 7 per cent in Q1, while the TSX ended Q1 up 6 per cent. Given the more competitive telecom environment, we believe that the industry spent more than anticipated on marketing and promotional expenses, and we have revised our Q1 adjusted EBITDA estimates down 2 per cent, on average. We also believe that warmer-than-average weather pulled forward some capex spending, with the cash costs of recent restructurings a factor in the quarter, and the benefits expected to manifest later in 2024. We are 4% below consensus Q1 free cash flow (FCF) estimates, driven by BCE and TELUS.”
Her changes are:
* BCE Inc. (BCE-T, “neutral”) to $52 from $54. The average on the Street is $53.77.
* Quebecor Inc. (QBR.B-T, “outperformer”) to $39 from $42. Average: $39.39.
* Rogers Communications Inc. (RCI.B-T, “outperformer”) to $77 from $80. Average: $74.68.
* Telus Corp. (T-T, “outperformer”) to $26 from $28. Average: $26.06.
“We continue to favour Rogers and Quebecor on a relative valuation basis. We see potential catalysts related to both companies’ broader national networks. We believe TELUS deserves a valuation premium (to reflect fibre completion and restructuring progress), which is not currently captured in valuation levels,” she said.
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Raymond James analyst Rahul Sarugaser initiated coverage of two Canadian biotech companies on Thursday, which he thinks are “looking to effect extraordinary change in areas of extraordinary unmet need.”
He gave Calgary-based Oncolytics Biotech Inc. (ONC-T) an “outperform” recommendation, touting the “clean safety and strong efficacy results” from recent studies on its pelareorep retrovirus-based drug, which has “been shown to make tumors more susceptible to other important oncology treatments by turning immunologically ‘cold’ tumors ‘hot’.”
“ONC’s most advanced clinical assets include Phase 2 programs in breast and pancreatic cancer; both programs have received FDA Fast Track Designation,” said Mr. Sarugaser. “In this Moonshots-themed report, we focus on ONC’s opportunity in pancreatic cancer, given the dire unmet need for efficacious treatments, alongside pelareorep’s impressive tripling of objective response rates (GOBLET trial) and doubling of 12-mo overall survival rates (REO 017 trial) vs. benchmark data.”
“We see the potential for ONC to submit NDAs for pelareorep in both pancreatic and metastatic breast cancer in 2027/8, yielding a large potential market opportunity (alongside earlier-stage pipeline programs with compelling clinical signals). In the interim, we anticipate a succession of value-creating catalysts, including multiple looks at clinical data, and, with a collection of well-heeled Pharmas already hanging around the hoop (Pfizer, Merck, Roche, Adlai Nortye, Incyte), we assign a non-zero probability to ONC securing material partnerships on data readouts/regulatory guidance in the near- and medium-term, which drives our OP2 rating.”
He set a target of $3 per share. The average is $7.58.
Mr. Sarugaser gave London, Ont.-based Sernova Corp. (SVA-T), which is focused on the development of a cell-based functional cure for type 1 diabetes (T1D), a “market perform” recommendation.
“1.8 mln adults in the U.S. live with T1D (a population that benefits little from the action of GLP-1s): the opportunity before SVA is a big one,” he said. “The combination of SVA’s implant technology and EVO’s engineered cell production capability is powerful, and, if well-managed, could gain these companies access to a market where sub-1% penetration would yield massive returns. Aside from competition (Vertex has the most advanced horse in this race), a key near-term obstacle we identify for SVA is the recent turbulence in its executive team, which drives our current MP3 rating.”
His $1.50 target falls below the $3.92 average.
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Citing “heightened going concern risks associated with another liquidity shortfall,” Scotia Capital analyst Orest Wowkodaw placed his investment rating for shares of Nevada Copper Corp. (NCU-T) to “under review” from “sector perform” previously.
“As disclosed on April 2, NCU exited Q4/23 with cash of only $1-million, an elevated net debt position of $238-million (vs. $203-million at Q3/23), and a net working capital deficit of $84-million, as the ramp-up of the 5ktpd underground Pumpkin Hollow Cu [copper] mine continues to underperform expectations (only 1.5 million pounds copper produced in Q4/23),” he said. “While the company’s largest shareholder, Pala, has loaned NCU an additional $25-million of capital in Q1/24, there is no obligation for Pala to supply additional liquidity; moreover, the amount of loans provided by Pala has been decreasing, resulting in an accumulation of trade payables. NCU warned that it will not be able to continue carrying on business without additional near-term funding. The company has entered into an exclusivity agreement with a third party regarding a proposal for additional financing and a potential change of control transaction; however, there is no assurance that additional funding will be secured and that a transaction will be completed.”
He removed both financial estimates and $2 target for the Vancouver-based company’s shares. The current average on the Street is 10 cents.
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In other analyst actions:
* Pointing to recent share price gains, Stifel’s Michael Dunn downgraded Perpetual Energy Inc. (PMT-T) to “sell” from “hold” with a 40-cent target. The average is 50 cents.
“With the Sequoia litigation soon behind it, Perpetual stands at a crossroads, and will no doubt be considering its options to either continue as a standalone entity or sell itself. With its remaining oil and gas assets primarily being non-operated stakes in Tourmaline-operated Deep Basin lands, and its shared staffing and history with Rubellite Energy, those two entities are potential dance partners,” he said.
* In response to Wednesday’s post-market release of its quarterly results, Raymond James’ Steven Li trimmed his BlackBerry Ltd. (BB-T) target to $5.50 from $6.50 with a “market perform” rating. The average is $4.39.
“Cyber ARR [annual recurring revenue] finally stabilizes after consecutive q/q decline since 2Q22 but F2025 guide below,” he said. “Cyber expected to decline again in F2025 (down 5 per cent year-over-year at the mid point) while IoT/QNX fares a little better (up 6 per cent y/y at mid point, but slower than previous expectations of teens+ growth).”
* National Bank’s Cameron Doerksen raised his targets for Canadian National Railway Co. (CNR-T, “sector perform”) to $190 from $172 and Canadian Pacific Kansas City Ltd. (CP-T, “sector perform”) to $121 from $112. Elsewhere, Barclays’ Brandon Oglenski raised his CN target to $175 from $170 with an “equal weight” rating and CP target to $130 from $120 with an “overweight” rating. The averages are $179.15 and $119.72, respectively.
“We maintain our neutral stances on both CN Rail and CPKC ahead of Q1/24 earnings releases later in April. While Q1 saw some winter-related operational challenges for both rails, particularly early in the quarter, there have been some encouraging signs in recent volume trends, especially for international intermodal. We nevertheless do not find current valuations compelling,” said Mr. Doerksen.
* Scotia’s Mario Saric hiked his Dream Office REIT (D.UN-T) target to $20 from $10 with a “sector perform” rating. The average is $17.
“CBRE Q1/24 Office update shows no major changes from Q4/23,” he said. “Similar to Q4/23, in terms of positives, downtown sublet space fell again; asking rents are holding (we suspect NERs are still falling though), and new supply (as a percentage of inventory) is the lowest since 2011, with 1.7Msf delivered in Q1/24 leaving only 5.8Msf to go (2.2 per cent of inventory). Negatives: Toronto negative absorption continues, driving a more modest 60bp and 10bp quarter-over-quarter jump in Toronto DT and National Class A vacancy to 18.0% and 19.5 per cent, although Canada’s 2nd-largest market (Montreal) vacancy fell 30bp q/q. In the short term, we think the results support 2H-weighted occupancy gains from Allied, as opposed to Q1 results in late April (we think it falls 30bp, before moving higher), which we think are needed for investor confidence in distribution sustainability to improve.”
“We view CAD Office as an attractive ‘soft landing’ trade, but reversal of year-to-date under-performance require occupancy gains and asset sales for AP and D, respectively, which still seem like 2H/24 events, to the extent they materialize.”
* Jefferies’ Randy Konick lowered his Street-low Lululemon Athletica Inc. (LULU-Q) target to US$240 from US$300 with an “underperform” rating. The average is US$479.14.
* Raymond James’ David Quezada cut his Carbon Streaming Corp. (NETZ-NE) target to $1, matching the consensus, from $3 with a “market perform” rating.
“While Carbon Streaming continues to trade at a material discount to NAV, we believe ongoing uncertainty surrounding the timing of credit issuance from the flagship Rimba Raya project and generally slower than expected revenue ramp up represent key concerns, prompting our neutral stance,” he said.
David Leeder