Inside the Market’s roundup of some of today’s key analyst actions
Touting its “attractive” valuation, “strong” growth and seeing financing initiatives on the way, iA Capital Markets analyst Naji Baydoun named Innergex Renewable Energy Inc. (INE-T) one of his “Top Picks” for the third quarter of 2023.
“In our view, INE has a low-risk investment profile backed by (1) a diversified portfolio of renewables technology platforms (providing long-term output stability, and resource, offtake and market diversification), and (2) a large and high-quality hydro fleet,” he said. We believe that INE’s large development pipeline (1) provides optionality and visibility on future greenfield and brownfield project activities, and (2) positions the Company for sustainable organic growth over time (particularly within its core markets with favourable tax incentives such as Canada and the U.S.”
“Given its leading position and market share in Quebec’s wind sector, INE can competitively bid on significant renewable power RFPs in the province (1.5GW wind procurement releasing in Q3/23, with projected CODs spanning 2028-2030). Hydro-Québec (HQ) will award 20-30-year contracts for procured power, with 40 per cent of evaluation criteria related to non-price factors (see here for INE’s latest success in Quebec). Elsewhere, BC Hydro recently announced its intention to secure new utility-scale clean power; procurement processes are expected to launch in 2024 to source 3,000GWh of generation from greenfield projects (starting in 2028), and potentially 700GWh from existing facilities (contract awards expected in 2025). INE’s presence in B.C. (990MW of operating capacity, 85-per-cent hydro) and significant development expertise with local stakeholders position the Company well to accelerate its growth in Canada. We continue to also see financing initiatives as key near-term catalysts that could (1) unlock value from existing assets (via monetizations and refinancings), and (2) provide low-cost capital to fund growth (thus removing an important overhang on the shares.”
Maintaining his “strong buy” recommendation and $22 target for Innergex shares, Mr. Baydoun thinks Innergex’s “compelling” valuation supports “significant upside potential.” The average target on the Street is $17.90, according to Refinitiv data.
“INE’s shares continue to trade at a significant discount to their own historical trading averages and well below their 2 times forward EV/EBITDA historical premium to peers,” he said. “As INE delivers more stable operating and financial performance and executes on its growth and financial priorities, we believe that improved execution, a rapidly declining payout ratio, and more consistent growth could potentially lead to improved market sentiment toward the shares (including perception related to the quality of underlying cash flows), which could support a positive valuation multiple re-rating.”
In a separate research note, Mr. Baydoun also named TransAlta Corp. (TA-T) a “Top Pick,” seeing its “market positioning and growth strategy underpin compelling upside potential.”
“Our overall investment thesis on TA remains unchanged: (1) a strong near-term outlook for Alberta power prices should continue to drive above-market expectations financial performance in 2023 (as with the impressive Q1/23 beat); (2) excess FCF generation from the strong financial performance provides capital allocation optionality (e.g., self-funded internal and external growth initiatives); (3) continued execution on the clean energy transition plan could underpin a significant positive valuation multiple re-rating (via incremental portfolio diversification and contractedness, which should reduce TA’s overall risk profile),” he said. “Furthermore, in early 2023, TA entered into an automatic share purchase plan (ASPP), providing visibility on an active buyback program; this should continue to support the shares and provide downside protection. In our view, the combination of a strong financial outlook, potentially limited downside due to share repurchases, and Brookfield’s strategic support translate into an asymmetric risk/reward profile for investors in TA’s shares.”
“Catalysts on the horizon for TA’s shares include (1) strong financial performance and quarterly results driven by the Alberta power market tailwind, (2) upward revisions to financial guidance (based on the previous point), (3) new project announcements (targeting 500MW of new growth this year, which could add $75-100-million per year of EBITDA once completed), (4) continued execution on existing growth initiatives (expected to add $130-140-million per year of run- rate EBITDA), and (5) a potential corporate simplification initiative vis-à-vis TransAlta Renewables Inc.”
Believing TranAlta shares are “undervalued and are currently trading at attractive valuation multiples on both a forward EV/EBITDA and P/FCF basis,” he retained a “strong buy” rating and $16.50 target. The average is $16.25.
“Overall, we continue to see (1) a strong fundamental outlook for TA (underpinned by its clean energy transition plan), and (2) significant upside potential and limited downside risks in TA’s shares at their current trading levels,” he said.
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IA Capital Markets’s Gaurav Mathur named Nexus Industrial REIT (NXR.UN-T) and Primaris REIT (PMZ.UN-T) as his “Top Picks” for the third quarter.
The analyst sees Nexus “well-positioned to be the next pure-play Canadian industrial REIT as it focuses on divesting its exposure to office and retail while increasing and high-grading its industrial portfolio.”
“We reiterate NXR.UN as our Top Pick as we scan the Canadian REIT sector for opportunities to generate alpha amid ‘the higher for longer’ rate narrative, the pullback in the Canadian REIT sector, downturn prospects, liquidity crunch, and volatility in the CRE sector. Given the current level of the stock, we believe an opportunity to generate alpha exists, as the underlying fundamental drivers move from strength to strength.”
“The REIT has a long growth runway with rental rate increases of 50-100 per cent across the portfolio, much higher than its publicly listed peer set in the Canadian industrial REIT sector. Management reiterated its 4-per-cent SPNOI [same-property net operating income] guidance on its latest quarterly call. We note the focus on capital allocation discipline through redevelopment projects, recycling capital, and being opportunistic on the acquisitions front. From a supply/demand perspective, the availability rate for industrial space remains low across the REIT’s markets. Furthermore, rising construction costs ensure that developers focus on large-bay product as constructing small-to-mid bay product remains prohibitive. On a recent property tour, the REIT highlighted its strength in the London, ON, market along with its beneficial partnership with the McLaughlin family, which allows for 3 million square feet of industrial square footage to be vended into the REIT at below replacement cost. "
He has a “strong buy” rating and $14 target for Nexus units. The average is $11.93.
For Primaris, Mr. Mathur kept a “buy” rating and $16 target. The average is $17.38.
“Thee stock has been our Top Pick since we began coverage as the REIT consistently executes on increasing occupancy and SPNOI across the portfolio by increased revenue from rental increases, healthy renewal leasing spreads, and completed redevelopment projects,” he said. “We expect the growth to persist as retailers realize that they are opening profitable stores located in the REIT’s portfolio. The REIT also recently received an upgrade to its issuer rating to BBB (high). Management remains disciplined on capital allocation as a strengthened balance sheet and low payout ratio create optionality not only for distribution increases but also to keep the NCIB machine running on a leverage-neutral basis. Furthermore, the REIT executed on its first acquisition through an innovative mix of cash, equity units, and preferred units. While transaction details currently remain scant, we believe the growth path allows for accretion over the next two to three years, especially with upcoming lease turnover/conversion. More importantly, the REIT has now set a precedent of acquiring enclosed mall assets through an innovative mix of cash, units, and exchangeable preferred units, one that we expect the REIT to replicate as it negotiates with other pension funds, thereby setting itself up for future growth opportunities.”
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Badger Infrastructure Solutions Ltd.’s (BDGI-T) “deeply discounted” valuation is a “very attractive entry point,” according to Stifel’s Ian Gillies.
While he touted a “near-term valuation catch-up trade potential,” the analyst also sees the Calgary-based company as an enticing longer-term investment, citing his estimate of a 2023-2028 earnings per share compound annual growth rate of 25 per cent.
“This is our favourite sort of investment opportunity as the risk/reward is tilted significantly higher,” said Mr. Gillies. “Our view on Badger has been increasingly more positive since we initiated coverage on the stock four months ago. The company has put together a strong new management team to help turn around the business with compelling five-year goal posts and the strategy has been progressing well. In the past quarter, the stock has traded down 15.2 per cent versus the S&P 500 Industrials index at 5.8 per cent, which we view as unwarranted.”
He maintained a “buy” recommendation and $49 target. The average is $36.47.
“Based on our estimates, BDGI is trading at 10.0 times P/E and 4.8 times EV/EBITDA in 2024E, which is a 44-per-cent and 40-per-cent discount when compared to its 10-year averages of 17.7 times and 8.0 times,” said Mr. Gillies. “Based on consensus, BDGI’s P/E (+2FY) is currently at 11.9 times, a 33-per-cent discount to the 10-year average. There was only one notable period that the stock was trading below 12.0 times P/E when we looked at the data for the past 10 years. This was during the pandemic in March and April 2020. In our view, the business is in the early innings of a compelling turn around that is progressing well. Thus, we believe this price level creates a very attractive entry point given we believe the potential upside significantly outweighs the downside risk.”
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Dream Industrial Real Estate Investment Trust (DIR.UN-T) appears poised to benefit from “robust” market fundamentals in the Greater Toronto Area, according to Desjardins Securities analyst Kyle Stanley.
“In addition to DIR’s ability to mark 10–15 per cent of its portfolio to market each year as leases mature (70-per-cent upside in Ontario), it also benefits from 4–5-per-cent annual rent steps on new leases, which supports ongoing elevated revenue and SP NOI [same property net operating income] growth,” he said.
In a research note titled ‘Party in the GTA’, Mr. Stanley said he sees the REIT in a beneficial position in the area, which he calls “one of the tightest industrial markets in North America” following a recent property tour.
“DIR is seeing the most robust pockets of demand for the small- to mid-bay space that we toured in the north and west GTA,” he said. “The smaller form factor is attractive to tenants of all sizes, it can serve as a last-mile distribution solution and there is limited new supply of smaller-footprint space. Management highlighted several recent leasing transactions on smaller bay spaces with starting rental rates of more than $20 per square foot across the GTA. DIR’s average in-place rent across many of the nodes we toured ranged from $6–9/sf, which implies a 2–4 times rent lift opportunity on expiring leases.”
“The GTA is the fifth-largest industrial market in North America; however, its 1.1-per-cent vacancy rate positions it as second-tightest, behind only Montreal. According to Colliers, demand for space in the GTA has stabilized following the rapid acceleration brought on by the pandemic; however, the expectation is that demand should continue outstripping new supply. Rent growth in the GTA, while an elevated 35 per cent year-over-year, trails six of the top 10 markets; at $18.50/sf, net rent in the GTA is also among the most affordable across North America. In our view, this supports incremental rent growth upside over time.”
Despite “healthy” operating results, Mr. Stanley thinks DIR trades at a discounted valuation, reiterating a “buy” recommendation and $18 target. The average target on the Street is $17.31.
“DIR’s FFO yield spread (vs the BoC 10-year) is currently 385 basis points, 100bps wider than the peak (287bps) achieved in April 2022,” he said. “We do not believe a wider spread is warranted today given DIR’s performance over the last year and its growth outlook (10-per-cent two-year FFOPU CAGR [funds from operations per unit compound annual growth rate). If DIR were to trade at its peak FFO yield spread today, it would imply a unit price of $16.50 (17-per-cent return upside).”
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Following Patriot Battery Metals Inc.’s (PMET-X) in-line fourth-quarter 2023 financial results, Desjardins Securities analyst Frederic Tremblay thinks investor focus should remain on the upcoming maiden resource estimate at its flagship Corvette property and on the 2023 summer-fall drill program.
“Despite the temporary suspension of all activity at Corvette due to wildfires earlier this month, Patriot reiterated that it remains on track to announce an initial mineral resource estimate for the CV5 cluster in July, which will include all drill holes completed through April 17, 2023,” he said. “The resumption of on-site activities is expected in the near term. In 3Q CY23, Patriot intends to apply to graduate to the TSX (from the TSX-V). In 4Q CY23, Patriot anticipates that it will have advanced its pre-feasibility-related studies, which are subject to drilling progress.”
“Beyond what we expect to be sector-leading scale from the initial resource estimate, we like the significant resource expansion potential of the 100-per-cent-owned Corvette property, supported by further drilling and surface exploration across various areas of the 50km pegmatite trend. We are also comfortable with the path toward potential derisking milestones (eg infrastructure upgrades, permitting).”
After incorporating its quarterly results, which included a loss of 2-cents that matched the analyst’s projection and the impact of a recent $50-million flow-through equity offering, Mr. Tremblay trimmed his earnings and cash flow projections for fiscal 2024 and 2025. However, he kept a “buy” rating and $21 target. The average on the Street is $18.51.
“PMET’s share price has more than doubled in the year to date (vs 3.5 per cent for the S&P/TSX Index) and is up significantly over the past couple of years, thanks in large part to strong exploration results and the attractiveness of the Corvette project, as well as positive sector developments (lithium pricing, North American incentives, etc),” he said. “That said, with a pending maiden resource estimate, we believe the stock does not fully price in the potential sector‐leading scale of CV5 and the exploration potential across the Corvette property.”
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In other analyst actions:
* In a research note titled A Once in a Trough Opportunity, Scotia Capital’s Michael Doumet trimmed his Colliers International Group Inc. (CIGI-Q, CIGI-T) target to US$126 from US$127.50, maintaining a “sector outperform” rating. The average is US$133.
“while the banking crisis eased since March, credit conditions remain challenged. For CIGI, we believe its transactional business (Capital Markets [CM] and Leasing) will remain in a slump, with prospects for a recovery unlikely to materialize in the 2H23,” he said. “As a result, we think there are risks to CIGI’s 2023 EBITDA guidance (but, we suspect many investors already share our view). As we believe these near-term risks are well reflected in the share price, we remain positive on the name with the view that an eventual (multi-year) recovery in transaction volumes will lead to a high torque profit ramp in 2024 (and beyond), IM profit momentum will accelerate through the 2H23 (and into 2024) as fundraising improves, and as its valuation remains attractive. CIGI shares trade at 11.1 times EV/EBITDA on our (below consensus/guidance) 2023E, at the mid-point of its historical trading range of 8.0 times to 14.0 times EV/EBITDA. With cycle-resilient O&A and IM accounting for a larger portion of the CIGI’s EBITDA (more than 60 per cent) and CM at- or near-trough, we believe CIGI’s trading multiple could move towards the upper-range as visibility improves – i.e. CIGI shares have traded at a higher multiple on closer-to-peak EBITDA.”
* BMO’s Ben Pham cut his Capital Power Corp. (CPX-T) target to $47 from $51 with a “market perform” rating. The average is $51.31.
“CPX’s series of project wins in Ontario builds on its core business activities and reinforces the strategic value of its existing natural gas sites, while its new North Carolina solar project is the first of two expected renewable sanctions for 2023,” said Mr. Pham. “That said, the market will likely be more focused on the Gen 1/2 repowering project where capital costs have risen over 20 per cent with some slight friction to timing and 2023 guidance. As such, we have lowered our target.”
* Following Monday’s announcement of the US$85-million acquisition of a royalty interest in the worldwide net sales of Orserdu from Eisai Co. Ltd, CIBC’s Scott Fletcher raised his DRI Healthcare Trust (DHT.UN-T) target to $18.50 from $15.50, maintaining an “outperformer” rating, while Raymond James’ Rahul Sarugaser increased his target to $18 from $16 with an “outperform” rating. The average on the Street is $16.74.
“Orserdu is an oral Selective Estrogen Receptor Degrader (SERD) and is the first drug approved targeting ESR1-mutated advanced or metastatic breast cancer,” said Mr. Fletcher. “Orserdu was FDA approved in January 2023 and is under review by the European Medicines Agency for potential approval. This deal comes shortly after the sale of the TZIELD royalty and DRI expects Orserdu to have a similar cash flow profile, reaffirming its expectations that 2030 cash flows would be flat to slightly up relative to 2022. The uncapped nature of the deal allows DRI to share in the upside of a drug that appears to have solid potential. Due to the lack of publicly available forecasts for Orserdu, we have used management’s 2030 target to estimate the cash contribution, resulting in a mid-teens IRR above the trust’s typical 12-per-cent target.”
* Cormark Securities’ Kyle McPhee raised his Premium Brands Holdings Corp. (PBH-T) to $140 from $120, above the $116.50 average, with a “buy” rating.
David Leeder