Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Chris Li is “expecting another challenging quarter for Canadian Tire Corporation Ltd. (CTC.A-T) when it releases its first-quarter financial results on Thursday before the bell.
“We believe 1Q is expected to be another tough quarter, reflecting cautious consumer discretionary spending, limited dealer inventory replenishment, and higher net impairment losses and funding costs for Financial Services,” he said. “These pressures should be mitigated by margin management and cost control. We believe valuation reflects these headwinds, with declining interest rates, demand improvement, dealer restocking and/or FS partnership as potential catalysts in 2H. We maintain our positive long-term view.”
For the “smallest” Retail quarter of its fiscal year, Mr. Li is now projecting normalized earnings per share of 57 cents, down 43 per cent year-over-year (from $1) and below the consensus estimate of 70 cents. Expecting revenue to slid 6 per cent from fiscal 2023 to $3.473-million, he is forecasting same-store sales growth to fall at all three of its segments (Canadian Tire by 2.1 per cent, Sports Chek by 3.3 per cent and Mark’s by 3.1 per cent).
“We expect Retail gross margin to decline by approximately 20 basis points (consensus down 10 bps) with higher promotional intensity across all banners, partly offset by lower freight and product costs,” he said. “We expect Retail SG&A expense dollars (ex D&A) to decline by 2.5 per cent year-over-year (consensus down 4 per cent), mainly driven by operating leverage in supply chain costs from a significant reduction in corporate inventory (exit of expensive thirdparty warehousing and storage partnerships), productivity savings from DC automation.”
After modest declines to his 2024 and 2025 revenue estimates and increases to his earnings per share projections, Mr. Li reiterated a “buy” recommendation and $160 target for Canadian Tire shares. The average on the Street is $152.90.
“We expect further share price volatility until earnings visibility improves. We maintain our positive long-term view,” he concluded.
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After a “strong” first quarter, 5N Plus Inc. (VNP-T) continues to possess multiple tailwinds, according to National Bank Financial analyst Rupert Merer.
“VNP has visibility on a few years of growth in terrestrial solar, with FSLR’s U.S. expansion (6 GW in 2023 to 14.1 GW by 2026E) to be satisfied by VNP’s CdTe [cadmium telluride] production, and it remains the preferred supplier to the growing European and U.S. space industry,” he said. “In addition to its AZUR contracts, VNP received a $14-million award from the U.S. DoD in Q1 for space products. In 2025 and beyond, VNP could see revenue from CZT products (for medical imaging) and from GaN-on-Si technology licensing into multiple high-growth markets for power electronics (like EVs and data centres). It also noted promising developments for Bi-based APIs provided to Microbion (an investee). With deglobalization of manufacturing, VNP is well positioned as a strategic material supplier.”
After the bell on Monday, the Montreal-based producer of specialty semiconductors and performance materials reported quarterly revenue of $65-million, up 18 per cent year-over-year and in line with both Mr. Merer’s $66.3-million estimate and the consensus forecast of $65.3-million as its Specialty Semiconductors segment saw “strong” growth. Adjusted gross margin grew to 30.9 per cent from 29.8 per cent during the same period a year ago and better than Mr. Merer’s 29.3 per cent projection, while adjusted EBITDA jumped 33 per cent to $11.7-million topping expectations ($10.8-million and $10.2-million, respectively).
Believing its guidance for the current fiscal year of $50-$55-million in adjusted EBITDA (versus his $54.9-million estimate and the Street’s $54.8-million forecast) “could be conservative,” Mr. Merer thinks the backlog in Specialty Semiconductor will likely support growth.
“VNP’s backlog fell quarter-over-quarter to 288 days from 292 days based on its backlog definition (nothing is included beyond one year) and the pattern of annual contract renewals,” he said. “However, visibility on future sales grew significantly with the signing of $135-million in multi-year contracts at AZUR for deliveries post-2025. A new contract with First Solar should come soon, increasing the backlog (and possibly guidance too). We believe VNP’s semiconductor demand growth could soon justify additional expansion plans.”
Believing VNP “still looks attractive to peers on a multiple basis,” Mr. Merer raised his target for its shares to $6.50 from $6 based on its impressive performance and growing backlog, reiterating an “outperform” recommendation. The average target on the Street is $6.06.
“VNP has historically traded largely in the 6-8 times range on EV/EBITDA multiple for FY+1, and with outsized growth expected and better visibility, we believe it should trade above this range,” he said. “While shares of VNP have moved up 10 per cent in three months, it has lagged peers up 14 per cent, which are trading at an average of 9.1 times EV/EBITDA on 2024 estimates (range of 4.4-16.4 times). With a strong quarter, improving visibility on sales with new contracts and the outperformance of peers (despite higher growth at VNP), we are increasing our target.”
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With Aerospace and Defence stocks “on fire,” Desjardins Securities analyst Benoit Poirier thinks Héroux-Devtek Inc. (HRX-T) “still has more room to run” ahead of the release of its fourth-quarter results on May 22.
He is currently projecting quarterly sales for the Quebec-based landing gear manufacturer of $171-million, EBITDA of $26.1-milllion and earnings per share of 30 cents, falling in line with the consensus projections of $172-milion, $26.5-million and 30 cents, respectively.
“In our view, the Street’s numbers are appropriately calibrated and we would be buyers ahead of the quarter despite the 27.8-per-cent year-to-date run-up in the stock,” said Mr. Poirier. The Street is forecasting only an $8-milllion quarter-over-quarter revenue increase, which is below the five-year average bump of $12-million quarter-over-quarter (recall that 4Q has been HRX’s strongest quarter seasonally). The Street is forecasting margin expansion of 40 basis points quarter-over-quarter, also below the five-year average of 100 bps. Moreover, 3Q EBITDA margin of 15.0 per cent (which beat consensus of 13.3 per cent) was unfavourably impacted by FX fluctuations (totalling negative $0.6-million). Stripping this out, EBITDA margin would have been 15.4 per cent.”
Mr. Poirier also said the company was “vocal” on its third-quarter conference call as well as at the firm’s recent Montréal Conference that it sees upside above the historical EBITDA margin range of 15–16 per cent.
“The signs are even more positive across the A&D industry,” he said. “Among HRX’s supplier peers that have already reported results, nearly all players beat consensus, eight of 13 increased guidance and the average one-day stock price reaction to the results was 4.5 per cent. The sector is clearly on fire as supply chain issues are beginning to ease and civil/defence demand continues to ramp up. The OEMs also reported positive developments. Boeing unveiled two new contracts that will benefit HRX (F/A-18 and MQ-25), Airbus now targets a rate increase on the A350 to 12/month by 2028 (up from 10/month by 2026; positive read-through for future 777X wide-body demand, although EIS could slip into 2026, according to Emirates and Lufthansa), and WSJ reported that Embraer is planning a new B737/A320-sized plane (opportunity for HRX).”
Reiterating his “buy” recommendation and $26 target (versus the $24.50 consensus) for Héroux-Devtek shares, Mr. Poirier said he does not think “sentiment is overly hot, as HRX is trading at only 8.5 times EV/EBITDA FY2 (FY25), which is a 7.7 times (or 47-per-cent) discount to the average EV/EBITDA FY1 multiple for its A&D supplier peers of 16.2 times.
“We also see more upside following a number of aerospace transactions at elevated multiples (12–13 times) in recent months,” he added. “Also, the recent IPO of Loar Holdings (niche US A&D component supplier; US$4-billion market cap) opened at US$45/share (above expectations of US$24–26/share). Loar is up 14.2 per cent since then and is now trading at a whopping 42 times estimated 2023 EBITDA, demonstrating the continued demand for reputable aerospace assets and the relative attractiveness of HRX’s cheap valuation.”
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With Canadian gold projects continuing to be in demand, Raymond James analyst Craig Stanley thinks Thesis Gold Inc. (TAU-X) could draw the attention of larger peers as it continues to develop its Lawyers-Ranch Project in north central British Columbia.
He initiated coverage of the Vancouver-based company with an “outperform” rating on Tuesday.
“The August 2023 merger of Benchmark Metals Inc. and Thesis Gold Inc. consolidated the neighbouring Lawyers and Ranch Properties, respectively, into a single, 100-per-cent-owned, 495 square kilometre land package located 45 kilometres northwest of the past-producing Kemess Mine,” he said.
“Earlier this month, the company announced a resource of 4.7 million gold equivalent ounces. We note 85 per cent of the total Au eq oz are classified in the measured and indicated categories, including 94 per cent of the pit-constrained ounces at Lawyers. As well, the project hosts significant silver with 92 million Ag oz, including 84 million in the pit-constrained Lawyers resource.”
Mr. Stanley thinks the updated preliminary economic assessment (PEA), which is scheduled for the third quarter will show the benefits of property consolidation as it incorporates open pits at both Lawyers and Ranch, plus an underground mine at Lawyers.
“We estimate production of 212 thousand Au eq at an AISC [all-in sustaining costs] of US$972/oz in the first 10 years,” he said.
“The 2024 drill program should be announced in the coming weeks. Mineralization at both Lawyers (at depth) and Ranch (along strike and at depth) remains open. As well, numerous low and high-sulphidation targets have been identified along 25 kilometres of strike centered around NW-trending structures that extend southeast towards Kemess, only a fraction of which have been drilled.”
Mr. Stanley set a target of $2 per share. The average is $2.08.
“M&A activity in the Canadian gold sector remains active, notably in advanced-stage projects, including two in 2023 and three so far in 2024,” he said. “We believe Thesis could garner interest from gold producers looking to initiate or expand their presence in Canada as the company advances through the PEA.”
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ATB Capital Markets analyst Tim Monachello thinks the outlook for Akita Drilling Ltd.’s (AKT.A-T) second half of the fiscal 2024 has “significantly improved.”
After the bell on Monday, the Calgary-based company reported revenue for its first-quarter of $54-million, down 19 per cent year-over-year but in line with the analyst’s $53-million estimate. Mr. Monachello said Akita generated adjusted EBITDA of $12-million, falling 18 per cent but also narrowly higher than his forecast of $11-million.
“The beat vs. ATB was the result of modestly higher than forecasted activity and margins in both Akita’s Canadian and U.S. businesses,” he said. “We note that AKT received $1.5-million in contract cancellation revenue in its Canadian operations in the quarter, which was included in our forecasts. More importantly, we believe Akita’s outlook and visibility in Canada and the U.S. suggests that H2/24 should be stronger year-over-year and gaining momentum into 2025.”
“We understand that AKT has line of sight to running at least 11 rigs in Canada by August, with upside to 13 rigs if AKT is able to convert on opportunities it is targeting. Regardless, Akita is positioning to reach its strongest Canadian activity levels in H2/24 since 2017-2018. The strength in Akita’s Canadian outlook is the result of improving activity levels in its oilsands operations and in deep gas drilling operations as its customers look to grow with expanded takeaway capacity vis-à-vis the TMX expansion and medium-term LNG exports; it’s worth noting that Akita is running one of two rigs currently working for Shell Canada, the proponent of LNG Canada, and has at least two additional rigs mobilizing for Shell over the coming months. Additionally, Akita continues to asses the merits of upgrading an additional rig from its oilsands triple fleet for operations in Canada’s deep gas basins, which could drive continued upside in activity and add tension to negotiations for its remaining three oilsands triples.”
Raising his EBITDA projections through 2026 by an average of 25 per cent annually, Mr. Monachello hiked his target for Akita shares to $3.75 from $2.70, reiterating an “outperform” recommendation. The average is $2.70.
“AKT continues to screen as highly undervalued, trading at just 2.2 times|1.5 times 2024|2025 estimated EV/adj. EBITDAS vs. a 3.4 times|3.1 times median multiples across ATB’s contract drilling coverage universe,” he said. “Further, our estimates suggest AKT offers 25-per-cent|53-per-cent FCF yields (net of changes in working capital) in 2024|2025.”
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In other analyst actions:
* BMO’s Greg Jones initiated coverage of NextSource Materials Inc. (NEXT-T) with an “outperform” rating and $1 target. The average target on the Street is $2.87.
“NEXT is developing an integrated mine-to-anode graphite business with ramp-up underway at its Molo mine in Madagascar, potential to expand production, and plans to develop a network of battery anode facilities (BAFs),” he said. “NEXT holds an exclusive license for anode processing IP used in current OEM supply chains, which should mitigate technical risk. We believe these factors position NEXT to be an ex-China source of supply, subject to securing the financing required to execute on plan.”
* TD Cowen’s Craig Hutchison increased his target for Altius Minerals Corp. (ALS-T) to $26 from $25, keeping a “buy” rating. The average is $24.50.
* In response to the late Monday announcement of the sale of its non-core assets in southwest Saskatchewan (Battrum) and southeast Saskatchewan (Flat Lake) for gross proceeds of $600-million, Canaccord Genuity’s Mike Mueller raised his Crescent Point Energy Corp. (CPG-T) target to $14.50 from $14 with a “buy” rating, while BMO’s Jeremy McCrea raised his target to $14 from $13 with an “outperform” rating. The average is $14.57.
“One of the key attributes to successful investing in Oil & Gas is to recognize pivotal moments,” said Mr. McCrea. “For E&Ps this typically involves a new play or improved field economics that ultimately result in a multiple expansion. As Crescent Point effectively completes its transformation with its asset sale for $600-million (slightly more than our expectations given AROs/3rd quartile inventory), its improved balance sheet and ROC metrics for the years ahead may make CPG a ‘premium name’. In time, a premium multiple should reflect this.”
* RBC’s Keith Mackey lowered his Ensign Energy Services Inc. (ESI-T) target to $3.50, below the $3.71 average, from $4 with an “outperform” rating.
“Ensign’s 1Q24 adj. EBITDA was 3 per cent ahead of consensus,” he said. “Ensign reiterated its focus on debt reduction, and maintained its confidence to repay $200-million of debt in FY24. Ensign trades at a discount to land drilling peers, which largely reflects its tight, but manageable, liquidity position in our view. We decrease our FY24/25 EBITDA (down 9 per cent/down 6 per cent) estimates on weaker U.S. activity outlook and maintain our Outperform, Speculative Risk rating with a $3.50 price target.”
* TD Cowen’s Menno Hulshof moved his MEG Energy Corp. (MEG-T) target to $32 from $31 with a “hold” rating. The average is $34.97.
* CIBC’s Krista Friesen bumped her NFI Group Inc. (NFI-T) target to $12.50 from $12, maintaining an “underperformer” recommendation. The average is $16.50.
“NFI has had a solid start to the year with earnings coming in ahead of our expectations. It is evident that the operating environment for NFI is improving; however, the company is not out of the woods just yet. We will continue to monitor the supply chain and labour availability, as well as keep a close eye on liquidity as NFI ramps up deliveries throughout the year,” she said.
* Jefferies’ John Aiken increased his Power Corp. of Canada (POW-T) target to $44, above the $42.81 average, from $43 with a “buy” rating, while BMO’s Tom MacKinnon bumped his target to $42 from $41 with a “market perform” rating.
* Ahead of Thursday’s earnings release, Canaccord Genuity’s Aravinda Galappatthige reduced his target for Telus International Inc. (TIXT-N, TIXT-T) to US$16 from US$16.50 with a “buy” rating. The average is US$11.41.
“As indicated during the prior conference call F2024, is likely to be a more back-end weighted year in terms of growth and profitability owing to still sluggish macro conditions, which in turn is delaying enterprise level commitments on larger digital transformation spend,” he said. “Hence, our estimates reflect a similar cadence with revenue growth starting at 2 per cent in Q1/24 and accelerating to 5.3 per cent by Q4/24.
“Interestingly, several of TIXT’s comps which reported their December quarter after TIXT, saw weakness in their results, generally owing to prior expectations of an uptick in IT services spend by business being moderated. We note in particular the downswing in stocks like Endava, Teleperformance, and even Globant as the market reacted to lowered 2024 expectations. With this in mind, we see TIXT’s 2024 guidance of 3-5-per-cent revenue growth and 7-10-per-cent EBITDA growth as quite robust.”
* RBC’s Walter Spracklin cut his Westshore Terminals Investment Corp. (WTE-T) target to $25 from $27 with a “sector perform” rating, while CIBC’s Jacob Bout lowered his target to $29 from $30 with a “neutral” rating. The average is $26.38.
“Westshore’s Q1 results came in well below consensus, mainly on weaker than expected margin,” said Mr. Spracklin. “On one hand, margin weakness was partly attributable to one-time labour costs and temporary costs associated with potash construction, impacts we expect to subside over time. On the other hand, we believe cost inflation more generally affected margin in the quarter, and we see these costs as more persistent longer term. Factoring in these trends, our estimates move lower and price target decreases.”
David Leeder