Inside the Market’s roundup of some of today’s key analyst actions
The upcoming launch of Mogo Inc.’s (MOGO-Q, MOGO-T) trading platform could provide “meaningful upside,” according to H.C. Wainwright analyst Scott Buck, who sees it as a catalyst for member growth, revenue and share appreciation.
He projects MogoTrade, which is expected to be released in the fourth quarter, could be a US$100-million revenue opportunity over the next 3-5 years, and can be “further monetized through other existing Mogo products.”
“We do not believe any meaningful contribution from MogoTrade is included in the company’s 2022 revenue guidance of between C$70.0-million and C$75.0-million, suggesting potential upside to current guidance,” said Mr. Buck. “We recommend investors take advantage of the recent pullback in MOGO shares, down 38.0 per cent since June 30th, versus a 2.2-per-cent decline in the Russell 2000, ahead of more positive news flow and potential increase in consensus estimates.”
Concurrently, Mr. Buck also sees the Canadian market bringing “significant room for future growth.”
“While meaningfully smaller than the U.S. market, Mogo represents a leading fintech in Canada, a geography which has been somewhat slower than the U.S. in it’s to move away from traditional banks,” he said. “However, Canadians are now turning to financial technology companies for added convenience, lower costs, and additional services including cryptotrading and commission free stock trading. This trend has driven the valuation of Canadian Fintech peer WealthSimple to C$5.0-billion at its most recent capital raise in May 2021. We believe WealthSimple has a similar size user base and generates something close to twice the revenue of Mogo, which trades at a meaningful discount and provides the liquidity of a public company. As Mogo adds stock trading capabilities later this year, we believe investors will begin to recognize the significant valuation discrepancy between Mogo and fintech pees.”
Seeing it “well positioned should larger U.S. fintech come calling on Canada,” the analyst raised his target for Mogo shares to US$16 from US$12, reiterating a “buy” rating. The average on the Street is US$14.50.
Resuming coverage after its secondary equity offerings, CIBC World Markets analyst Stephanie Price reaffirmed Docebo Inc. (DCBO-T) as the top pick in her coverage universe, touting its “high-quality product suite, cost-efficient growth strategy, and attractive unit economics” and seeing “upside from future OEM agreements, customer wins and tuck-in M&A.”
“Docebo has seen accelerated demand through 2021, with Q2 subscription growth of 76 per cent year-over-year,” she said. “We see longer-term tailwinds driving the growth, with Docebo benefiting from the acceleration of e-learning adoption. The company’s solution allows divisions of larger enterprises to train employees and suppliers/customers, differentiating it from peers that sell into corporate HR departments.”
“The tuck-in acquisition of ForMetris and the launch of the Docebo Shape AI content creation platform have allowed Docebo to begin to market and sell a multi-product learning technology suite. The learning suite gives Docebo an offering that caters to net new customers looking for a multi-product offering while providing a simpler path to upsell new capabilities to existing customers. We see the suite as one of the next legs of growth for the company, which has grown its average contract value at a 37-per-cent CAGR [compound annual growth rate] from $20,000 at the time of IPO to $37,500 at the end of Q2/21.”
Also seeing “significant” opportunities from its OEM partnerships, including Ceridian, Ms. Price raised her target for Docebo shares to $125 from $95 with an “outperformer” rating. The average is $107.63.
“We are valuing Docebo at 20x 2022E sales, a 15-per-cent discount to SaaS peers with Rule-of-40 scores greater than 60 per cent given Docebo’s smaller revenue base. Docebo’s combination of cash efficient growth, strong gross margins and enterprise client base with sticky recurring revenue puts it in on similar footing with premium SaaS equities,” she said.
Elsewhere, TD Securities analyst Daniel Chan resumed coverage with a “buy” rating and $130 target, up from $100.
After a “strong rebound” in California led to better-than-expected fourth-quarter financial results, Canaccord Genuity analyst Matt Bottomley raised his rating for MedMen Enterprises Inc. (MMEN-CN) to “hold” from “sell”.
Post-market on Thursday, the Los Angeles-based cannabis retailer revenues of US$42-million, up 18.5 per cent quarter-over-quarter and above the analyst’s US$34.5-million forecast. The beat was driven, in large part, by a 24.4-per-cent increase in its home state through higher foot traffic and increased purchasing frequency. It also saw significant growth in Nevada, Florida and Arizona.
“As previously announced, Tilray has agreed to acquire a majority stake in MedMen’s senior secured convertible notes from Gotham Green Partners, LLC (GGP),” he said. “Most notably, this includes a six-year plus extension on the maturity of its converts, interest payments to be PIK, as well as a potential long-term partner in Tilray should the U.S. legalize cannabis at the federal level. Along with a concurrent US$100-million equity financing subsequent to quarter end, we believe the turnaround prospects for MedMen have improved given overall increased financial flexibly.”
“Both companies believe this arrangement is mutually beneficial by (1) providing MedMen with reduced near-term debt/interest burden (along with a separately announced concurrent US$100-million equity financing led by Serruya Private Equity) in an effort to navigate its operations to profitability; and (2) representing a potential path to U.S. cannabis exposure for Canadian operator Tilray should it be able to exercise the notes convertible feature if cannabis becomes legalized at the federal level in the U.S.”
Raising his 2022 financial estimates, Mr. Bottomley also increased his target for MedMen shares to 40 cents from 25 cents. The average is 39 cents.
“Although we were encouraged by MMEN’s FQ4/21 print, we would remain on the sidelines for the time being as the company continues to right the ship,” he said.
Desjardins Securities analyst Benoit Poirier reiterated his bullish stance on SNC-Lavalin Group Inc. (SNC-T) ahead of its Sept. 28 Investor Day event, its first since launching its turnaround plan.
“The event offers a unique opportunity for management to demonstrate the true potential of the core engineering services business to unlock value for all stakeholders,” he said.
“We believe management will likely introduce a three-year strategic plan similar to those launched by WSP and STN. SNC made it clear recently that SNCL Engineering Services was ready for growth now that the rest of the business has been stabilized. We identified key growth vectors for EDPM (expansion in the U.S. and Australia), Nuclear (attractive pipeline of opportunities, thanks partially to the green transition) and Infrastructure Services (growth of the project/construction management business).”
Mr. Poirier said expectations are “high,” noting its stock is up 12 per cent since it reported its second-quarter results on July 30, versus a 1-per-cent increase for the TSX, as “investors start to position themselves.”
“We are looking forward to SNC’s upcoming investor day as we believe it represents a unique opportunity for the company to demonstrate the true long-term potential of its strategic focus on SNCL Engineering Services,” he said “We estimate that the market is still attributing more than C$700-million of cash toward completion of the remaining C$1.4-billion of LSTK projects. This is well above our revised worst-case assumption of C$475-million (C$75-million for Resources LSTK projects and C$400-million for Infrastructure EPC projects). We believe SNC could be a C$50+ stock once the LSTK backlog is fully completed (assumes no appreciation for the ICI portfolio, including the 6.77-per-cent stake in Highway 407).”
The analyst raised his 2021, 2022 and 2023 earnings per share projections to $1.82, $2.48 and $2.69, respectively, from $1.81, $2.46 and $2.63.
“We remain confident that the inflection point for FCF generation should occur in 2022— an important milestone for SNC in its transformation to a pure-play engineering services business,” said Mr. Poirier. “We estimate that SNC will generate $900-million of cumulative FCF between 2022 and 2024, with FCF conversion improving from 55 per cent of adjusted net income to 70 per cent over the period.”
He maintained a “buy” rating and $44 target for SNC shares. The current average on the Street is $41.50.
Elsewhere, Laurentian Bank Securities analyst Troy Sun increased his target to $44 from $40.50 with a “buy” rating.
“We do not expect a numeric EPS target (akin to the Vision 2020 experience); instead, a directional guidance is a more likely outcome,” he said. “We expect the discussions to revolve around: 1) LSTK run-down, 2) risk control and project oversight, 3) nuclear, capital, O&M capabilities, 4) capital allocation, and 5) FCF prospects.
“For the stock to ‘work’, FCF generation is the key. Between 2016 and 2020, SNC’s FCF loss amounted to $1.5-billion, resulting in a 47-per-cent share price downdraft. The headwind remains as LSTK contracts continue to consume cash generated by the engineering business. That said, in 2.5 years’ time, SNC’s FCF generation should be on par with that of direct peers such as WSP and STN (recall, Engineering Service segment generated $800-million in OCF in 2020).”
In a research note titled 5 Reasons to Buy Heading into Fall, Raymond James’s Jeremy McCrea raised his financial expectations Whitecap Resources Inc. (WCP-T).
The analyst pointed to: a shift in capital spending to target “much stronger well economics”; a “low cash flow decline to build on”; the need to change its valuation to value undrilled land “much higher”; low sentiment and investor interest despite improving fundamentals; and a group of near-term catalysts that could include a special dividend or substantial issuer bid.
Keeping a “strong buy” rating, Mr. McCrea increased his target by $1 to $10. The average is $8.95.
“As companies become larger, there is less focus on well economics and more emphasis on FCF generation,” he said. “Unfortunately, as a result, investors can miss some important inflection points where share price returns can be the greatest. We believe that one of these inflection points is happening today at WCP given its acquisitions this year and where we are seeing capex being directed now (i.e., to much higher return plays). We look at how this shift will impact the future of the company given its low base decline, inexpensive valuation and investor sentiment that doesn’t appear to appreciate the fundamental changes we’ve seen this year. With annual discretionary cash flow now reaching 20 per cent of WCP’s market-cap, there should be plenty of shareholder ‘friendly’ catalysts that begin to drive investors back into the stock near-term.”
Bullish on the prospects for gold over the long term, KeyBanc analyst Adam Josephson initiated coverage of a group of royalty and streaming companies on Friday.
“Gold prices are inversely correlated with real interest rates, and we think real rates are likely to go increasingly negative as a result of the historically large amount of global debt outstanding; the higher debt levels are, the lower rates go,” he said. “Technically, gold prices are about where real rates suggest they should be, resulting in our neutral near-term view.
“Royalty/streaming stocks have historically outperformed the mining stocks, and we expect that to remain the case. Over any meaningful period, royalty/streaming companies have outperformed both gold and gold miners owing to the attractiveness of the former’s business model (capital- and G&A-light, leverage to commodity prices without the accompanying direct cost inflation risk, and the ability to diversify their portfolios). Given rising inflation and jurisdictional risks, ongoing pandemic-related disruptions, and the mining industry’s inability to generate production growth, we expect the royalty/streaming companies to maintain their outperformance for the foreseeable future.”
He initiated coverage of these stocks:
Analyst: “Agnico has a sterling reputation in the mining industry and a consistent long-term track record, and therefore has long traded at a premium to its larger peers (though less so today). We think Agnico’s story (and specifically its advantages vs. peers) is well understood.”
Analyst: “Barrick has no net debt, half of the world’s largest gold mines, and more copper exposure than peers. However, many of the miningrelated risks discussed above apply to Barrick as well.”
Analyst: “Franco has long outperformed its royalty/streaming peers as well as the mining companies and is considered the “gold standard” in the precious metals sector for good reason. Franco trades at the highest multiple in the sector by a comfortable margin, which has prompted some recent analyst downgrades; we expect the Company to continue to justify its premium multiple with solid execution and disciplined capital allocation.”
Analyst: “Wheaton is the other ‘go-to’ in the precious metals royalty/streaming sector, particularly among investors looking for sizable market cap. Wheaton has high-quality assets and management, in our view, and should continue trading at a premium to smaller peers.”
In other analyst actions:
* Goldman Sachs analyst Noah Poponak upgraded Bombardier Inc. (BBD.B-T) to “buy” from “neutral” with a target of $2.35, rising from $1.15 and above the $1.86 average on the Street.
* TD’s Michael Aelst cut his Saputo Inc. (SAP-T) target to $39 from $41, keeping a “buy” rating. The average is currently $40.13.
“Clearly, Brookfield continues to have success in raising newer larger funds, although the introduction of new products, is likely, in our view, to have a more significant impact on management fees and intrinsic value,” said Mr. Rothschild.
“The PCI acquisition will strengthen Celestica’s engineering-led engagements in its ATS portfolio, including full product development capabilities in highmargin areas such as radiofrequency, internet of things, and embedded systems,” said Mr. Coupland. “Design and engineering expertise will also be added. The complementary nature of both companies’ offerings should present opportunities for cross-selling and expansion into adjacent emerging markets, and will add ~20 customers to Celestica’s platform, the majority of whom operate within the industrials and telematics markets..”
* CIBC’s Jamie Kubik increased his Freehold Royalties Ltd. (FRU-T) target by $1 to $14, maintaining an “outperformer” rating. The average is $13.23.
* Mr. Kubik hiked his target for Tourmaline Oil Corp. (TOU-T) to $55 from $47.50, topping the $51.45 average, with an “outperformer” rating.
“We see Tourmaline’s free cash flow allocation strategy as being aligned with the recent commentary from the company, and also see the 75 cents per share special dividend announcement as a sweetener for shareholders, likely arriving earlier than most had anticipated. The company is also increasing its base dividend to 72 cents per share annually (up from 68 cents per share) for Q4/21. These moves are consistent with the company’s stated focus of returning “the vast majority of free cash flow to shareholders on a go-forward basis,” and with gas prices at their strongest point in years, we expect more of the same for 2022. We expect the stock to continue to perform favorably relative to peers,” he said.
* CIBC’s John Zamparo lowered his Hexo Corp. (HEXO-T) target to $5 from $6 with an “outperformer” rating. The average is $5.51.
* CIBC’s Allison Carson increased her Marathon Gold Corp. (MOZ-T) target to $4.50 from $3.75, exceeding the $4.12 average, with an “outperformer” rating upon assuming coverage of the stock.
“Marathon Gold trades at 0.7 times P/NAV, a premium to development peers at 0.5 times P/NAV. We believe that the premium is warranted due to the advanced nature of the project, its location and management’s ability to advance the project and exploration upside. There are few projects at this advanced status with as large of a resource, in a politically stable jurisdiction; we continue to view Marathon as a takeout target.,” she said.