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Inside the Market’s roundup of some of today’s key analyst actions

Following another quarterly earnings miss, Canaccord Genuity analyst Yuri Lynk sees the profitability of Xebec Adsorption Inc. (XBC-T) remaining “under pressure.”

Accordingly, he lowered his recommendation for the Montreal-based air purification equipment manufacturer to “hold” from “buy” after its shares jumped 21.3 per cent on Thursday in response to its premarket earnings release.

“Once again, Xebec badly missed its own guidance,” said Mr. Lynk in a research note. “This time the culprit was supply chain issues in Europe, which management expects to continue through early 2023. The company’s difficulties accurately forecasting its own financial performance throughout all of 2021 is worrisome. On the growth front, it appears the transformational acquisitions of HyGear, Inmatec, and UEC grew less than 10 per cent year-over-year collectively in 2021 on an annualized basis. This pales in comparison to the growth being demonstrated by others in the space. Furthermore, we do not see a hydrogen mobility growth avenue emerging for HyGear in the foreseeable future, which brings us to valuation. Xebec trades at 2.0 times EV/Sales (2022E) versus industrial gas peers at 3.0 times.”

For its fourth quarter of fiscal 2021, Xebec reported revenue of $45.9-million, up from $6.3-million a year early due largely to $35.3-million in gains from acquisitions “against an easy comparator that featured revenue write-downs on 10-12 unprofitable RNG projects.” Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $0.2-million was lower than Mr. Lynk’s $3.9-million estimate and the consensus forecast of $3.2-million.

“Xebec’s gross margin is likely to remain under pressure for the foreseeable future,” said the analyst. “The legacy RNG projects are still running at 0-per-cent margin. The supply chain issues that hurt profitability in Q4/2021 have only intensified. Lastly, we believe the gross margin on the first several Biostream units will be skinny as Xebec likely had to entice customers to try these first-of-a-kind standardized units. Taking a step back, Xebec’s business model has proven vulnerable to externalities over the last year and a half with increased costs to complete projects a common reoccurrence. It is perhaps not surprising then that management will no longer be providing annual guidance.

“The company maintained a positive outlook. Management continues to see positive indicators for demand of its products, but noted it continues to manage supply chain disruptions, and that given the uncertain conditions it would stop providing annual guidance. In a separate press release, the company announced Jim Vounassis transitioned into the role of President and CEO succeeding Kurt Sorschak effective immediately, ahead of the scheduled May 12 date. Mr. Sorschak, who owns 5 per cent of the company, will also retire from the Board on May 11, 2022.”

“Materially” reducing his earnings expectations through fiscal 2023, Mr. Lynk dropped his target for Xebec shares to $2.25 from $5. The average on the Street is $3.40.

“All told, we recommend moving to a neutral stance after the positive stock price reaction to Q4/2021 results,” he said. “In our view, Xebec looks fairly valued given its growth prospects and margin profile”

Elsewhere, Cormark Securities’ Nicholas Boychuk lowered Xebec to “reduce” from “market perform” with a $1.50 target, down from $3.25.

Desjardins Securities’ Frederic Tremblay reduced his target by $1 to $4.50 with a “buy” rating.

“Xebec is entering 2022 with encouraging top-line indicators (record backlog, accelerated RNG quoting activity, expanding capacity) and several potential levers to improve profitability, although supply chain and inflation risks persist. Following an acceleration of the CEO transition, we look forward to the introduction of management’s multi-year strategic plan as part of the investor day on March 29,” said Mr. Tremblay.

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RBC Dominion Securities analyst Ken Herbert thinks MDA Ltd.’s (MDA-T) in-line fourth-quarter financial results set the floor for future expectations with a jump in bookings leading him to express ”increased confidence” in the company’s growth potential.

“On the back of recent significant contract wins, the company was able to maintain its 2022 guidance (adjusted after its 3Q21 results) and is entering 2022 with an $864-million backlog (up 54 per cent),” he said. “We believe the 4Q21 results will support increased confidence in the 2022 outlook. Management called out some lingering supply chain and COVID risks, and it expects the revenue growth to inflect in 2Q22 and strengthen across the year. We expect top-line visibility to remain important for investor sentiment.”

Shares of the Brampton, Ont-based space technology company soared 8.4 per cent on Thursday following the premarket earnings release. Revenue grew 15 per cent year-over-year to $115.5-million, narrowly below Mr. Herbert’s $119.7-million, however adjusted earnings before interest, taxes, depreciation and amortization of $26.8-million topped his forecast ($22.2-million).

As strong bookings helped build a “significant” backlog, MDA maintained its 2022 guidance, leading the analyst to make modest increases to his projections.

“Total FY21 bookings were $768-million, led by the recent Globalstar LEO satellite ($415-million) and Canadarm3 phase B ($269-million) contracts,” said Mr. Herbert. “The contracts represent significant bookings on the company’s flagship programs and new business opportunities, while helping generate a book-to-bill ratio of 1.6 times over the last twelve months. At the end of 4Q21, the total backlog has increased to $864-million, up 54 per cent from the year prior.

“The company sounded confident about the potential for continued bookings strength in 1H22, which should be a positive catalyst for the stock. MDA delivered strong de-leveraging in 2021 (current leverage ratio of 0.4 times) but FCF continues to lag EBITDA. For 2021, the company posted a cash use of $23-million. While the 4Q21 FCF was just a use of $3M, the elevated 2022 capex guidance of $200-million implies that the company remains in growth mode. Company management estimates maintenance capex at just $30-million. We expect investors will remain supportive of the elevated capex as long as growth is tracking to plan.”

Maintaining an “outperform” rating for MDA shares, Mr. Herbert raised his target to $15 from $13. The average on the Street is $17.40.

“Our price target reflects a 9.0 times EV/EBITDA multiple on our FY23 estimates,” he said. “While this multiple is at the lower end of the historical range, we believe it reflects the fact that MDA is in the early stages of its significant investment phase.”

“We believe future multiple expansion is possible as the company continues to build its backlog.”

Others making target changes include:

* Scotia Capital’s Paul Steep to $20 from $21 with a “sector outperform” rating.

“In our view, MDA is positioned to see an increase in business as investment in space projects appears to represent an upcycle over the next several years,” said Mr. Steep. “The current book of business reflects a more diversified mix of key programs than the company has had in the past, having now secured three flagship programs (e.g., Canadian Surface Combatant, Canadarm3, and Telesat Lightspeed). We believe there are opportunities for MDA to secure additional LEO satellite component and prime manufacturing projects over our forecast horizon.”

* Canaccord Genuity’s Doug Taylor to $20 from $21 with a “buy” rating.

“We see upside to MDA shares as the company executes against its growth profile with continued underlying profitability,” said Mr. Taylor.

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Pointing to ongoing supply chain disruptions and the war in Ukraine, Scotia Capital analyst George Doumet made “modest” reductions to his financial projections for BRP Inc.’s (DOO-T) current fourth quarter of fiscal 2022 as well as 2023.

“Year-to-date, DOO shares are down 20 per cent on supply chain concerns and risks around a potential economic slowdown (in Europe),” he said. “While we expect input costs to remain elevated and supply chain to be pressured over the next 12 months, pricing actions should be somewhat supportive of margin containment (although we model 140 basis points compression in F23). Furthermore, F23 should mark an inflection point in FCF generation. All-in-all, with similar growth trajectories (higher margins, and improving FCF conversion), we continue to believe that BRP’s shares should trade in-line with Polaris (currently trading at a1.2- times discount on EV/EBITDA NTM).”

For the quarter, Mr. Doumet is now forecasting revenue of $2.324-billion and adjusted EBITDA of $383-million. Both are narrowly higher than the consensus estimates on the Street of $2.294-billion and $381-million.

“For F23, we expect continued robust demand and pricing to be met by supply chain challenges, higher input cost inflation and (modestly) less favorable dealer dynamics (i.e., more sales program and less favorable vehicle mix),” he added.

“Questions we will look to get answered: (i) what level of growth does DOO see at retail and how much dealer inventory restocking is expected to take place this year, (ii) how much pricing will the company take (vs. LSD in F22), (iii) what is management’s assessment of the level of improvement in the supply chain this year (and starting when), and (iv) an update on demand/order levels for Switch. Lastly, we will be looking for a sense of where working capital requirements could land for F23.”

Keeping a “sector outperform” rating for BRP shares, Mr. Doumet reduced his target to $125 from $127, below the $132.14 average.

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Desjardins Securities’ Kyle Stanley sees Flagship Communities Real Estate Investment Trust (MHC.U-T) as an “increasingly attractive option for housing affordability.”

The analyst said the U.S. REIT, which owns and operates a portfolio of manufactured housing communities in Kentucky, Indiana, Ohio and Tennessee, benefits from “solid” pricing power, given the relative affordability of MHCs. He expects that to lead to mid-single-digit same property net operating income growth through our forecast period.

“Home price appreciation and rent growth in Flagship’s three largest markets (Louisville, Cincinnati and Evansville) averaged 10–15 per cent last year, creating a robust backdrop for MHCs as an affordable housing option,” said Mr. Stanley. “In this context, SP AMR [same property average monthly rent growth of 3 per cent and 140 basis points of occupancy gains (to 80.6 per cent) drove 7.6-per-cent SP NOI growth in 4Q. Our outlook calls for 4–5-per-cent SP NOI growth through 2023.”

“Flagship’s entire portfolio was externally appraised at year-end, which resulted in 60 basis points of sequential cap rate compression (to 4.7 per cent) and a 15-per-cent increase in BVPU [book value per unit] (based on trailing 12-month NOI). In response, we have compressed our utilized cap rate by 30 basis points to 5.0 per cent and, when combined with a modestly improved NOI outlook, our NAVPU increases 13 per cent to US$24.10 (from US$21.40).”

Mr. Stanley also emphasized a “supportive” operating environment for MHCs, which is attracting an increasing amount of capital. He expects Flagship to continue to pursue external growth opportunities in 2022, citing its “significant” balance sheet flexibility, organic growth through newly acquired assets and possible margin expansion from costs containment initiatives.

Keeping a “buy” rating, he raised his target by US$1 to US$24. The average is US$23.31.

Others making target changes include;

* Raymond James’ Brad Sturges to $24 from $23 with an “outperform” rating.

“We believe Flagship is well positioned to generate solid AFFO/unit growth through internal and external growth avenues, augmented by its value-creation initiatives. Future external acquisition growth in Flagship’s U.S. MHC platform that is partly funded by future equity issuances can improve its unit trading liquidity, and may augment the possible expansion in Flagship’s P/AFFO multiple. We suggest that Flagship’s deep NAV discount valuation fails to capture the inherent underlying value of its U.S. MHC portfolio, and Flagship’s near-term SP-NOI and AFFO/unit growth prospects.”

* Echelon Capital’s David Chrystal to US$24 from US$23 with a “buy” recommendation.

“We expect the REIT will continue to deliver mid to high single-digit revenue growth through ongoing occupancy improvement and increases in lot rents as the price of alternative accommodation continues to rapidly increase. The REIT’s revenue growth rate should match or exceed inflationary pressure on operating expenses, and result in mid to high single-digit organic NOI growth,” said Mr. Chrystal.

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In other analyst actions:

* BMO’s Stephen MacLeod lowered his Dentalcorp Holdings Ltd. (DNTL-T) target by $1 to $20 with an “outperform” rating. The average is $20.39.

* CIBC’s Scott Fletcher lowered his Dialogue Health Technologies Inc. (CARE-T) target to $9 from $11 with an “outperformer” rating. The average is $10.50.

* Following its acquisition of a gold stream on the Ming copper-gold underground mine in Newfoundland, Canaccord Genuity’s Carey MacRury raised his target for Elemental Royalties Corp. (ELE-X) to $2.50 from $2, keeping a “buy” rating. The average is $2.48.

“The Ming stream is a sizable asset for Elemental (representing approximately 18 per cent of our royalty NAV), in a top-tier jurisdiction that further diversifies its portfolio and boosts our 2022 and 2023 GEO forecasts for Elemental by 18 per cent and 27 per cent respectively,” said Mr. MacRury. “In our view, Elemental continues to source attractive royalty and streaming opportunities, adding its seventh producing asset to date with an estimated IRR of 18 per cent at $1,800 per ounce.”

* BMO’s Ben Pham raised his target for Emera Inc. (EMA-T) shares to $68 from $65, above the $62.70 average, with an “outperform” rating.

* Canaccord Genuity’s Tania Armstrong-Whitworth lowered her HLS Therapeutics Inc. (HLS-T) target by 25 cents to $30.50 with a “buy” rating. The average is $30.58.

* Canaccord Genuity’s Katie Lachapelle trimmed her Lithium Americas Corp. (LAC-T) target to $50, above the $46.60 average, from $54 with a “speculative buy” rating, while TD Securities’ Craig Hutchison cut his target to $44 from $45 with a “hold” rating.

* Scotia Capital’s Trevor Turnbull increased his Osisko Gold Royalties Ltd. (OR-T) target to $26 from $25, keeping a “sector outperform” rating. The average is $22.96.

* Raymond James’ David Quazada increased his Polaris Infrastructure Inc. (PIF-T) target by $1 to $26, exceeding the $25.88 average, with a “strong buy” rating.

“Consistent with our constructive thesis, Polaris has delivered on more diversification at what we believe are attractive terms. The execution of a share purchase agreement for an operational hydro asset in Ecuador and acquisition of two shovel ready solar projects in Panama, broadens PIF’s footprint to four jurisdictions and adds solar as a new generation modality,” said Mr. Quezada.

* CIBC’s Nik Priebe lowered his Power Corp. of Canada (POW-T) target to $44 from $47, which is the current consensus, with a “neutral” rating, while National Bank’s Jaeme Gloyn cut his target to $46 from $48 with a “sector perform” recommendation.

* CIBC’s Bryce Adams cut his Sierra Metals Inc. (SMT-T) target to $2.25 from $2.50, below the $2.80 average, with a “neutral” rating.

* RBC’s Keith Mackey raised his Step Energy Services Ltd. (STEP-T) target to $3 from $2.50 with a “sector perform” rating, while ATB Capital Markets’ Waqar Syed bumped up his target to $5.50 from $4 with an “outperform” rating and Stifel’s Cole Pereira increased to $4 from $3 with a “buy” rating. The average is $3.68.

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