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

National Bank Financial analyst Cameron Doerksen is “confident” Transat AT Inc. (TRZ-T) will see earnings and cash flow improvement as the rebound in travel “accelerates” through the remainder of this year and into 2023.

However, following Thursday’s release of weaker-than-anticipated third-quarter results, he expressed concern over the tour operator’s “very high” leverage and continues to see a risk of future shareholder dilution.

“With $511-million in liquidity, Transat’s near-term financial situation is stable, but at the end of Q3, net debt stood at $1.5-billion (up from $1.3 billion in Q2), and even assuming a recovery in EBITDA materially higher than F2019 in F2024, we estimate leverage will be too high at 4.9 times,” said Mr. Doerksen. “The company has pushed out major debt maturities to April 2024, but these loans will need to be refinanced eventually, and we suspect additional equity will be required. With a market cap of only $112-million, the risk of material shareholder dilution remains.”

The Montreal-based company reported revenue for the quarter of $508-million, missing the estimates of both Mr. Doerksen ($634-million) and the Street ($561-million). An adjusted EBITDA loss of $58-million was higher than the analyst’s expectation (a $38-million loss) but was better than the consensus projection (a $65-million loss).

“Transat indicates that booking trends remain positive with the weekly average at 109 per cent of 2019 levels since mid-May,” said Mr. Doerksen. “Prices have also steadily increased through the summer and relative to 2019 were up 8 per cent to European destinations and up 26 per cent to sun destinations in Q3. For the upcoming winter season, Transat is planning capacity to be the same as in the 2019 winter season and so far, load factors for winter are comparable to 2019 with prices higher. Fuel prices remain a major cost headwind (current spot price of jet fuel at $1.20 per litre versus the $0.78 average spot in Transat’s F2019).”

Lowering his full-year earnings estimate due to rising fuel costs, Mr. Doerksen also introduced his 2024 financial estimates “which assumes modest revenue growth of 2.7 per cent and a higher EBITDA margin (8.9 per cent versus 4.6 per cent assumed for F2023) driven in part by a lower fuel price assumption of $0.90/litre as well as further cost efficiencies.”

“We note that our F2024 EBITDA forecast of $269 million is well above the adjusted $192 million Transat recorded in F2019,” he said. “Transat has a much more efficient aircraft fleet today and management believes it can generate the same amount of capacity with 10 per cent fewer employees relative to F2019.”

Keeping an “underperform” rating for Transat shares, Mr. Doerksen trimmed his target to $2.50 from $3.75. The average on the Street is $2.65.

“Given Transat’s high leverage, the per share equity value is highly sensitive to relatively minor changes in forecasted earnings and multiples,” he said.

Elsewhere, other analysts making price adjustments include:

* Desjardins Securities’ Benoit Poirier to $3.25 from $4.50 with a “hold” rating.

“TRZ reported weaker-than-expected 3Q results due to a soft month in May and a volatile fuel price environment. Cash burn stabilized in July and management hinted at a similar performance in August. Ultimately, while the company’s long-term strategy makes sense, we prefer to wait for additional signs of execution, especially given TRZ’s elevated indebtedness,” said Mr. Poirier.

* Scotia Capital’s Konark Gupta to $2.25 from $3 with a “sector underperform” rating.


Though he sees a “more realistic growth trajectory that’s achievable, and thus, reduces execution risk” for D2L Inc. (DTOL-T), National Bank Financial analyst John Shao expects short-term pressure on the stock following revisions to its full-year 2022 guidance.

“D2L reported what we considered a mixed quarter with revenue below our estimate while the EBITDA loss came in ahead of our earlier forecast,” he said. “If anything, we’d see FQ2 a continuation of the previous quarter as a competitive labour market and FX headwinds still weighed down results. Those factors have collectively explained why Management has again revised its revenue guidance for the year. Other than those macro factors, what’s more important to us and the investors following this name is the strategic shift to a more sustainable growth model, as reflected in its upward revisions of the F2022 guidance and the F2025 Target Operating Model.”

After the bell on Wednesday, the Toronto-based technology company, which is focused on software for online learning and teaching, reported revenue of US$41.2-million for its second quarter, up 11.9 per cent year-over-year but missing both Mr. Shao’s US$42-million estimate and the consensus of US$42.4-million. An adjusted EBITA loss of US$1.5-million beat expectations (losses of US$3.4-million and US$3.7-million, respectively).

“Based on our analysis, the lower EBITDA loss was mainly driven by a better-than-expected gross profit care of a higher staff utilization as well as by a lower sales and marketing spend given the Company’s balanced growth strategy,” the analyst said. “Looking out, management now expects an accelerated path to profitability with a breakeven point in F2024.”

Seeing a smaller execution risk “coupled with a strong balance sheet to support the transition, an accelerated path to profitability and an EV/Sales multiple of less than 1.0 times,” Mr. Shao maintained an “outperform” rating for D2L shares with a target of $10, down from $14. The average on the Street is $11.86.

Elsewhere, others making changes include:

* Canaccord Genuity’s Doug Taylor to $10 from $15 with a “buy” rating.

“After D2L made a more significant shift in its growth vs. investment posture, we have made equally significant changes to our near and medium-term model,” said Mr. Taylor. “The company now targets double-digit growth with high-teens cash margins by F2025 (starting 1.5 years from now). As D2L delivers against this new outlook, we believe that the current valuation at 1 times revenue will prove inexpensive, not only on a relative basis vs. more profitable comps, but also on an intrinsic basis as a 16-per-cent-plus cash flow margin would suggest a comparable FCF yield.”

* BMO’s Thanos Moschopoulos to $7 from $8.50 with a “market perform” rating.

“We remain Market Perform on D2L and have reduced our target price following Q2/23 results, which were a miss on revenue but a beat on EBITDA,” he said. “We remain neutral on the stock, as we generally prefer to focus on growth over value with respect to the smallcap SaaS names in our coverage universe. That said, we don’t see much downside risk to D2L’s multiple given its depressed valuation and our expectation that the company will turn EBITDA-positive next year. We’ve reduced our revenue forecasts while raising our EBITDA forecasts,” said Mr. Moschopoulos.

* TD Securities’ Daniel Chan to $9.50 from $15 with a “buy” rating.


Despite a “challenging” second-quarter financial report and “gloomy” industry conditions, Canaccord Genuity analyst Luke Hannan thinks there’s reasons for optimism for Waterloo Brewing Ltd. (WBR-T).

“There are some encouraging developments for WBR: (1) the contract manufacturing volumes lost during the quarter are expected to be made up in the back half of the fiscal year, which should help drive H2/F23 operating leverage; (2) the company is seeing signs of stabilization in its labour base; and (3) Q2/F23 marked another quarter of overall owner brand outperformance, most notably with its LandShark Lager volumes well ahead of the domestic premium category year-over-year decline at The Beer Store of 13 per cent during the quarter,” he said in a research note. “Perhaps most importantly, the recent easing of freight rates and fuel costs suggest WBR could see some relenting of these margin headwinds moving forward. On the latter point, we’ll wait to see signs of this playing out in WBR’s results before incorporating it in our model, but we nonetheless are cautiously optimistic that margins could trend higher in the coming quarters.”

Before the bell on Thursday, the company reported EBITDA for the quarter of $5.1-million, down 36.5 per cent year-over-year and missing both Mr. Hannan’s $6.5-million estimate and the consensus projection on the Street of $6.3-million. Diluted earnings per share slid 82.4 per cent to 2 cents, lower than the analyst’s 5-cent forecast.

“WBR continues to be adversely impacted by supply chain delays that, coupled with cost inflation across its operations, were key drivers for gross margin declining 950 basis points year-over-year to 23.2 per cent,” said Mr. Hannan. “Further compounding the margin headwinds were supply chain delays with WBR’s contract manufacturing customers, leading to contract volumes being pushed out to later in the fiscal year. Notably, 94 per cent of the $5-million year-over-year decline in revenue was due to these co-pack volumes.”

“The industry backdrop remains gloomy, in our view. At-home consumption was down 8 per cent for the quarter, according to Beer Canada data, a trend we expect will show modest signs of improvement over the balance of the year. Further, supply chain headwinds remain rampant, particularly when it comes to lead times for key inputs like boxboard and flavours, with the overall supply chain environment expected to remain somewhat challenging for the next 12 months.”

Reducing his revenue and earnings estimates for 2023 and 2024, Mr. Hannan cut his target for Waterloo Brewing shares to $5.25 from $6, which is the current average on the Street. He reiterated a “buy” rating.

“In our view, WBR’s owner brand outperformance, coupled with volume growth in its margin-accretive contract manufacturing business, leaves it well positioned to generate ample free cash flow in the coming quarters,” he concluded.

Elsewhere, Acumen Capital’s Nick Corcoran lowered his target to $5.25 from $5.50 with a “buy” rating.

“We will look to the back half of the year for a catchup in co-pack volumes and continued strength in the WBR’s owner brands,” he said.


In other analyst actions:

* TD Securities analyst Michael Van Aelst upgraded North West Company Inc. (NWC-T) to “buy” from “hold” with a $38 target, down from $40. Others making changes include: BMO’s Stephen MacLeod to $38 from $40 with a “market perform” rating and CIBC World Markets’ Mark Petrie to $35 from $39 with a “neutral” rating. The average is $38.

“North West reported in-line Q2/22 results but indicated that the elimination of government support payments and cost pressures are expected to lead to lower H2 sales and earnings (in line with H1 declining LDD),” said Mr. MacLeod. “2022E earnings are expected to be down vs. 2021A but higher than pre-pandemic levels. Management is optimistic on 2023E, in light of expected settlement payments to residents in Northern Canada, as well as easing cost pressures; however, earnings visibility is low. We rate the stock Market Perform, but think NWC could appeal to income-oriented investors.”

* JP Morgan’s Richard Sunderland upgraded Emera Inc. (EMA-T) to “neutral” from “underweight” with a $66 target, up from $63 and above the $65.54 average on the Street.

* Piper Sandler’s David Amsellem trimmed his Bausch Health Companies Inc. (BHC-N, BHC-T) target to US$6 from US$7 with a “neutral” rating. The average is US$13.67.

* TD Securities’ Cherilyn Radbourne resumed coverage of Brookfield Asset Management Inc. (BAM-N, BAM.A-T) with an “action list buy” recommendation and US$72 target, down from US$79 previously. The average is US$67.20.

* Following the release of a pre-feasibility study for its Marban Engineering Project located in Val-d’Or, Que. and an analyst tour of the mine, Canaccord Genuity’s Michael Fairbairn cut his target for O3 Mining Inc. (OIII-X) to $2.50 from $3.10 with a “speculative buy” rating, while CIBC’s Bryce Adams cut his target to $4 from $6 with an “outperformer” rating. The average is $3.75.

“Though we view the Marban PFS favourably, our reduced long-term gold price (from US$2,093 per ounce to $2,002 per ounce) has offset the positive impact of the study results, driving our lowered target price,” said Mr. Fairbairn. “We continue to like O3 for its significant production and FCF potential, strong ties to the Osisko group, and solid M&A potential given its location in the Val-d’Or mining camp, all highlighted in our recent initiation piece.”

* CIBC’s Mohamed Sidibe lowered his target for Skeena Resources Ltd. (SKE-T) to $17.50, below the $18.07 average, from $19 with an “outperformer” rating.

“We slightly reduce our price target ... and reiterate our Outperformer rating after updating our model with the feasibility study (FS) on the Eskay Creek project released on September 8,” he said. “We are now modeling 6% lower gold and silver head grades, now in line with the FS, which drives our lower annual gold production of 355koz GEO (375koz GEO prior). On the costs front, while we have taken our unit operating costs slightly lower, our AISC remains largely unchanged on the back of lower production. Our initial capex of $640-million ($660-million prior) remains above the FS estimate of $592-million as we continue to factor in some contingency for any potential future cost pressures. As a result of our changes, our NAV5% decreases from $17.89 to $16.31. We continue to like the project and expect further optimizations of the mine plan as well as resource upside from the exploration programs conducted. The focus continues to be on the permitting process as well as project financing.”

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