Inside the Market’s roundup of some of today’s key analyst actions
Seeing improved performance across its three major banners, BMO Nesbitt Burns’ Peter Sklar upgraded his recommendation for shares of Restaurant Brands International Inc. (QSR-N, QSR-T) to “outperform” from “market perform” on Friday.
“Over recent quarters, traffic trends have been flat/negative for most quick-service brands due to tough 2021 COVID-recovery comps and a squeezed consumer wallet,” he said. “However, we expect traffic to turn positive soon as COVID-recovery comps are lapped and as inflation finally eases.”
“Tim Hortons, BK, and Popeyes contribute 45 per cent, 43 per cent, and 10 per cent to overall EBITDA, respectively. In recent history, it has been rare for all three brands to align with improving performance momentum at the same time, with the stock typically held back by whichever one underperforming brand (usually Tim’s or BK). We believe a rare alignment of improving momentum at all three banners has arrived.”
Mr. Sklar thinks Tim Hortons has been a “trade-down beneficiary recently” driven by an emphasis on “affordable treats.”
“Share of consumer wallet that was previously allocated for sit down restaurants has been pared down as a result of increasing cost-of-living inflation (e.g. food, gas, goods and services, debt servicing, etc.),” he said. “As a result of Tim Hortons’s relatively smaller average ticket and assortment of low-priced menu items, we believe Tim Hortons will continue to benefit from trade-down behaviour from new customers from both sit down dining experiences and from more expensive competitors (i.e., other coffee, baked goods, snacking type occasion limited-service competitors). At the same time, we believe sales from existing customers could benefit from Tim’s menu assortment of ‘small ticket’ items that are “treats” people can generally afford to keep, and it could also be hard pressed for consumers to find fast food treat alternatives that are more economical than Tim Hortons (aside from buying your own groceries). Tim Hortons’s recently launched Anytime Snackers (savoury pastries with creamy jalapeno or herb & garlic filling), and $3 value breakfast sandwiches (Canadian back bacon & cheese or sausage & cheese breakfast sandwiches without the egg, or a cream cheese bagel). These are great examples of menu extensions that fit the affordable ‘treats’ category. Last quarter, in Q3/22, cold beverages and lunch/afternoon dayparts were drivers of outperformance, which we believe could be early signs of some trade-down benefit.”
Also believing Tim Hortons is starting to benefit from Canada’s slowly accelerating return-to-office trend and “resilience” in its app usage, Mr. Sklar raised his target for its shares to US$72 from US$63, exceeding the US$68 average.
“RBI generates substantial & consistent FCF, and we view RBI as a consolidator of quick-service restaurant chains. Over recent quarters, traffic trends have been flat/negative for most quick-service brands due to tough 2021 COVID-recovery comps and a squeezed consumer wallet. However, we expect traffic to turn positive soon as COVID-recovery comps are lapped and as inflation finally eases,” he concluded.
IA Capital Markets analyst Gaurav Mathur recommends investors “become more active” in the Canadian REIT sector in 2023, expecting “multiple opportunities to materialize and create significant value in an increasingly volatile year ahead.”
“We expect the correction in the Canadian real estate sector, which began in mid-2022, to continue in 2023 as the sector and broader economy absorb the effects of higher interest rates, higher cost of capital, softening fundamentals, and capital constraints,” he said. “The volatility ensured that most investors remained on the sidelines as the S&P/TSX Capped REIT Total Return Index printed a 17-per-cent loss in 2022. While the sector has rebounded in the past from material down years, we believe that the challenges ahead are very different from those seen in past rebounds.”
“In our view, this is the start of a period where most investors will begin to focus on the bottom line, both in the sector and the broader market, as the downdraft in risk assets from mid-2022 can potentially turn into a longer route in 2023. While the sector will continue to remain in risk-off mode, we may begin to see a risk-on sentiment at some point in 2023 should rates stabilize and if recession conditions are averted or remain mild. However, for the foreseeable future, we think that the probability of risk-on sentiment remains low. Thus, for the year ahead, we recommend investors rotate into names that offer a healthy mix of capital preservation and growth prospects, i.e., names that produce cash flow growth, maintain conservative balance sheets, have strengthening fundamentals, and are liquid.”
In a research report released Friday titled It’s Time to be Active, Mr. Mathur relaunched coverage of 13 REITs, suggesting investors “rotate into names that offer a healthy mix of capital preservation and growth prospects, i.e., names that produce cash flow growth, maintain conservative balance sheets, have strengthening fundamentals, and are liquid.”
He resumed coverage of these equities:
• Automotive Properties Real Estate Investment Trust (APR.UN-T) with a “hold” rating and $12.50 target. Average: $13.03.
• Boardwalk Real Estate Investment Trust (BEI.UN-T) with a “buy” rating and $60 target. Average: $60.36.
• BSR Real Estate Investment Trust (HOM.U-T) with a “strong buy” rating and US$18 target. Average: US$19.19.
“We are upgrading our rating from Buy to Strong Buy for BSR REIT,” he said. “The REIT derives 97 per cent of its NOI from four target markets (Dallas, Houston, Austin, and Oklahoma City), which continue to witness strong population growth, strong employment growth, affordable cost of living, and no rent control in any of its markets. The robust demand has led BSR to post double-digit rent increases on new leases for six consecutive quarters. The REIT also maintains a defensible balance sheet that allows for growth as macro headwinds subside. We forecast 7.9-per-cent AFFO [adjusted funds from operations] per unit growth (2022-2024 CAGR [compound annual growth rate]), which is the highest in the Canadian multifamily REIT peer set.”
• Canadian Apartment Properties Real Estate Investment Trust (CAR.UN-T) with a “buy” rating and $56 target. Average: $53.52.
• Choice Properties Real Estate Investment Trust (CHP.UN-T) with a “buy” rating and $16 target. Average: $15.47.
• European Residential REIT (ERE.UN-T) with a “hold” rating and $3.75 target. Average: $4.35.
" We are downgrading our rating from Buy to Hold for European Residential REIT,” he said. “While the REIT has multiple demand drivers – favourable immigration policy, strong employment, strong housing demand – we note the regulatory overhang from the proposed 2024 mid-market MFR regulations leads us to remain on the sidelines until further clarity ensues.”
• First Capital Real Estate Investment Trust (FCR.UN-T) with a “hold” rating and $18 target. Average: $18.69.
“We are downgrading our rating from Buy to Hold for First Capital REIT. The REIT owns a portfolio of urban grocery-anchored assets across Canada that allows for steady operating performance. However, the rise in investor activism has led us to move to the sidelines until a clearer path emerges,” he said.
• InterRent Real Estate Investment Trust (IIP.UN-T) with a “strong buy” rating and $16 target. Average: $14.85.
• Killam Apartment REIT (KMP.UN-T) with a “hold” rating and $18.50 target. Average: $20.41.
“We are downgrading our rating from Buy to Hold for Killam Apartment REIT. While the REIT has multiple demand drivers – favourable immigration policy, strong housing demand, newer product, and a track record of improving operating metrics – which allows consistent SPNOI [same-property net operating income] growth, from a cash flow lens we forecast 2.8-per-cent AFFO [adjusted funds from operations] per unit growth (2022-2024 CAGR), which is at the lower end of the Canadian multifamily REIT peer set,” he said.
• Minto Apartment Real Estate Investment Trust (MI.UN-T) with a “buy” rating and $18 target. Average: $19.54.
• Slate Office REIT (SOT.UN-T) with a “hold” rating and $5 target. Average: $4.72.
• SmartCentres Real Estate Investment Trust (SRU.UN-T) with a “hold” rating and $30 target. Average: $30.13.
• True North Commercial REIT (TNT.UN-T) with a “hold” rating and $6.25 target. Average: $6.05.
Concurrently, Mr. Mathur said his top long-only pair trade ideas for 2023 “represent a mix of these attributes.”
They are: Nexus Industrial REIT (NXR.UN-T, “strong buy” and $14 target); Granite REIT (GRT.UN-T, “strong buy” and $95); BSR REIT (HOM.UN-T, “strong buy” and US$18); Boardwalk REIT (BEI.UN-T, “buy” and $60); Primaris REIT (PMZ.UN-T, “buy” and $16) and Choice Properties REIT (CHP.UN-T, “buy” and $16.50.).
For our more income-oriented investors “focused on longer-term value and defensible property characteristics,” Mr. Mathur recommended these three equities: Slate Grocery REIT (SGR.UN-T, “buy” and US$14); Allied Properties REIT (AP.UN-T, “buy” and $36) and Dream Industrial REIT (DIR.UN-T, “strong buy” and $17)
Triple Flag Precious Metals Corp.’s (TFPM-T) acquisition of Maverix Metals Inc. adds depth to its asset base, according to National Bank Financial analyst Shane Nagle.
Seeing a “diversified portfolio with [an] improved outlook,” he raised his recommendation for the Toronto-based miner to “outperform” from “sector perform” after coming off research restriction following the success completion of the deal on Thursday.
“Given the make-up of Maverix’s portfolio was highly diversified with 54 per cent of company’s net asset value in growth assets (vs 5 per cent for TFPM previously), the company now has a well-diversified asset base with its top ten assets making up 66 per cent of the company’s NAV,” said Mr. Nagle. “The near-term growth outlook sees a GEO sales CAGR [compound annual growth rate] of 5 per cent over from 2023-2027 (vs 3 per cent for TFPM previously).”
“[Its] balance sheet remains in [a] strong position/ Following the deal, we estimate TFPM to have US$10-million of net cash with credit capacity likely to be expanded beyond its existing US$700-million RCF (assumed US$100-million currently drawn). At spot commodity prices, the portfolio generates US$165-million in FCF for 2023 (a yield of 6 per cent).”
The analyst raised his target for Triple Flag shares to $23 from $21. The current average is $22.28.
“Our Outperform rating stems from a more diverse asset base and greater FCF generation as a combined company,” he said. “Additionally, Elliott Management, the company’s largest shareholder has been reduced to a 64-per-cent equity interest, improving share liquidity and the outlook for further index inclusion. While improved outlook for gold prices may see a flow of funds away from the royalty sector in general, we continue to see further consolidation of the industry and expect the company’s ambitious management team to play an integral role in adding additional scale/multiple expansion.”
Despite reporting “strong” fourth-quarter 2022 financial results, National Bank Financial analyst Zachary Evershed reduced his forecast for Richelieu Hardware Ltd. (RCH-T) in response to “a slide in macro drivers and price pressure in certain product categories.”
“In the face of uncertain supply lines last year, customers built up inventories in order to ensure they would not lose out on projects, but as supply chains have improved, they are now content to buy only as needed, relying on Richelieu’s fill rates,” he said. “Thus, though there is solid visibility on demand for at least six months, volumes likely won’t be as strong as last year given the absence of this stocking up behaviour. As management is also now expecting pricing pressure in certain product categories, reflecting the current macro backdrop, easing transportation costs, and elevated inventory levels, we move our timing on organic growth declines forward by one quarter to Q1/23.”
On Thursday, the Montreal-based specialty hardware distribution and manufacturing company reported quarterly revenues of $457.5-million, down 1 per cent year-over-year and narrowly below Mr. Evershed’s $462-million estimate. However, earnings per share of 80 cents was an improvement of 6.2 per cent and exceeded the analyst’s expectation of 75 cents.
It also raised its quarterly dividend by 15.4 per cent to 15 cents.
“Days of inventory rose to 124 in the quarter (vs. 106 in Q3/22 and 84 in Q4/21) as inventories increased $56-million quarter-over-quarter to $660-million,” said Mr. Evershed. “Management notes higher product costs represent $45-50-million of incremental inventory while $30-million is due to acquisitions and organic expansion projects, with the remainder the result of an acceleration of deliveries as supply chains improve. We anticipate inventory reduction through the year as January and February are anticipated to be the high watermark, and management expects to unload $60-80-million of inventory to reach normalized levels, which may see margins take a temporary hit. Additionally, customers built up inventories last year in the face of uncertain supply chains, but are now content to buy only as needed. Though there is solid visibility on demand for at least six months, volumes will likely soften given the absence of this stocking up behaviour.”
“With Q4 results, Richelieu announced four new acquisitions, closed in January, that are expected to add an incremental $18-million in sales annually. The acquisitions complement RCH’s product offering by adding an industrial fastener distributor, a specialty hardware distributor, and two business units offering custom products for architectural and industrial markets. We remain bullish on RCH’s acquisition program in a potential economic slowdown as the company boasts a clean balance sheet and more dry powder than it is able to deploy given the size of its typical targets and strong FCF generation.”
Expecting a reduction in volumes and pricing to weigh on margins, Mr. Evershed has taken a “more bearish” stance on Richelieu moving forward, citing “continued pressure on new residential construction markets.” He’s now expecting EPS for 2023 and 2024 of $2.38 and $2.31, respectively, down from $2.46 and $2.34 previously.
Maintaining an “outperform” recommendation for the company’s shares, he trimmed his target by $1 to $54. The average is $50.
Touting the “substantial” potential in the renewable gas market, Canaccord Genuity analyst John Bereznicki sees Anaergia Inc. (ANRG-T) “well positioned” for the strong tailwinds.
However, he initiated coverage of the Burlington, Ont.-based company with a “hold” rating on Friday, believing “it will need to successfully execute on its 2023 guidance and expand its [Build, Own, Operate] backlog to support future growth and a more bullish investment thesis.”
“We believe recent M&A in the RNG space underscores its growing importance in what we believe could be a US$500-billion-plus global build-out over the next 20 years,” the analyst said. “In our view, Anaergia’s established market presence and growing focus on a Build, Own, Operate (BOO) model should drive improved EBITDA visibility and a multiple re-rating. However, the company’s start-up challenges at its flagship Rialto Biofuel Facility (RBF) and recent withdrawal of (and subsequent reinstatement of reduced) 2023 financial guidance speak to the challenges it faces in an environment with inflationary pressures and rising interest rates.”
With the release of its third-quarter results in November, Anaergia withdrew its full-year guidance, including EBITDA of $85-$100-million and “tempered growth expectations,” citing a number of factors, including a slower-than-expected ramp-up at its Rialto Bioenergy and SoCal facilities. It later reintroduced EBITDA guidance of $25-$35-million.
“In our view, rising interest rates, cost inflation, and supply chain challenges have made the post-pandemic environment challenging for many infrastructure developers. Anaergia has not been immune to these headwinds, and we view the company’s recent BOO update and reintroduction of 2023 financial guidance as encouraging,” said Mr. Bereznicki.
He set a target of $6, below the average on the Street of $9.04.
“Project development risks include inflationary pressures, rising interest rates, policy uncertainty, feedstock availability, FX volatility, commodity and renewable fuel pricing uncertainty and capital funding,” the analyst said. “In our view, Anaergia’s dual voting share structure could create governance risks, while its 2022 financial restatement could increase the risk of future revisions.”
After a “humbling” 2022 for technology stocks that saw “a valuation resetting across the board,” National Bank Financial analysts Richard Tse and John Shao now see “a compelling
opportunity for long-term outperformance,” believing a “blanket resetting” in valuation has “overly penalized some names.”
“What’s clear to us is that avoiding this sector comes at the peril of potentially missing meaningful outsized returns relative to the market,” they said. “In our opinion, the group is quietly being spooled up to be unleashed when the market conditions (particularly rates) come to an inflection. Just consider the volatile moves we saw (even) in 2022 when glimmers of rate relief spawned material runs in the sector such as the 23-per-centmove in the S&P Info Tech Index from June 16 to August 15 as signs of slowing economic growth fueled optimism for rate relief. This is why we think investors should start sharpening their pencils for that eventuality. That said, the market has become more discerning which is why we continue to believe that names executing on their strategy with the added variable of showing a credible path to (near-term) profitable growth will be notable names to own through 2023.”
“Given the continued uncertainty in the market today, we’re sticking with a ‘barbell’ approach that includes opportunities in both defensive names while opportunistically building positions in “high torque” names that have the potential for a snapback given a mispricing to the underlying fundamentals as we look out longer term.”
In a research report released Friday previewing 2023 for the sector, valuations remain “inflated under the current sentiment” and warn further downward estimate revisions may be inevitable.
“While we know 2022 was a painful year for tech investors, we remain optimistic,” they added. “In 08/09, multiples for many high torque names contracted meaningfully, with names like Taleo and NetSuite seeing their multiples contract by 90 per cent or more. Yet, within two years following their troughs, many of those former High-Flying names saw their multiples reflate meaningfully, with some like Salesforce, DemandTec and RightNow surpassing their previous peak multiples. Given that precedent, we’d expect some of our names to benefit from multiple expansion as the economic backdrop eventually improves. To be clear, we’re not saying that they’ll return to their 2021 peak multiples anytime soon; that said, much like in 2022, where we saw a reversion to the mean (downwards) and potentially an overshoot to the downside, there’s potential we’ll see the opposite effect (multiple expansion) in H2′23 to realign (more closely) with historical averages.”
“Looking ahead, while EBITDA growth is a notable factor that we expect to drive outsized returns in Tech throughout 2023, there are several others including market positioning (i.e., leader in respective industry), target market (e.g., we expect B2B to be more resilient than B2C), execution on the fundamental business strategy, and relative valuations. Bottom line, much like 2022, we expect 2023 to remain a year of stock selection.”
With that view, the analysts made their top picks for 2023. They are:
‘Large-Cap Technology Pick’
Mr. Tse: “Investors following our research will know OTEX remains one of our favourite ‘legacy’ names. It’s also one we’ve been touting as notable in the current environment. Profitability and strong recurring cash flow offer investors compelling defensive attributes. We see a growing base of recurring revenue through opportunistic acquisitions, expanding operating leverage and optionality from organic growth (7 consecutive quarters of positive organic growth in CC) that is not fully reflected in its current stock price.”
‘High Torque (Potential) Technology Pick’
Mr. Tse: “In our view, the selloff in Lightspeed has been overdone particularly for a Company growing 30 per cent year-over-year while operating at near breakeven with a viable path to profitability. At the time of writing, LSPD is trading at 1.7 times calendar 2023 sales, 4.1 times below its peers across POS, Payments, eCommerce, and High Growth North American SaaS companies and well below its historical average NTM EV/S [next 12-month enterprise value to sales] multiple of 12.1 times. In terms of the Company’s path to profitability, LSPD has a number of levers to pull to gain operating efficiencies including (1) savings from the consolidation of its platform into its flagship Hospitality and Retail offerings where there’s a potential to benefit from the freeing up of 30 per cent of its engineering resources currently dedicated to its legacy offerings; (2) flagship products decreasing onboarding time and training costs; and (3) growing scale that is expected to offer better terms for payments and hosting costs.”
‘Niche Technology Player Picks’
* Coveo Solutions Inc. (CVO-T) with an “outperform” rating and $11 target. Average: $9.37.
Mr. Tse: “We continue to believe Coveo’s validated technology, experienced growth Management,
marquee customers and partner roster combined with a robust organic growth rate (25 per cent) and accelerated path to profitability make it compelling at 3.1 times EV/S.”
Mr. Tse: “We believe the underlying fundamentals, particularly the size of its customers (e.g., Affirm, Chipotle, Stambaugh Ness, Zoom) continues to underscore Docebo’s growing market share. It’s the continuation of those trends that corroborates Docebo’s market position and that its growth in the past few years was more than the COVID benefit of remote learning. That strength is also corroborated by third-party research firms like the Fosway Group, where Docebo ranks as the highest-performing LMS within Fosway’s ‘Core Leader’ category in its most recent 2022 9-Grid report for Learning Systems. We see growth coming from multiple drivers: (1) new logos; (2) cross-/up-selling to existing customers; (3) larger deal sizes; and (4) geographic expansion.”
* Magnet Forensics Inc. (MAGT-T) with an “outperform” rating and $50 target. Average: $43.46.
Mr. Shao: “We continue to like MAGT in 2023 for its high-quality growth model despite the recent share rally. If anything, those meaningful growth drivers such as the enterprise market and MDIS will continue to be the main themes to watch for in the year.”
* Softchoice Corp. (SFTC-T) with an “outperform” rating and $28 target. Average: $22.67.
Mr. Shao: “We believe Softchoice has the defensive attributes to post strong relative outperformance in 2023 ... We like Softchoice for its large addressable market, strong partner relationships and a simple, but efficient, go-to-market strategy.”
In other analyst actions:
* In a research report previewing 2023 for North American fertilizer and agricultural chemical companies, Citi’s P.J. Juvekar downgraded Mosaic Co. (MOS-N) to “neutral” from “buy” with a US$50 target, down from US$61 and below the US$58.78 average. He also lowered his Nutrien Ltd. (NTR-N, NTR-T) target by US$1 to US$86 with a “buy” rating. The average is US$99.65.
“We are taking down MOS to Neutral as MOS has 50-per-cent exposure (last 12-month EBITDA) to potash, the weakest of the three nutrients (NTR at 45-per-cent exposure),” said Mr. Juvekar. “While Ag companies’ cash flows have been robust, ag companies have outperformed over the last 18 months. We are not calling for ‘peak Ag’ as farmers remain in robust shape. We do think the risk/reward in general is less attractive today compared to a year ago. The next key datapoints are likely to be (1) Ag commentary on earnings calls and (2) planting decisions by growers in March, when they decide how much fertilizer to apply and what crops they would plant.”
* Scotia’s Mark Neville lowered his CCL Industries Inc. (CCL.B-T) target to $73 from $75 with a “sector outperform” rating. The average is $75.10.
“We have lowered our Q4 EBITDA forecast but are in line with consensus,” Mr. Neville said. “Why the Q4 reduction? Primarily to reflect, (i.) customer inventory destocking, as previously called out by Avery Dennison (AVY-US; not covered), CCL Segment’s largest label supplier, and (ii.) COVID-related lockdowns in China. Despite the reductions, we still expect CCL.b to deliver another year of organic earnings growth and record profits in 2022E – like it did in 2021 and 2020, despite the pandemic. Also, on a more positive note: (i.) we wouldn’t expect inventory destocking to last more than a couple quarters and believe the Q4 impact at CCL Segment may be less acute (than at Avery Dennison), (ii.) China is re-opening, and (iii.) moderating inflationary pressures (e.g., freight, energy, and materials) should provide some margin relief, assuming (as we would) the company can maintain its pricing discipline. As such, we expect continued earnings growth in 2023E, despite macro challenges. Our one-year target goes to $73/share. We have CCL.b shares trading at 9.5 times EV/EBITDA on our 2023E, near the low end of where the stock has traded over the last eight years.”
* RBC’s Walter Spracklin raised his GFL Environmental Inc. (GFL-N, GFL-T) target to US$36 from US$33, while he cut his Waste Connections Inc. (WCN-N, WCN-T) target to US$148 from US$153, keeping “outperform” ratings for both. The averages are US$37.50 and US$152.79, respectively.
“Waste underperformed the market in Q4 (except for GFL which significantly outperformed), as investors rotated away from late-cycle defensive names into higher beta growth stocks,” Mr. Spracklin said. “We believe GFL is best positioned to benefit from the continued style shift and see the realization of key catalysts in 2023, namely FCF inflection and deleveraging via FCF and non-core asset sales (expect an update in Q4). In this preview, we are keeping our estimates unchanged for the big 3 (ex GFL). Additionally, we have taken our target multiples down across the big 3 and up for GFL by 0.5 times on the rotation described above. Our areas of focus for the quarter will be the anticipated 2023 outlooks, expectations for continued pricing growth, colour on the M&A environment, and volume trends as economic conditions are expected to slow.”
“Though the easy money has likely been made in Sigma (one of the best performing lithium stocks amid a burgeoning EV dynamic), we still see upside as Sigma (with material spodumene assets) re-rates from developer to producer by mid-2023, ramps/expands production over time, and becomes a more attractive takeover target,” he said. “However, upside is not unlimited considering execution/operating risks, low stock liquidity, and spodumene/lithium prices trading multiples above the cost curve (despite possibly peaking sentiment).”