Inside the Market’s roundup of some of today’s key analyst actions
With Franco-Nevada Corp.’s (FNV-T) valuation having “pulled back” recently, Stifel analyst Ingrid Rico now sees an “entry opportunity to this premium royalty/streamingco name.”
That led her to raise her recommendation for its shares to “buy” from “hold” on Friday following “strong” second-quarter results.
“Overhang from Cobre Panama has been lifted and results in Q2 confirmed that Cobre is back to normal production levels,” said Ms. Rico in a research report. “The most recent update from Cobre Panama’s operator in Q2 has confirmed that the refreshed concession contract has completed the public consultation process, and has been signed by the Government of Panama as of June 26th. The refreshed concession contract is anticipated to be presented before the National Assembly of Panama during the current term, with the most recent legislative term started on July 1st. This refreshed concession contract has, in our view, removed a significant overhang on operations at the mine.”
“During the quarter we’ve seen that the operation is returning to previous operating levels following export restrictions being lifted at the operation. It appears that the resumption of operations is progressing well and things are looking up for the remainder of 2023. Looking ahead to H2, we are anticipating stronger GEO deliveries from FNV’s precious metals segment as a result.”
Adjusting her estimates to include the Global Minimum Tax, Ms. Rico trimmed her target for Franco-Nevada shares to $215 from $222. The average on the Street is $214.60, according to Refinitiv data.
Recommending royalty/streaming stocks for “lower risk exposure to precious metals,” she also reduced her target for Wheaton Precious Metals Corp. (WPM-T) shares to $68 from $75, reiterating a “buy” recommendation. The average is $74.91.
“As a reminder, the uniqueness of the royalty/streaming business model provides good upside potential (metal price leverage + exploration and/or expansion optionality), while limiting risk to inflationary cost pressures and/or potentially increasing mining taxes/royalties in some geographies, in our view,” said Ms. Rico. “Year-to-date, the royalty/streaming companies are up on average 2 per cent (vs GDX down 3.6 per cent and HUI down 5.8 per cent). Despite seeing inflation pressures (and margin compression) easing for the gold miners, royalty/streamingcos remain the lower risk exposure to the underlying metal. Valuation multiples for the bellwethers – FNV & WPM – have pulled back from pandemic levels and overall we see attractive entry valuation levels. The precious metals royalty/streamingcos have historically shown attractive returns (share price appreciation + dividends) across different cycles. Good entry point for generalists looking at the space, in our view.”
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Scotia Capital analyst Ben Isaacson continues to see “lots to like” with Chemtrade Logistics Income Fund (CHE.UN-T) over the medium term.
However, he’s now “moving to sidelines” based on a weakened outlook, downgrading its shares to “sector perform” from “sector outperform” previously.
“Chemtrade has made tangible strides forward over the past year, irrespective of commodity price moves. Examples include: improved leverage, more evident capital discipline, a clear growth strategy, better disclosure/messaging, etc.,” he said. “But, while all of that is true, it is equally true the near-term outlook for CHE has, not only deteriorated, but continues to do so. We recommend investors take profits now and look to re-load at a more attractive entry point.”
Mr. Isaacsaon said he’s seeing “softness” in the chlor-alkali market, sodium chlorate volume “remains under pressure, and may not see relief anytime soon” and sodium chlorate margins/spreads may also be “under pressure, given a shift in customer mix.”
For investors, he also sees few catalysts to push Chemtrade’s stock price higher.
“(1) the Cairo project won’t see commercial production hit the P&L until ‘25; (2) CHE’s flagship growth project has been shelved due to soaring costs; we think it’s unlikely this project will return – but we’re hopeful; (3) CHE believes low EU TTF gas prices are transient in nature – we agree 100%, but are not convinced it will matter much if demand weakness means the Europeans are needed to run chlor-alkali; (4) other than a few small debottlenecking or improvement projects here and there, CHE provided no other updates on growth or catalysts near-term,” he said.
Expecting leverage to deteriorate, despite seeing Chemtrade “at a healthy starting point to face further macro pressure,” Mr. Isaacson maintained a $10 target. The average on the Street is $11.57.
“The company used to suggest mid-cycle EBITDA was $300-million to $350-million, and a 2H implied guide of $175-million certainly supports that view,” he said. “The record $275-million generated in 2H ($550-million run-rate) is more reflective of peak conditions. If we assume low-$400s is now run-rate EBITDA, and using the long-term average multiple of 6.6x would give us fair value of $11.50 (unsurprisingly, this is the Street’s PT). While we don’t think this is unreasonable for fair value, we’re not convinced why the stock should rise more than 35 per cent to get there, given a weakening near-term backdrop.”
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In a research report titled Multiple Ways to Grow, Multiple Ways to Win, Morgan Stanley analyst Josh Baer raised his recommendation for Docebo Inc. (DCBO-Q, DCBO-T), calling it “a differentiated small-cap with more than 25-per-cent growth & GAAP profitability, disrupting a large Learning Management System market & executing against a greenfield external training opportunity.”
Seeing the Toronto-based online learning platform provider as “underpriced” compared to peers, he upgraded its shares to “overweight” from “equal-weight” previously,” emphasizing “stabilizing growth, evidence of strengthening competitive position and momentum upmarket aligns with share underperformance, creating an attractive risk/reward.”
“We have remained on the sidelines because of the seemingly crowded competitive landscape making it more difficult for Docebo to differentiate, move upmarket, and expand beyond niche use cases, and because we previously struggled to point to a growth floor as revenue growth decelerated from 67 per cent in FY21 to 37 per cent in FY22 to 25 per cent in 2Q23,” said Mr. Baer.
“What’s in the Price? We think investors expect deceleration trends will continue given macro pressures and debate around criticality of Learning Management Systems, driving subscription revenue growth toward 20 per cent vs. our expectation for durable mid-20-per-cents growth. Our recent customer and channel diligence and the underappreciated ‘big tech’ Enterprise win announced on the Q2 call gives us confidence in Docebo’s ability to move upmarket, serving the largest Enterprises. Additionally, several signs of stabilization in recent results supports our updated model forecasting subscription revenue growth holding at approximately 25 per cent and we expect a more than 25-per-cent three year subscription revenue CAGR [compound annual growth rate]. Beyond the compelling growth story, Docebo is on the brink of double digit EBITDA margins by 4Q23, has best-in-class stock-based-comp as a percentage of revenue of only 3 per cent, and at less than 5 times EV/S [enterprise value to sales] or less than 0.20 times EV/S/G, DCBO trades at a 37-per-cent discount to its SaaS/HCM/Learning Management peers.”
He raised his target for Docebo’s U.S.-listed shares to US$49 from US$40. The current average is US$50.86.
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With industry checks indicating continued market share gains, D.A. Davidson’s Brandon Rolfe sees shares of BRP Inc. (DOO-T) as “severely undervalued” and thinks a recent price pullback “provides an attractive entry point for investors.”
The analyst estimates the Valcourt-based company’s North American off-road vehicle sales jumped in the period between May and July by approximately 20 per cent year-over-year, which he says “vastly” outpaced rival Polaris Industries Inc. (PII-N).
“We would also note our checks indicate BRP’s NA ORV retail outperformance has continued through mid-August with BRP’s retail sales trending up a low double-digits percentage (up 10-15 per cent) and PII’s retail sales trending down a mid-to-high single digit percent,” said Mr. Rolfe. “Although the BRP August year-over-year retail trend is lower vs. 2Q23, we believe the underlying retail trend vs. 2019 is stable. For PII, we believe their 3Q23-to-date NA ORV retail sales are trending down a mid-single-digit-percent (vs. 3Q23 NA ORV retail guidance of up a low-20s per cent). We believe BRP’s continued outperformance vs. the broader industry since April, confirms our view that BRP is the NA ORV market share winner in a normalized retail environment, despite not offering the greatest retail incentives.”
Mr. Rolfe thinks “effective” promotional activity is keeping BRP’s inventory “lean,” while Polaris dealers are seeing an inventory build.
“We believe BRP’s overall retail success and leaner ORV dealer inventories (especially in the Premium segment) should provide BRP with a profitable 2H23 ORV channel fill tailwind,” he said.
The analyst is expecting important announcements at its Club BRP dealer event in Atlanta on Sunday, noting: “While most dealers are expecting BRP to introduce new products to compete with PII’s new Xpedition and Ranger XD models, dealers are equally excited for new PWC product introductions, as well as the potential expansion of the Sea Doo Switch platform. We believe BRP’s new productions are crucial to their future success, as their superior innovation has driven strong recent market share gains within the ORV, PWC and pontoon industries.”
Though he trimmed his full-year 2023 and 2024 earnings estimates modestly based on updated margin assumptions, Mr. Rolfe maintained a “buy” recommendation and $126 target for BRP shares. The average target on the Street is $133.89.
“Although shares have been under pressure over the last couple weeks, we are positive on the name heading into their 2Q24 earnings release with the belief BRP’s underlying fundamentals have remained strong through early 3Q24,” he said.
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Echelon Partners analyst David Chrystal thinks the outlook for Canadian Net Real Estate Investment Trust’s (NET.UN-X) external growth “remains challenging,” citing “continued volatility in the debt markets, limited cap rate expansion and the REIT’s discounted unit price.”
After the bell on Wednesday, the Montreal-based REIT reported second-quarter funds from operations of 16.1 cents per unit, up 0.6 per cent year-over-year and in line with both the analyst’s 15.8-cent forecast and the consensus expectation of 16 cents.
“Interest expense headwinds remain, though savings are expected to be generated from the repayment of expensive variable rate debt (effective rate of 8 per cent) using proceeds from assets held for sale and up-financing activity. The REIT’s portfolio continues to generate a steady stream of cash flows, with modest organic growth expected from positive leasing spreads on 2024 lease expiries (5.5 per cent of GLA, 8 per cent of net rent) and from high-return property level capex (9-per-cent unlevered return, $1-million aggregate spend).”
Touting its “healthy” balance sheet, which he thinks “provides ample capacity to weather a higher rate environment while maintaining stable cash flow,” Mr. Chrystal expects the REIT to also continue to benefit from dispositions.
“During the quarter, the REIT sold a single-tenant asset located in Timmins, Ontario for gross proceeds of $1.3-million, equating to a cap rate of 6.2 per cent (19-per-cent premium to IFRS value). The REIT is currently marketing two additional properties with a carrying value of $4.8-million. While the timing of the sale and pricing for these assets are uncertain given continued volatility in the debt markets, we expect these dispositions to be accretive as they are backed by variable rate debt ($2.8-million) which bears interest at approximately 8 per cent, and net proceeds will likely be used to reduce outstanding debt on the REIT’s credit facility.”
“CNET’s mortgage maturity schedule is well-staggered, with just 28-per-cent maturing through year-end 2026. We expect that near-term debt maturities should result in up-financing opportunities ($2-million for balance of 2023), which should allow the REIT to reduce the $16.4-million credit facility balance. While maturing mortgages will see higher rates on renewal, the interest expense headwind should be somewhat offset by repayment of higher-cost floating rate debt.”
Predicting a net asset value discount will persist until transaction activity continues, Mr. Chrystal cut his target to $6.25 from $7, maintaining a “buy” rating based on a “significant” valuation discount to peers and “an attractive (7 per cent) and sustainable (55-60-per cent payout ratio) distribution. The average target on the Street is $6.54.
Elsewhere, Desjardins Securities’ Kyle Stanley trimmed his target to $5.75 from $6 with a “buy” rating.
“We are reducing our target ... to reflect updated NAV work and a decreased target multiple,” he said. “The latter largely reflects (1) the impact that the elevated rate as well as broader economic environment are having on transaction volumes; (2) its limited organic growth profile; (3) its higher leverage profile; and (4) its lack of trading liquidity.”
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While Neo Performance Materials Inc. (NEO-T) delivered a “sizable” second-quarter earnings beat due to a “strong” performance from its Rare Earth Metals segment, Stifel analyst Ian Gillies continues to expect near-term commodity price volatility.
“Positively, leading edge commodity prices could be bottoming with the latest prices indicating a 3-per-cent tick up from the quarter-to-date average in 3Q23,” he said. “We have increased 2024 estimated EBITDA by 18 per cent.”
Last week, the Toronto-based company reported revenue for the quarter of $170-million, exceeding Mr. Gillies’s estimate of $118-million by 45 per cent and the consensus projection of $131-million by 30 per cent. EBITDA of $20-million was blew past the $6-million forecast of the analyst and the Street, due to higher-than-expected volumes and pricing in its Chemicals & Oxides segment and higher-than-expected pricing in Rare Earth Metals.
“The outlook remains largely unchanged from the prior quarter’s update as the market remains in a near-term lull while the medium- to long-term outlook is constructive,” said Mr. Gillies. “In Magnequench, we expect volumes to continue their recovery from 1Q23 low. We anticipate margins to recover over the next few quarters but not meaningfully until 2024E. C&O volumes remain healthy, but margins are expected to remain under pressure albeit a modest recovery in the next few quarters.”
With increases to his earnings forecast, the analyst raised his target for Neo Performance shares to $9.50 from $8, maintaining a “hold” rating. The average is $13.10.
“We believe Neo is well positioned to generate organic growth through increasing use of magnets in all types of automobiles and electronics; continued demand for emission reduction technology in ICE light duty vehicles; and pursuit of new end markets. We expect this growth to be augmented by deployment of a sizable cash position on M&A or new growth projects,” said Mr. Gillies. “In our view, Neo will likely evolve into a larger, better diversified company, and we will reevaluate our investment thesis as these events are announced.”
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After a “steady” second quarter, Wishpond Technologies Ltd. (WISH-X) is “setting [the] stage for scale,” according to Paradigm Capital analyst Daniel Rosenberg.
“Wishpond is a SaaS provider of marketing technology,” he said. “The company supports small business owners who may not have the knowledge, resources, or time to run a marketing program. Wishpond’s ability to deliver value to an under-served segment of businesses has led to strong growth and retention numbers. The company is growing rapidly at 30 per cent per year with industry-leading retention and an attractive cost structure. We see a meaningful opportunity for Wishpond to exploit a gap in the market as smaller businesses look to Wishpond to provide a holistic marketing solution at a very attractive price point.”
Before the bell on Thursday, the Vancouver-based company reported revenue of $5.6-million, up 13 per cent but narrowly lower than the Street’s $5.9-million estimate. Adjusted EBITDA of $200,000 fell in line with expectations, which Mr. Rosenberg noted is “trending positively toward management’s goal of achieving positive EBITDA for the year.”
“WISH initiated additional cost measures in Q2, which should further support profitability,” he added.
The analyst also emphasized the company’s recent industry recognition, noting: “WISH received five industry awards in February from Gartner Digital Markets, a leading business software reviewer and researcher. We believe the awards validate WISH’s ability to compete with much larger incumbents such as Salesforce and Adobe. In reviewing the methodologies behind these specific awards, we would characterize the achievements as placing WISH in the top 10–15 per cent of products being evaluated, a notable feat for the small company. We see this milestone as evidence of WISH’s strong technology and feature-rich offering.”
Maintaining a “buy” rating, Mr. Rosenberg trimmed his target for Wishpond shares to $2.25 from $2.25 based on an updated sales multiple. The average is currently $1.78.
“We believe Wishpond has the opportunity to be the leader in a massive SMB market. Management is making strides in maintaining profitability, which should translate into positive cash flow for the year. We reiterate our Buy recommendation as current levels present an attractive opportunity for long-term investors.”
Elsewhere, iA Capital Markets analyst Neehal Upadhyaya lowered his target to $1.50 from $1.75, reiterating a “buy” recommendation.
“Our target price reduction is due to decreasing our 2024 revenue forecast from $31.0-million to $35.4-million,” said Mr. Upadhyaya. “We continue to believe management has done an excellent job in integrating the standalone products it has developed and acquired and believe the Company is on the right track. We expect record quarters in both Q3 and Q4 in terms of top line, however, due to the restructuring that needs to be done to scale PropelIQ, we expect the larger growth quarters to be achieved in 2024. WISH is trading at just 1.0 times our 2024 revenue estimate compared to its Canadian SaaS comps trading at 5.8 times and its North American marketing peers at 6.0 times. Looking at EV/EBITDA, the Company trades at just 13.4 times our 2024 EBITDA estimate, well below its overall peer group at 38.6 times, despite providing a growth profile that ranks in the top three amongst its peers. We believe the current risk-to-reward ratio is very compelling.”
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In other analyst actions:
* CIBC’s Allison Carson reduced her Ascot Resources Ltd. (AOT-T) target to 90 cents from 95 cents with a “neutral” rating. The average on the Street is $1.04.
* TD Securities’ Arun Lamba cut his target for Augusta Gold Corp. (G-T) to $2.25 from $2.75 with a “speculative buy” rating.
* Credit Suisse’s Andrew Kuske lowered his target for Northland Power Inc. (NPI-T) to $33 from $34.50, keeping an “outperform” rating. The average is $37.07.
“On August 10th, Northland Power Inc. (NPI) reported results that missed both of our and the Street’s expectation,” he said. “For the most part, NPI missed much of the bad inflationary pressures in offshore wind, in part, given the lack of projects in construction in the last few years. Moreover, NPI was not a participant in the US market that suffered a few significant setbacks. With the decline in industry inflation and the severe supply chain pressures now reduced, we look at NPI’s project plan as potentially delivering better risk-adjusted returns than would have been expected 6-18 months ago. Finally, NPI’s funding “toolbox” of farm downs and, among other things, asset sales should help with maintaining a high degree of financial flexibility during the coming capex cycle.”
“NPI’s offshore wind exposure can drive growth in years ahead and versus some peers comes at a more reasonable valuation. Moreover, we believe NPI possesses financial capacity to backfill a near-term growth gap with optionality.”
* RBC’s Keith Mackey raised his Mattr Infratech (MATR-T) target to $23 from $22 with a “sector perform” rating. The average is $23.61.
“We raise our target multiple based on higher margins in the remaining business, following the announced sale of the company’s pipe coating business for $220-million,” he said. “Our target multiple is the weighted average of the 6.5 times and 9.0 times multiples that we apply to our EBITDA estimates for Mattr’s Composite and Connection Technologies divisions, respectively.”
* RBC’s Pammi Bir cut his Northwest Healthcare Properties REIT (NWH.UN-T) target by $1 to $8, below the $8.50 average, with a “sector perform” rating.
“From our lens, NWH’s portfolio is not the problem,” said Mr. Bir. “The assets are in good form and putting up healthy organic growth. Yet, the right side of the balance sheet requires some heavy lifting, particularly with the recent setback in the UK JV. As a result, our earnings forecasts have taken a sizeable hit, putting further stress on the payout ratio. We see the strategic review as a step forward to bridging the gap to the underlying value of its assets. Yet, with timing and outcomes uncertain, we continue to watch from the sidelines.”
* TD Securities’ Steven Green lowered his target for Prime Mining Corp. (PRYM-X) to $3.75 from $4, below the $5.15 average, with a “speculative buy” rating.
* Raymond James’ Brad Sturges trimmed his Tricon Residential Inc. (TCN-N, TCN-T) target to US$11.25 from US$12, keeping a “strong buy” recommendation. The current average is US$10.28.
“Our 2023 and 2024 FFO/share and FD AFFO/share estimates are lowered to reflect a slower expected SFR acquisition pace, and slightly lower forecasted SP-NOI growth year-over-year,” he said. “However, we believe after facing lower management fee income YoY and greater financing cost headwinds YoY in 2023E, Tricon could be relatively better positioned next year to generate improved 2024E AFFO/share growth YoY, that is generally in-line or possibly above its U.S. SFR peers. Further, we believe Tricon’s recent pull-back in its share price provides an attractive value proposition based on a deep discount to its U.S. SFR home portfolio value, while also providing effectively a free investment option on Tricon’s asset management platform and adjacent residential businesses.”
David Leeder