Inside the Market’s roundup of some of today’s key analyst actions
While acknowledging investors were disappointed that Empire Company Ltd. (EMP.A-T) was unable to sustain the momentum it exhibited in the previous quarter, Desjardins Securities analyst Chris Li sees headwinds facing the grocer as “transitory and should ease next year as inflation moderates and macro conditions improve.”
“Admittedly, there are limited near-term catalysts and we expect the shares to be range-bound until sales improve,” he added. “Our positive long-term view is based on EMP’s large valuation discount to peers (11 times forward P/E vs 14–15 times for L and MRU [Loblaw and Metro]), which is unwarranted assuming it can achieve 8–11-per-cent EPS growth longer-term.”
Shares of the Stellarton, N.S.-based retailer plummeted 11.2 per cent after it reported second-quarter earnings per share of 71 cents, missing Mr. Li’s 81-cent estimate. The miss was attributed to both lower-than-expected sales and margins, as well as higher-than-expected SG&A expenses. Same-store sales, excluding fuel, rose 2.0 per cent, below the analyst’s estimate of 2.4 per cent and consensus forecast of 3 per cent.
“Following the weaker-than-expected 2Q results ... we have lowered our FY24 and FY25 EPS estimates by 6–7 per cent to reflect a more cautious view in the near term on same-store sales and gross margin as well as higher SG&A expenses,” said Mr. Li. “While the market is disappointed that the momentum in 1Q was not sustained, we continue to believe the headwinds are largely transitory and should ease next year as food inflation moderates and macro conditions improve.
“Admittedly, there are limited catalysts in the near term and we expect the shares to be rangebound until the consumer improves. But we believe there were a few encouraging developments during the quarter: (1) 3Q-to-date SSSG is trending higher than 2Q (albeit helped by an easy year-ago comp); (2) transaction counts at conventional stores continue to increase; (3) management believes modest gross margin improvement is sustainable despite increasing cost pressures; (4) efficiency and cost optimization initiatives (strategic sourcing, supply chain and organizational restructuring) are well on track; and (5) Voilà posted solid sales growth of 15 per cent.”
For 2024, he’s now projecting EPS of $2.90, falling from $3.10. His 2025 forecast slid to $3.17 from $3.37.
Maintaining a “buy” recommendation for Empire shares, Mr. Li trimmed his target to $40 from $42. The average target on the Street is $41.63, according to Refinitiv data.
Elsewhere, TD Securities’ Michael Van Aelst downgraded Empire to “hold” from “buy” with a $39 target, down from $45.
Other analysts making target adjustments include:
* National Bank’s Vishal Shreedhar to $42 from $44 with a “sector perform” rating.
“Looking forward, we believe EMP has opportunity related to easy comparisons in H2/F24 (in part due to the cybersecurity event in H2/F23), ongoing improvement initiatives and inexpensive valuation,” said Mr. Shreedhar. “That said, it has structural deficiencies versus peers including an elevated mix of lower growth conventional stores and less pharmacy exposure (which we believe is a superior business versus grocery). We consider the value gap versus peers to be noteworthy; however, we believe it will persist until EMP delivers comparable/sustainable growth versus peers.”
* Scotia’s George Doumet to $39 from $43 with a “sector outperform” rating.
“Q2 results came in softer than expected, but we believe they are not necessarily extrapolative to 2H performance,” he said. “We expect comps to improve quarter-over-quarter, gross margins (ex-fuel) to get back to their 10 to 20 basis points expansion rhythm and for SG&A inflation to have peaked (given the organization optimization strategies currently underway). Net/net, our 24 and 25 numbers are down 3 per cent and 5 per cent. Furthermore, the sell-off in the shares was pressured by general weakness across the staples space (ATD down 4 per cent, DOL down 4 per cent and the other grocers down 4 per cent plus), resulting from a significant shift towards a more risk-on sentiment.
“While we generally don’t have a very favourable view on the grocers over the NTM [next 12 months], we believe EMP could outperform in a disinflation backdrop/and a soft-landing scenario (which seems to be the consensus view). Valuation remains (very) attractive in our view.”
* RBC’s Irene Nattel to $49 from $50 with a “sector perform” rating.
“EMP Q2 EPS down 2 per cent year-over-year within range of reasonable expectations, reinforces our view that near to medium term, industry-level share migration in favour of discount and value-oriented consumer behaviour likely to persist even as inflation moderates. Our revised three-year EPS CAGR now at the low-end of the stated long-term aspiration 8-11 per cent with slower growth in F24E/F25, but we remain comfortable with EMP ability to achieve objectives over time as consumer wallet pressure eases and as P&E initiatives gain traction,” said Ms. Nattel.
* CIBC’s Mark Petrie to $42 from $44 with an “outperformer” rating.
“Food inflation has slowed materially, but pressure on consumer spending remains meaningful and continues to favour the discount channel. This is a headwind for EMP, and we do not expect a meaningful reversal in the near term, but margin initiatives will take hold soon. The outlook on rate cuts caused significant swings in equity values, and while this is a headwind to defensive names, we believe EMP is overly discounted,” said Mr. Petrie.
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Ahead of the Jan. 12 release of Corus Entertainment Inc.’s (CJR.B-T) first-quarter 2024 results, National Bank Financial analyst Adam Shine raised his recommendation to “outperform” from “sector perform,” seeing the Street’s earnings expectations as “too low and [the] trend should improve.”
“Hollywood strikes that lasted many months caused the 2023-2024 TV season to get delayed. Production has rebooted and new episodes will start to get aired later in January and more pervasively thereafter,” he said. “While Q1 should mark the greatest pressure for TV ad sales in fiscal 2024, programming amortization in Q1 could fall more within the negative 15 per cent to negative 20 per cent than previously expected.”
Mr. Shine is now projecting revenue of $371.5-million, down 13.9 per cent year-over-year and narrowly below the consensus forecast of $374-million. However, he estimates earnings before interest, taxes, depreciation and amortization (EBITDA) to fall 11.1 per cent to $117-million, exceeding the Street’s expectation $101.4-million.
He did warn that the next fiscal year is likely to also be “abnormal” and brings “uncertainty” for the Toronto-based company.
“We forecast TV ad sales down 12.5 per cent in Q2 before possibly growing 2 per cent as new programming returns in a seasonally important Q3 ahead of an anticipated gain of 8 per cent in Q4 in the face of easy comps (down 9.5 per cent Q4/23, down 14.2 per cent Q4/22) as the advertising contraction began in July 2022,” he said. “We still wait to see how a long anticipated recession eventually plays out and to what extent advertisers recommit to the medium amid secular competitive dynamics and any lingering cyclical challenges. Management for its part needs to reduce costs wherever possible, with programming amortization likely to fall by $100-million in f2024 and labour plus G&A costs possibly down by at least mid-single digits.”
Believing covenants were “not likely breached” and predicting free cash flow will improve in fiscal 2025, Mr. Shine maintained a target of $1.30 per share for Corus shares. The average on the Street is $1.56.
“Having updated our forecast, we opted to reverse the added layer of conservatism we applied in our last note when we dropped our TV multiple 25 basis points amid the actors’ strike that hadn’t yet been resolved,” he said.
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Despite “strong” fourth-quarter results and a “good” outlook for air travel demand, National Bank Financial analyst Cameron Doerksen said he’s remaining “cautious” on shares of Transat AT Inc. (TRZ-T), waiting for its expected comprehensive refinancing plan that “could have implications for equity holders.”
“Transat has been working towards a comprehensive refinancing plan, and we were hopeful there would be news on that front with the Q4 report,” he said. “However, while management is still working on the plan, there is nothing new to report at this time, which means that the uncertainty will persist. At the end of Q4, Transat’s unrestricted cash stood at $436 million, noting that Q4 is the typical seasonal low point for cash.”
“Refinancing/repayment of the company’s secured floating rate debt is a priority, but we also note that interest rates on the company’s LEEFF unsecured credit facility ($312-million drawn) will begin to escalate starting in 2024 (5.0 per cent currently, rising to 8.0 per cent in 2024 and an incremental 2.0 per cent per year thereafter), so there will eventually be some urgency to pay off or refinance this debt (maturing in 2026). Although the company’s financial position is much improved, in our view, net debt remains too high, sitting at $1.6 billion at the end of Q4 with leverage on a trailing basis as of the end of F2023 at 5.8 times. Under our assumption that EBITDA will continue to improve in F2024 and cash from working capital is positive, after payment of interest expense and lease obligations, we forecast only modest positive free cash flow next year, so the company’s ability to reduce total debt through organic cash flow generation is limited.”
With the linger uncertainty, shares of Montreal-based company slid 2.95 per cent on Thursday following the release of quarterly results that topped expectations. Revenue rose 33.4 per cent year-over-year to $765-million, ahead of Mr. Doerksen’s $734-million estimate and the consensus forecast of $754-million. Adjusted EBITDA of $89-million also blew past projections ($61-million and $59-million, respectively).
“Recall that in reporting its Q3 results in September, Transat noted that the booked load factor was running 2 points ahead of last year with yields up 7 per cent year-over-year,” the analyst said. “Currently, the booked load factor for the winter is running 1.3 points below last year with yields 2.4 per cent higher year-over-year, implying that pricing has deteriorated somewhat on more recent bookings. Although we still expect a solid winter from Transat, we have previously cautioned that winter yields could come under some pressure given the significant increase in overall industry capacity from Canada to sun destinations.”
After raising his 2024 and 2025 financial projections due largely to higher revenue expectations stemming from greater than previously forecasted capacity growth, Mr. Doerksen raised his target for Transat shares to $3.25 from $3 with an “underperform” rating. The average is $4.
“We also highlight that based on our updated F2024 forecast (which assumes ongoing EBITDA improvement), Transat shares are trading at 5.7 times EV/EBITDA versus Air Canada (which has significantly lower leverage, much stronger free cash flow and margins that are double Transat’s) that is trading at 3.4 times EV/EBITDA,” he said. “As such, the current valuation premium for Transat also explains our Underperform rating on the stock.”
Elsewhere, TD Securities’ Tim James moved his target to $4.75 from $4.50 with a “hold” rating.
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Desjardins Securities analyst Chris MacCulloch trimmed his forecast for Canadian Natural Resources Ltd. (CNQ-T) following Thursday’s release of its 2024 guidance and capital budget, moderating his production expectations to “align with the company’s staggered growth profile following a planned shift to shorter-cycle investments, which drives a higher exit rate.”
Shares of the Calgary-based company rose 1.1 per cent after it said it expects production in 2024 of 1.46 million barrels of oil equivalent per day an increase of nearly 40,000 boe/d from 2023 levels. It’s projecting to spend $5.42-billion in 2024, largely in line with its 2023 forecast of $5.41-billion.
“‘We were not entirely surprised to see the stock lag vs peers and the broader Canadian energy sector following [Thursday’s] 2024 capital budget release given production guidance slightly missed Street expectations while disclosure shifted on abandonment and reclamation spending,” said Mr. MacCulloch. “However, it is clear that CNQ is playing the long game with asset development, a trend highlighted in recent marketing materials where it has focused on multi-year growth projects befitting a company with an industry-leading RLI. Through the update, CNQ highlighted several growth projects, including its Pike 1 thermal in situ project, which will begin drilling and pipeline development late next year, before bringing 25,000 bbl/d on production in 2027. Additionally, the Naphtha Recovery Unit Tailings Treatment project continues to make progress and is expected to add 6,300 bbl/d of SCO production in 3Q27 while supporting a 6 per-cent reduction in Horizon Scope 1 GHG emissions.
“On the flip side, the company outlined a conventional drilling program weighted toward 2H24 activity, focused on short-cycle drilling opportunities where economics are more sensitive to near-term commodity prices (vs a thermal oil sands project, for instance). With expanded WCSB egress capacity on the docket for both crude oil and natural gas over the next few years, the recent retrenchment in commodity prices has provided CNQ with an opportunity to counter-cyclically flex its muscles, all while retaining flexibility to cycle capital back into longer-cycle investments or opportunistic M&A. Don’t stray far.”
After lowering his cash flow and production expectations through fiscal 2025, Mr. MacCulloch trimmed his target to $105 from $107, reiterating a “buy” recommendation. The average is $98.74.
“Although implied returns to our target are relatively thin, we still see upside through achievement of the net debt target and with TMX coming online,” he said.
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In a separate research note, Mr. MacCulloch also reduced his expectations for Cenovus Energy Inc. (CVE-T) in response to its Thursday’s guidance release.
“Although headline metrics from the 2024 guidance release were slightly disappointing, CVE outperformed its large-cap peers [Thursday], suggesting the market is starting to recognize the valuation disconnect at hand,” he said. “Although our 2024 CFPS estimate decreased by 6 per cent, primarily driven by reduced upstream production and downstream throughputs which were further exacerbated by increased opex assumptions, our 2025 CFPS estimate was relatively stable (down 2 per cent). More importantly, we are still firmly in the camp that market sentiment for CVE will continue improving in 2024 as we gain better visibility on TMX line fill, which should support further narrowing of WTI–WCS differentials, where CVE retains the highest torque within the Canadian large-cap integrated space. For context, following our estimate revisions, we now see the stock trading at an apathetic 4.5 times 2025 EV/DACF multiple at strip prices, a nearly two full-turn discount vs its integrated peers (6.3 times).
“From a capital return perspective, CVE remained elusive on the timeline for achieving its $4.0-billion net debt floor, which is prudent, in our view, given previous corporate messaging missteps on this front, although it has not stopped capital returns from materially outpacing our model expectations. Based on the most recent SEDI filings, CVE had already repurchased 10.7 million shares in October and November for $263-million, well above our previous 4Q23 estimate of $100-million, with another month remaining on the books. There’s something to be said about getting your holiday shopping done early!”
Mr. MacCulloch trimmed his target for Cenovus shares by 50 cents to $34, keeping a “buy” recommendation. The average is currently $32.44.
“While the stock is now a ‘show me’ story in the eyes of many investors, we believe it will continue gaining momentum through consistent operational execution and with 2023 operational headaches consigned to the history books, coinciding with TMX coming online,” he said. “We continue to highlight CVE as our top pick in the Canadian large-cap integrated space.”
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In other analyst actions:
* In a report titled Play the Cycle Now, Get Secular Late, ATB Capital Markets analyst Martin Toner initiated coverage of Galaxy Digital Holdings Ltd. (GLXY-T) with an “outperform” rating and $13 target. The average on the Street is $11.67.
“As momentum returns to the price of [bitcoin], investors are turning their attention to levered equity plays on cryptocurrencies,” he said. “After a quiet 2023, investors are starting to recognize GLXY’s leverage to improving digital asset markets. In Q3/23, GLXY had book value of US$1.5-billion, $472-million in BTC, and $227-million in ETH. The increase in the value of GLXY’s balance sheet is just one way that GLXY benefits from price appreciation in digital assets. Fees on AUM, client-facing trading, investment banking advisory, and venture investments all benefit to different degrees and on different timetables. The capital markets and asset management businesses require modest amounts of capital and possess significant operating leverage. Longer term, we believe the institutionalization of the digital asset space will accelerate with price appreciation for BTC and other digital assets. Many believe increased institutional participation in the space will drive demand and prices. Being constructive on the price of BTC is a de-facto requirement for an investment in GLXY Digital. We forecast the price of BTC out to the end of 2025 by looking at qualitative factors like growing demand as well as quantitative factors such as the hashrate, publicly traded BTC miners’ growth plans, and the implications of the upcoming halving, although we acknowledge the limitations of doing so. We believe after two years since BTC peaked and a year since it bottomed, there are a number of tailwinds that suggest a new cycle has begun.”
““We believe the next up-cycle for digital assets has begun. The recent doubling in GLXY’s shares have increased the valuation to 1.6 times trailing price/book value (P/BV). We estimate that mark-to-market current P/BV is 1.1 times, which we believe undervalues the opportunity in GLXY’s shares. We believe GLXY will show leverage to the price of digital assets and book value will grow with digital asset price appreciation. At the peak of the last bull run for digital assets, GLXY traded at 40 times trailing P/BV, and 10 times P/NTM [next 12-month] BV.”
* RBC’s Michael Siperco initiated coverage of Orla Mining Ltd. (OLA-T) with an “outperform” rating and $6 target, below the $6.41 average on the Street.
“Orla offers investors a platform of low-cost production from its Camino Rojo mine in Mexico, a clear pathway to growth via South Railroad project development in Nevada, and high optionality from Camino Rojo’s large-scale sulphide resource, in our view. 2024 permitting and development catalysts could surface value across the portfolio, and reverse recent share price underperformance,” he said. “We believe OLA represents an attractive risk/reward opportunity, trading at a 20-per-cent discount to growth-focused peers.”
* CIBC’s Allison Carson initiated coverage of Snowline Gold Corp. (SGD-X) with an “outperformer” rating and target of $7.50 per share. The average is $10.38.
“Its 100-per-cent‑owned flagship Rogue project is focused on the pre-resource Valley deposit, for which we model a hypothetical 5.75Moz resource,” she said. “We expect the exploration season in 2024 to generate positive news flow and a potential initial resource estimate for Valley, which we anticipate could be out in late 2024. Snowline is an attractive M&A target, in our view, due to the potential size and grade of its near-surface, bulk‑tonnage deposit located in a Canadian jurisdiction.”
* Stifel’s Cody Kwong reduced his target for Bonterra Energy Corp. (BNE-T) to $8.50 from $10.25 with a “buy” rating. The average is $9.85.
“In this update Bonterra released its 2024 guidance that paid homage to the volatile commodity price environment,” said Mr. Kwong. “We would characterize their plans as conservative, with a focus on balance sheet preservation and remaining flexible for return of capital optionality, further Montney delineation, and opportunistic M&A activity. Initial results from its first Montney test were encouraging with peak rates reaching 750 boe/d (62-per-cent oil). While we continue to believe 2024 could be a transformational year for the company, the recent commodity price slide has us reducing our target.”
* Following its Investor Day event on Wednesday, PI Financial’s Ben Jekic trimmed his CCL Industries Inc. (CCL.B-T) target by $1 to $74 with a “buy” rating. The average is $73.
“Despite trim to the target, the core CCL thesis is intact,” he said. “Most of our changes are tied to timing of the Innovia’s further shifting of product mix to Labels, and to Avery’s ability to optimize profit growth by lowering reseller exposure organically and by more acquisitions. We see major gains in this regard reached in late 2024 and 2025.”
* KBW’s Rob Lee raised his CI Financial Corp. (CIX-T) target by $1 to $21, below the $17.67 average, with an “outperform” rating.
* Following the sale of its entire equity position in Osisko Mining Inc. for $132-million, Scotia’s Tanya Jakusconek raised her target for Osisko Gold Royalties Ltd. (OR-T) by $1 to $23 with a “sector perform” rating.
“We view this as a positive for the shares for two main reasons: (1) the cash generated from this equity investment can be used for debt reduction, improving the balance sheet and (2) this sale removes a holding discount on the equity position in Osisko Mining. Importantly, this moves OR towards being a pure play streaming and royalty company,” she said.
* RBC’s Darko Mihelic raised his Sagicor Financial Company Ltd. (SFC-T) target by 50 cents to $8.50, matching the average, with an “outperform” rating.
“SFC’s Business Acquisition Report disclosed a preliminary negative goodwill balance of US$434.7million, much higher than the US$270-million we previously assumed,” he said. “We update our model for the new negative goodwill and some transaction costs and while our ROE estimates decrease, there will be a positive impact to BVPS and capital all else equal. We view this as a mild positive though we leave our buyback estimates unchanged.”
* In response to its plan to acquire the 78 per cent of VettaFi Holdings LLC it did not already own for US$848-million, CIBC’s Nik Priebe increased his TMX Group Ltd. (X-T) target to $34 from $32 with a “neutral” rating, while Scotia’s Phil Hardie moved his target to $35 from $33 with a “sector perform” rating. The average is $32.50.
“We like the transaction given that we believe it 1) accelerates TMX’s strategy and transformation, 2) adds a new growth engine in a high-value segment, and 3) is financially accretive,” said Mr. Hardie.
“The stock has rallied over recent weeks and while the initial stock reaction to the deal appears relatively tepid, we believe the transaction will add far more shareholder value. We expect the benefits from an accelerated shift toward a greater portion of recurring revenue, and additional growth provided by the new platform, to contribute to stock re-rate with TMX closing its relative valuation gap to Nasdaq and its global exchange peers.”
David Leeder