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

Seeing rising global geopolitical tension pushing energy security to “the top of the Western world’s priority list through 2022,” National Bank Financial analyst Patrick Kenny thinks the valuations for Canadian energy infrastructure stocks “continue to benefit from a renewed longevity profile given the social need to balance reliability and affordability with the pace of transition.”

“Our coverage universe is well positioned to participate in the race to export low-cost, low-carbon energy with rising demand for gas processing / NGL fractionation (KEY, PPL, BIP), Westcoast LPG terminals (ALA), as well as LNG connectivity and liquefaction capacity (ENB, TRP, PPL),” he said.

In a 2023 outlook for the sector titled If you ain’t first, you’re last…, Mr. Kenny reiterated the firm’s expectations for a slowdown in interest rate hikes, including from the Bank of Canada, seeing it as a “year of relief,” leading to “modest valuation tailwinds” across the sector.

“Despite interest rate relief on the horizon, dividend yield spreads remain at or below historical average spreads, suggesting potential downside risk,” he said. “We highlight the Utilities names within our coverage universe as being most exposed with current dividend yield spreads sitting 150 basis points tighter than the pre-pandemic five-year average spread of over 3 per cent, translating to valuation downside risk of approximately 20 per cent, assuming yield spread mean reversion. That said, we recognize Utility valuations have structurally gained positive investor sentiment from their participation in energy transition-related growth projects while also being considered a ‘defensive play’ during times of economic turmoil given the highly predictable, rate regulated return business nature. Overall, in light of recent political inference challenges surfacing related to inflationary pressures/affordability issues, we remain cautious surrounding further valuation pressure through 2023.”

While he expects oil prices to remain range bound for the year, Mr. Kenny sees commodity prices as “healthy” and “projects production growth across the WCSB, supporting increased utilization for oil & gas processing facilities with spare capacity (SES, KEY, ALA, PPL).”

“Meanwhile, we forecast a relatively tight oil pipeline egress picture until TMX is in service (NBF estimate: mid-2024) with a call on rail of 200 mbpd through 2023, indicating an upward bias to differentials and Marketing margins (KEY, ALA, GEI, PPL). Finally, a robust Alberta power price outlook continues with forward prices at $160/MWh for 2023 and $100/MWh for 2024, extending outsized cash flows and clean balance sheets for CPX and TA,” he added.

Mr. Kenny’s investing advice is: “We continue to screen our top picks using a multi-pronged approach for: 1) Double-digit free cash flow (AFFO) yield; 2) healthy balance sheet metrics; 3) attractive per share growth; and 4) strong catalyst potential (see individual catalyst calendars in the Appendix: Company Profiles). Our catalyst potential for 2023 largely relates to securing/executing on growth opportunities and capitalizing on energy security concerns, supporting renewed tailwinds as well as funds flow for the energy infrastructure sector. Overall, we recommend overweighting high-quality, double-digit FCF yields poised for continued valuation upside. Our top picks for 2023 include ALA, CPX, KEY and SES.”

He raised his rating for TransAlta Corp. (TA-T) to “outperform” from “sector perform,” touting the impact of “surging” cash flow from its Alberta Hydro assets and several “positive 2023 catalysts.”

“We now forecast average annual EBITDA for the AB Hydro Assets for 2022-2024 of $440-million,” he said. “Recall, Brookfield has the option after Dec. 31, 2024 to convert its $750-million strategic Investment of 7-per-cent exchangeable securities into an equity stake in TA’s Alberta Hydro Assets with the value based on the trailing three-year average EBITDA contribution multiplied by 13 times. As such, we calculate Brookfield’s $750-million would convert into an equity stake of less than 15 per cent if exercised in 2025 (well below the initial 30-35-per-cent expectation), and compounding the positive DCF valuation impact from the outsized nearterm cash flow performance.”

“With rising corporate PPA demand for new renewables, combined with Canada’s recent 30-per-cent renewable ITC announcement, we anticipate the company successfully sanctioning 500 MW of contracted growth through 2023, while also completing rehabilitation of the entire fleet of turbines at Kent Hills. Meanwhile, with forward AB power prices sitting at $160/MWh through 2023, we expect TA to increase its initial 2023 financial guidance from $1.20-$1.32-billion towards our $1.5-billion forecast throughout the year, supporting another dividend increase of 10 per cent, which we expect to be announced towards year-end.”

He raised his target for TransAlta shares by $1 to $15. The average on the Street is $16.

“TA trades at a 2024 estimated P/AFFO multiple of 4.5 times versus peers at 5.5 times, partly reflecting robust merchant contributions expected to normalize by 2025,” said Mr. Kenny. “That said, with strong merchant cash flows driving a much cleaner balance sheet of 2.0 times D/EBITDA, and 10-per-cent valuation upside related to its Clean Electricity Growth Plan, including 500 MW of contracted renewables to be sanctioned in 2023, we are upgrading our rating to OP from SP based on a 12- month total return profile of 19.7 per cent (group: 11.0 per cent).”

Mr. Kenny also made these target adjustments:

  • Atco Ltd. (ACO.X-T, “sector perform”) to $45 from $41. Average: $49.64.
  • Canadian Utilities Ltd. (CU-T, “sector perform”) to $37 from $34. Average: $37.81.
  • Capital Power Corp. (CPX-T, “outperform”) to $53 from $50. Average: $52.31.
  • Emera Inc. (EMA-T, “sector perform”) to $52 from $51. Average: $58.60.
  • Enbridge Inc. (ENB-T, “sector perform”) to $56 from $54. Average: $58.25.
  • Fortis Inc. (FTS-T, “sector perform”) to $55 from $51. Average: $57.38.
  • Gibson Energy Inc. (GEI-T, “sector perform”) to $25 from $24. Average: $25.43.
  • Hydro One Ltd. (H-T, “sector perform”) to $36 from $32. Average: $37.50.
  • Pembina Pipeline Corp. (PPL-T, “sector perform”) to $47 from $46. Average: $51.47.
  • Secure Energy Services Inc. (SES-T, “outperform”) to $10 from $9. Average: $10.41.
  • TC Energy Corp. (TRP-T, “sector perform”) to $56 from $48. Average: $63.68.


Heading into fourth-quarter earnings season for North American casual dining and fast food companies, RBC Dominion Securities analyst Christopher Carril continues to “lean more cautious on the overall group as valuations continue to move higher,” despite expecting “in-line or better 4Q top-line, potential for moderating labour costs and easing FX headwinds.”

“Given solid industry-level trends and other data points — including positive commentary and preannouncements from the ICR Conference earlier this month — we are generally expecting in-line-to-better domestic top-line results for 4Q,” he said. “On international trends, we expect China will be a key focus this earnings season (particularly for SBUX and YUM). We view our recent constructive discussions with operators (e.g. Tim Hortons China) and other data points as supportive of elevated China expectations to begin the year. Meanwhile, we think some reversal of FX headwinds reflected in Street estimates following 3Q earnings should also be a benefit this earnings season, and we have updated our models accordingly ... We are adjusting estimates and rolling forward our price targets; on average, we are raising 4Q22 EPS estimates by 4 per cent, though reducing 2023 EPS estimates by approximately 1 per cent.”

In a research report released Friday, Mr. Carril said he continues to “prefer stocks of fast food franchisors given ongoing macro focus/questions” and reaffirmed Restaurant Brands International Inc. (QSR-N, QSR-T) as his “top pick” in the group.

For the parent company of Tim Hortons, he’s forecasting earnings per share of 77 US cents, up from 74 US cents a year ago and exceeding the consensus estimate on the Street of 72 US cents.

“Last quarter’s results showed encouraging signs of ongoing momentum at Tim Hortons Canada and stability at Burger King US,” he said. “For Tim Hortons Canada, we believe that continued execution against the current iteration of the Back to Basics strategy, as well as improvement in mobility (i.e. super urban locations were still running 5 per cent below 2019 levels in 3Q), should support sequential three-year trend improvement during the 4Q (we model three-year comp of 5.9 per cent, from 5.0 per cent in the 3Q). As it relates to Burger King US, Carrols provided preliminary 4Q22 results on January 9th (at ICR Conference), including comp growth of 6.2 per cent at its Burger King restaurants (vs. prior Street estimates at 4.6 per cent) and 9.2 per cent at its Popeyes restaurants (vs. Street 3.8 per cent).

Seeing “improving customer satisfaction” at Burger King as sales increase with incremental advertising investment and “continued strength across digital channels aided sales performance” at Popeyes, Mr. Carril said he’s “listening for any commentary around development, particularly as we look for QSR to reaccelerate net new unit growth back to 5-per-cent-plus historical levels.”

Maintaining an “outperform” rating for Restaurant Brands shares, he raised his Street-high target to US$83 from US$80. The average target is currently US$68.65.

“Our price target of $83 (from $80) is based on an 18 times (prior 17 times) multiple, which is in line with QSR’s peer group (e.g. MCD, YUM, DPZ) average, applied to 2024E EBITDA of $2.8-billion,” said Mr. Carril. “Our price target equates to 23 times 2024 estimated EPS and a 4.8-per-cent FCF yield. We believe QSR deserves a multiple closer to in line with the peer group average given its continued momentum at Tim Hortons Canada, stable trends at Burger King, solid unit growth (historically more than 5 per cent) and M&A optionality. Its among best-in-class dividend yield also supports our valuation.”


“Moving beyond mere operational improvements,” Bombardier Inc. (BBD.B-T) is “now also consistently generating free cash flow and reducing its debt burden,” according to Citi analyst Stephen Trent.

“This combination of improvements should continue to support a re-rating in the shares. Citi identifies Buy-rated Bombardier as its favorite Canadian air transport stock,” he said.

In a research note released Friday, Mr. Trent raised his financial forecast for the fourth quarter of 2022 through fiscal 2024, citing “the incorporation of slightly higher, expected jet deliveries, modestly higher sales mix-driven margins and slightly lower net interest expense into our model.”

Ahead of the Feb. 9 release of its fourth-quarter results, he bumped his earnings per share projection to 64 cents from 12 cents. His 2023 and 2024 estimates increased to $1.59 and $3.48, respectively, from $1.22 and $3.08.

Those changes led Mr. Trent to hike his target for Bombardier shares to $73.50 from $61 on “some deserved valuation tailwind.” The average target on the Street is $67.75.

“The nudge higher in ‘24E estimated EBITDA, along with moving the target multiple from 7 times to 7.75 times, results in Citi’s target price on the Canadian jet manufacturer moving from $61 to $73.50/b-share ... The target multiple increase also entails moving the fair value range from 6 times to 7 times, to a new range of 7 times to 8 times,” he said. “Although this represents a ca. 5-per-cent discount to 2024E EBITDA, it would be closer to a ca. 12-per-cent premium were it based on one-year forward EBITDA. Still, this level seems reasonable – and Bombardier trading above its historical average multiple would seem to be a sign of the market validating the company’s much stronger operational and financial profile, relative to its pre-pandemic positioning.”

Reiterating a “buy” recommendation for the company’s shares, Mr. Trent added: “On the back of successive, significant corporate re-shufflings and production adjustments, the company’s business model is more simplified. Although aerospace EBITDA generation is still recovering and the debt load remains high, the company’s efforts to boost its operational metrics and de-risk the balance sheet are trending stronger than we had anticipated.”


While Celestica Inc. (CLS-N, CLS-T) reported “solid” fourth-quarter 2022 results and first-quarter 2023 guidance that exceeded the Street’s expectations, RBC Dominion Securities analyst Paul Treiber warns growth is likely to slow through the year.

“Celestica now anticipates revenue in its Capital Equipment segment to decline slightly in FY23,” he said. “Due to Capital Equipment, ATS [Advanced Technology Solutions] is guided to increase low single digits Q1, decelerating from 30 per cent (25 per cent organic) Q4 and 29 per cent (15-per-cent organic) FY22. Easing supply constraints are a headwind to additional service billings and premium pricing, which is likely to weigh on margins in FY23. Customers are still conveying a solid demand outlook to Celestica, but the delta vs. Celestica’s FY23 published outlook is less than FY22.”

“Celestica reiterated its FY23 outlook (more than $7.5-billion revenue, $1.95-2.05 adj. EPS), which implies a slowdown in growth following Q1. The mid-point of Q1 guidance for $1.725-1.875-billion revenue and $0.41-0.47 adj. EPS exceeded consensus at $1.72-billion and $0.40. However, the upside is less than previous quarters. The mid-point of Q1 revenue guidance is only 5 per cent above consensus, which is less than the 14-per-cent upside for Q4 guidance. Our revised outlook calls for year-over-year revenue growth to decelerate from 8 per cent 1H/ FY23 to 0 per cent 2H/FY2.”

After the bell on Wednesday, the Toronto-based multinational electronics manufacturing services company reported revenue of US$2.04-billion, up 35 per cent year-over-year and above the US$1.97-billion estimate of Mr. Treiber and the Street. Earnings per share of 56 US cents was also ahead of expectations (55 US cents and 54 US cents, respectively).

“The magnitude of the upside is less than previous quarters and growth is likely to slow in 2023,” he said. “In light of macroeconomic uncertainty, we believe shares of Celestica are defensive, given valuation, FCF, and the mix-shift to higher quality end markets.”

After minor revisions to his forecast, Mr. Treiber raised his target by US$1 to US$15, maintaining a “sector perform” rating. The average on the Street is US$14.36.

“Celestica is transforming its business away from traditional end markets (enterprise, communications) towards non-traditional markets like industrial, aerospace & defense, healthcare, and capital equipment,” he concluded. “The move is expected to lead to higher organic growth and margins over time. While the company has a healthy growth outlook and has re-positioned towards higher quality, more durable segments, the stock is not as compelling as others in our coverage universe, in our view. "

Elsewhere, other analysts making changes include:

* Citi’s Jim Suva to US$14 from US$12 with a “neutral” rating.

“Celestica’s strategic transformation to higher value-added customers and products continues to impress. This is evident by operating margin of 5.3 per cent vs 4.9 per cent a year ago. By segment, ATS and Enterprise outperformed while Communications was in line with guidance,” said Mr. Suva.

* Canaccord Genuity’s Robert Young to US$16 from US$15 with a “buy” rating.

* CIBC’s Todd Coupland to US$15 from US$14 with a “neutral” rating.

* TD Securities’ Daniel Chan to US$14 from US$13 with a “hold” rating.

* BMO’s Thanos Moschopoulos to US$15.50 from US$14 with an “outperform” rating.


In other analyst actions:

* TD Securities’ Tim James cut his Andlauer Healthcare Group Inc. (AND-T) to $57 from $58 with a “hold” rating. The average is $56.

* Scotia Capital’s Mark Neville raised his ATS Corp. (ATS-T) target to $66 from $60 with a “sector outperform” rating. The average is $59.14.

“We’ve raised our fiscal 2024 estimates to reflect the continued strength in order bookings, which is being largely driven by secular tailwinds (e.g., growing North American electric vehicle capacity), positive commentary from other industrial automation companies (i.e., Rockwell Automation; ROK-US; not covered) re: end-market demand, and what we expect to be an improving margin outlook as revenues ramp, supply chain pressures ease, and cost optimization benefits are realized,” he said. “Our revised F2024 adj. EBITDA forecast is approximately 7 per cent ahead of consensus. We have also increased our valuation multiple to 15 times (from 14 times), which, admittedly is well above historical but, in our opinion, deserved given the improvements in the business and strengthening secular and structural drivers (e.g., re-shoring, the need for more resilient supply chains, an aging population/workforce, inflationary pressures, etc.). It is also in line with (or below) where comparable companies trade.”

* Cowen and Co.’s Oliver Chen cut his Canada Goose Holdings Inc. (GOOS-T) target to $35 from $33 with an “outperform” rating. The average is $28.10.

* Scotia’s Michael Doumet raised his target for E Automotive Inc. (EINC-T) to $6 from $5 with a “sector perform” rating. The average is $7.58.

* Echelon Capital’s Amr Ezzat slashed his GURU Organic Energy Corp. (GURU-T) target to $5.25 from $9 with a “buy” rating. The average is $4.21.

“GURU Organic Energy Corp. FQ422 results reflect, as anticipated, continued headwinds hampering top-line growth,” he said. “We went into the quarter expecting spillover from FQ322, which was impacted by industry-wide logistics constraints. EBITDA was ahead on lower SG&A spend as well as slightly higher GM%. We are lowering our target price ... on a tempering of our medium-term forecasts, as well as a recalibration of our valuation parameters.”

* Canaccord Genuity’s Robert Young reduced his Haivision Systems Inc. (HAI-T) target to $3.50 from $5 with a “hold” rating. The average is $4.

* RBC’s Irene Nattel raised his Loblaw Companies Ltd. (L-T) target to $165 from $160, exceeding the $136.55 average, with an “outperform” rating.

* TD Securities’ Tim James lowered his targets for Mullen Group Ltd. (MTL-T) to $16.50 from $17 with a “hold” rating and TFI International Inc. (TFII-T) target to $175 from $180 with a “buy” rating. The averages are $16.20 and $143.51, respectively.


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