Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities’ Daniel Perlin expects the first half of 2023 to be a “transition period” for Lightspeed Commerce Inc. (LSPD-N, LSPD-T) as it implements a new payments unification strategy.
He was one of a large group of equity analysts on the Street to reduce their target prices for shares of the Montreal-based payments technology company in response to Thursday’s release of fourth-quarter earnings and guidance, which included a weaker-than-anticipated estimates for the next quarter. That sent its TSX-listed shares plummeting 12.5 per cent.
“Results came in as expected; however, management provided F1Q24 guidance that was below Street expectations but in-line with ours, that contemplates both challenged retail verticals, and management’s announced unified payments strategy, which indicates an aggressive shift towards converting new and existing customers to attach Lightspeed Payments,” said Mr. Perlin. “We view the success of this strategy as a key function to achieve the adj. EBITDA breakeven management is targetting for FY24.”
As it implements its new initiative, Mr. Perlin expects adjusted EBITDA to remain negative, “inclusive of management’s $12-million expected cost associated with the strategy across contract buyouts and implementation support, which has potential to pay off in F2H23 as Payments penetration accelerates and drives adj. EBITDA positive.”
“Management highlighted that it will focus its account management team away from Software sales to Payments in the near-term, which will impact Software performance, but potentially result in favorable conversion of customers to Payments,” he said. “Another consideration is the impact to margins, as Payments does create a drag, which management believes it can offset by increasing its penetration of Lightspeed Capital.”
Maintaining an “outperform” recommendation for Lightspeed shares, Mr. Perlin cut his target to US$21 from US$24. The average target on the Street is US$20.75, according to Refinitiv data.
Other adjustments include:
* Stifel’s Suthan Sukumar to US$16 from US$18 with a “hold” rating.
“While LSPD’s F24 guide was in-line and reaffirmed positive EBITDA this year (see first-look note here), expectations for H2-weighted strength suggests little room for error in execution amidst growing macro uncertainty,” said Mr. Sukumar. “The accentuated H1 vs H2 dynamics are due to an accelerated payments strategy, with the company shifting gears from organic adoption to mandated adoption for its in-house payments solution across both new and existing customers over H1, setting the stage for stronger GPV growth over H2 and beyond, which should support greater value capture (payments customers have double the average LTV/CAV of 3 times) to help offset headwinds from a slowdown in consumer spend. Net-net, we believe recent strategy shifts to larger merchants and mandated payments position the company well for stronger growth and profitability long-term, but remain on the sidelines as we await more proof-points of successful execution.”
* Eight Capital’s Adhir Kadve to US$18.50 from US$26 with a “buy” rating.
“The initiative will likely result in lower growth and an impact on profitability during H1/F23, with a return to more normalized growth and an increase in profitability during H2,” he said. “In our view, the initiative will require meticulous execution from Lightspeed and ultimately should result in significant acceleration of Payments adoption and profitable growth ahead for the company, with management targeting a ‘Rule of 40′ business exiting the FY.”
* IA Capital Markets’ Neehal Upadhyaya to $23 from $31 with a “buy” rating.
“As the Company continues to onboard more customers on its payments platform and the penetration rate increases, significant revenue growth will follow,” said Mr. Upadhyaya. “Due to this, we expect the second half of the year to provide similar growth to what LSPD has achieved historically (30-per-cent-plus). We continue to believe LSPD is undervalued despite the softness in revenue guidance, as it is trading at just 1.0 times our C2024 revenue estimates, well below its peer group average of 4.8 times. For a SaaS company that posted a strong retention rate of 110 per cent, and is on the cusp of Adj. EBITDA profitability, we believe the risk-reward ratio is very compelling.”
* Credit Suisse’s Timothy Chiodo to US$15 from US$18 with a “neutral” rating.
“We continue to view Lightspeed as well-positioned long-term as a software platform capable of enabling complex merchants to run their businesses, but also in embedding and powering additional ecosystem- and monetization-enhancing financial services,” said Mr. Chiodo “However, given a more discretionary base, a still challenging path toward achieving the 20-per-cent non-GAAP EBITDA margin target, ramping efforts from scaled competitors (Clover, Square, Toast, Shift4, and others, notably with Shopify POS annualizing $23-billion plus CS estimate in volumes), and a less attractive LTV/CAC demonstrated thus far (relative to Square, Toast, etc.), we await signs of success in the strategy pivot (still early) and/or abatement of macroeconomic pressures cited by management.”
* Scotia’s Kevin Krishnaratne to US$22 from US$28 with a “sector outperform” rating.
* BMO’s Thanos Moschopoulos to US$19 from US$24 with an “outperform” rating.
* Barclays’ Raimo Lenschow to US$17 from US$20 with an “overweight” rating.
* ATB Capital Markets’ Martin Toner to $50 from $55 with an “outperform” rating.
* Piper Sandler’s Clarke Jeffries to US$15 from US$18 with a “neutral” rating.
* CIBC’s Todd Coupland to $21 from $27 with a “neutral” rating.
Citi analyst Stephen Trent thinks Air Canada’s (AC-T) operations “seem to have turned the corner,” pointing to a combination of “ongoing solid demand and more moderate fuel prices driving earnings growth.”
“An ongoing recovery of international, long-haul travel and improvements from the AeroPlan loyalty program should provide the next steps upward in revenue growth,” he said.
In a research note released Friday, Mr. Trent called the airline “the exemplar of international long-haul” compared to other Americas-based airlines in his coverage universe.
“This demand momentum should continue to drive the Canadian flag carrier’s revenue in the right direction,” he said. “On the capacity side, aircraft availability continues to screen as a key topic.”
He raised his earnings per share projection for 2023 to $3.15 from $3.04. His 2024 and 2025 estimates increased to $4.02 and $5.43, respectively, from $3.88 and $4.83.
“Forecast adjustments for Air Canada include the incorporation of (A) slightly lower expected available seat mile or ASM growth, (B) lower 2023 estimated passenger yields, (C) a stronger expected ex-fuel cost per available seat mile or CASM ex-fuel, (D) cheaper fuel, and (E) 1Q’23 results factored into our model,” said Mr. Trent. (Yield, the airline industry’s price point, measures the amount of ticket revenue per passenger mile flown).”
With those changes, he raised his target for Air Canada shares by $1 to $26, reiterating a “buy” recommendation. The average on the Street is $29.06.
“We rate Air Canada Buy, which is based on strong global potential for a continued recovery in international long-haul passenger revenue, and what looks to be a stock price dip,” said Mr. Trent. “Although the carrier’s margins seem unlikely to catch those of several of its southern peers, this carrier has the most international long-haul exposure among Citi’s Americas Airline coverage.”
Stifel analyst Alex Terentiew thinks “the world needs more copper to meet its demand growth aspirations,” leading to enticing investment opportunities for investors.
“Despite indications globally of slowing industrial activity and declining investor sentiment, copper prices have held ground, down 1 per cent year-to-date, solidly outperforming most other industrial commodities, most of which are down more than 10 per cent,” he said. “In our view, copper prices may have overshot to the upside in Q1 on strong expectations of a global economic recovery, with a subsequent price retreat on weaker economic data in April. Copper’s relative out performance, however, we view as an indication of market tightness and a robust longer-term outlook driven by both supply challenges and strong demand.”
Calling “Dr. Copper, one of the most reliable indicators of global economic activity,” Mr. Terentiew resumed coverage of five base metals miners in a research report released on Friday after raising his long-term forecast for copper to US$4.20 per pound from US$4.
* Capstone Copper Corp. (CS-T) with a “buy” rating and $8.70 target. The average on the Street is $7.83.
Analyst: “A Transformative Year. Following the merger of Capstone Mining and Mantos Copper in 2021, Capstone Copper has been steadily advancing on its growth ambitions. The pending completion of the Mantoverde sulphide expansion at the end of 2023 is set to fundamentally improve the company’s production and cost profile, improving margins and cash flow, and positioning it to both deleverage and pursue other avenues of growth. With sufficient liquidity to complete its growth plans, we view Capstone as one of our preferred names within the sector.”
* Ero Copper Corp. (ERO-T) with a “hold” rating and $30 target. Average: $28.36.
Analyst: “High Margin, Growing Producer but with a Premium Valuation. Ero Copper is the lowest cost, highest margin producer in our coverage, despite spending on its Tucumã copper project, which will start production next year and double the company’s copper production. Beyond 2025, however, we forecast a declining production profile that may be filled by successful exploration on its promising, extensive land package, which is in the early stages of being evaluated. At the company’s current valuation, however, we believe its high-margin business is well recognized by the market. Although the return to our target price is currently favorable, we believe the recent decline in share price is largely attributable to falling copper prices, and because of this volatility, we resume coverage at Hold.”
* First Quantum Minerals Ltd. (FM-T) with a “buy” rating and $40 target. Average: $34.72.
Analyst: “Copper Growth, from the Ground Up. In addition to having a portfolio of world class assets that have recently seen their political risk improve, First Quantum hosts an industry-leading team that we believe has valuable experience building more large-scale base metal mines from the ground up than any other miner. Understanding the high level of project development expertise required, while simultaneously mitigating risks involved in successfully delivering projects from concept to commissioning, is a valuable skill we believe First Quantum brings to shareholders that are looking for growth and increased exposure to copper.”
* Hudbay Minerals Inc. (HBM-T) with a “buy” rating and $10.70 target. Average: $10.19.
Analyst: “Gold Plated Copper Growth. Of all the copper miners in our coverage, we believe Hudbay posts some of the strongest valuation upside on near-term multiples (EV/EBITDA), with the upside driven by higher copper and gold grades at Constancia over the next three years, with higher gold grades at Lalor also pushing out nearly 200 kozpa. Longer term, however, we consider Hudbay to have more limited growth, making its P/NAV valuation relatively more expensive. And yet, we think exploration upside at both Constancia and Lalor have potential to rectify this problem over the next few years.”
* Lundin Mining Corp. (LUN-T) with a “buy” rating and $13 target. Average: $10.95.
Analyst: “Consolidating and Growing in the Andes. Although many investors prefer certainty and a low-risk profile, Lundin’s growing presence in Chile and Argentina, we believe, provides substantial upside potential with a reasonable risk profile. Lundin Mining, keeping in line with its founder’s history, is actively progressing an early mover advantage to unlock substantial potential value and deliver the benefits consolidating operations in that part of the Andes can bring to stakeholders. Ultimately, we expect Lundin to be part of a consortium of companies that unlocks this potential and creates a new, world-class mining district.”
Scotia Capital analyst Ahmed Abdullah sees Good Natured Products Inc. (GDNP-X) as “a unique industry player working towards capitalizing on a significant market opportunity at hand.”
However, he assumed coverage of the Vancouver-based manufacturer of eco-friendly products with a “sector perform” recommendation on Friday, warning “timing is everything.”
“There is no silver bullet scenario that can replace the current materials being used overnight,” said Mr. Abdullah. “As such, this will require time and substantial development of supply chains to gain critical mass. Investments being made by GDNP will position it well to leverage its first mover advantage. We are closely monitoring its progress.”
“The Company is focused on becoming North America’s leading earth-friendly product company. It aims to gain the highest share of each customer’s total spend on sustainable products to drive a recurring revenue model through customer loyalty. Progress towards this goal is expected to be driven by its two-pronged strategy, an organic and an acquisition-based strategy that leverages both sides well. Over the long term, it seeks to achieve 50 per cent of its growth organically through the addition of new customers and 50 per cent of its growth through acquisitions. GDNP strives to convert acquired petroleum-based offerings to plant-based alternatives within an 18-month timeframe from closing. Four acquisitions have been completed since 2020. Products offered are based on three plant-based ingredient families (fibre, bio-plastics, and biodegradables).”
The analyst sees Good Natured in a “transitionary year with M&A conversions underway and Industrial customer destocking” and thinks its leveraged capital structure should be monitored closely.
“M&A has caused the percentage of plant-based materials as a percent of revenue to decline (2022 36 per cent vs. 2021 41 per cent and 2020 74 per cent),” said Mr. Abdullah. “GDNP is working on completing the conversions with the Shepherd acquisition (May 2020) almost 100-per-cent converted and the conversions of IPF (Dec. 2020), Ex-Tech (May 2021), and FormTex (July 2022) underway. The Industrial business group (66% of 2022 revenue) faces reduced demand for its products as its thermoforming customers destock high inventory levels accumulated in 2022. As such, the destocking will likely weigh on results in 2023, as the build-up of inventory and the rapid increase in interest rates are expected to negatively impact demand. GDNP aims to grow Packaging’s contribution to revenue (31 per cent of 2022 revenue) and gross margin mix by leveraging its Industrial M&A and executing on organic growth initiatives.”
“The Company had $61.9 million of longterm debt outstanding as of 4Q22 with just under $12 million of cash on hand. Debt levels are high relative to the current EBITDA of the Company. However, a large portion of the debt is in mortgages with the market value of associated real estate likely sitting at or higher than the carrying value of these assets. While our 2024 adjusted EBITDA forecast sits below minimum EBITDA covenants at the end of 2024 (NBF $6.2 million vs. $7.6 million covenant), we would expect GDNP to pursue a waiver of this covenant requirement if needed. Management highlighted that the focus of its lender is more on the liquidity component of the agreement given the early-stage growth the Company is in.”
He set a target of 25 cents per share. The average on the Street is 39 cents.
Raymond James analyst Rahul Sarugaser upgraded Eupraxia Pharmaceuticals Inc. (EPRX-T) to “strong buy” from “outperform” following Thursday’s appointment of Dr. Mark Kowalski as its first Chief Medical Officer.
“We read this as a positive leading indicator of strong top-line data from its Ph2 clinical trial in OA [osteoarthritis], which should read out in a matter of weeks, so we raise our rating on EPRX,” he said.
Mr. Sarugaser added the Victoria-based company’s hiring of a “very experienced” CMO “raises confidence” in the results of the trial.
“EPRX completed recruitment of its Ph 2 trial in osteoarthritis (OA) before 2022YE, and the company has maintained its guidance of top-line readout from the trial in 2Q23, which we estimate as mid-late June,” he said. “Given this trial’s 24-week read-out, we estimate full data has been collected by now.
“The trial has been double-blinded, and we assume it will remain so until top-line readout. This said, we expect management to leverage any data it has collected to date to make strategic decisions about its future; hiring a Chief Medical Officer in preparation for conducting a Ph3 trial, for instance. To this end, Dr. Kowalski is a highly experienced Ph3 clinical program-oriented CMO. As part of his own due diligence, we assume he would have reviewed all available data, informing his decision to join the company. Dr. Kowalski, we expect, would view this data through the lens of a commercially-minded clinician who, it appears, appreciates the demonstrated safety and likely efficacy of the drug. This, in our view, bodes very well for EPRX.”
Maintaining an $11 target for Eupraxia shares, Mr. Sarugaser continues to see them as attractive despite significant recent gains. The average target on the Street is $9.02.
“EPRX’s stock has lifted from a low of $0.90 on Aug. 15, 2022, to approximately $7.00 presently, a 700-per-cent run over 9 months vs. TSX up 1 per cent,” the analyst said. “We put this in context: drawing near an important Ph2 readout, EPRX’s market cap is only $150-million. EPRX’s closest historical comp, Flexion Therapeutics (FLXN-Q, acquired by Pacira Biosciences [PCRX-Q]) saw its market cap reach US$500-million when its first pivotal Ph 2 study of Zilretta (extended-release suspension of triamcinolone in OA) printed data in mid-2015, eventually reaching US$1-billion in May 2018. Given this historical context, and not to mention EPRX’s second Ph2 trial read-out expected end-of-summer, we believe EPRX remains heavily discounted at its current market cap of $150-million.”
In other analyst actions:
* Calling its financial targets “encouraging,” CIBC’s Todd Coupland upgraded BlackBerry Ltd. (BB-N, BB-T) to “neutral” from “outperformer” and raised his target to US$6.50 from US$4.20. The average target on the Street is US$5.50.
“Our update is informed by the Investor Day context and the recently announced portfolio review, that will include consideration if the company should undergo a possible separation of one or more of its businesses. In our view, the splitting of its two businesses – Cyber and IoT (QNX) – would be positive for Blackberry,” he said. “Both businesses have opposing growth and margin profiles; with IoT expected to grow by 20 per cent plus on average across F24-F25, compared to 5 per cent or more for its Cyber business (FactSet). Such a move, in our view, would be positively received by investors ... No timeline has been provided for the completion of the strategic review process, and the company does not intend to disclose developments until the Board has approved a specific agreement, transaction, or has terminated its review.”
* Scotia Capital’s Mario Saric cut his Artis REIT (AX.UN-T) target to $9, remaining above the $8.85 average, from $10.50 with a “sector perform” rating.
“We’re reiterating our ‘Slight Positive’ take post an in-line Q1 almost exclusively on an expected re-acceleration in asset sales and associated debt reduction, and notwithstanding the ‘buy floating-rate debt’ trade being pushed out a bit further, in our view (given recent strong inflation readings),” said Mr. Saric. “Coming into the quarter, we felt significant market concern over AX liquidity position (Q4 = $136-million = 31 per cent of 2023 debt maturities) and ability to refinance a substantial amount of near-term debt. We felt AX expressed strong confidence in its ability to do so. Bottom-line, while we see below-avg. NAVPU [net asset value per unit] growth from AX, we do think debt refinancing could narrow the trading discount to NAV through Q2/Q3, providing some near-term relief to a struggling unit price.”
* RBC’s Sabahat Khan increased his ATS Corp. (ATS-T) target to $69 from $64 with an “outperform” rating. Other changes include: Raymond James’ Michael Glen to $67 from $59 with an “outperform” rating and National Bank’s Maxim Sytchev to $66 from $61 with an “outperform” rating.. The average is $64.38.
“On the back of Rockwell Automation Inc. and ABB Ltd. positive prints (and our Site tour with EV focus - business is very robust now on March 30, 2023), we saw little risk to ATS showing a different trajectory but one, of course, still needs to execute, and we believe the company has delivered on most fronts – organic growth, margin improvement and constructive outlook,” he said. “Net income to FCF conversion should improve as EV contracts ramp-up (only point of contention in F2023 results). With generational investments going into North American / European supply chain re-localizations, there are few vehicles to play this thematic in Canada. The scarcity factor should continue to attract investors towards this name, supporting the trading multiple in the process (on top of potential M&A in the U.S. down the line).”
* Canaccord Genuity’s Edward Nash bumped his Cardiol Therapeutics Inc. (CRDL-Q, CRDL-T) target to US$6, above the US$4.50 average, from US$5.
* Barclays’ John Aiken reduced his CI Financial Corp. (CIX-T) target to $16 from $19 with an “equalweight” rating. The average is $18.94.
* TD Securities’ Sam Damiani cut his Dream Unlimited Corp. (DRM-T) target to $35 from $43, keeping a “buy” rating. The average is $42.50.
* TD Securities’ Tim James moved his Heroux Devtex Inc. (HRX-T) target to $18 from $16.50 with a “hold” rating, while Scotia’s Konark Gupta raised his target to $18 from $17 with a “sector outperform” rating. The average is $19.
“HRX showed better-than-expected volume and margin progress in FQ4, which is a sign that its efforts to stabilize production and mitigate cost inflation are starting to pay off after a challenging year,” said Mr. Gupta. “We expect further improvement in production this year along with margin inflection, given the backlog is solid (near record), production is stabilizing, and pricing is finally catching up with inflation. We think the valuation multiple should recover as investors gain more confidence in HRX’s ability to execute on the backlog and return margins toward the historical levels. With our cautiously optimistic view on production stability, we are maintaining our Sector Outperform rating while raising our target.”
* RBC’s Sabahat Khan increased his target for High Liner Foods Inc. (HLF-T) to $17 from $16 with a “sector perform” rating. The average is $21.
* Raymond James’ Brad Sturges lowered his target for Nexus Industrial REIT (NXR.UN-T) target to $12 from $12.50 with a “strong buy” rating. The average is $11.98.
“Nexus has several avenues to transform the quality and growth profile of its Canadian industrial portfolio through its various strategic initiatives: 1) the acquisition of high-quality industrial real estate in targeted Canadian primary and secondary markets; 2) starting development and expansion projects on existing excess land; and 3) the executed sale of non-core industrial and non-industrial assets,” said Mr. Sturges. “As Nexus successfully executes its 3-pronged strategy, we believe the REIT can re-rate to a higher P/AFFO multiple to reflect its improved quality and growth prospects.”
* Credit Suisse’s Andrew Kuske increased his Northland Power Inc. (NPI-T) target to $46, above the $41.97 average, from $42 with an “outperform” rating.
* RBC’s Pammi Bir lowered his Northwest Healthcare Properties REIT (NWH.UN-T) target to $9, below the $10.50 average, from $10 with a “sector perform” rating.
* JP Morgan’s Jeffrey Zekauskas cut his Nutrien Ltd. (NTR-N, NTR-T) target to US$78 from US$92 with an “overweight” rating.