Inside the Market’s roundup of some of today’s key analyst actions
National Bank analyst Adam Shine thinks Transcontinental Inc. (TCL.A-T) stock “just looks too cheap,” prompting him to raise his recommendation to “outperform” from “sector perform” previously.
“TCL faces secular pressures and needs to deliver more consistent organic growth and margin improvement in Packaging but also a better preservation of Printing EBITDA. We expect progress on all of this in fiscal 2024,” he said in a research note.
“We think these issues have been more than discounted in a stock which fell 25 per cent from Sept. 7 to Nov. 1 after Q3 EBITDA missed us by 2.5 per cent (consensus estimate by 7.5 per cent). We see fair value at $13.65 on f2023 estimated NAV [net asset value] and base our target on our f2024 NAV with implied EV/EBITDA of 5.6 times f2023 estimate and 5.1 times f2024. TCL’s forward EV/EBITDA averaged 5.6 times for the past five years (5.6 times f2024 points to $18.50). We use discounted multiples to peers: Printing 4.5 times (peers 5.0 times consensus 2023), Packaging 6.5 times (peers 8.0 times with Amcor at 10.0 times) & Publishing 6.0 times (peers 7.5 times) and also apply a 50-per-cent discount to the flyer distribution business which may very well be too conservative as TCL moves from the Publisac that faced municipal regulatory scrutiny to the new raddar flyer that will see its distribution expanded across Quebec and in Toronto, Hamilton, and Vancouver. TCL now trades at an unusually elevated 39-per-cent discount to peers on f2024 multiples. From Q4/20 to Q1/23, working capital usage totaled $268-million as inventories were built up amid rising resin prices. Post-Q1, working capital reverted to a contribution each quarter, with FCF resuscitating and leverage of 2.5 times at Q3 poised to return toward 2.0 times in f2024. Though not yet in our forecast, a dividend hike could come with Q1/24.”
Ahead of the Montreal-based packaging, commercial printing and specialty media company’s Dec. 12 release of its financial update, Mr. Shine is projecting fourth-quarter revenue, adjusted EBITDA and adjusted earnings per share of $787-million, $131-million and 62 cents, respectively. They sit largely in line with the consensus expectations on the Street of $788-million. $128.5-million and 62 cents.
“Packaging faces a tough comp as Q4 last year benefitted from restocking which gave way through the first nine months of f2023 to destocking that still drove two-thirds of volume pressure in Q3,” he said. “While destocking may have largely run its course heading into Q4, macro conditions continue to weigh on demand. Amid top-line pressures, inflationary cost recovery has been pursued via higher prices and cost savings expanded through f2023. Exiting Q3, annualized restructuring savings had hit $40-million, including over $20-million in Printing where secular challenges were exacerbated this year by the transfer of cost increases that further pressured volumes.”
His target for Transcontinental shares remains $16. The average target on the Street is $17.10, according to Refinitiv data.
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Touting its “significant copper exploration potential,” Morgan Stanley analyst Carlos De Alba upgraded Ivanhoe Mines Ltd. (IVN-T) to “overweight” from “equal-weight” on Friday.
“We expect Ivanhoe’s copper volumes to increase at an industry-leading 17-pe-cent CAGR [compound annual growth rate], rising from 402kt in 2023 to 640kt in 2026, well above the peer average of 5 per cent over the same period,” he said. “In addition, the company published a preliminary economic analysis to potentially extend the life-of mine at the Kamoa-Kakula complex by nine years, which suggests further growth beyond our current base case forecasts (i.e., included in the bull case only).
“... With declining cash costs and EBITDA expansion ... The company is constructing a 500ktpa smelter at its Kamoa-Kakula copper complex that is expected to be completed by year-end 2024. We estimate that the smelter will significantly reduce C1 cash costs (driven mostly by lower logistical costs, at a CAGR of negative 5 per cent, from $1.43/lb to $1.24/lb in 2023-26, much better than the negative 1-per-cent expected average CAGR for pure-play peers over the same period). Given the growth in copper volumes and declining costs in the near term, we forecast Ivanhoe’s EBITDA will expand rapidly at a 46-per-cent CAGR, from $0.6-billion in 2023 to $2.0-billion in 2026.”
Seeing its initial reporting on the Western Foreland resource pointing to copper growth that exceeded his prior expectations. Mr. De Alba bumped his target to $13.50 from $13. The average is $15.45.
“Ivanhoe has large EBITDA expansion in the coming years, mainly driven by higher copper volumes and lower cash costs. In addition, the company has significant exploration potential which points to further copper volume growth beyond our base case,” he concluded.
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National Bank analyst Cameron Doerksen sees Andlauer Healthcare Group Inc. (AND-T) as “a high quality, well-managed company with attractive long-term secular growth drivers.”
However, he took a “more neutral” stance on the Vaughan, Ont.-based supply chain management company, which specializes in logistics and delivery solutions for the health care sector, upon assuming coverage on Friday with a “sector perform” recommendation due to concerns over its current valuation, which he sees as above peers.
“We see more torque in some other stocks in our coverage universe,” he said. “We forecast that AHG will see a resumption of earnings growth in 2024 supported by underlying healthcare industry growth trends. The total return from the current share price to our $46.00 target is attractive at 17 per cent; however, if one believes the current freight recession (which started in early 2022) ends in 2024, earnings growth (and likely share price upside) for some other stocks in our transportation coverage universe could be more compelling than the potential upside for AND shares over the next 12 months.”
Despite those concerns, he emphasized the presence of “multiple positives” for the company, including “attractive” long-term growth drivers and the presence of several potential catalysts in the near term.
“The North American healthcare market enjoys favourable demographic trends that we expect will sustain solid organic demand growth for AHG over the long term, noting that retail drug purchases in Canada as well as sales of health and personal care products in Canada have grown at a 5.4-per-cent and 5.5-per-cent CAGR [compound annual growth rate], respectively, over the past 20+ years,” the analyst said. “Additionally, AHG should benefit from continued growth in the use of biopharmaceuticals, which require much tighter temperature controls and are expected to make up over 40 per cent of the global pharmaceutical market by 2028 (compared to 33 per cent in 2020).”
“With leverage sitting comfortably at just 0.37 times net debt/EBITDA as of the end of Q3/23 and solid free cash generation estimated through our forecast period, AHG is well positioned to make acquisitions, which would be upside to our current forecasts. In addition, while AHG’s U.S. operations have faced margin headwinds in 2023, we see the potential for a market rebound in 2024, which would be positive for investor sentiment.”
Mr. Doerksen’s $46 target for Andlauer shares. The current average on the Street is $49.36.
“The most important reason for our neutral stance on AHG shares is around relative valuation,” he said. “On our 2024 estimates, AHG is currently trading at 23.4 times P/E and 10.4 times EV/EBITDA versus its historical (since IPO) FY1 average of 34.1 times P/E and 15.6 times EV/EBITDA. We note, however, that since the company went public in late 2019, multiples have been skewed higher during the pandemic period but have steadily declined since early 2022. While the stock is currently trading below its historical forward average, the current valuation is slightly higher than the Pharma Logistics peer group average of 9.5 times 2024 EV/EBITDA and considerably higher than both the Package & Courier peer group (UPS, FDX and DHL) and the Canadian freight peer group (MTL, TFII and CJT) averages of 7.4 times and 7.1 times 2024 EV/EBITDA, respectively.”
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In a research note titled Black Friday sale comes early with highest-quality Canadian developer at a rare discount, Desjardins Securities analyst John Sclodnick said the results of Skeena Resources Ltd.’s (SKE-T) definitive feasibility study (DFS) for its Eskay Creek project in the Golden Triangle of B.C. displayed “impressive” potential economic returns.
“However, even more important is that the estimates and assumptions driving those headline numbers appear reasonable and achievable in our view, and it is one of the most conservative studies we have seen from a developer,” he added.
Mr. Sclodnick highlighted the DFS, released Tuesday after the bell, included an updated reserve estimate which features 33 per cent more tons at a 12-per-cent lower grade for 16 per cent more ounces on a gold-equivalent basis from its previous study.
“We have updated our model to reflect the DFS and now model initial capex of $780-million, sustaining and expansion capex of $590-million, and operating costs of $57.11 per ton vs the DFS at $713-million, $570-million and $53.98 per ton, respectively,” he said. “The DFS presents average cash costs of US$130 per ounce and AISC [all-in sustaining cost] of US$296 per ounce, and we now model cash costs of US$247 per ounce and AISC of US$447/oz (all net of Ag credits and prior to our stream assumptions). Compared with the 2023 global cash cost curve, Eskay Creek falls in the bottom 3 per cent of all production based on both the DFS and our cash cost estimates over the LOM [life of mine].
“Met work was completed on the concentrate leading to a 43-per-cent reduction in mass pull, resulting in a higher grade, as well as lowering transport and smelter costs while increasing payable rates. The impact of higher payables goes straight to the bottom line.”
Expecting project financing to be announced in the first half of 2024, Mr. Sclodnick increased his target for Skeena shares to $18.25 from $17, reiterating a “buy” recommendation. The average target is $14.60.
“SKE currently trades at 0.28 times NAV vs gold developer peers at 0.32 times,” he said. “Over the past year, the stock has traded at a 20-per-cent premium to peers but is now trading at a 13-per-cent discount. With the lowest AISC in the group and average annual production over 300koz in a toptier jurisdiction, it should regain a meaningful premium in our view.”
“SKE remains our top gold developer pick and is trading at the same share price as in May 2020 when it had 1.9 million ounces gold equivalent less than it currently does.”
Elsewhere, CIBC World Markets’ Allison Carson increased her target to $17 from $16.50 with an “outperformer” rating.
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Raymond James analyst Brad Sturges sees “significant torque to the upside in a declining interest rate environment” for Tricon Residential Inc. (TCN-N, TCN-T) following its third-quarter earnings release.
“We believe after facing lower management fee income year-over-year and greater financing cost headwinds year--over-year in 2023, Tricon could be relatively better positioned next year to generate improved 2024 AFFO [adjusted funds from operations] per share growth year-over-year, that is generally in-line or possibly above its U.S. SFR peers,” he said. “Further, we believe Tricon’s current share price levels provides an attractive value proposition based on a deep discount to its U.S. SFR home portfolio value.”
On Nov. 7, the Toronto-based real estate company, which invests in single-family rental and multi-family rental homes, reported fully diluted funds from operations of 14 US cents per share, down 7 per cent year-over-year (or 1 US cent). However, it maintained its full-year guidance of 55 US cents to 58 US cents (versus the consensus forecast on the Street of 56 US cents).
“In 2023 year-to-date, Tricon’s cash SP-NOI [same-property net operating income] rose 6.1 per cent year-over-year (2023E SP-NOI growth guidance: 6.0-6.5 per cent year-over-year), driven by 6.0-per-cent higher same-property revenues year-over-year, partly offset by 5.7-pef-cent greater same-property expenses year-over-year,” said Mr. Sturges. “Tricon noted that in October it realized lease renewal rent growth of 7 per cent, while the company generated new leasing rent spreads in the 7-per-cent range. This compares to Tricon’s estimated U.S. SFR portfolio loss-to-lease of 11 per cent, or equal to over a $40-million annualized revenue opportunity if fully captured. Tricon plans to capture its embedded rent mark-to-market by pushing lease renewal rent spreads above Tricon’s self-imposed caps where there is a significant embedded loss-to-lease.”
“Over the past few months, Tricon has been focused on optimizing its workforce to fit the company’s current needs, which included reducing Tricon’s staffing by 5 per cent over the past several months and reallocating its operating staff from servicing vacant homes and acquisitions to servicing occupied homes. Notably, most of Tricon’s G&A rationalization efforts have not yet been reflected in its FFO/share results in 2023 year-to-date. However, the company expects to realize the benefits of its cost reduction plan starting in 4Q23, and increasingly more in 2024.”
After raising his 2024 FFO per unit projection to 62 US cents from 60 US cents and introducing a 2025 estimate of 67 US cents, Mr. Sturges increased his target for Tricon shares to US$10.50 from US$9 with a “strong buy” rating. The average is US$9.70.
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D2L Inc.’s (DTOL-T) improved market share gains “bode well for growth re-acceleration,” according to Stifel analyst Suthan Sukumar.
Seeing “multiple growth levers to fuel further upside,” he initiated coverage of the online learning software provider with a “buy” recommendation on Friday.
“We believe a commitment to innovation and stronger go-to-market execution have elevated D2L’s competitive positioning in its core market of higher-ed, allowing it to capture nearly 50 per cent of global deal activity last year,” said Mr. Sukumar. “This inflection from the mid-teens in prior years is reinforced by consistent customer feedback that points to a compelling product/platform experience that helps bridge the gap with market-leader Canvas. While there is potential for a rebound in the K-12 market with anticipated Federal funding tailwinds, we see more opportunity with corporate learning and its intersection with higher-ed, alongside growing international penetration, to sustain accelerated double-digit organic growth with EBITDA and FCF expansion as well as line-of-sight to rule-of-40 longer-term.”
The analyst thinks D2L’s business model provides “high revenue durability with profitability upside.”
“D2L’s mission-critical offering serves a sticky customer base with multi-year contracts (avg. tenure of +10 years), driving 100-per-cent net revenue retention rates and a 90-per-cent recurring revenue profile for solid forward visibility,” he said. “Further, expectations for increased higher-ed enrollments and demand for degree programs and upskilling with higher unemployment suggests counter-cylical growth. Meanwhile, D2L’s focus on profitable growth is fueling operating leverage, as reflected in expanding margins and cash flows, with a 3-4-per-cent EBITDA margin guide and positive FCF expected this year (vs. negative EBITDA and break-even FCF last year), expanding to 13-16-per-cent EBITDA and 16-19-per-cent FCF margins next year, which could prove to be conservative. We see a path to 25-30-per-cent EBITDA and FCF margins, in line with larger, more established LMS peers.”
“While D2L’s core higher-ed market is seeing renewed strength with a stabilizing spend environment from pent-up demand for digital transformation, there remains large greenfield opportunities ahead that provide a long runway for growth with potential for further upside. These include: (1) the corporate learning market (20 per cent of revenues), which is D2L’s fastest growing segment given tailwinds from growing corporate upskilling and increasing convergence with higher-ed, and (2) international markets (20 per cent of revenues), which are under-penetrated by LMS tech and offer potential for larger scale deals; and (3) the K-12 market (20 per cent of revenues) where U.S. Federal stimulus over 2024 could be a tailwind for LMS adoption given wide use of free/point solutions.”
Believing its valuation “appears de-risked, disconnected from fundamentals,” he set a $14 target for D2L shares. The current average is $11.36.
“D2L trades at 0.8 times calendar 2025 estimated Sales/5 times C25E EBITDA, vs. EdTech peers at 3 times/19 times and education LMS peers at 7 times/18 times, despite a pristine balance sheet and re-accelerating growth, profitability and cash flows,” said Mr. Sukumar. “While D2L doesn’t share the same scale opportunity of a high-growth D2C-model like DUOL at the high-end of EdTech peers (1-11 times), there are several small-cap names with comparable (or lower) growth and profitability at 1-2 times, which we think supports limited downside. Our $14/share target implies 2 times C25E Sales. We see multiple expansion with continued execution on growth and profitability upside, with a larger market cap supporting a further rerate to larger, more established LMS peers at 7 times as visibility improves to a rule-of-40 profile.”
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Seeing Ayr Wellness Inc.’s (AYR.A-CN) valuation as less attractive following a 46.8-per-cent jump in share price in November, ATB Capital Markets analyst Frederico Gomes lowered his recommendation to “sector perform” from “speculative buy” following the release of “negative” third-quarter results.
Before the bell on Thursday, the Miami-based vertically integrated U.S. multi-state cannabis operator reported revenue for its third quarter of $114.4-million, below both Mr. Gomes’s $119.6-million estimate and the consensus projection on the Street of $120.1-million. Adjusted EBITDA of $28.4-million also missed expectation ($30.4-million and $29.8-million, respectively).
“The impact of price compression (primarily in New Jersey) and temporary cultivation issues in Florida offset positive momentum from Massachusetts and Ohio and the traction of cost-savings initiatives,” he said. “The issues in Florida have been fixed but are expected to have a $4-million-$6-million drag on Q4/23 revenues, supporting revised guidance for flat growth quarter-over-quarter. We believe a highlight of the quarter was generating CFO of $20.1-million (ahead of guidance for reaching positive CFO exiting 2023e), driven primarily by working capital changes of $19.3-million.
“We believe Ayr’s management has been successful in improving margins in a challenging competitive environment, and has taken steps to extend debt maturities, improving near-term liquidity. However, we think interest costs remain a drag on material cash flow generation. In Q3/23, interest expense represented 9.4 per cent of sales, and year-to-date interest cash payments 7.3 per cent of year-to-date sales.”
Reducing both his full-year 2023 and 2024 financial expectations, Mr. Gomes maintained his target for Ayr shares of $3. The current average is $5.28.
“We note that, given its leverage and outsized exposure to catalyst-states (notably, Ohio, Florida, and Pennsylvania), Ayr offers one of the highest potential upsides to regulatory reform in the sector; this upside is not factored into our base-case estimates,” he added.
Elsewhere, Canaccord Genuity’s Matt Bottomley lowered his target to $6.25 from $7 with a “speculative buy” rating.
“Although the quarter was a little behind our expectations on the top line (on pricing headwinds and transient cultivation headwinds in Florida), the reduction of our price target was largely a result of truing up Ayr’s capital structure in our model based on management’s pro forma estimates following the company’s recent debt extension,” said Mr. Bottomley.
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In other analyst actions:
* CIBC’s Allison Carson lowered her Ascot Resources Ltd. (AOT-T) target to 85 cents from 90 cents, keeping a “neutral” rating. The average is 96 cents.
* BMO’s Michael Markidis lowered his Automotive Properties REIT (APR.UN-T) target to $11.50 from $12.50. with a “market perform” rating. The average is $12.15.
“APR reported Q3/23 results that were in line with our expectations,” said Mr. Markidis. “Investment activity has been subdued following an active H1/23; however, APR’s solid balance sheet should allow the REIT to continue capitalizing on growth opportunities, in our view. We’ve trimmed our target price ... to reflect an increase to our cap rate assumption (up 25 basis points to 6.80 per cent) and a modest downward revision to our 2024 estimated FFOPU [funds from operations per unit] due to higher interest expenses.”
* Stifel’s Michael Dunn trimmed his Birchliff Energy Ltd. (BIR-T) target to $6.50 from $7.75 with a “hold” rating. The average is $9.48.
* RBC’s Paul Treiber raised his target for Coveo Solutions Inc. (CVO-T) to $14 from $13, exceeding the $12.85 average, with an “outperform” rating, while Scotia’s David Weiss moved his target to $13 from $12 with a “sector perform” rating.
“We attended Coveo’s second Capital Markets Day. Global awareness of GenAI is driving a surge of demand for enterprise search and other foundational data technologies, which are crucial underpinnings for GenAI. Coveo has several large potential catalysts that we believe are likely to help re-accelerate bookings and SaaS growth over the next several quarters. We believe high-profile customer wins and improved growth would lead to an upward valuation re-rating of the stock,” said Mr. Treiber.
* Scotia Capital’s Himanshu Gupta lowered his Dream Residential REIT (DRR.U-T, DRR.UN-T) target to US$10 from US$12.50 with a “sector outperform” rating. The average is US$10.69.
“Five quarters have now elapsed since DRR’s IPO, and it has met our expectations on both NOI and FFO so far,” said Mr. Gupta. As a new entity, building a track record is important. Our FY2023 estimate is now in line with management guidance, which was the upper end of the range originally announced.”
* Resuming coverage following its $111-million equity financing, Stifel’s Alex Terentiew cut his target for Ero Copper Corp. (ERO-T) to $22 from $30 with a “hold” rating, while Canaccord Genuity’s Dalton Baretto trimmed his target to $29 from $30 with a “buy” recommendation. The average is $25.
“Of the $8 per share reduction in target, $2 is attributable to the financing, with the remainder coming from our assumption of higher costs going forward,” Mr. Terentiew said. “While ERO is facing the same cost pressures the broader industry is facing, the stronger Brazilian real and our new assumption that all concentrate from Caraiba will now be sold internationally and incur higher off-site charges, has moved our forecast 2024 estimated AISC cost higher by 14 per cent, and our all-in-cost per lb CuEq [copper equivalent] up by 13 per cent.”
* Recommending Flagship Communities REIT (MHC.U-T) for small-cap growth investors following “solid” third-quarter results, Scotia’s Himanshu Gupta trimmed his target to US$21.50 from US$22 with a “sector outperform” rating. The average is US$20.25.
“Flagship expects mid-to-high single-digit SP NOI [same-property net operating income] growth in 2024 on the back of 9-per-cent SP NOI growth in 2023 year-to-date,” he said. “This combined with some acquisition activity sets them up for 11.7-per-cent year-over-year AFFOPU [adjusted funds from operations per unit] growth in 2024 (despite 9.3-per-cent growth in 2023). Within foreign residential, we like MHC given fundamentals are not slowing down. We downgraded our rating on BSR REIT as we expect slower operating metrics in the U.S. Sunbelt multi-family due to elevated new supply. On the contrary, Flagship is expected to show consistent and yet superior SP NOI growth.”
* BMO’s Kevin O’Halloran reinstated coverage of Fortuna Silver Mines Inc. (FVI-T) with an “outperform” rating and $5.50 target. The average is $5.59.
“Fortuna trades at a discounted valuation on a cash flow basis, and we expect FVI shares to re-rate to higher levels as investors see a track record of strong operations and cash flow emerge at the recently completed Séguéla mine,” he said. “Further catalysts to FVI shares include near-mine exploration to extend mine lives, optimizations at Séguéla, and advancement of the recently acquired Diamba Sud gold project to provide further visibility on production growth.”
* TD Securities’ Michael Van Aelst cut his George Weston Ltd. (WN-T) target to $195 from $200 with a “buy” rating. The average is $193.14.
* RBC’s Pammi Bir cut his Northwest Healthcare Properties REIT (NWH.UN-T) target to $5.50 from $6 with a “sector perform” rating. The average is $6.25.
“Notwithstanding results that were modestly below our call, we believe NWH has made some incremental advances on its path to repairing the balance sheet. As well, the portfolio remains operationally sound, with high and stable occupancy and healthy organic growth. In the near-term, we think the units could be range-bound in the absence of any significant updates on the strategic review and a murky view on the earnings profile. Still, we’re encouraged by steps taken to date,” said Mr. Bir.
* Piper Sandler’s Charles Neivert trimmed his Nutrien Ltd. (NTR-N, NTR-T) target to US$68 from US$70, maintaining a “neutral” rating. The average is US$73.67.
* Goldman Sachs’ Neil Mehta bumped his Street-low Parkland Corp. (PKI-T) target to $40 from $39. The average is $50.62 with a “neutral” rating.
* Following in-line quarterly results, Scotia’s Mario Saric cut his SmartCentres REIT (SRU.UN-T) target to $25.50 from $30 with a “sector perform” rating. The average is $25.79.
“Bottom-line, no meaningful change in our neutral investment thesis,” he said. “We’re pleased with the occupancy growth SRU is achieving along with improved lease renewal spreads. By all accounts, tenant demand for space remains really strong. Notwithstanding that, a more positive rating is challenged by lower forecast FFOPU and NAVPU growth on SRU’s higher financial leverage profile (Exhibit 5). We continue to think SRU’s relatively high distribution yield (approximately 8 per cent) is sustainable (2024-2025 estimated AFFO payout ratio = 96 per cent) and that SRU offers reasonable defense and one of the best development pipelines in our universe (zero value in current unit price).”
David Leeder