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

While acknowledging a “tougher” macroeconomic climate, BMO Nesbitt Burns analyst Thanos Moschopoulos now sees “better value” in Kinaxis Inc. (KXS-T) after a period of share price depreciation.

“The stock has significantly underperformed SaaS peers in recent weeks, and is trading at its lowest EV [enterprise value]/sales multiple since 2018,” he said. “Based on industry discussions, we believe that deal activity is likely slowing in response to macro uncertainty. However, we believe that a deceleration has been priced into the stock, and that customer expansions (stemming from the large cohort of new wins KXS signed over the past two years) should allow KXS to sustain a healthy growth rate.”

Mr. Moschopoulos said a senior consultant at a large global advisory firm told him deal activity for supply chain planning software has “sharply decelerated” in recent weeks.

“According to the consultant, the volume of enterprise customers in the vendor selection or contract negotiation phase during Q3/23 was at the lowest level in two years —as macro uncertainty is weighing on deal activity, and as some customers aren’t feeling the same sense of urgency with respect to addressing supply chain challenges as they previously did,” he said.

“Expansions should provide KXS with a strong built-in source of growth, in our view. While we see a risk of further deceleration in KXS’s ARR growth as new logo wins potentially slow down, we think there’s a partial offset to this stemming from expansion opportunities; we believe KXS has a large hidden backlog of expansions, as the large cohort of new customers it signed over the past two years continue to roll out their multi-year deployments.”

After “modestly” trimming his revenue expectation for fiscal 2024, the analyst cut his target for Kinaxis shares to $190 from $205, maintaining an “outperform” recommendation.

“KXS’s share price is down 20 per cent since the end of June (down 23 per cent in U.S. dollar terms) relative to a 9-per-cent drop for the BVP NASDAQ Emerging Cloud Index,” said Mr. Moschopoulos. “It’s now trading at its lowest multiple since 2018, at 5.8 times CY2024E EV/sales, and its multiple is roughly in line with the SaaS group, having lost the premium it enjoyed through much of the past two years. While we wouldn’t expect the upcoming quarter to be a positive catalyst for the stock, we believe KXS’s current valuation represents an attractive entry-point for investors willing to look past a potential near-term deceleration.”


National Bank Financial analyst Zachary Evershed thinks Richelieu Hardware Ltd.’s (RCH-T) in-line third-quarter results showed signs of “stabilization” and a “base on which to build moving forward.”

“Richelieu continues to make significant progress reducing its inventory position contributing $24.5-million to cash generation during the quarter and bringing the year-to-date decline to $66-million vs. management’s target of $60-80-million in 2023,” he said. “As execution has been robust thus far and the company might exceed 2023′s guidance, management adjusted prior guidance for another $50-million in 2024 and now calls for a $20-million reduction in H1, with a number for the remainder of the year still to be determined, though we expect a return to usual seasonal patterns.”

“Management reiterated a strong pipeline of M&A opportunities as the company works through several open files backed by a clean balance sheet. Given an outstanding 2022, sellers’ expectations likely remain inflated, but this anchoring will likely fade as time passes and deal flow will accelerate.”

In a research report titled Q3/23 Results: A most welcome uneventful quarter in interesting times, Mr. Evershed introduced his 2025 financial expectations, “calling for gradual margin expansion as we believe that we have largely touched bottom and that the first three quarters of 2023 represent a stable base off which RCH can build.”

“We make only minor revisions to our Q4 estimates following an in-line Q3,” he added. “We fine tune our organic growth, seeing relatively flat performance to H1/24, which is a nominal improvement to our prior outlook, but we remain cautious of deflation in some product categories and therefore temper our margin expectations for next year.

“The company is poised for growth, having invested in its distribution network, growth which we expect will begin to flow through the financials in H2/24, building back towards 4-per-cent annual organic growth as R&R demand recovers and helping margins improve through operating leverage.”

Remaining bullish on “management execution and end-market growth in the long term,” Mr. Evershed trimmed his target for Richelieu shares to $47.50 from $48, keeping an “outperform” rating. The average on the Street is $46.25.

“Our new target is equivalent to a 6-per-cent FCF yield, a level we believe is more defensible given the current opportunity cost of cash investments,” he said.


CIBC World Markets analyst Kevin Chiang made a series of target adjustments in a third-quarter earnings preview for Canadian industrial and transportation sectors on Friday.

“Our focus will be on commentary related to the upcoming peak season (we expect a muted outlook but are optimistic the freight cycle has bottomed), air travel demand trends (we expect strong pent-up demand in Canada), the margin outlook for the waste sector, and an update on supply chains,” he said.

“We highlight the following key points from this preview. 1) Our preferred names heading into earnings season are TFII (see it raising its 2023 guidance), WCN (expect a positive preliminary outlook for 2024 and a dividend bump), and GFL (EV to forward EBITDA at 10.8 times whereas 10 times has been a good floor in the past, and expect strong FCF in H2/23 and commitment to deleveraging plan). 2) We are below Q3/23 consensus earnings for AC, CAE and CJT and modestly above for TFII.”

He reduced his targets for these companies:

* Air Canada (AC-T, “outperformer”) to $30 from $33. The average is $31.

“A key focus this earnings season for the Canadian airlines will be around off-peak demand comments/trends,” he said. “While there are broader concerns over consumer demand with U.S. carriers commenting on softer trends exiting August, we would argue that Canadian airlines are more insulated given the amount of pent-up demand in the system. Canadian airlines are also facing supply chain bottlenecks that limit how fast they can increase capacity. While fuel prices will weigh on near-term earnings (we have taken down our Q3/23 and 2023 earnings for AC further on higher fuel prices), we believe the fare environment remains supportive enough to allow the sector to pass along higher input costs. One way we look at this for AC is to consider that prior to the move in jet fuel, it was trading at ~4x EV to forward EBITDA versus approximately 3.2 times today. This would imply that the market expects AC to lose $900-million from higher fuel. In our model, to offset this, PRASM would need to increase by 4 per cent. In other words, with AC down 25 per cent since mid-July, we think the market has taken too punitive a view. We do recognize, though, that given the sharp move in fuel price over the past three months, AC’s 2023 EBITDA guidance is at risk. We are now at $3.63-billion versus its guidance of $3.75-$4-billion.”

* Bombardier Inc. (BBD.B-T, “neutral”) to $60 from $69. Average: $80.23.

* Mullen Group Ltd. (MTL-T, “neutral”) to $15.50 from $16.50. Average: $17.43.

Mr. Chiang raised his target for TFI International Inc. (TFII-N, TFII-T) to US$159 from US$156 with an “outperformer” rating. The average is US$152.23.

“While we have seen a downward revision across the Canadian transport equities space on weaker freight volumes and/or rising fuel costs, TFII is an outlier,” he said.

“We increase our third quarter EPS from US$1.73 to US$1.81 and expect TFII’s 2023 to exceed the top end of its guidance of US$6.00-US$6.50 (we are at US$6.67 and consensus is at US$6.48). While the softer freight environment is weighing on TFII’s TL and P&C segments, it is benefitting from the Yellow bankruptcy which has led to a positive inflection point within the LTL sector. With TFII’s LTL segment benefitting from a step-up in volumes, and with yields improving and its cost per shipment decreasing, we see a clear line of sight to TForce Freight (TFF) achieving a mid-80-per-cent OR in 2024.”


Calling it “a value-play with an organic growth engine,” National Bank Financial analyst Gabriel Dechaine initiated coverage of Sagicor Financial Co. Ltd. (SFC-T) with an “outperform” recommendation on Friday.

“SFC is a Bermuda-based life insurer with mature operations in the Caribbean and Canada, and a rapidly growing U.S. operation in an attractive market segment,” he said. “We believe SFC offers attractive re-rating upside potential relative to peers. Currently trading at approximately 0.65 times pro forma book value, we believe the stock price could potentially double as investors gain more clarity on growth opportunities ahead of the company and as the company itself executes on them.”

In justifying his “favourable” rating for Sagicor, Mr. Dechaine pointed to “several drivers” following the completion of its $375-million acquisition of Canadian individual life insurer ivari from Wilton Re Ltd on Tuesday after the bell as well as S&P upgrading its credit rating to BBB from BB+ on Thursday.

“For starters, the closing of the ivari transaction should yield 70 per cent book value accretion (and a pro forma 0.65 times P/B multiple vs. current 1.1 times level),” he said. “Confirmation of this accretion should take place with the acquisition report filing around late November. The ivari acquisition, which will upgrade SFC’s investment portfolio quality, could also yield a credit rating upgrade (e.g., S&P put SFC on positive outlook following deal announcement). As such, SFC could benefit from lower financing costs & improved investor perception. SFC’s shareholder base is an interesting part of the investment story, with nearly 50 per cent held by a small group of investors. We believe the group could pursue strategic opportunities to unlock value not reflected in the stock. At the very least, post-ivari closing, we believe SFC will resume/accelerate its buyback activity. Finally, we believe the organic growth potential of the U.S. annuities business could materially improve the company’s ROE in the next 4-5 years (with visible improvement along the way). Relatedly, the company’s Contractual Service Margin (CSM) relative to its equity base points to a large future earnings stream.”

Mr. Dechaine did warn that Sagicor’s thin trading liquidity will continue to be an obstacle for investors, noting its trading value has exceeded $1-million on less than 3 per cent of trading days over the last three years.

“Another matter that may deter investors is the question of synergies within SFC’s operations,” he added. A smaller company operating across multiple jurisdictions, selling a somewhat inconsistent group of products, dealing with multiple regulators and regulatory frameworks incurs cost overruns that may not be addressable. Finally, comparisons of SFC’s performance relative to the Big-4 Canadian lifecos is not flattering. ROE volatility and a trend of flat/declining book value are key features of this comparison. Introduction of adjusted metrics later this year may improve this perception.”

Taking a “conservative approach” to valuation given those risks, Mr. Dechaine set a target of $7 per share. The average on the Street is $7.50.


Despite trimming his third-quarter earnings expectation for Ag Growth International Inc. (AFN-T), Desjardins Securities analyst Gary Ho expects notable gains for the remainder of the year from its International segment.

“We expect strong 2H results from Brazil,” he said. “Activity has picked up with improving farmer sentiment, strong crop yields and increasing order books, aided by new government financing programs and a stabilizing political backdrop. AFN recently won some commercial projects in Brazil (lumpy). This more than offset some pockets of weakness in Canada due to drier conditions (spotty; some areas have decent crop yields).”

“With better visibility into 4Q, we remain confident in AFN hitting $290-million-plus in EBITDA and an 18-per-cent-plus margin given operational/ efficiency initiatives.”

In a note released Friday, Mr. Ho trimmed his third-quarter revenue estimate to $432-million, down from $452-million previously but above the Street’s expectation of $430-million and above both the results of last year ($402-million) and last quarter ($390-million). His lower projection is a result of declining projections for its Canadian business ($93-million from $111-million).

“[We] increased 4Q EBITDA to reflect more even seasonality, and introduced 2025 estimates,” he said. “We view AFN’s focus on operational synergies, margin improvement and deleveraging as catalysts, while insights gathered from the Canada Farm Show gave us greater conviction on these initiatives and product transfers, and comfort around the ag backdrop.”

“With robust growth in International (stronger 3Q/4Q), earnings attribution should be more evenly distributed in 2H. We thus reined in 3Q EBITDA to $82-million and increased 4Q EBITDA to $74-million (2023 unchanged at $292-million).”

Maintaining a “buy” recommendation for Ag Growth shares, Mr. Ho lowered his target to $82 from $84. The average is $76.85.

“AFN’s strategic investments in product and regional expansion have positioned it to harness its size and scale in the global buildout of food infrastructure,” he said. “Our positive investment thesis is predicated on: (1) broad-based growth across segments and regions; (2) margin expansion through operational excellence; (3) deleveraging; and (4) a proactive approach to driving organic growth through product transfers and other initiatives.”


Scotia Capital analyst Jason Bouvier initiated coverage of Strathcona Resources Ltd. (SCR-T) with a “sector outperform” recommendation on Friday, believing its “countercyclical strategy has added tremendous value.”

The Calgary-based company closed its merger with Pipestone Energy Corp. earlier this week, combining to create the country’s fifth-largest oil producer. Trading of Strathcona common shares began on Thursday.

“SCR offers a significant inventory of projects, with the goal of bringing the value forward via strong production growth of around 8 per cent per year (2-3 times its oil sands peer group),” he said in a research report titled Unabashed Bulls! Unyielding Optimism for the Energy Sector. “The company offers significant torque to heavy oil prices (on which we remain bullish) and its long-life/sustainable assets provide investors with a low break-even (less than $50 WTI).”

“SCR has grown aggressively over the past six years. Management has held the view that Canadian energy has been cheap and built up the company rapidly through mergers and acquisitions (M&A). Our proven and probable (2P) NAV estimate (Scotia deck) is approximately $8.2-billion, versus the initial shareholder capital of $2 billion (up almost 300 per cent). We expect the company to continue to be an acquirer going forward, as management’s view is that Canadian energy continues to be undervalued (we would agree!). Of its current core areas, we see the most opportunity for consolidation in the Montney. However, we believe SCR would consider adding a fourth core area, although it is likely that it will want to operate the new asset.”

Mr. Bouvier did warn Strathcona’s debt level is above its Canadian large-cap peers, including Suncor Energy Inc. (SU-T) and Canadian Natural Resources Ltd. (CNQ-T), however he sees its balance sheet as “strong” and expects it continue to focus on debt reduction.

“Management believes it can grow SCR by 75 per cent over the next eight years (implies a CAGR [compound annual growth rate] of 8 per cent),” he said. “This compares with the Canadian large caps with expected production growth CAGRs of around 2-4 per cent. Initially (next 12 months), we expect most of the growth to come from the Montney (modestly increasing the company’s gas weighting), followed by growth in its oil assets. We continue to believe the Montney offers very strong returns.”

“SCR’s production is 78-per-cent liquids, of which 70 per cent is heavy oil. The company provides investors with significant exposure to heavy oil prices (on which we are bullish over the next several years). For every US$1/bbl change in heavy oil differential, SCR’s 2024 CF changes by 2.1 per cent. Initially, SCR will produce over 2 times the natural gas it consumes, falling over time as oil growth projects kick in (however, we expect the company to remain long natural gas for quite some time).”

Mr. Bouvier set a target for Strathcona shares of $40, representing a potential gain of over 33 per cent from Thursday’s closing price.

Elsewhere, BMO’s Randy Ollenberger initiated coverage with a “market perform” rating and $33 target.

“The company has established an impressive track record of accretive growth and has built a multi-decade resource base,” he said. “It also provides exposure to heavy oil prices, which we expect to improve over the next several years. That said, we believe the small float will limit trading liquidity, which would likely act as a drag on share price performance.”


RBC Capital Markets analyst James McGarragle expects Exchange Income Corp.’s (EIF-T) Investor Day event next week to focus on its growth avenues, particularly its Window Solutions and Aerospace segments, which he views as “well positioned for meaningful growth into 2024 and 2025.”

“Key is that we believe Exchange’s growth profile provides a solid long-term investment opportunity, not fully priced into the shares at current levels in our view,” he added.

Following Thursday’s announcement of its $60-million acquisition of tuck-in acquisition of DryAir, Mr. McGarragle raised his 2023 EBITDA projection by $3-million to $571-million with his 2024 and 2025 estimates rising $11-million and $12-million, respectively, to $672-million and $720-million.

However, he cut his Exchange Income target by $1 to $70, exceeding the average by 5 cents, with an “outperform” rating.

“We apply a blended 7.7 times EV/ EBITDA multiple (8 times for Aviation and 7 times (from 7.5 times) for Manufacturing) to our 2025 EBITDA estimate discounted back,” he said. “Our blended multiple of 7.7 times is ahead of current consensus NTM [next 12-month] valuation of 6.1 times as we see opportunity for a re-rate given EIF’s resiliency in the current macro backdrop as well as due to the company’s significant growth opportunity.”


In other analyst actions:

* HSBC’s Vikram Gandhi initiated coverage of Brookfield Asset Management Ltd. (BAM-N, BAM-T) with a “buy” rating and US$39 target. The average on the Street is $37.49.

* Following the $72-million acquisition of the trademarks and other intellectual property used by BarBurrito Restaurants Inc. and a 2.1-per-cent increase to its annual dividend (to 24.5 cents from 24 cents), CIBC’s John Zamparo trimmed his target for Diversified Royalty Corp. (DIV-T) to $3 from $3.20 with an “outperformer” rating, while Cormark Securities’ Jeff Fenwick raised his target to $4.25 from $4 with a “buy” rating. The average is $4.06.

“We positively view DIV’s acquisition of BarBurrito’s royalty stream, which provides diversification, as well as exposure to the fast-growing yet resilient quick-service restaurant (QSR) industry,” said Mr. Zamparo “The addition should increase distributable cash flow per share by 6 per cent. Though leverage at 4.6 times may exceed some investors’ preferences, we gain comfort from likely achievement of sub-4 times by late 2024. We reduce our price target to $3.00 ($3.20 prior), on a lower cash flow multiple (now 10.5 times, 12 times prior) to reflect weaker sentiment for dividend stocks amid higher bond yields, but DIV remains rated Outperformer, and we believe the 9.8-per-cent dividend yield offers attractive value.”

* BMO’s Brain Quast raised his New Gold Inc. (NGD-T) target to $2.25, above the $2.06 average on the Street, from $2 with an “outperform” rating.

“NGD has continued its strong start to the year with another impressive quarter, beating Q3 expectations with production of 111.2 koz AuEq (BMO estimate: 101.4 koz AuEq),” he said. “With Rainy River roughly in line, it was New Afton that led the beat on account of better-than-expected throughput. We now expect the company to reach or potentially exceed the top end of annual production guidance.”

* Resuming coverage following completion of its acquisition of the public float of TransAlta Renewables Inc., TD Securities’ John Mould lowered his TransAlta Corp. (TA-T) target to $16 from $16.50 with a “buy” rating. The average is $16.55.

“TransAlta’s take-in of RNW simplifies its growth outlook and corporate structure at what we view as a reasonable valuation,” said Mr. Mould. “As Alberta’s largest generator by capacity (approximately 3.2 GW), we believe TA’s leading position in Canada’s only deregulated power market cannot be easily duplicated by a competitor. In our view, the benefit of TransAlta’s diverse Alberta generating portfolio and asset optimization expertise has been demonstrated by robust financial results in recent quarters. Strong results from the Alberta merchant fleet should support additional investments in contracted renewable power development. We view the current share price as a good entry point, given TransAlta’s discounted valuation, renewable power growth strategy, near-term opportunities in the Alberta market, and quality hydro assets.”

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 20/02/24 2:49pm EST.

SymbolName% changeLast
Ag Growth International Inc
Air Canada
Bombardier Inc Cl B Sv
Brookfield Asset Management Ltd
Diversified Royalty Corp
Exchange Income Corp
Kinaxis Inc
Mullen Group Ltd
New Gold Inc
Richelieu Hardware Ltd
Sagicor Financial Company Ltd
Strathcona Resources Ltd.
Tfi International Inc
Transalta Corp

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