The Equity Research Team at iA Capital Markets revealed their top picks for 2023 in a report released Monday.
The firm’s 2022 selections had an annual return of negative 1.8 per cent, outperforming the TSX/S&P composite index, which fell 5.4 per cent.
“Although dipping into negative territory, we still managed to outperform the TSX Composite Index by 360 basis points in this extremely dynamic environment,” it said.” Entering 2023, we are providing a refreshed Top Picks list to start Q1 while our Analysts continue to ramp up coverage on names in the names in the Technology, Metals & Mining and Real Estate & REITs sectors.”
This year’s list contains 14 stocks spanning the company’s growing coverage universe. They are:
Diversified Industries
Freehold Royalties Ltd. (FRU-T) with a “buy” rating and $20.50 target. The average target on the Street is $20.66, according to Refinitiv data.
“As an Oil & Gas Royalty company, FRU exposes investors to the sector through a lower-risk, non-operating business model with very low costs,” said analyst Matthew Weekes. “Royalties provide strong cash returns and a natural hedge against inflation.
“FRU trades at a discounted valuation to peers despite being fundamentally similar, providing positive anchor points for valuation. FRU’s exposure to the U.S., which is unique among its peer group, provides additional diversification, exposure to premium-priced barrels, a hedge on USD/CAD FX rates, and a larger opportunity pipeline for M&A.”
Parkland Corp. (PKI-T) with a “buy” rating and $40 target. The average is $39.29.
“PKI has recovered off lows reached in November after reporting weak Q3 results but remains an underperformer in 2022 and attractively valued in our view at approximately 7 times forward EV/EBITDA, below its historical average, and 16-per-cent P/AFFO yield,” said Mr. Weekes. “Recently unveiled 2023 guidance projects stronger year-over-year growth than previously expected without incremental M&A.
“PKI’s focus on debt reduction, optimizing assets, organic growth, and synergies should enhance shareholder returns after being focused on M&A for several years. Beyond execution of near-term priorities, the potential for medium- to long-term valuation expansion is driven by advancement of food and renewables strategy, resulting in a shift in business mix and higher margins.”
Healthcare & Biotechnology
DRI Healthcare Trust (DHT.U-T, DHT.UN-T) with a “buy” rating and $15.50 target. The average is $14.92.
“A significant set of transactions in 2022 will provide heft and cash flows, fuelling more royalty interest activity in 2023,” said analyst Chelsea Stellick.”DRI expanded its portfolio into the rare disease space, which is an attractive market due to asset exclusivity and premium pricing for orphan drugs.
“Multiple drug assets have upcoming clinical development catalysts in additional indications for improving efficacy. In addition, DRI has an extended portfolio duration of drug assets and is well capitalized with $20-million cash and $97-million in available credit. Expected deployment of the remaining target of $275-375-million capital for royalty interest acquisitions by 2026.”
Quipt Home Medical Corp. (QIPT-X) with a “buy” rating and $14 target. The average is $12.62.
“Strong execution of roll-up strategy as QIPT consistently acquires targets with more than 20-per-cent Adj. EBITDA margins in states with a higher prevalence of respiratory illness and achieves synergies through overlaying its online resupply program,” said Ms. Stellick. “QIPT’s specialized sales team of clinicians and home medical equipment experts supports a consistent level of single-digit organic growth through cross-selling services, signing national insurance contracts, and opening de novo sites.”
Power & Infrastructure
TransAlta Corp. (TA-T) with a “strong buy” rating and $16.50 target. The average is $15.95.
“Strong Alberta power market outlook to drive above-market expectations in operating and financial performance in 2023,” said analyst Naji Bayoun. “Excess near-term FCF generation provides capital allocation optionality (e.g., buybacks, self-funded internal and external growth initiatives). Sustained execution on clean energy transition plans to underpin significant positive valuation multiple re-rating, particularly as TA diversifies its portfolio and invests in lower risk, contracted clean power assets.
“Asymmetric risk/reward profile of the shares with downside protection and upside optionality from Brookfield’s strategic support.”
Brookfield Infrastructure Partners LP (BIP.UN-T) with a “strong buy” rating and US$47.50 target. The average is US$44.87.
“Based on its exceptional capital deployment and execution track record over the past few years, we expect BIP to exceed its growth targets again in 2023 by taking advantage of market dislocations and its access to funding to capitalize on accretive & strategic M&A,” said Mr. Baydoun. “Expecting larger-scale asset monetizations to (1) surface/crystalize underappreciated value from BIP’s existing portfolio, and (2) support funding for growth initiatives (i.e., internal sourcing of capital for M&A).”
“Best-in-class diversified infrastructure platform with high-quality cash flows; defensive portfolio attributes on display during the COVID-19 pandemic, while offensive characteristics continue to pay off in the current inflationary environment.”
Technology
Lightspeed Commerce Inc. (LSPD-T) with a “buy” rating and US$27 target. The average is US$30.76.
“We expect LSPD to provide strong Adj. EBITDA margins while delivering robust growth as the path towards profitability continues to be the major focus in F2024,” said analyst Neehal Upadhyaya. “Targeting high GTV/location customers should help in increasing already robust ARPU metrics ($345 excluding Ecwid, up 45 per cent over the last six quarters) while decreasing churn rates. We are expecting year-over-year revenue growth of 25 per cent in FQ3, and even as macroeconomic pressure lowers GTV growth, we expect payments revenue to help backstop LSPD’s growth initiatives as adoption rates increase.
“Current valuation presents a lucrative opportunity for investors to get back into the story as LSPD is trading at just 1.7 times C2023 revenue, a far cry from its peer group average of 5.3 times; due to this, we believe the story is somewhat de-risked.”
Wishpond Technologies Ltd. (WISH-X) with a “buy” rating and $1.50 target. The average is $1.77.
“WISH remains undervalued despite 30-per-cent-plus year-over-year organic growth, positive Adj. EBITDA (11-per-cent margins last quarter), and robust FCF,” said Mr. Upadhyaya. “Company continues to perform amidst challenging market conditions for SMBs as its one-stop-shop marketing platform helps customers successfully execute their marketing strategies while simultaneously reducing S&M spend.”
“WISH is trading at just 1.3 times our C2023 revenue estimates, well below its peer group average of 5.8 times, presenting investors a strong entry point into the story; especially given that the Company, unlike most other high-growth SaaS companies, is profitable, has a robust balance sheet, and an unused credit facility of $6-million that will allow it to be opportunistic in the M&A market.”
Real Estate & REITs
Nexus Industrial REIT (NXR.UN-T) with a “strong buy” rating and $14 target. The average is $12.44.
“Post the SMU.UN/DIR.UN/GIC acquisition, NXR.UN is well-positioned to be the next pure-play Canadian industrial REIT,” said analyst Gaurav Mathur. “The REIT has a long growth runway with rental rate increases of 50-100 per cent across the portfolio, much higher than its publicly listed peer set in the Canadian industrial REIT sector. Management continues to maintain capital allocation discipline by focusing on redevelopment projects, recycling capital, and being opportunistic on the acquisitions front.”
“The REIT currently trades at 12.6 times 23E P/AFFO, well below the peer average of 14.8 times. We expect NXR.UN to close the gap through a combination of NOI growth, disciplined capital allocation, its focus on organic growth opportunities, and continuous high grading of its portfolio. Given the multiple growth drivers in the business and strong sector tailwinds, we reiterate our Strong Buy rating on the stock.”
Primaris REIT (PMZ.UN-T) with a “buy” rating and $16 target. The average is $17.
“PMZ.UN is the only REIT to have raised NOI guidance thrice and reported stronger-than-expected results through 2022,” said Mr. Mathur. “Management has reiterated its commitment to drive FFO/unit growth through capital recycling initiatives and NCIB activity. We expect leasing strength and occupancy gains to persist in 2023 as the REIT benefits from pent-up tenant demand for its portfolio. Additionally, management remains strongly shareholder focused and has stated that the best use of its capital, amid macroeconomic volatility, is to repurchase its shares given the sizeable discount to NAV.”
Metals & Mining
Reunion Gold Corp. (RGD-X) with a “speculative buy” rating and 70-cent target. The average is 78 cents.
“Reunion Gold is advancing its flagship Oko West gold project in Guyana, which is a brand new gold discovery within the prospective Guiana Shield,” said analyst Sehaj Anand. ”Reunion recently got an Exploration Discovery of The Year Award at Mines & Money, London for Oko West. Oko West is a potential high-grade open-pit project with multi-million-ounce potential located in a mining-friendly jurisdiction. With the ongoing expanded exploration drill program, Reunion plans to complete 85,000 metres of core drilling at Oko West, followed by a maiden resource estimate in H1/23. We expect the maiden resource to fall between 3.5-5.0M oz.
“The Company is run by a strong management team with capability and experience in developing gold projects in Guyana and is fully funded with over $50-million in the bank at the end of Q3/22.”
Osisko Mining Inc. (OSK-T) with a “buy” rating and $5.50 target. The average is $5.21.
“Osisko is advancing its flagship Windfall Project in the James Bay region in Quebec,” said Mr. Anand. “Windfall is one of the highest-grade underground deposits in the world, located in a tier 1 jurisdiction and run by a strong management team with a solid track record.
“Osisko recently published the much-awaited feasibility study (FS) for Windfall, which featured 306Koz annual production at a robust US$758/oz AISC for a 9.6-year mine life. The FS came slightly behind our estimates owing to the Company’s conservative mineable resource numbers (3.16Moz Au in FS vs. 4.82M oz Au in iA model).”
Arizona Sonoran Copper Company Inc. (ASCU-T) with a “speculative buy” rating and $3.50 target. The average is $3.27.
“Safe Jurisdiction with Established Infrastructure – Located 3 miles from Casa Grande, Arizona, electrical substation in place, water use permit obtained, private land ownership, and mining county with available labour,” said analyst Ronald Stewart.
“ASCU trades at a significant discount to other SX/EW developer peers. ASCU trades at an EV$/lb of approximately $0.025/lb versus its neighbour Ivanhoe Electric (IE-T, Not Rated), which trades at $0.18/lb.”
Osino Resources Corp. (OSI-X) with a “speculative buy” rating and $2.75 target. The average is $2.39.
“PFS Level Twin Hills Gold Project – Remarkable three-year period from discovery to PFS,” said Mr. Stewart.
“Attractive Production Profile – 170K oz/a over a 10-year mine life @ less than $1,000 per ounce AISC.”
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David Leeder