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

Equity analysts on the Street applauded Tourmaline Oil Corp.’s (TOU-T) $1.1-billion deal to acquire Black Swan Energy Ltd. as it continues to fortify his presence in the British Columbia’s lucrative Montney natural gas region.

Shares of the Calgary-based company jumped 8.3 per cent to $33.25 on the Toronto Stock Exchange on Friday following the announcement of the move before the bell. Tourmaline is now up 175 per cent in the past year after deals that include the initial public offering of affiliate Topaz Energy Corp.

CIBC World Markets analyst Jamie Kubik thinks the deal came at a “reasonable” price with Black Swan assets offering a “high-quality and strategic fit” in the region.

“We have followed Black Swan’s progression for multiple years and consider the asset base to be a high-quality addition for Tourmaline,” he said in a research note. “We also fully expect the development formula from TOU will enhance economic returns on the assets moving forward. The addition is complementary for Tourmaline’s NE BC Montney position, which should drive future operational synergies for the business.”

“The purchase metrics compute to 4.5 times 2022 estimated cash flow, which closely approximates our pre-deal trading metrics for TOU at 4.6 times EV/DACF [enterprise value to debt-adjusted cash flow] in 2022 on strip, and we see the transaction as being good for both parties. Although we do see the Black Swan hedge book weighing down cash flows somewhat in 2022, our cash flow expectation increases on the back of the transaction for 2021 and 2022, and we see the 6.25-per-cent dividend increase as being appropriate given Tourmaline’s superior financial position.”

Keeping an “outperformer” rating for Tourmaline shares, Mr. Kubik hiked his target to $40 from $35. The average target on the Street is $39.32, according to Refinitiv data.

Others making adjustments include:

* Scotia Capital’s Cameron Bean to $47 from $43 with a “sector outperform” rating.

“We see TOU’s deal to acquire Black Swan Energy Ltd. (private) as another big win on the acquisition front,” said Mr. Bean. “In our view, the Black Swan assets are among the most attractive in the North Montney region, with strong productivity and low costs from the core Aitken area and significant long-term upside potential in the Laprise and Jedney areas. The assets are contiguous with TOU’s existing Conroy/Laprise assets and will establish the company as the dominant player in the North Montney.”

* BMO Nesbitt Burns’ Randy Ollenberger to $40 from $38 with an “outperform” rating.

“We believe Tourmaline shares are attractively valued and that the company is uniquely positioned to generate impressive levels of free cash flow, which could be used to bolster its balance sheet, further increase returns to shareholders, or fund future acquisitions,” said Mr. Ollenberger.

* RBC Dominion Securities’ Michael Harvey to $44 from $42 with an “outperform” rating.

* Stifel’s Robert Fitzmartyn to $50.75 from $42.25 with a “buy” rating.

* National Bank Financial’s Dan Payne to $40 from $37.50 with an “outperform” rating.

* TD Securities’ Aaron Bilkoski to $37 from $35 with a “buy” rating.


Several analysts reduced their targets for shares of Enghouse Systems Ltd. (ENGH-T) following weaker-than-anticipated second-quarter results that sent its shares down 4.1 per cent on Friday.

The Markham, Ont.-based enterprise software provider reported revenue of $117-million, down 16.7 per cent year-over-year and 6.4 per cent below the consensus expectation ($125-million). Adjusted earnings per share of 37 cents fell 24.2 per cent and also missed the Street’s forecast by 8 cents.

“This quarter was a tough year-over-year comparison for Enghouse, given record Vidyo fuelled revenue in the year-ago quarter,” said CIBC World Markets’ Stephanie Price. “That said, our fundamental outlook for Enghouse is unchanged. Enghouse has a diversified offering with strong margins and impressive returns from its acquisition strategy (including a one-year payback on Vidyo.”

Ms. Price noted the pandemic continues to hurt Enghouse’s Transportation business, given the drop on public transit ridership.

“We believe that there may be some incremental demand for contactless payment solutions going forward, but that demand will continue to lag until ridership levels return. The recent $29-million contract with Norway to update its National Fire Services Technology should help to offset weakness in the AMG division,” she said.

Keeping an “outperformer” rating for Enghouse shares, Ms. Price cut her target to $69 from $80 after adjusting her earnings expectations to “more normalized” post-COVID-19 levels and to value the company in line with Canadian consolidator peers. The average is $67.75.

Others making changes include:

* Scotia Capital’s Paul Steep to $65 from $67 with a “sector perform” rating.

“Our view is that Enghouse’s Q2 results reflect on-going impact of COVID-19 and variability within the firm’s IMG business (in particular a tough YoY comparable for Vidyo),” said Mr. Steep. “In Q2, the firm’s professional services revenues improved with loosening of restrictions while other segments were impacted by a shift towards increased cloud deployments with lower than expected revenues and slightly higher R&D driving the decline in EBITDA margins vs our expectations. We continue to believe upside in the stock is largely centered on management’s ability to deploy capital toward acquisitions while maintaining at least neutral growth in the core business. The stock continues to see challenges relating to weak organic growth and historical variability in deploying capital on a consistent basis.”

* RBC’s Paul Treiber to $65 from $80 with an “outperform” rating.


Though its second-quarter missed expectations, RBC Dominion Securities analyst Sabahat Khan expects Roots Corp. (ROOT-T) to see a sequentially improvement in both sales and earnings as pandemic-related store restrictions ease through the second half of the year.

On Friday, the Toronto-based retailer reported consolidated sales of $37.3 million, up 24.7 per cent year-over-year and above the forecasts of both Mr. Khan ($31.3-million) and the Street ($33.3-million). However, excluding the Canada Emergency Wage Subsidy and $0.8 million of Canada Emergency Rent Subsidy, adjusted earnings before interest, taxes, depreciation and amortization fell 14.5 per cent to a loss of $5.4-million, below the analyst’s forecast of a loss of $3.9-million and the consensus of a $3.4-million deficit.

“During Q1, e-commerce sales were up 50 per cent year-over-year, continuing the strong growth trajectory over the recent quarters (recall that Q4 e-commerce sales were up 60 per cent year-over-year),” said Mr. Khan. “Looking ahead, although we expect e-commerce penetration to remain above pre-pandemic levels, we do expect a gradual moderation as stores re-open. We expect this will become more evident in Q3/21 onwards when we expect (hope) that a majority of shelter-in-place restrictions will have been lifted.”

“Management noted that heading into Q2, Roots reopened two of its Quebec stores in early May and four of its Nova Scotia stores in early June. In addition, the Government of Ontario announced that non-essential retailers will be able to open street-front locations in Ontario on June 11, 2021 (at 15-per-cent capacity). As a result, Roots will be reopening 26 of its 62 closed Ontario locations today (with indoor/mall-based locations to open once restrictions permit). Although sales should benefit from the partial reopening, we expect a more sustained and material improvement in top-line and earnings once restrictions are completely removed.”

Keeping a “sector perform” rating for Roots shares, Mr. Khan increased his target by $1 to $3. The current average is $4.46.

Other analysts making changes include:

* Canaccord Genuity’s Matthew Lee to $4 from $3.25 with a “hold” rating.

“Roots delivered a very solid quarter in Q1 with revenue and EBITDA both above consensus estimates, showing a strong recovery off a low Q1/20 base,” he said. “Revenue in the quarter was up 22 per cent year-over-year with the company benefiting from a shorter period of closures y/y (30 per cent in Q1/21, 50 per cent in Q1/20). Equally important, the company has done an excellent job in managing its cost base, allowing it to deliver negative $2.5-million in EBITDA during its seasonally weakest quarter. While the company did benefit from $2.5-million in CEWS, we believe the improved margins are largely a result of cost-cutting initiatives and lower promotional activity. Despite lowering some of our near-term estimates to reflect continued COVID-19 challenges in Q2, we have increased our target ... which reflects our more positive outlook on a medium-term revenue recovery and the sustainability of the company’s improved cost structure even in a post-COVID environment.”

* Scotia Capital’s Patricia Baker to $4.25 from $4. with a “sector perform” rating.

“We are impressed by the new management team’s response to the challenges of the COVID-19 pandemic,” she said. “In our view, Roots is one of the companies that will emerge from the pandemic far better positioned. In fact, it is obvious that over the course of the last five quarters, this team has focused hard on driving improving fundamentals, with noted success. This paves the way for a significantly enhanced performance once we emerge from the pandemic-specific challenges associated with lockdowns and retail restrictions.”

* TD Securities’ Brian Morrison to $5 from $4.50 with a “buy” rating.

* BMO Nesbitt Burns’ Stephen MacLeod to $4.50 from $4 with a “market perform” rating.

* National Bank Financial’s Vishal Shreedhar to $6 from $5 with a “sector perform” rating.


Touting its “longstanding reputation as a successful consolidator” and “highly scaleable” platform, iA Capital Markets analyst Chelsea Stellick initiated coverage of Neighbourly Pharmacy Inc. (NBLY-T) with a “buy” recommendation.

The Toronto-base company, currently Canada’s third-largest pharmacy chain operator, went public on the Toronto Stock Exchange on May 25.

“The Canadian retail pharmacy market is heavily fragmented with the majority of pharmacies being independently owned. Neighbourly currently has a slate of 3,600 acquisition targets,” she said. “What differentiates Neighbourly from the major national retail pharmacy chains is that it operates in different geographic profiles servicing communities of less than 100,000inhabitants. The Company becomes the acquirer of choice especially for independent pharmacy operators that seek an ownership succession plan. These pharmacies tend to have longer-standing relationships and loyal customer bases. In F2020, NBLY posted $187-million in revenues, which we expect to be $305-million for F2021, just ended in March, and growing to $589-million by F2024 as a result of both organic growth (3-5 per cent year) and acquisitions (25 stores acquired per annum.”

Ms. Stellick thinks Neighbourly, formerly known as Rx Drug Mart, possesses a “best-in-class” IT and Business Intelligence system, which she thinks are compatible with those used by its potential acquisition targets, “thus enabling seamless integration of acquisitions.”

“The Company seeks to move from 145 stores today to more than 230 by fiscal 2025,” she said. “Neighbourly can leverage its data analytics to improve its product and service offerings across its network (ex. virtual care options and home delivery), which we have not included in our forecasting but recognize as potential upside.”

The analyst set a 12-month target of $28 per share, $2 higher than its Friday closing price and $9 above the price on its market debut.

“We believe that NBLY has a niche competitive position and will continue to scale up by growing its portfolio of stores and in turn creating economies of scale,” said Ms. Stellick.

Elsewhere, Scotia Capital analyst Patricia Baker initiated coverage with a “sector outperform” rating and $32 target, calling it “Canada’s community pharmacy consolidator.”

“NBLY’s three-year CAGRs [compound annual growth rates] of 24.5 per cent on pro forma revenue and 29.7 per cent on EBITDA for the fiscal 2022-2024 period compare favourably with those of a group of companies engaged in similar roll-up strategies,” she said. “NBLY’s current valuation is in line with the average for the group of Canadian consolidators on 2021, but at a modest discount to the group’s average valuation on F2022E. NBLY’s three-year CAGRs also fall in line with consensus growth expectations for a group of high-growth retailers, including Ulta Beauty, Inc. (ULTA), Lululemon Athletica Inc. (LULU), and Canada Goose Holdings Inc. (GOOS). However, the high-growth retailers do command much higher valuations, with the group currently trading at 17.0 times EBITDA on average on calendar 2022, a 3.7 point premium to NBLY’s valuation. While there are valid reasons for this group to trade at a premium, NBLY’s market valuation will, in part, reflect growth rates consistent with these high-growth consumer companies. We believe NBLY’s growth profile, unique positioning, scalable infrastructure, and strong industry reputation should support its valuation.”

BMO Nesbitt Burns’ Peter Sklar gave it a “market perform” rating and $28 target, calling its valuation “excesssive.”

“Overall, we find Neighbourly’s pharmacy roll-up story a compelling investment thesis as there is a significant valuation arbitrage opportunity. However, since the IPO, the stock has run up considerably from the $17 issue price over a short period of time, resulting in limited potential return,” he said.

RBC’s Irene Nattel initiated coverage with a “sector perform” rating and $28 target.

“Based on our analysis, the Neighbourly growth story and operating backdrop are both highly compelling, our rating reflects current valuation with the shares up 51 per cent since the May 25 IPO. Our sector-leading earnings growth forecasts are underpinned by a long tail of consolidation opportunities, favourable demographic trends, and ongoing expansion of pharmacy services. With fiscal 2022-25 estimated EBITDA CAGR 21 per cent predicated on relatively conservative M&A assumptions, in our view, there is a strong argument for sustained valuation, and potentially, upward revision to forecasts,” she said.”


Though he continues to see SNC-Lavalin Group Inc. (SNC-T) “on a path to put its troubled past in the rear-view mirror,” BMO Nesbitt Burns analyst Devin Dodge now thinks there’s “limited remaining runway for a potential re-rating.”

“We believe there is little available cushion in the valuation to absorb any bumps in the road (e.g., further losses as problematic LSTK projects wind-down), yet the risk of unfavourable developments arising remains elevated. As a result, we believe the risk/reward for the shares is not favourable,” he said.

In a research report released Monday, Mr. Dodge warned “conservatism [is] warranted when selecting multiples, adding: “For the EDPM and Infrastructure Services divisions, we estimate margins are below the peer average once SNC’s corporate costs are burdened across the segments. Layering in muted M&A growth objectives, margin guidance that suggests limited expansion opportunities, and cash flow contributions being consumed by SNCL Projects, we believe these businesses warrant a multiple at the low end of the peer group range. We are more optimistic about the Nuclear division and believe it to be a low double-digit multiple business.”

“Unlike most stocks where valuation discussions focus primarily on earnings projections and the appropriate multiple, we believe there are several ‘SNC-specific’ items that need to be considered (e.g., near-term cash flow burn, non-controlling interests in JVs, settlement payments from federal charges, and legacy LSTK projects, etc.). In addition, most investors utilize EV/EBITDA as the primary valuation methodology for SNC but we believe care must be taken to neutralize the impact from lease accounting changes on equity values for E&C names. We estimate these ‘other considerations’ lower our NAV for SNC by more than $5 per share.”

Though he said potential upside from a “Blue Sky” scenario isn’t compelling, Mr. Dodge raised his target for SNC shares to $33 from $31 with a “market perform” rating to account for “more optimistic assumptions for cash usage at LSTK projects, Highway 407 valuation, and the multiple for Infrastructure Service.” The average is currently $39.

“Applying multiples to SNC’s divisions that are consistent with the most relevant comps, we estimate SNC’s shares could edge up into the mid-to-high $30s, or a bit more than 10 per cent above current levels,” he said. “However, we expect the closing of the multiple gap will be gradual and requires significantly improved and more stable financial performance. In our view, we believe the remaining re-rating opportunity isn’t sufficient to offset the downside risk should adverse developments emerge.”


In other analyst actions:

* National Bank Financial analyst Maxim Sytchev raised his WSP Global Inc. (WSP-T) target to $160 from $143 with an “outperform” rating. The average is $144.46.

* Canaccord Genuity analyst Kevin MacKenzie increased his target for shares of Bluestone Resources Inc. (BSR-X) to $5 from $4.75 with a “speculative buy” rating. The average is $4.56.

* JP Morgan analyst Richard Sunderland cut his Algonquin Power & Utilities Corp. (AQN-T) target by $1 to $20 with a “neutral” rating. The average is $17.64.

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