Monday’s analyst upgrades and downgrades

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

Desjardins Securities analyst Chris Li expects consumer stocks to remain volatile in 2022 creating “attractive buying and selling opportunities” for investors

“Clear winners are difficult to identify for two reasons. First, Omicron, supply chain disruptions, inflationary pressures and normalization of consumer behaviour post-pandemic pose risk to earnings. Second, while we expect the grocers to benefit from rising food inflation and a rotation to defence (Omicron) in the near term, we believe this is largely reflected in their premium valuation (L and MRU),” he said in a research report released Monday.

With that view, he named Dollarama Inc. (DOL-T) and Alimentation Couche-Tard Inc. (ATD-T) his “top picks” for the next year, citing “relatively better earnings visibility and trade in line with/below historical valuation.”

For Dollarama, he sees “multiple levers to drive attractive earnings growth,” projecting gains of at least 20 per cent in 2022.

That led him to raise his rating for the discount retailer to “buy” from “hold” with a target price of $72. The average on the Street is $64.54, according to Refinitiv data.

“While we may be early with our upgrade (to Buy from Hold) given margin uncertainty from inflationary pressures and the recent surge in COVID-19 cases, we believe they are manageable,” said Mr. Li. “Our recent pricing survey shows a continuing attractive price gap between DOL and its key competitors. This supports flexibility for SKU refresh/mark-ups to offset cost pressures. FX hedging tailwinds and lower COVID-19 expenses will also help. We believe DOL is well-positioned to generate 20-per-cent EPS growth next year (highest in our coverage) and mid-teens percentage growth longer-term, with upside from the introduction of higher price points ($4.50 and $5.00). Valuation is reasonable at 23.1 times forward P/E (vs approximately 25-times five-year average). We believe there is potential for valuation to improve as it becomes increasingly clear that the inflationary pressures are manageable.”

Mr. Li has a “buy” rating and $56 target for Couche-Tard shares. The average is $57.88.

“While the market may be concerned about U.S. labour challenges and inflationary pressures, we believe they are manageable and that ATD is on track to generate attractive organic growth, supported by its robust pipeline of growth initiatives (see our report) and improvement in morning daypart traffic,” the analyst said. “While we expect ATD to achieve its organic EBITDA target of US$5.1-billion in FY23 (in line with management’s conservative target), the market is more cautious, with consensus expecting only US$4.9-billion (US$4.4–5.1-billion). Better earnings visibility should be a catalyst. ATD’s strong FCF and balance sheet support value creation through share buybacks and/or acquisitions. Valuation is reasonable at 15.3 times forward P/E vs the historical average of 17 times, supported by 10-per-cent-plus long-term organic EPS growth.”

Concurrently, he named Gildan Activewear Inc. (GIL-T, “buy” and $59 target) a “reopening play.”

“A continuing demand recovery in North America in 2022 and benefits from Back to Basics are key,” said Mr. Li. “Despite the strong year-to-date share price performance (+45%), valuation is reasonable at 15.5 times P/E (2022 estimates) vs the historical average of 15–16 times and supported by sustainable 10-per-cent-plus EPS growth. We see cotton price volatility and news on a global minimum tax as key risks.”

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With its valuation “too low to ignore,” TD’s Vince Valentini upgraded AcuityAds Holdings Inc. (AT-T) to “buy” from “hold” on Monday, finding its risk-reward proposition “too compelling at these levels” following a 34-per-cent decline in share price since he downgraded the stock at the beginning of November. We

“The falling share price has led to a total collapse in EV/Revenue to 2.5 times 2021 estimated net revenue, down from 10.7 times in June and over 25 times when we initiated coverage back in February 2021,” he said. “Valuations of AT shares have come down much more versus the broader peer group, and we highlight that the valuation of TTD shares (closest comparable, in our view) is now back to where it traded in February. This now leaves us with a situation where Acuity is no longer trading as a high-growth digital-media story.

“Expectations have seemingly been dramatically lowered, which we believe sets up asymmetric upside potential versus downside risk in 2022. If revenue growth accelerates in mid-2022 (following the illumin sales-cycle issues and supply-chain issues), then we believe AT shares could once again re-rate materially higher. But if revenue growth remains underwhelming, we would not expect much more downside, now that the stock is trading at only 7.2 times 2022 EBITDA.”

Seeing its shares having dropped “to a point where the rewards outweigh the risks,” Mr. Valentini maintained an $8 target, below the $10.44 average.

“Given the favourable risk/reward scenarios that we see over the next year, we are willing to upgrade now, even though we are well aware that management does not expect a meaningful improvement in revenue growth in either Q4/21 or Q1/22,” the analyst said.

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In response to recent share price weakness, TD Securities analyst Tim James raised GFL Environmental Inc. (GFL-T) to “buy” from “hold.”

“In the current environment of uncertainty around the trajectory and prolonged impact of the pandemic, we believe GFL is a compelling investment opportunity at current levels, given the company’s strong execution, improving FCF, growth potential, and M&A pipeline,” he said. “In particular, we believe that GFL represents a good opportunity for an investment with relatively limited sensitivity to the outcome of the pandemic, inflation, and economic conditions over the next 12 months.

“We view GFL’s strengthening FCF year-to-date in 2021 and increases in full-year guidance as positive developments. Results through Q3/21 have demonstrated the stability of the business and the high predictability of revenue and earnings. Although we acknowledge that sector valuations are at historically high levels, we believe that the stability and risk profile of the industry have improved relative to historical precedents, and that the current environment of uncertainty due to COVID-19 will support elevated multiples for the foreseeable future.”

Believing it is “capitalizing on key strategic acquisition opportunities and taking on the required debt financing without creating undue financial risk” and suggested the presence of upside potential to his current financial forecast, the analyst maintained a $56 target. The average is $48.41.

“We believe that GFL offers investors a relatively resilient source of earnings and cash flow that justify higher levels of financial leverage to maximize returns to shareholders. In addition, its acquisition-driven growth potential provides incremental return opportunities that have proven relatively successful when observing industry consolidators with a longer public financial history,” said Mr. James.

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Calling it an “authentic, founder-led, customer focused company levered to several attractive growth themes,” ATB Capital Markets analyst Martin Toner initiated coverage of Thinkific Labs Inc. (THNC-T) with an “outperform” rating on Monday.

The Vancouver-based company, which provides a platform for entrepreneurs and businesses to create and run online course, went public on the Toronto Stock Exchange in late April.

“The nature of work is changing, and we believe Thinkific is well positioned to benefit from that trend,” said Mr. Toner. “In media, ‘the audience has taken the stage,’ the landscape has changed forever, and there is a unique opportunity for creators and companies that can innovate and create value for this new marketplace. Thinkific is also grounded in the concept of social good. The Company views its solution as democratic, and we believe Thinkific will appeal to ‘ESG impact’ investors. The shock of COVID-19 accelerated Thinkific’s growth dramatically, and similar to e-commerce trends, the Company is going through a ‘normalization’ process.

“We believe the creator economy is still very nascent, more so than e-commerce, which represents both an opportunity and a risk. We believe customer-focused innovators will be rewarded, but the risk of failure is high. Thinkific’s history and culture shows vision and an authentic focus on creating value for the entire ecosystem. We believe Thinkific’s growth will ‘normalize’ to a level that will make the stock look inexpensive over the medium term, and we recommend investors take note of the low revenue growth CAGR [compound annual growth rate currently priced into the stock at these levels. Good growth companies have embedded optionality to future innovation. We believe Thinkific’s pace of innovation will continue, and the price of the optionality to value creating innovation implied by Thinkific’s current stock price is effectively zero.”

Seeing it as “enabler of the creator economy,” Mr. Toner thinks Thinkific provides an platform that benefits the growing number of people performing independent work in both North America and Europe, which he estimates at 162 million currently.

“The creator economy represents a multi-billion dollar opportunity, is growing rapidly, and we believe Thinkific will drive innovation in this market,” he said. “Thinkific is a market growth story, as opposed to a market share gain story. We believe the Company’s growth algorithm will compound market growth and wallet share growth, and investors should expect growth to persist for years.”

“Thinkific is a flexible solution intended for creators to use it in a number of ways. Most creators attracted to Thinkific are already generating revenue, but not yet charging a subscription or charging directly for content. The jump from a transactional based revenue to subscription based recurring revenue stream is a ‘gangster move,’ according to New York University, Stern School of Business’ Scott Galloway, and makes Thinkific’s value proposition to creators compelling. Of course, Thinkific is itself a high growth, subscription-based model, which attracts a premium multiple.”

Emphasizing its “creator friendly” model and referring to the company as “Shopify’s little sister” due to its “willingness to share the value its platform creates in order to build the ecosystem,” he set a target of $13 per share. The average on the Street is $18.91.

“COVID-19 undoubtedly accelerated adoption, and now the Company’s growth trajectory is normalizing,” said Mr. Toner. Our estimates conservatively estimate that revenue growth will normalize in the low 30.0-per-cent range by 2023, and we forecast deceleration from there. Our ten year revenue CAGR is 22.7 per cent, and we forecast the Company reaching adjusted EBITDA breakeven around the $125.0-million revenue mark. Thinkific maintaining growth rates north of 30.0 per cent over the next several years would have positive implications for the share price, in our opinion.”

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Franco-Nevada Corp. (FNV-N, FNV-T) is an “industry leader with resilience to sector cyclicality,” said H.C. Wainwright analyst Heiko Ihle.

Touting its growth opportunities and “consistent sector outperformance,” he initiated coverage with a “buy” rating on Monday.

“Franco-Nevada is widely regarded as the most prolific company in the mining royalty space,” said Mr. Ihke. “In turn, and as with other established royalty companies, Franco maintains a highly de-risked business model given its hands-off approach to the actual mining operations. The firm nonetheless maintains strong upside to project growth and longevity amid a lack of required capital expenditures. At present, Franco provides investors with unparalleled asset diversity based on its 325 mining interests and 82 energy assets that cover roughly 63,000 square kilometers of land globally. In FY20, 49 per cent of total revenues were derived from South America, while 19 per cent and 18 per cent were attributable to Canada and the United States, respectively. Notably, the remaining 14 per cent of revenue, categorized as ‘Rest of World’ assets, is derived from 11 different countries.

“One of Franco’s key characteristics within the mining space is its low-cost structure. In turn, this provides resilience during downturns in commodity cycles. As a result, the company has shown long-term growth despite the cyclical nature of precious metal markets.”

Noting Franco-Nevada has maintained a variety of interests in producing, advanced-stage and exploration-stage assets, Mr. Ihle sees it a strong position for additional long-term growth through the development of non-producing projects.

“We further stress anticipated expansion of current operations,” he said. “In order to conceptualize the value of these ounces attributable to Franco-Nevada, we then utilize the company’s calculated royalty ounces associated with each of its interests. We stress that Franco-Nevada presently maintains exposure to 21.5Moz of gold across a variety of producing, pre-production, and exploration-stage projects. We expect these royalty ounces to drive the company’s profitability over the long-term.”

Mr. Ihle sees several catalysts for the company in 2022, including gains from its royalty at Kirkland Lake Gold Ltd.’s (KL-T) Detour Lake deposit in northern Ontario with the expectation of a new mine life plan.

Touting its “strong foundational revenue with room for growth,” he set a target for Franco-Nevada shares of US$167. The average is US$149.22.

“Franco has continually outperformed the VanEck Vectors Junior Gold Miners index (GDXJ; not rated), and the VanEck Vectors Gold index (GDX; not rated),” said Mr. Ihle. “We stress that this outperformance comes despite many years of precious metal price cyclicality. Additionally, even though the S&P 500 has benefited from a bull market that has spanned more than a decade, Franco-Nevada’s share price has virtually matched its gains. This phenomenon has occurred despite precious metals falling out of favor with many investors after FY11 following a long bull market. We therefore believe that Franco-Nevada offers a strong investment vehicle when navigating general market volatility, both in the long-term and in the short-term, while also providing exposure to upside in the precious metals sector.”

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H.C. Wainwright analyst Vernon Bernardino initiated coverage of Toronto-based Edesa Biotech Inc. (EDSA-Q) with a “buy” recommendation on Monday, believing its “pipeline shows promise for inflammatory diseases with unmet needs.”

“We are bullish on Edesa Biotech, a clinical-stage biotechnology company exploring new ways to treat inflammatory and immune-related diseases, based on three points: (1) EB05′s favorable reduction inmortality in critically ill hospitalized patients compared to placebo; (2) EB01′s statistically significant improvement of multiple allergic contract dermatitis (ACD) symptoms with minimal side effects; and (3) the extension of anti-inflammatory technology to other indications with high unmet needs,” he said. “We look to results from the Phase 3 trial of EB05 in COVID-19 patients with acute respiratory distress syndrome (ARDS),and the Phase 2a trial of EB01 in ACD patients in 2022 as positive catalysts.”

Mr. Bernardino sees Edesa’s EBO5 monoclonal antibody therapy as a “potential first-in-class TLR4 pathway inhibitor” for the treatment of Acute Respiratory Distress Syndrome (ARDS) in COVID-19 patients.

Silcoff: Edesa stock soars after Toronto biotech shares data showing COVID-19 antibody saves lives

“ARDS is a life-threatening form of respiratory failure, and the leading cause of death among COVID-19 patients,” he said. “ARDS is caused by a number of conditions, such as sepsis, bacterial, viral infection, smoke/chemical inhalation, and/or chest injury, which result in inflammation and injury to the lungs, depriving the body of oxygen. To tackle ARDS in COVID-19 patients, Edesa is developing EB05, a monoclonal antibody that inhibits toll-like receptor 4 (TLR4), a key immune signaling protein and an important mediator of inflammation that is activated by SARS-COV2 infection, as well as other respiratory infections, such as influenza. If approved, EB05would potentially be the first TLR4 pathway inhibitor approved for ARDS in COVID-19 patients, a market expected to be worth approximately $16.9-billion by 2027.”

He set a target of US$16 per share. The current average is US$19.

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In other analyst actions:

* Piper Sandler analyst Michael Lavery downgraded Canopy Growth Corp. (CGC-Q, WEED-T) to “underweight” from “neutral” with a US$7, falling from US$11. The average on the Street is US$12.56.

* CIBC World Markets analyst Dennis Fong raised his target for Cenovus Energy Inc. (CVE-T) to $24 from $22, reiterating an “outperformer” rating. The average is $20.14.

* In response to its fourth-quarter results, RBC Dominion Securities analyst Paul Treiber cut his Enghouse Systems Ltd. (ENGH-T) target to $65 from $70 with an “outperform” rating. Others making changes include: TD Securities’ Daniel Chan to $60 from $70 with a “buy” rating and Scotia Capital’s Paul Steep to $58 from $65 with a “sector perform” rating. The average on the Street is $63.

“We remain positive on Enghouse given our view of its strong balance sheet and the potential for improving M&A valuations,” said Mr. Chan.

* RBC’s Keith Mackey raised his target for Shawcor Ltd. (SCL-T) to $9 from $8.50, exceeding the $7.50 average, with an “outperform” rating.

* Following the announcement of its $31.5-million acquisition of Dana Hospitality LP, TD Securities’ Aaron MacNeil bumped up his Dexterra Group Inc. (DXT-T) target to $11.50 from $11 with a “buy” rating, while Scotia Capital’s Michael Doumet moved his target to $10.75 from $10.50 with a “sector outperform” rating. The average is $11.33.

“Since it completed its reverse takeover of Horizon North, the Dexterra management team has consistently met or beat TD and consensus expectations in five sequential quarters, despite significant operating uncertainty across the company’s various business segments and end-markets,” said Mr. MacNeil. “As a result, we believe that the company continues to build credibility with investors. With this acquisition, we are maintaining our BUY rating.”

* Eight Capital initiated coverage of Lithium Americas Corp. (LAC-N, LAC-T) with a “buy” rating and US$39.50 target, exceeding the US$35.80 average.

* Eight Capital also initiated coverage of Montreal-based Critical Elements Lithium Corp. (CRE-X) with a “buy” recommendation and $2 target. The average is currently $2.47.

Editor’s note: ATB Capital Markets republished its report on Thinkific on Monday afternoon. This version has been updated