Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Justin Bouchard and Chris MacCulloch continue to see “deep value” in the Canadian energy sector heading into fourth-quarter earnings season.
“The rally in oil prices caught us by surprise; we were expecting this type of move later in the year,” they said in a research report released Monday. “Natural gas has been a story of commodity whiplash, with an extremely mild, deflationary December reflated by a jolly January and, so far, fantastic February forecasts. Either way, the current commodity price environment translates into significant FCF generation for energy producers, carrying with it the ability to further strengthen corporate balance sheets and enhance shareholder returns. We have upped our targets on every producer under coverage, each of which maintains a Buy recommendation.”
In the report, the analysts moved their 2022 price forecast for WTI to US$80 per barrel from US$70 previously, and they introduced a US$90 estimate for 2023.
“While there are still several potential near-term headwinds for oil prices, by all accounts that ship has sailed,” they said. “Traders are laser-focused on the expectation that global oil markets are woefully unprepared for eventual tighter supply balances later this year— and unconvinced of OPEC+ spare capacity. When combined with the systemic capital starvation of oil-producing assets in recent years, it is a recipe for higher prices.”
With that view, the analyst said they would continue to buying producer equities “with reckless abandon.”
“Following a blockbuster performance in 2021, it is the same story this year for the sector,” they said. “The combination of US$80+/bbl WTI and US$4+/mmbtu NYMEX prices, along with industry’s newfound zeal for capital discipline, continues to support one of the most compelling recent investment climates for Canadian oil & gas equities. Factoring in the growing inflationary storm, there are few safer harbours than physical commodities. The FCF story is long and strong. Most importantly, the majority of producers are in the final innings of their respective balance sheet cleanups. In other words, short of a breakdown in capital discipline or an unexpected collapse in commodity prices, investors can count on significant capital returns through a combination of share buybacks, dividends and special dividends.”
Raising their target prices for all stocks in their coverage universe, Mr. Bouchard made these adjustments to large-cap stocks:
- ARC Resources Ltd. (ARX-T) to $25 from $21. The average on the Street is $18.54.
- Canadian Natural Resources Ltd. (CNQ-T) to $75 from $65. Average: $66.43.
- Cenovus Energy Inc. (CVE-T) to $25 from $21. Average: $21.24.
- Imperial Oil Ltd. (IMO-T) to $60 from $50. Average: $51.20.
- Suncor Energy Inc. (SU-T) to $50 from $42. Average: $41.87.
- Tourmaline Oil Corp. (TOU-T) to $71 from $70. Average: $63.14.
Among dividend-paying stocks, Mr. MacCulloch made these changes:
- Crescent Point Energy Corp. (CPG-T) to $14 from $11. Average: $10.25.
- Enerplus Corp. (ERF-T) to $21 from $17.50. Average: $17.13.
- Freehold Royalties Ltd. (FRU-T) to $19 from $17.50. Average: $16.17.
- Peyto Exploration & Development Corp. (PEY-T) to $14.50 from $14. Average: $13.68.
- Topaz Energy Corp. (TPZ-T) to $23 from $22. Average: $23.35.
- Tamarack Valley Energy Ltd. (TVE-T) to $6.25 from $5.75. Average: $5.85.
- Vermilion Energy Inc. (VET-T) to $27.50 from $19.50. Average: $19.72.
- Whitecap Resources Inc. (WCP-T) to $13.50 from $11.50. Average: $11.67.
For growth stocks, the analysts’ changes were:
- Advantage Energy Ltd. (AAV-T) to $10.50 from $10. Average: $9.37.
- Athabasca Oil Corp. (ATH-T) to $2.50 from $1.75. Average: $1.75.
- Crew Energy Inc. (CR-T) to $4.25 from $4. Average: $4.27.
- Headwater Exploration Inc. (HWX-T) to $8 from $7.25. Average: $7.49.
- Leucrotta Exploration Inc. (LXE-X) to $1.50 from $1.25. Average: $1.31.
- MEG Energy Corp. (MEG-T) to $20 from $14.50. Average: $16.83.
- NuVista Energy Ltd. (NVA-T) to $13.50 from $9.50. Average: $10.04.
- Pine Cliff Energy Ltd. (PNE-T) to $1.05 from $1. Average: $1.05.
- Spartan Delta Corp. (SDE-T) to $14.50 from $10.75. Average: $11.33.
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CIBC World Markets analyst Todd Coupland expects Lightspeed Commerce Inc. (LSPD-T) to report “solid” third-quarter results after the bell on Wednesday that confirms his “positive thesis” and leading him to recommend buying its shares ahead of the release.
“Lightspeed is benefiting from Gross Transaction Value (GTV) and customer location growth and rising Lightspeed Payments adoption that together are expected to contribute to almost 40-per-cent organic annual revenue growth,” he said in a research note. “This compares to its discounted valuation at approximately 4 times fiscal 2023 estimated EV/Sales. The Bessemer Cloud Index median growth is 34 per cent while its one-year forward EV/Sales multiple is 9 times. In light of these lowered comparable multiples and the risk of rising interest rates, we have reduced our multiple but left our forecast intact.”
Mr. Coupland is expected quarterly revenue for the Montreal-based point-of-sale and e-commerce software provider of $141-million, in line with the Street’s forecast. His estimate of an earnings per share loss of 44 cents falls 8 cents lower than the consensus.
“During the quarter, visits to Lightspeed’s primary website increased 42 per cent year-over-year (vs. 58 per cent in the prior quarter), higher than all peers, including Shopify and Toast,” he said. “In January, traffic increased 94 per cent year-over-year. We were pleased to see Lightspeed’s web traffic stayed strong past the release of the short report in September. As COVID19 case counts rose, OpenTable data showed that diners in the U.S. and Germany began limiting their in-room dining at restaurants in the December quarter (FQ3). Offsetting this was Australia, where in-room dining climbed sharply over 2019 levels (69 per cent in December quarter vs. down 9 per cent in prior quarter.”
For the next two fiscal years, the analyst expects Lightspeed’s organic growth to “benefit from the re-opening of economies, customer growth, and an acceleration in Payments adoption.”
Maintaining an “outperformer” recommendation, Mr. Coupland cut his target to $68 from $125 based on his revised multiple. The average on the Street is $107.19.
“Our thesis is based on: 1) the SMB market for omnichannel innovation is large with a low cloud adoption rate; 2) Lightspeed’s platform advantages render it a top choice; and, 3) growth is expected to rise as economies re-open post-COVID-19,” he added.
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While its first-quarter 2022 financial results disappointed the Street, ATB Capital Markets analyst Martin Toner thinks the share price of Real Matters Inc. (REAL-T) are “deeply undervalued, and implies no market share growth on much lower U.S. Title market volumes.”
On Friday, the Markham, Ont.-based company, which was one the worst performing stock of 2021 in the S&P/TSX Composite Index, fell almost 10 per cent after reporting revenue of $107.8-million, down 34.7 per cent year-over-year and missing both Mr. Toner’s $112.5-million estimate and the consensus projection of $110.6-million. Adjusted earnings per share fell 71 per cent to 4 cents, also missing forecasts (9 cents and 6 cents, respectively).
“When the refinance market was booming, 60.0 per cent to 70.0 per cent of Real Matters’ net revenue was driven by mortgage refinance volumes,” said Mr. Toner. “That number is down to below 50.0 per cent, on our FY2022 estimates. The ongoing weakness in this market is placing significant pressure on the business, and the current environment suggests it will only get worse. The stock reached all-time lows of $3.00 in January 2019, when refinance volumes reached trough levels. A combination of market share growth, improvements in the refinance market, and share buybacks turned the stock around. We are not expecting refinance markets to turn around quickly; in fact we incorporate more year over year declines in FY2023 to be conservative. We believe market share improvements in the second half of FY2022 in Title will improve sentiment for the stock significantly.
“In Q1/FY22, Real Matters’ results deteriorated slightly, with additional share losses and lower than expected EBITDA. The Company also did not deliver any materially positive good news on new Tier 1 lenders.”
The quarterly report led Mr. Toner to reduced his fiscal 2022 and 2023 revenue and earnings expectations, citing the expectation for lower refinance and purchase mortgage origination volumes.”
However, he reiterated: “We remain confident in the long-term market share story. We continue to believe market share in Title will grow significantly as the Company brings on large lenders, and do not see any disruptive forces that will impact their attractive competitive position in the medium term.”
Maintaining an “outperform” recommendation, he lowered his target to $13 from $16. The average on the Street is $8.94.
“Next quarter, Real Matters will lap share losses in Title. With those losses behind them, and new lenders contributing to share gains, we believe market share gains will improve sentiment on the stock, in the second half of FY2022,” said Mr. Toner.
Other analysts making target adjustments include:
* Canaccord Genuity’s Robert Young to $6 from $8.75 with a “hold” rating.
“We expect that seasonality combined with a higher rate environment will weigh more heavily on volumes in FQ2 (March), although management indicated it sees reason to be optimistic on the back half of the year given share gains and channel expansion,” said Mr. Young. “That said, we assume that Real Matters faces a more difficult environment in 2022, more than offsetting expected share gains, about which we remain confident. Real Matters continues to drive wallet share gains in Tier1 Appraisal and Title with strong performance on balance scorecards and continued momentum on new wins. Management was optimistic on Tier1 Title opportunities given ongoing discussion with the majority of Tier1 lenders but did not provide any detail on new wins. We expect that the impact of rate increases is likely to fall more heavily on Title given its high exposure to refinance volume than previously. Real Matters indicated it would moderate OpEx but will balance that with the longer-term objectives. Given the weaker-than-expected FQ1 and expected pressure on Title, we have reduced our estimates further.”
* Scotia Capital’s Paul Steep to $8 from $10 with a “sector perform” rating.
“We remain cautious on Real Matters shares given the impact of repositioning the firm’s U.S. title business and cyclicality in the U.S. mortgage refinancing market. We would take a cautious approach to the stock and watch for stabilization of the firm’s Title operations during a transition period and uptake by new Tier 1 and 2 clients in this segment. Factors we are monitoring in revisiting our view on the shares include the ramp-up of volumes in U.S. Title, given the new Tier 1 client launched during 2021 and additional new client wins,” said Mr. Steep.
* Raymond James’ Steven Li to $10 from $18 with an “outperform” rating.
* BMO’s Thanos Moschopoulos to $7 from $9 with a “market perform” rating.
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In a separate note, Mr. Toner said he sees an opportunity for investors to jump into technology stocks after a disappointing start to 2022, believing fourth-quarter 2021 “were surprisingly strong in Q4/21” and will act as a tailwind for companies, including Shopify Inc. (SHOP-T).
“The impact of the Omicron variant became more significant in late December, and January, and we believe this may impact the narrative and the guide for Q1/2,” he said.
“ Technology stock stripped at the start of 2022, with several high growth companies ending the first few weeks of the year down double-digits, following the review of the Federal Reserve’s last meeting minutes, which pointed to more hawkish tone from Fed officials, and the market pricing in rates hikes for 2022,with the first one expected possibly as soon as March. This concerned growth investors, and triggered a sector rotation, out of growth equities, into value and cyclical equities, with energy shares performing notably well to begin the year. We view this as an opportunity for long-term growth investors to build positions in innovative, fast growing, high-quality companies, which we believe will continue to grow rapidly and surpass growth expectations. We believe the recent selloff and depressed valuations offer a favorable setup as we enter the Q4/21 earnings season.”
In response to this volatility, Mr. Toner reduced his target prices for several stocks in his coverage universe:
* Shopify Inc. (SHOP-T, “outperform”) to $2,150 from $2,500. The average on the Street is $2,072.29.
“Shopify is now trading below 20.0 times NTM P/S [next 12-month price to sales],the valuation it had just prior to COVID-19,” he said. “However, those levels were new grounds for the Company and coincided with changing financial conditions. We would attribute some of Shopify’s multiple expansion to the fortification of their competitive position. The larger their platform becomes, the more merchants they attract. However, multiples for stocks, especially growth stocks, expanded broadly in 2019 and early 2020. Retracing to preCOVID-19 valuation levels ma not be the bottom for this selloff.”
* Lightspeed Commerce Inc. (LSPD-T, “outperform”) to $145 from $200. Average: $107.19.
* Kinaxis Inc. (KXS-T, “outperform”) to $230 from $240. Average: $225.73.
* Docebo Inc. (DCBO-T, “outperform”) to $110 from $120. Average: $115.03.
* Softchoice Corp. (SFTC-T, “outperform”) to $35 from $36. Average: $33.64.
* E Automotive Inc. (EINC-T, “outperform”) to $27 from $28. Average: $26.84.
* Thinkific Labs Inc. (THNC-T, “outperform”) to $10 from $13. Average: $16.09.
* Mcloud Technologies Corp. (MCLD-X, “strong buy”) to $12.50 from $13. Average: $9.83.
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Raymond James analyst Michael Glen believes K-Bro Linen Inc.’s (KBL-T) current valuation “ignores underlying business fundamentals.”
Accordingly, he raised his rating to “strong buy” from “outperform,” seeing “a very compelling entry point.”
“For context, KBL stock is down 24.4 per cent over the past 6 months, vs. the S&PTSX up 2.5 per cent and S&PTSX Small Cap Index down 0.2 per cent,” the analyst said. “In the context of a market seemingly shifting towards fundamentals and cash flow generating businesses, we believe such an outsized underperformance is unwarranted. As such, we are upgrading the stock to SB1 from OP2 previously.
“We want to be clear that this upgrade is not a ‘buy in front of the 4Q’ type call, it is based squarely on the current valuation and the long-term underlying fundamentals of the business. We are confident that in purchasing KBL stock at this level, an investor will generate an attractive all-in return over the coming year (i.e. dividend + capital return).”
Expecting the stock to benefit from organic growth in the the Canadian Healthcare segment, which he calls “a recurring and consistent business,” Mr. Glen maintained a $50 target. The average is $50.81.
“In buying this stock, investors are purchasing a company with a very solid underlying business (74 per cent is Canadian healthcare), attractive dividend yield (3.5 per cent), strong balance sheet (net debt/EBITDA = 1.0x), prospects for growth via the eventual rebound in hotel volumes, and potential healthcare wins (during the 3Q21 CC KBL indicated $3-5-million of RFP coming available during 2022). All-in-all, we believe there is a very compelling opportunity in the name for any investor willing to look beyond the next few quarters,” he said.
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Believing its “short-term looks dramatically better with supply chain disruptions and unexpected downtime,” RBC Dominion Securities analyst Paul Quinn upgraded Vancouver-based Mercer International Inc. (MERC-Q) to “outperform” from “sector perform” on Monday.
“When we moved Mercer to Underperform in October, our thesis was underpinned by a negative pulp market outlook in both the short and medium term,” he said. “Since then, the outlook for pulp has markedly improved in the short-term due to significant supply disruptions and the medium-term is also looking better due to the delayed start-up of new capacity. We also expect Mercer to see unusual one-time gains from European power prices and a repeat of strong lumber prices.”
“Chaos for global pulp markets began in November with severe flooding in the BC Interior that cut off rail lines to key export points at the Port of Vancouver. Lack of transportation options resulted in downtime at West Fraser and Canfor mills. This alone sent Chinese pulp futures soaring as buyers sought to shore up supply as Chinese energy restrictions eased. Issues worsened in December when Canfor was forced to take an extended outage at its Northwood mill, clipping 70-80k mt of NBSK production. On January 1st, three UPM pulp mills in Finland went on strike, which could potentially last until February 19. In BEK, there is also a three-month (Jan-March) mismatch between the shutdown of Arauco Horcones Line 1 (290k tpy) and the start up of Line 3 (1.56 million tpy). Finally, the lack of railcars at Alberta-Pacific has caused the mill to take downtime for one week (12.5k mt). Combined, these disruptions have dramatically altered the supply-demand balance.”
With that “attractive near-term setup” and seeing further gains ahead with the “market will be better positioned to absorb the incremental capacity,” Mr. Quinn hiked his target for Mercer shares to US$15 from US$8. The average is US$14.
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IA Capital Markets analyst Matthew Weekes expects fourth-quarter 2021 earnings season for diversified industrial companies in his coverage universe to be focused on “effects of supply-side issues and inflation on our coverage universe, and for any changes in tone and outlook for 2022 and beyond.”
“As Q4 progressed, the effects of tightening labour markets, supply-side shortages, and high levels of inflation emerged as key concerns for market participants, which were exacerbated by the emergence of the COVID-19 Omicron variant, although we are less concerned about the variant than we are about inflation and expected monetary policy tightening going forward,” he said. “These factors have put renewed caution into markets, as we believe investors are considering the undesirable combination of potentially slower economic growth with tight supply and high prices, putting pressure on equity performance. The TSX is down nearly 5.0 per cent off of its November highs, and down 2.3 per cent year-to-date in 2022. YTD, stocks in our coverage universe have experienced mixed returns, with a weighted average return of negative 3 per cent. Going forward, we see attractive return potential in our coverage universe, which mostly consists of above-market beta stocks. We believe that operating and financial performance will be key determinants of relative performance over the next twelve months.”
After updating his valuations, Mr. Weekes made a pair of target changes:
* Pulse Seismic Inc. (PSD-T, “speculative buy”) to $2.70 from $2.60. Average: $2.60.
“We are forecasting a robust quarter, incorporating the Company’s update that it recognized the remaining revenue associated with an earlier large Transactional sale, resulting in PSD recording its second highest annual revenue in its history,” he said.
* Shawcor Ltd. (SCL-T, “speculative buy”) to $7.50 from $6.75. Average: $7.50.
“Management has guided for weakness over the next two quarters, with Adj. EBITDA in both Q4/21 and Q1/22 expected to be weaker than in Q1/21 due to a combination of factors, including a gap in scheduled pipe coating activity and supply-chain headwinds. Our Q4 forecast remains unchanged and in line with consensus,” he said.
Mr. Weekes maintained a $16 target and “strong buy” recommendation for Mullen Group Ltd. (MTL-T), which remains his top pick for 2022. The average target on the Street is $15.
“Mullen ... finished 2021 modestly positive but underperforming the TSX,” he said. “While MTL’s Q3 OIBDA was in line with forecasts, we believe that the market was disappointed by the margin performance in the quarter following the flurry of acquisitions completed in the first half of the year. Additionally, MTL’s 2022 guidance released in December was below expectations, overshadowing its 25-per-cent dividend increase. MTL is modestly outperforming the TSX so far in 2022.”
“Our Q4 forecasts are in line with consensus. We will be looking into MTL’s Q4 results and commentary for indications on the outlook for margins and demand as we consider supply-side issues, inflation and its impact on shipping and consumer demand, integration of 2021 acquisitions, and headwinds for certain specialized industrial services.”
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Scotia Capital analyst Michael Doumet continues to recommend Canadian equipment dealers, seeing the possibility of fourth-quarter 2021 earnings surprises based on “robust demand indicators, lean inventories, and strong pricing.”
“Our 4Q21 and 1H22 estimates are above consensus for all the equipment dealers,” he said. “While backlogs may have reached their peak and inventories will need to be replenished (likely in 2023), we believe the risk/reward remains favorable given the valuations. On our 2022 estimates, FTT (14 times vs. historical average of 16x) and WJX (8 times vs. 10 times) trade at P/E multiples below their respective mid-cycle multiples and offer upside optionality from capital deployment and an extended cycle beyond what is reflected in the shares (i.e., their valuations suggest a peak EPS in 2022 – we do not think that is the case). While we are equally optimistic on TIH’s prospects for a beat, its higher relative valuation and lower leverage inherently reduces upside torque from positive earnings revisions; M&A remains its primary catalyst.”
Mr. Doumet raised his target price for shares of Finning International Inc. (FTT-T) by $1 to $43, matching the consensus on the Street. He kept a “sector outperform” recommendation.
“For 4Q21, we forecast EPS of $0.56, ahead of consensus of $0.53,” he said. “We expect strong pricing and cost leverage (despite inflationary pressures) to drive the beat. The floods in B.C. appear to have had little to no impact on operations; remediation work in the region may boost rental rates and increase the long-term need for infrastructure. As for the election outcome in Chile in December, we expect it will have a limited impact in the near-term; however, a resolution on the mining bill could release pent-up spend beyond 2022. For 2022, mid-single-digit growth in product support, favorable operating leverage, healthy gross margins, and share repurchases, support approximately 15% EPS growth, in our view. Finning continues to make progress on multiple fronts, structurally gaining share and enhancing operating efficiencies. It has been able to cut fixed costs, which should provide earnings upside as volumes recover in what we expect to be a multi-year mining upcycle. Planned capex in the oil sands are expected to climb moderately and copper production is expected to increase from 2021 levels.”
He trimmed his targets for these stocks:
- Toromont Industries Ltd. (TIH-T, “sector outperform”) to $120 from $122.50. Average: $122.
- Wajax Corp. (WJX-T, “sector outperform”) to $30 from $32.50. Average: $29.75.
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Canaccord Genuity analyst Michael Fairbairn resumed coverage of six Canadian junior precious metal equities on Monday.
“The past year was a challenging one for gold and gold equities, with the physical metal falling 4 per cent while gold equities (GDX-USA) were down 12 per cent as investors sought higher returns elsewhere in the market (S&P 500 was up 27 per cent in the year),” he said. “Within golds, junior gold equities (GDXJ-USA) underperformed further, falling 23 per cent on the year as performance was skewed to the large caps and royalties. Despite this, we remain longer-term bullish on gold.”
“With that backdrop, we see many attractive opportunities within the junior producer space specifically. The sideways trade in gold paired with the underperforming GDXJ throughout 2021 has left a number of high-quality names trading at prices more reasonable than they were a year prior. In combination the M&A cycle has continued to heat up and we believe the junior producer equities are well positioned to outperform, having a solid floor and good upside with continued production growth and M&A acting as possible catalysts.”
Mr. Fairbairn resumed coverage of these companies:
* Calibre Mining Corp. (CXB-T) with a “buy” rating and $2 target. The average target is $2.53.
Analyst: “We believe that over the next few years, CXB has the potential to increase production to over 275koz from 183koz in 2021 while materially extending mine lives as its aggressive exploration programs drive organic growth.”
* Karora Resources Inc. (KRR-T) with a “buy” rating and $6.25 target. Average: $6.41.
Analyst: “We see Karora as the one of the lower-risk names in the space, with operations in a top-tier jurisdiction in Western Australia, an experienced and operator-focused management team, and a relatively straightforward and self-funded path to growth.”
* Wesdome Gold Mines Ltd. (WDO-T) with a “buy” rating and $13.50 target. Average: $14.45.
Analyst: “We like Wesdome for its portfolio of high-quality assets in low-risk jurisdictions, strong management team, and expected near-term growth.”
* K92 Mining Inc. (KNT-T) with a “speculative buy” rating and $8.75 target. Average: $11.60.
Analyst: “We view K92 as a solid producer with prospects for material production growth and strong exploration potential on their large land package situated atop Papua New Guinea’s world-class geology.”
* i-80 Gold Corp. (IAU-T) with a “speculative buy” rating and $4.50 target. Average: $5.37.
Analyst: “Over the past year, i-80 has transformed itself, disposing of non-core assets and acquiring projects that will allow it to run a hub-and-spoke operation in Northern Nevada. i-80 also boasts a strong management team with decades of experience working with refractory ore in Nevada.”
* Argonaut Gold Inc. (AR-T) with a “speculative buy” rating and $3.25 target. Average: $3.91.
Analyst: “Though the recent CapEx blowout at Magino and departure of CEO Pete Dougherty present major challenges, we still see deep value in Argonaut’s portfolio of projects and contend that AR is capable of working through its issues. We also flag Argonaut and its discounted valuation as a potential M&A target as the hunt for high-quality Canadian precious metals asset continues. We see Alamos Gold as a logical acquirer, whose Island Gold mine is adjacent to the Magino project.”
Mr. Fairbairn also assumed coverage of Torex Gold Resources Inc. (TXG-T) with a “buy” rating and $23 target, down from the firm’s previous $26 target. The average is $24.22.
“With open pit mining expected to conclude in 2024, Torex is transitioning to an underground gold miner. The company’s Media Luna project forms a substantial part of this transition and will provide the majority of process plant feed beginning in 2024. This makes an ongoing FS study (expected in Q1/22) critical to the future of the operation and Torex as a whole,” he said
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In other analyst actions:
* Scotia Capital analyst George Doumet sees “lots to like in 2022 (and beyond” for Maple Leaf Foods Inc. (MFI-T). He raised his target for its shares to $46 from $42 ahead of its quarterly earnings release, keeping a “sector outperform” rating. The average is $40.43.
“FI shares have been range bound for the better part of 2 years,” he said. “Why would 2022 prove any different? For starters, we see a catalyst in Q4/21 results (in late February), where we expect to see (hopefully substantial) changes to the company’s growth and profitability algorithms at its plant segment – that could ultimately lead to break-even (much) earlier than expected. We remind investors that MFI’s plant segment is burning $25-million to $30-million per quarter of adj. EBITDA. Secondly, we expect MFI’s capex cycle to finally come to an end in 2022 following the completion of its London poultry plant. This should allow the company to generate substantial FCF and to deleverage balance sheet (back down below 2x by 2023). This ultimately positions the company to take a more aggressive stance on capital deployment to shareholders (similar to what we saw circa 2015-2018). Lastly, we see improved visibility around the company’s 14-16-per-cent adj. EBITDA margin goal aided by: (i) secular drivers and favourable pricing dynamics (mentioned below), in the near term and (ii) a 200+ bps contribution to adj. EBITDA margins from the London Poultry plant, in the longer term. MFI is one of our top picks for 2022.”
* With its $32.7-million acquisition of a solar facility in Chile, Scotia Capital’s Justin Strong raised his target for Innergex Renewable Energy Inc. (INE-T) to $21 from $20.50, maintaining a “sector perform” rating. The average is $23.03.
* Canaccord Genuity analyst Matthew Lee raised his target for Stingray Group Inc. (RAY.A-T) to $9 from $8.50 with a “buy” rating. The average is $8.88.
“We expect RAY to deliver a solid quarter with revenues and EBITDA recovering on the back of improving metrics across the board,” he said. “On the music broadcasting front, we expect RAY to continue delivering robust SVOD subscriber growth, which should combine with an expanding commercial music business to drive 2-per-cent revenue growth. In radio, we expect top-line growth of 10 per cent off COVID-19 lows, which is now within 15 per cent of pre-COVID levels. On the cash flow front, we expect RAY to deliver robust FCF of $14.2-million ($0.20/share), which puts the company well on its way to deliver on our estimate of $0.84/share for the year.”
* Seeing its “current levels as marking an attractive entry point,” CIBC World Markets analyst Stephanie Price upgraded Descartes Systems Group Inc. (DSGX-Q, DSG-T) to “outperformer” from “neutral” with a US$89 target. The average is US$90.
“:The persistence of the logistics and supply chain challenges continued to provide a tailwind to Descartes throughout its F2022,” she said. “Descartes completed $90-million of M&A in H1/F22, and we are expecting an update on the M&A environment as management did not close any transactions in the second half of the year. We expect FQ4 to be another relatively easy year-over-year comparison given the pandemic-related slowdown in transportation volumes in the prior year ... We are upgrading Descartes from Neutral to Outperformer as we foresee longer-term tailwinds for Descartes as supply chain disruptions highlight the need for digitization and technology adoption.”
* Ms. Price cut her Converge Technology Solutions Corp. (CTS-T, “neutral”) target to $11 from $12.50 and his Softchoice Corp. (SFTC-T, “outperformer”) to $31 from $37.50. The averages are $13.75 and $33.64, respectively.
* RBC Dominion Securities analyst Matt Logan raised Morguard North American Residential Real Estate Investment Trust (MRG.UN-T) to “outperform” from “sector perform” with a $22 target, topping the $21.10 average.
* RBC’s Sam Crittenden cut his Teck Resources Ltd. (TECK.B-T) target by $1 to $52, exceeding the $46.07 average, with a “buy” rating.
* Needham analyst Scott Berg lowered his Absolute Software Corp. (ABST-Q, ABST-T) target to US$14 from US$18 with a “buy” rating. The average is US$17.67.
* “To align with prevailing negative sector sentiment,” Raymond James analyst Rahul Sarugaser cut his Village Farms International Inc. (VFF-Q, VFF-T) target to US$19 from US$27 with a “strong buy” rating. The average is US$14.92.
“Given the significant asymmetry between VFF’s strong Rev. growth and its uncatchable industry-leading COGS — the sum of which generate VFF’s consistent (cannabis-derived) + EBITDA performance — we view VFF as the most derisked company among its peers, such that when the sector recovers (likely not until we see some major cannabis legislative action in the U.S. that leads to an influx of rational institutional capital[vs. irrational Reddit trade]), we believe VFF will be the best positioned company among its peers to not only ride the eventual sector recovery, but also provide greater long-term value for its shareholders,” he said.
* Raymond James’ Steve Hansen bumped up his Methanex Corp. (MEOH-Q, MX-T) target to US$54 from US$52 with a “market perform” rating, while Barclays’ Michael Leithead raised his target to US$60 from US$57 with an “overweight” recommendation. The average is US$51.67.
“We upgraded MEOH in early September on the view that there was a meaningful disconnect between MEOH’s valuation and vastly improving cash flow profile and still think there is meaningful room for outperformance from here.,” Mr. Leithead said.
* Stifel analyst Cody Kwong upgraded Petrus Resources Ltd. (PRQ-T) to “buy” from “speculative buy” with a $2.15 target, up from $1.50 and matching the consensus.
“Petrus bring in the new year with a high impact IP30 rate from its first 100% WI well in North Ferrier,” he said. “This success helps reduce the risk of meeting or beating compelling production growth bogeys set at more than 50 per cent year-over-year (based on exit volumes). Marrying this with a WTI oil quote that has increased over US$20.00/bbl within the last two months and a constructive natural gas price backdrop, we are making a material increase to our new target price of $2.15/sh while also upgrading the stock from Speculative Buy to BUY.”
David Leeder