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

Rogers Communications Inc. (RCI.B-T) agreement to sell wireless carrier Freedom Mobile to Quebecor Inc. (QBR-B-T) for $2.85-billion is likely to be seen as a “positive” for investors, according to Canaccord Genuity equity analyst Aravinda Galappatthige, who thinks it will “likely gets them to the finish line as far as securing Shaw Cable is concerned.”

In a research report released Monday, he upgraded his recommendations for both Rogers and Shaw Communications Inc. (SJR-B-T) to “buy” from “hold,” expecting the the trilateral agreement to satisfy the commissioner of the federal Competition Bureau as well as the Ministry of Innovation, Science and Economic Development on issues related to their merger.

Rogers stands to gain nearly half a million clients as part of deal to sell Freedom Mobile

Mr. Galappatthige thinks the Freedom deal increases the prospect of the Rogers-Shaw transaction closing to over 95 per cent.

For Rogers, he thinks the Quebecor deal came at a higher cost than originally expected “considering the lower-than-expected valuation for Freedom (vs the $3.75-billion bids publicized in the media)” and the asset “ultimately went to the least desirable buyer from a Rogers (and incumbent) perspective.”

“Given this news, which we see as net positive and the steep 21-per-cent downswing in the stock since their Q1 report two months ago, we have opted to upgrade the stock from Hold to BUY.” the analyst said.

However, to reflect “the tougher macro and lower market valuations,” he cut his target price for Rogers shares to $69 from $71. The average on the Street is $78.07, according to Refinitiv data.

“This is ultimately positive for Rogers, given that it likely clears the way to close the Shaw deal and extract both the near-term synergies and longer-term benefits (e.g., better positioning for 5G) of the transaction,” said Mr. Galappatthige. “With that said, it seems to have been a little more costly than originally envisaged, given the somewhat lower valuation for the wireless asset and backhaul/roaming concessions to Quebecor. By our calculation, with this deal, the acquisition of Shaw’s cable assets translates to 10.9x EV/EBITDA on a pre-synergies basis. This, of course, falls below 8x when the full synergies are factored in. On the other hand, we believe that Rogers’ shareholders (and even BCE, TELUS investors) can be relieved by the absence of a network share arrangement as part of the agreement.

“We note that under this construct Rogers’ balance sheet leverage would rise to 5.15 times net debt/proforma LTM [last 12-month] EBITDA (pre-synergies) upon closing.”

For Shaw, he raised his target back to the offer price of $40.50 from $35. The average is $39.80.

He maintained a “buy” rating and $30 target, below the $34.33 average, for Quebecor shares.

“For QBR, it is a mixed bag,” he said. “On one hand, the opportunity to develop Canada’s fourth national wireless operation comes with significant growth potential. If executed successfully, it represents a meaningful upside to QBR’s NAV. On the flip side, it does open up vulnerabilities and questions around the prospect of longer-term success as a national wireless player (e.g exposure to promotional activity in Quebec, leveraged balance sheet, inexperience outside Quebec). We calculate that starting leverage would be 3.9 times (net debt/LTM EBITDA). We have opted to maintain our current target of $30 per share and our BUY rating.

“While too early to determine the longer-term impact of this transaction, which would depend very much on Quebecor’s strategies and execution, we do believe that this result is moderately negative for the incumbents. Rogers, BCE and TELUS would have preferred one of the other proposed buyers to have taken Freedom, given that QBR is arguably the strongest competitor the incumbents could face. With that said, it is still a long journey for Quebecor.”


National Bank Financial analyst Adam Shine thinks Quebecor Inc.’s (QBR-B-T) $2.85-billion deal to acquire wireless carrier Freedom from Rogers Communications Inc. (RCI-B-T) is a “reasonable” price, requiring no equity or partners.

Estimating the purchase price is approximately $2.75 per share less than the Street expected, Mr. Shine upgraded Quebecor to “outperform” from “sector perform” previously.

“Pro forma leverage will be 3.8 times with strong FCF poised to delever ahead of next spectrum auctions,” he said. “We estimate that Quebecor is adding $1.1B-$1.2-billion of revenues and $400-million of EBITDA for related multiples of 2.5 times and 7.1 times. The assumption remains that Freedom would be rebranded as Fizz and Quebecor would go into Ontario, Alberta, and British Columbia with a mobile offer plus bundle through a TPIA arrangement with Rogers.”

“Prior to the Freedom news, the Competition Bureau (CB) replied to Rogers & Shaw and reiterated its opposition to their deal. The CB continues to say the sale of Freedom “is not an effective remedy” and will weaken Freedom as a competitor and won’t replace Shaw Mobile competition. We disagree. Parties have to advise the Competition Tribunal on June 23 if they intend to seek mediation whose first go around would occur July 4-5. We’ll now see if the parties can work through a negotiated settlement this summer which might allow the deals to potentially close in July or August. It would be beneficial for Quebecor to get approvals and close Freedom before September to better position it for back-to-school & holiday sales in 2H22.”

Seeing Quebecor “positioning to become fourth wireless carrier in Canada,” he maintained a target of $32 per share. The average target on the Street is $34.33.

“QBR shares look oversold on concerns about a wireless foray outside Quebec and recent cable underperformance management expects to resolve by end of 2H22,” he said.


After recently hosting institutional meetings with Suncor Energy Inc. (SU-T) in London, RBC Dominion Securities analyst Greg Pardy said he’s “encouraged that the company has a tighter group on the steps required to regain its status as a best-in-class oil sands operator.”

That led him to upgrade the Calgary-based company to “outperform” from “sector perform” on Monday.

“We believe that Suncor has reached a favourable inflection point as it relates to improving its operating reliability and safety,” said Mr. Pardy. “This will take time and there are bound to be bumps in the road along the way, but the direction of travel is clearer to us now. Suncor’s market valuation holds the potential to appreciate on a relative basis. To illustrate, a half multiple point turn in Suncor’s 2022 debt-adjusted cash flow multiple applied to our base outlook would equate to share price appreciation of about $7.”

He raised his target for Suncor shares to $53 from $47. The average target on the Street is $55.68.

“At current levels, Suncor is trading at a discount debt-adjusted cash flow multiple of 3.3 times in 2022 (versus our global major peer group average of 3.9 times) and at a free cash flow yield of 24 per cent (versus our peer group average of 19 per cent),” the analyst said. “We believe the company should trade at an average multiple vis-a-vis our peer group given its physical integration, free cash flow generation and shareholder returns, partly offset by disappointing operation performance in recent years.”


Believing its valuation has “never been as attractive,” Scotia Capital analyst Konark Gupta raised his recommendation for Cargojet Inc. (CJT-T) to “sector outperform” from “sector perform” on Monday.

“CJT is trading at just under 7 times EV/NTM EBITDA [enterprise value to next 12-month earnings before interest, taxes, depreciation and amortization] as the market is growing concerned about a potential downturn due to high inflation while the company is going to spend $1-billion in growth capex over the next four years (70-per-cent backstopped by disclosed contracts),” he said. “Since winning the transformational Canada Post contract in early 2014, CJT has traded at an average multiple of 10.5 times (7.5-times to 16.5 times range). Prior to the effects of COVID-19, it was trading at more than 14 times in February 2020.

“While we appreciate the macro uncertainty and its impact on equity valuations, we believe a 7-times multiple for a highly defensive business in a structurally stronger industry is an attractive entry point for even risk-off investors and a deep bargain for long-term investors.”

Mr. Gupta said he’s “confident” that the Mississauga-based company has “an inherent ability to largely mitigate the impact of a recession or stagflation through long-term contracts (including the latest DHL contract) while the air cargo market is still well under-supplied.”

With that view, he touted its “unique” business model that “provides immunity,” noting: “The majority of CJT’s business is under long-term contracts with minimum guarantees (similar to take-or-pay), fixed pricing with CPI-linked escalators, and surcharges for uncontrollable costs (including fuel). Of the three segments, 25 per cent of Domestic and almost 100 per cent of All-in Charter revenues are not contracted, although spot demand is exceeding supply in those segments such that CJT is turning away volumes. ACMI [Aircraft, Crew, Maintenance and Insurance] revenue is contracted and poised to witness solid growth from the new seven-year deal with DHL, effective Q2/22, that is first-of-its-kind in the industry. CJT expects the contract to generate $2.3-billion in cumulative revenue over seven years ($330-million per year on average), expanding the current DHL revenue run-rate of likely $120-$160-million. We note DHL has committed to utilize nine of CJT’s upcoming ~20 aircraft as seven aircraft are going to domestic and spares, leaving four B777s (delivering in 2024-26) for future visible opportunities. As management has stated in the past, it has an ability to lease out aircraft, divest conversion slots, sell feedstock or freighters, downgauge aircraft, consolidate routes, or align costs if demand falters. However, it believes a potential downturn will first bring demand-supply in balance.”

Despite his bullish view, Mr. Gupta trimmed his EBITDA forecast, largely for 2022 and 2023, to “‘reflect a potential soft landing, which may not materially impact CJT.” That led him to trim his target for Cargojet shares to $190 from $197. The average target is $233.17.


Canaccord Genuity analyst Shaan Mir sees 4Front Ventures Corp. (FFNT-CN) as a “compelling investment due to the company’s national cost advantages and growth avenues as it scales operations in its new jurisdictions (namely California and Illinois).”

Accordingly, seeing an “attractive” entry point for investors, he initiated coverage of the Phoenix-based multi-state cannabis operator and retailer with a “speculative buy” rating.

“4Front is the #2 market share leader in Washington due to what we believe is one of the lowest-cost manufacturing structures in the nation today,” said Mr. Mir. “The company has achieved its pricing advantage through established leadership in industry yields and identifying best practices in post-harvest activities. We believe 4Front is uniquely positioned to enter and succeed in hyper-competitive markets, where many of its peers (that predominantly operate in regions with high pricing) remain on the sidelines.”

“With a proven operating model in Washington, 4Front is now implementing a plan that will see it expand its low-cost platform into California and Illinois over the next 12 months. Specifically, the company opened a 170,000 sq. ft. full-service facility in California during Q4/21 and should have its 270,000 sq. ft. phase-one “Big Daddy” facility up and running by the end of year. We believe the company’s ability to replicate its Washington operating model positions it favourably to capture outsized market share in new states, and we look to the operationalization of these sites as a catalyst for future earnings.”

Mr. Mir thinks 4Front’s MSO peer group also offers “a compelling valuation proposition as regulatory easing and continued fundamental growth should help drive sector-wide multiple appreciation.”

He set a target of $1.40 for its shares. The average is $2.07.

“Although we believe a discount is warranted relative to the leaders in the space, we believe that 4Front’s fundamental profile and growth opportunities justify a valuation at least in line with the broader U.S. market,” the analyst said. “Further, we believe that delays in federal cannabis reform and custodial issues for large institutional investors have kept a lot of capital on the sidelines. Should any of these limitations ease, we believe the U.S. sector as a whole is primed for a re-rating.”

“Although the company was subject to many of the macro-level trends that contributed to industry-wide weakness through FQ1/21, we believe commentary from MSO peers as a whole points to a much stronger H2/22. When combined with newly added infrastructure in California and Massachusetts, we see opportunity for the company to expand its top line and margin profile.”

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