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

BMO Nesbitt Burns’ Tim Casey thinks Rogers Communications Inc.’s (RCI.B-T) “unprecedented” network outage is “likely to introduce incremental regulatory risk” to its proposed acquisition of Shaw Communications Inc.

In a research note released Monday, the equity analyst also thinks the incident “heightens investor concerns regarding Rogers’ ability to execute on deal synergies and counters a constructive industry narrative on network performance.”

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“We expect Rogers will proactively credit customers for two days of lost service (we estimate a $70 million hit to revenue and EBITDA in Q3),” said Mr. Casey. “Customer acquisition and retention costs will likely increase in 2H22 to placate understandably wary and frustrated customers.

“We believe the incident also introduces incremental regulatory risk into the Shaw transaction. The Competition Bureau’s opposition is based on unrelated issues, but the wide-ranging impact of the outage will add to concerns regarding industry concentration. Assuming a resolution is reached with the CB, the outage will also introduce more investor concerns Rogers ability to execute on its $1 billion synergy target.”

Maintaining an “outperform” recommendation for Rogers shares, Mr. Casey reduced his target to $72 from $75. The average on the Street is $77.62, according to Refinitiv data.

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Citing “repeated safety issues” and the uncertainty brought on by the departure of president and CEO Mark Little, Raymond James analyst Michael Shaw lowered his rating for Suncor Energy Inc. (SU-T) to “market perform” from “outperform” on Monday.

After the bell on Friday, the Calgary-based company announced Mr. Little’s immediate departure. He’ll be repaced by Kris Smith, who is currently executive vice-president of downstream operations, on an interim basis.

The move came a day after the death of a contractor at the Base Mine north of Fort McMurray, Alta.. It was the second this year at a Suncor facility.

“We do not expect the market will be surprised by Mr. Little’s resignation,” said Mr. Shaw in a research note. “Suncor has been plagued by safety issues in recent years. Safety, along with SU’s operational shortfalls, was a principle issue raised by activist investor Elliott Investment Management in the spring. As part of a wider turnaround plan, Elliott had called for a review of SU’s leadership. We expect less vocal investors have been expecting turnover in the C-suite as well but certainly did not expect it to follow such tragic circumstances.

“Our expectation is SU will look outside the company for the next CEO. Suncor was open in the release announcing Mr. Little’s departure that they have ‘fallen short’ of achieving ‘safety and operational excellence.’ While part of the blame must be placed with the CEO, safety is built into the wider corporate culture. We don’t underestimate the qualification of internal candidates, but we expect an external CEO will be better positioned to reset the culture at Suncor and help right the operational issues that have gone alongside the safety issues.”

Mr. Shaw maintained a $57 target for Suncor shares. The average is $56.

“SU has a number of characteristics that make it attractive in a volatile energy market – an unmatched downstream positioning, low decline assets, and natural hedge against wider Canadian heavy differentials being key among them,” he said. “Nonetheless, until the safety and operational issues are resolved, we recommend that investors look to other Canadian large cap and integrated producers for energy exposure. SU’s peers are trading at attractive valuations under current strip pricing and can be used to gain the same market exposure as Suncor.”

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In response to a period of outperformance, Credit Suisse’s Andrew Kuske lowered Boralex Inc. (BLX-T) to “neutral” from “outperform” previously,

“For the year-to-date, Boralex Inc. (BLX) shares delivered nearly a 30-per-cent capital return that outperformed many peers and broader indices on several timeframes,” he said. “As one example, the ICLN ETF delivered a negative 6.5-per-cent performance and the S&P/TSX Clean Energy index negative 11 per cent - both on the year-to-date. As with the Infinergy transaction, we like BLX’s business delivery along with strategic positioning. Yet, given the share price moves, we believe better relative value exists elsewhere with a NAV-driven framework.”

Looking for “growth validation (largely by acceleration) or a better entry point for the stock,” Mr. Kuske maintained a $46 target, falling 37 cents below the average.

“We continue to favour exposure to the power/renewable sector versus other sub-sectors of coverage in the Canadian infrastructure universe,” he said. “A large part of that view comes from the combination of growth potential, thematic appeal on multiple fronts and valuation. Our bias of ratings in this sub-sector is skewed towards Outperform (as was the case with BLX prior to this downgrade). Yet, we don’t see the case to accelerate underlying value in our NAV-based approach at this time. Admittedly, BLX does possess opportunities for outsized impacts from individual facilities partially owing to company’s size. That reality along with the company’s European exposure are understandably attractive to many along with the typically prudent approach by management.”

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National Bank Financial analyst Ryan Li expects the near-term share price for Goodfood Market Corp. (FOOD-T) to be hampered by “the unfavourable macro-economic backdrop” and time required for its strategy to “manifest.”

He’s projecting the Montreal-based meal kit and online grocery company to reported third-quarter revenue before the bell on Wednesday of $69-million, below the Street’s expectation of $74-million and down from $108-million a year ago. His adjusted EBITDA forecast of a loss of $10.9-million is narrowly above the consensus of a loss of $11.5-million and down from a profit of $1.3-million during the same period in fiscal 2021.

“We anticipate sequential tapering and a year-over-year decline in active customers (consistent with recent trends), impacted by improving brick and mortar traffic (customers are increasingly returning to stores) and increasing travel during March/Spring break,” said Mr. Li. “Notwithstanding, we project continued sequential improvements across: the gross margin rate, SG&A rate, EBITDA, and cash burn.”

The analyst expects consumer behaviour to be the focus of investors coming out of the quarterly release.

“Our understanding is that Goodfood has rolled out 8 Micro Fulfillment Centres (MFCs); 20 are targeted by the end of 2022,” he said. “Investors will be looking for sequential improvements in quarterly performance and sustained strength with on-demand KPIs.

“Goodfood has been able to pass on pricing, particularly in the non-meal-kit business. However, commentary from various grocery peers suggests a shift in consumer behaviour (which could impact Goodfood): slowing e-Commerce trends, higher in-store traffic, lower baskets, consumer trade-downs, a shift to discount, and higher promotional penetration.”

Citing “increasingly uncertainty” with the online grocery backdrop and shifts to consumer behaviour, Mr. Li lowered his valuation multiple for Goodfood, leading him to cut his target for its shares to $2.25 from $3.75 with an “outperform” rating. The average on the Street is $2.84.

“In our view, Goodfood’s focus with on-demand and private label groceries provide credible drivers to grow sales/earnings over the longer term,” he added. “Recent partnerships from Loblaw (DoorDash), Walmart (Instacart – Walmart Now), and Metro (CornerShop), indicate that on-demand is an area of focus for the traditional grocers.”

Elsewhere, RBC Dominion Securities’ Paul Treiber cut his target to $2 from $3 with a “sector perform” rating.

“We believe re-opening from Omicron-related lockdowns is likely a headwind to Goodfood’s meal kit sales,” he said. “We forecast Q3 revenue to decline 32 per cent year-over-year and active subs down 23 per cent. Headwinds include increased restaurant spending, heightened competition and higher input costs. On-demand grocery is likely to ramp further, but remains small and unprofitable.”

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Following better-than-expecting second-quarter results, Scotia Capital analyst George Doumet sees “only a few remaining opportunities to fill the gap with pre-pandemic system sales” for MTY Food Group Inc. (MTY-T), leading him to predict it will resume M&A activity to grow the top-line materially beyond those levels.”

On Friday, the Montreal-based restaurant franchisor and operator reported adjusted EBITDA of $47.6-million for the quarter, exceeding both Mr. Doumet’s $45.4-million forecast and the consensus estimate of $45-million as margins came in stronger than anticipated.

“Apart from Mall and Office and some room in casual dining, the company expects recovery in some laggard geographical areas (e.g., California) to help it reach its pre-pandemic sales levels,” said the analyst. “MTY is also yet to see indications of slow down in traffic and consumer behavior. For F22, we are looking for system sales growth of 14 per cent with F22 system sales at similar levels than F19 – proforma acquisitions. Food processing, distribution and retail revenue increased 32 per cent due to new listings in retail (174 items vs 154 in 2021), expansion to new territories, and higher revenues generated by processing and distribution centers.

“During the quarter, MTY closed 91 locations, the lowest over the last 16 quarters, in spite of one franchisee closing 22 non-traditional frozen yogurt locations. MTY also opened 47 new restaurant locations despite supply chain and construction issues. Management hopes the obstacles to open new location to subside over the next two quarters.”

After raising his margin assumptions, Mr. Doumet bumped up his target for MTY shares by $1 to $64, keeping a “sector perform” rating. The average is $66.86.

“Although MTY sees more active deal flow and valuations reverting toward historical levels, and reiterates acquisitions of brands as its preferred method of capital deployment, management emphasized their intention to remain disciplined in pursuing M&A transactions,” he noted. “We estimate F22 exit leverage of 1.4 times, which is supportive of acquisition activities should the opportunity arises.”

Elsewhere, others making adjustments include:

* Acumen Capital’s Nick Corcoran to $77 from $76 with a “buy” rating.

“There remains headroom for growth driven by a number of factors,” he said. “These include (1) a number of casual dining concepts remain below pre-pandemic levels, (2) California continues to lag other geographies in the pandemic recovery, and (3) malls and office towers remain below pre-pandemic levels.”

* CIBC World Markets’ John Zamparo to $68 from $77 with an “outperformer” rating.

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Stifel analyst Martin Landry sees “good upside potential” in Dollarama Inc. (DOL-T) after carrying out a consumer survey of 300 Canadians last week, believing the emergence of “trade down patterns” favours value retailers.

“According to our survey, 80 per cent of respondents are expected to reduce their spending given the recent economic turmoils, which continues to impact consumer sentiment,” he said. “These results are likely to have negative implications for future discretionary spending in Canada, and we will monitor if these trends begin to impact demand in the coming earnings season. We have yet to see a slowdown in retail sales, which had a strong showing in April 2022, up 0.9 per cent month-over-month or 8.3 per cent year-over-year. However, we could see a rotation away from goods and into experiences as we enter into the summer months which could weight on mattress sales and other home improvement categories.”

Mr. Landry said 65 per cent on respondents said they are are likely or very likely to increase their shopping at dollar stores, like Dollarama, in the next 12 months, which is an increase of 200 basis points from his first-quarter survey.

“Furthermore, 87 respondents (29 per cent) are very likely to increase their shopping at dollar stores, a material growth of 32 per cent in three months. These results support our thesis that Dollarama has a good opportunity to capture a bigger share of customers’ wallet. Hence, we see upside potential to our earnings estimates on Dollarama in the coming year.”

Mr. Landry kept a “buy” rating and $82 target for Dollarama shares. The average on the Street is $79.

The analyst also found “resilience” within the Powersports industry, suggesting BRP Inc. (DOO-T) is poised to benefit.

“Our survey results within the powersports industry continue to impress with 22 per cent of Canadians likely or highly likely to purchase or upgrade a powersport vehicle over the next 12 months, which is mostly unchanged vs our last two surveys,” he said. “This suggests continued resilience within the industry and is aligned with recent scanner data from CDK Global Data made exclusively available by Powersports Business. According to CDK’s scanner data, retail sales volumes for powersports vehicles at U.S dealerships are sustained in May 2022 and up 40 per cent vs pre-pandemic levels. These results strengthen our thesis that BRP’s TTM [trailing 12-month] earnings, despite being extremely strong, are sustainable in the near-term.”

He kept a “buy” rating and $145 target for BRP shares, above the $131.88 consensus.

Mr. Landry also found encouraging brand awareness for Guru Organic Energy Corp. (GURU-T, “buy” and $11 target), Pet Value Holdings Ltd. (PET-T, “buy” and $42) and Spin Master Corp. (TOY-T, “buy” and $64).

“According to our survey, aided brand awareness for GURU increased by 200bps outside of Quebec compared to our Q4/21 survey, suggesting that the company’s early marketing efforts in the rest of Canada are starting to get traction,” he said. “GURU continues to over-index with younger demographics and with females, both appealing groups. With regard to Pet Valu, the company’s newly acquired Chico network shows good brand awareness in Quebec at 24 per cent, despite being a relatively new chain. Finally, brand awareness for three of Spin Master’s licensed properties is strong with Paw Patrol at 70 per cent, Monster Jam at 42 per cent and Kinetic Sands at 40 per cent.”

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In other analyst actions:

* Jefferies analyst Randy Konick downgraded Lululemon Athletica Inc. (LULU-Q) to “underperform” from “hold” with a US$200 target, falling from US$375. The average is US$394.37.

* JP Morgan’s Phil Gresh raised his target for Cenovus Energy Inc. (CVE-T) to $34 from $31, maintaining an “overweight” rating. The average is $30.36.

* Pointing to the higher cost of debt ahead of its Exterran Corp. acquisition, Raymond James’ Andrew Bradford reduced his target for Enerflex Ltd. (EFX-T) by $1 to $13 with a “strong buy” rating.

* In an earnings season preview for North American auto and auto parts companies, Wells Fargo’s Colin Langan raised his Magna International Inc. (MGA-N, MG-T) target to US$77 from US$72 with an “overweight” rating.

* Barclays’ Michael Leithead cut his Methanex Corp. (MEOH-Q, MX-T) target to US$60 from US$63 with an “overweight” rating. The average is US$54.33.

* Deutsche Bank’s Brian Mullan cut his target for Restaurant Brands International Inc. (QSR-N, QSR-T) to US$64 from US$70 with a “buy” rating. The average is US$61.98.

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