Inside the Market’s roundup of some of today’s key analyst actions
Northland Power Inc. (NPI-T) is “surging forward on the heels of hot European power prices and blowout results,” according to iA Capital Markets’ Naji Baydoun.
He was one of several equity analysts on the Street to raise their financial estimates and target price for the Toronto-based producer following its second-quarter release, which sent its shares higher by 3.8 per cent on Friday.
“Overall, we view NPI as the best investment vehicle for investors to gain exposure to the offshore wind investment theme,” said Mr. Baydoun. “NPI offers investors an attractive mix of (1) stable cash flows from contracted power assets (approximately 2.6GW net in operation, 10-year weighted average contract term), (2) strong potential long-term FCF/share growth (primarily driven by offshore wind projects), (3) longer-term potential upside from organic development activity and accretive M&A, and (4) an attractive dividend profile (3-per-cent yield, 50-70-per-cent long-term FCF payout). We believe that the current power price dynamics in Europe are likely to (1) lead to significantly stronger financial performance for NPI over the near term, (2) help accelerate project development activities in the region at more attractive returns, and (3) support higher terminal power price assumptions. As such, we are increasing our financial estimates for NPI and increasing our post-PPA price assumptions for the Company’s installed European offshore wind assets (i.e., higher value for operating assets).”
After the bell on Thursday, Northland reported adjusted earnings before interest, taxes, depreciation and amortization of $335-million for the quarter, easily exceeding both Mr. Baydoun’s $233-million estimate as well as the consensus forecast on the Street of $237-million. Free cash flow per share of 63 cents also topped forecasts (5 cents and 8 cents, respectively).
“Even when adjusting for the one-time impacts of the Kirkland Lake refinancing, results would have easily beat expectations,” the analyst said. “Strong wind resources, elevated power prices, and regulatory changes in Spain all contributed to strong performance and contributions from NPI’s renewables platform
Seeing the prospects for its offshore wind projects improving, Mr. Baydoun thinks the company’s revised financial guidance is likely to prove “conservative.”
“Given the strong H1/22 results and expectations about H2/22 performance, management has elected to increase 2022 financial guidance for EBITDA to $1.25-1.35-billion (from $1.15-1.25-billion previously) and FCF/share to $1.40-1.60 (from $1.20-1.40 previously),” he said. “Interestingly, we note commentary around ‘further upside should power prices in Europe continue to trade at elevated levels’; our views on current power price dynamics in Germany and the Netherlands would indicate that the revised guidance is conservative, and could likely be materially increased again. We believe that NPI is firing on all cylinders, with higher power prices in Europe driving (1) substantially stronger near-term financial performance from operating assets, and (2) potentially better returns on development activities. We continue to see multiple near-term catalysts for NPI’s shares throughout the remainder of 2022, including (1) financial close and a potential 30-per-cent sell-down of Hai Long, (2) much higher financial estimates/guidance/performance (potentially even through 2024 if European power price trends persist), (3) potentially less equity dilution due to the two previously mentioned items, and (4) project development updates (particularly in Europe).”
Maintaining a “strong buy” recommendation for Northland shares, Mr. Baydoun hiked his target to $51 from $47. The average is $48.23.
. Others making changes include:
* Desjardins Securities’ Brent Stadler to $54 from $50 with a “top pick” recommendation.
“We expect significant growth in global offshore wind over the next decade and believe NPI is the best way for Canadian investors to play the space. We believe NPI offers best-in-class growth through its large, primarily secured, identified pipeline. In our view, current levels offer an attractive entry point given its current 9.5 times EV/EBITDA multiple vs peers at 13.5 times and Ørsted at 15.2 times,” said Mr. Stadler.
* National Bank Financial’s Rupert Merer to $49 from $47 with an “outperform” rating.
“We believe estimates should move higher as the year progresses and power prices remain at elevated levels,” he said.
* RBC’s Nelson Ng to $48 from $46 with a “sector perform” rating.
“Northland Power is set to realize material upside from elevated European merchant power prices in the coming quarters. The upside could be an incremental $1.5-billion of EBITDA in the H2/22–2024 period, but we note that power prices have been very volatile, and there is always a risk that a future windfall tax limits the upside as Europe navigates through an energy crisis,” said Mr. Ng.
* Scotia’s Justin Strong to $51 from $46 with a “sector outperform” rating.
* ATB Capital Markets’ Nate Heywood to $53 from $50 with an “outperform” rating.
* CIBC’s Mark Jarvi to $48 from $44 with an “outperformer” rating.
In a research note titled A Sober Assessment of a Difficult Year, Echelon Capital Markets analyst Amr Ezzat lowered his recommendation for Mdf Commerce Inc. (MDF-T) to “speculative buy” from “buy” after weaker-than-anticipated first-quarter 2023 results, believing it has underperformed since its $259.9-million acquisition of Periscope Holdings Inc. last year.
“Post the closing of the acquisition (FQ222 and FQ322), we anticipated that Periscope would average $11.6-million in revenues per quarter based on management guidance,” he said. “At the time, we had forecasted $11.7-million per quarter post-C2021, which assumed very modest growth from the ... $11.6-million management guidance.”
“Fast forward a year, we estimate that Periscope is running at $9.0-9.5-million per quarter, 20-25 per cent below our forecasts. Periscope has therefore significantly underwhelmed, with revenues not only falling far below our F2023 estimates, but with results that are currently tracking significantly below management’s C2021 estimates.”
Believing “Periscope’s pre-acquisition prospects of meaningful, profitable growth have yet to materialize,” Mr. Ezzat emphasized the company’s “ballooning” costs and “growth debt pile” following the deal.
“Accretion from the acquisition is yet to be visible and the deterioration in MDF’s once pristine balance sheet, to a highly levered one, has yet to be justified by the acquisition,” he said.
At the same time, he called the “collapse” of valuations for technology companies “a double whammy” with MDF down 76.3 per cent over the past year.
“Investors should acknowledge that part of MDF’s lacklustre share price performance is also attributable to sector-wide multiple compression in the tech sector,” he said. “Namely, multiples have roughly halved since their peak in the second half of C2021, with e-commerce-related companies facing even greater investor apathy and a more violent selloff. We note that BigCommerce Holdings Inc. (BIGC-Q) and Shopify (SHOP-T) are down 67.0 per cent and 72.8 per cent in the last year, respectively. Nonetheless, many of the aforementioned concerns have certainly exacerbated MDF’s multiple compression, as it now trades at only 1.0 times our F2023 revenues estimate, a significant discount to comparable companies’ 4.5 times NTM [next 12-month] sales multiple. Additionally, MDF completed the Periscope acquisition in August 2021, coinciding with near-peak tech multiples.”
Recalibrating his multiple and valuation parameters in response, Mr. Ezzat cut his target for the Montreal-based company’s shares by $1 to $5, implying 111.6-per-cent upside to current levels. The average on the Street is $3.60.
“While the highly levered capital structure and poor operational performance have increased the Company’s risk profile, we believe the current valuation provides the enterprising investor with a lot of room for upside,” he said.
While acknowledging the “relatively high beta” of its stock, iA Capital Markets analyst Matthew Weekes thinks the underlying risk of Shawcor Ltd.’s (SCL-T) business has been “reduced,” leading him to revise his recommendation to “buy” from “speculative buy” following a second-quarter beat.
“We maintain our view that SCL’s business is at an inflection point and is positioned to benefit from strong demand for core products serving infrastructure and industrial markets, improving oil and gas and pipe coating activity, and stronger profitability due to cost reduction initiatives, all while having achieved significant debt reduction and healthier leverage metrics,” he said.
After the bell on Thursday, the Toronto-based company reported revenue for the quarter of $307-million, flat year-over-year but above both Mr. Weekes’s $287-million estimate and the consensus forecast of $285-million. Adjusted EBITDA of $31-million was a decline of 11 per cent from the same period a year ago but above the $26-million projection of both the analyst and the Street.
The analyst said an 11-per-cent jump in its backlog from the previous quarter (to $779-million) is “indicative of positive trends across the business.”
“SCL anticipates Adj. EBITDA in H2/22 to be substantially higher compared to H1,” he said. “This is expected to be driven by an improvement in pipe coating activity from the execution of projects in backlog, continued strength in demand for composite tanks and A&I products, including growing demand for water and storm water tank solutions, and continued improvement in demand for composite pipe and tubular management services to serve oil and gas activity in western Canada and the Permian basin. Finally, SCL expects supply chain issues that have impacted tank production to ease in the second half of the year. SCL expects supply chain volatility to continue, including challenges with gas supplies in Europe which could create headwinds for the Company’s operations in that region going forward.”
Saying the quarterly report “further strengthens” his outlook, Mr. Weekes raised his forecast for 2022 and 2023, leading him to increase his target for its shares to $8.50 from $7.75. The average is $8.82.
Following a “solid” second-quarter, National Bank Financial’s John Shao raised his rating for Softchoice Corp. (SFTC-T) to “outperform” from “sector perform,” noting “a number of risks we saw in the past have essentially been moderated.”
“First of all, we believe the newly revised EBITDA guidance (down to 25-28 per cent of gross profit) reflects a more realistic OPEX structure in an environment with wage inflation,” he said. “With the previous EBITDA guidance (30 per cent of gross profit), our main concern was the Company’s investments in sales channels and the inflationary pressure would lead to a performance shortfall relative to what’s been guided. But with the new guidance, expectations have now been reset – as such, that guidance-related performance shortfall risk has essentially been eliminated.
“On the supply chain issue, which was another risk identified in our previous notes, FQ2 saw a 30-per-cent year-over-year increase in hardware gross sales – a positive sign that its hardware deliveries are starting to get normalized. Based on what we heard from OEMs and other players in the market, we have reasons to believe the supply chain issue in the industry is improving, and the Company’s relatively low exposure to hardware (26 per cent of gross sales) has further reduced that risk.”
Mr. Shao also sees an easing of risks in the labour market with the company “well” withing its hiring range, adding: “Given the 12-14 months breakeven timeline, we’d expect this investment would generate meaningful returns in F2023″
“From a shareholder’s perspective, we believe the Company would stay committed to returning value to shareholders through its active NCIB and dividends given a strong balance sheet and cash flow generation, thus further reducing the risk,” he added.
Mr. Shao hiked his target for Softchoice shares to $28 from $25, above the $27.21 average.
“Investors following our research would recall that in our initiation report, we like this name for its large addressable market, strong partner relationships and a simple, but efficient, go-to-market strategy. While historically certain risks in the macro environment and the near-term execution had us believe the risk-to reward profile was balanced, as we revisit those risks today, they seem to have been moderated in a postpandemic environment,” he concluded.
Ahead of coming third-quarter earnings season, Barclays analyst John Aiken reduced his targets for Canadian bank stocks on Monday.
His changes are:
- Bank of Montreal (BMO-T, “overweight”) to $140 from $149. The average target on the Street is $151.79.
- Bank of Nova Scotia (BNS-T, “equalweight”) to $85 from $86. Average: $89.18.
- Canadian Imperial Bank of Commerce (CM-T, “equalweight”) to $69 from $74. Average: $77.87.
- Canadian Western Bank (CWB-T, “overweight”) to $32 from $36. Average: $36.46.
- National Bank of Canada (NA-T, “underweight”) to $91 from $93. Average: $102.67.
- Toronto-Dominion Bank (TD-T, “overweight”) to $100 from $105. Average: $100.41.
In other analyst actions:
* Berenberg’s Jonathan Guy upgraded Galiano Gold Inc. (GAU-T) to “buy” from “hold” with an 80-cent target, up from 70 cents and above the 60-cent average on the Street.
* RBC’s Andrew Wong raised his Ag Growth International Inc. (AFN-T) target to $55 from $50, above the $53.35 average, with an “outperform” rating.
“We believe AGI should see continued growth from the combination of a strong ag cycle with high crop volumes and prices, structural tailwinds from global ag infrastructure investments, ramp-up of new businesses (Brazil, India, Digital), and continued strong execution. We forecast strong FCF generation (20 per cent starting in 2023) which should support further investment in organic growth initiatives and balance sheet de-leveraging,” said Mr. Wong.
* CIBC’s Hamir Patel raised his CCL Industries Inc. (CCL.B-T) target to $74 from $71 with an “outperformer” rating. The average is $78.50.
“We believe CCL’s diversified platform and end-market exposure support steady top-line growth over the cycle,” he said. “We are projecting price-driven organic growth of 6.0 per cent in 2022 (vs. 11.8-per-cent growth last year), with further annual gains in 2023/2024 of 2.4 per cent/1.9 per cent. With leverage of only 1.5 times, the company retains significant flexibility to be opportunistic on the M&A front.”
* National Bank Financial’s Mike Parkin cut his Centerra Gold Inc. (CG-T) target to $10.50 from $14, above the $8.79 average, with an “outperform” rating.
* Scotia Capital’s Jonathan Goldman bumped his target for CES Energy Solutions Corp. (CEU-T) to $3.90 from $3.60 with a “sector outperform” rating.
* Desjardins Securities’ Kyle Stanley trimmed his Crombie REIT (CRR.UN-T) target to $18 from $19.50, keeping a “hold” rating. The average is $18.11.
* Mr. Stanley also reduced his Minto Apartment REIT (MI.UN-T) target to $23 from $26 with a “buy” rating. The average is $21.70.
* CIBC’s Scott Fletcher reduced his target for Dentalcorp Holdings Ltd. (DNTL-T) to $16.50, below the $17.54 average, from $18 with an “outperformer” rating, while BMO’s Stephen MacLeod cut his target by $1 to $17 with an “outperform” rating.
“We maintain our Outperform following the Q2 beat. The outlook remains constructive, and we believe dentalcorp is well-positioned to drive double-digit earnings growth, while reducing leverage. We view dentalcorp as a unique Canadian growth stock with a niche market position and multi-year opportunity to grow its market-leading network of dental clinics (market is 94-per-cent unconsolidated). We see attractive risk-reward in the stock, with multiple expansion opportunity over time,” said Mr. MacLeod.
* Mr. Fletcher increased his target for Well Health Technologies Corp. (WELL-T) to $7.50 from $6.50 with an “outperformer” rating. The average is $8.04.
* CIBC’s Dean Wilkinson cut his Dream Unlimited Corp. (DRM-T) target to $50 from $53 with an “outperformer” rating. The average is $48.67.
“We continue to believe that DRM’s high-quality development pipeline, growth in its many Dream subsidiaries, and rapidly growing asset management platform (which added a further $1-billion in AUM this quarter) will continue to be material growth drivers, and could lead to a further valuation expansion in coming years,” he said.
* Mr. Wilkinson raised his SmartCentres REIT (SRU.UN-T) target to $33 from $32.75, above the $30.93 average, with an “outperformer” rating.
“This quarter highlights the main traits that can be used to define SRU: safe, secure, and stable,” he said. “Supported by its rock-solid national tenant base (notably Walmart), the REIT continues to deliver solid results, with leasing demand accelerating, further improving its stable 97%+ occupancy. In short, tenants are back, and so are the shoppers. As SRU continues to morph (for lack of a better term and meant in the best of ways) into a diversified REIT, it made its first foray into the industrial space with the purchase of a 38-acre site in Pickering, ON, with construction and pre-leasing having commenced. We believe that the move to become a truly diversified REIT may, in time, attract a potentially larger investor base that could drive further valuation expansion (when comparing the broader REIT universe, we note that the group of diversified REITs has generally outperformed the complex on a YTD basis).”
* RBC’s Geoffrey Kwan raised his ECN Capital Corp. (ECN-T) target to $8 from $7.50 with an “outperform” rating. The average is $7.70.
“We have an overall positive view on Q2/22 results. The key takeaway is that ECN made another bolt-on acquisition of a boat/RV loan originator (IFG) and signed 4 letters-of-intent with smaller but similar companies. EPS was a penny ahead of our and consensus forecast. 2022 guidance was reaffirmed, although the mix changed with ECN expecting Triad and Source One to be better than prior guidance but Kessler is expected to be worse than prior guidance in part as potential credit card advisory/asset management transactions could be delayed until 2023. Current fundamentals are positive but if economic conditions weaken, while we think Triad could still perform well, Kessler is likely to see financial performance weaken and potentially Source One/IFG could experience weaker financial performance. We think of the risk-reward as balanced and that if economic conditions remain constructive, the shares offer doubledigit total return potential,” said Mr. Kwan.
* RBC’s James McGarragle raised his Exchange Income Corp. (EIF-T) target to $63 from $62 with an “outperform” rating. Others making changes include: ATB Capital Markets’ Chris Murray to $65 from $60 with an “outperform” rating, Scotia’s Konark Gupta to $60 from $56 with a “sector outperform” rating, iA Capital Markets’ Matthew Weekes to $56 from $53 with a “buy” rating and CIBC’s Krista Friesen to $59 from $56.50 with an “outperformer” rating. The average is $59.64.
“EIF reported solid Q2 results, and increased 2022 guidance. Key however in our view is upside to the 2023 guide, which we view as increasingly conservative reflecting 1) potential M&A; 2) robust Northern Mat results; 3) Regional One investment; and 4) a higher Quest backlog. Overall, we do not believe the shares trading at 7.6 times consensus NTM EV/EBITDA appropriately reflect our expectation for 28-per-cent adj. EBITDA CAGR 2021-23. We therefore continue to see an attractive investment opportunity at current levels and reiterate our OP ratin,” said Mr. McGarragle.
* RBC’s Pammi Bir raised his Granite REIT (GRT.UN-T) target by $1 to $100 with an “outperform” rating. Others making changes include: Raymond James’ Brad Sturges to $98 from $112 with an “outperform” rating. and Desjardins Securities’ Kyle Stanley to $97 from $104 with a “buy” rating. The average is $99.
“Following an in line Q2 print, we remain constructive on GRT. In the face of slowing global economic activity, we believe the business is in a good place to navigate. While we certainly acknowledge the potential for moderation in industrial momentum, GRT’s leasing pipeline remains strong, which coupled with solid new & renewal spreads should continue to drive healthy organic growth over the next 18 months. Layering on contributions from developments, we see an attractive growth profile at a discounted price,” Mr. Bir said.
* Scotia Capital’s Phil Hardie cut its Guardian Capital Group Ltd. (GCG.A-T) target to $42, matching the average, from $43 with a “sector outperform” rating.
“Against a challenging backdrop, Guardian reported Q2/22 operating earnings that were ahead of expectations with AUM also coming in line with our forecast, but experienced elevated outflows,” he said. “Management noted the outflows were due to headwinds that have plagued the industry for some time, namely, the continued shrinking allocation of the Canadian Equity asset class, and internalization of investment management functions by institutional clients. Guardian made strategic progress through the quarter, including taking a majority stake in a private wealth management firm and entering into a new ten-year strategic partnership with a key corporate partner of the Dealers business.
“We believe Guardian’s valuation discount is too steep to ignore and that the stock can outperform its peers in both bull and bear scenarios given its limited sensitivity to AUM outlook.”
* CIBC’s Hamir Patel raised his Hardwoods Distribution Inc. (HDI-T) target to $46 from $41 with an “outperformer” rating. The average is $63.93.
* RBC’s Jenny Ma bumped her target for H&R REIT (HR.UN-T) to $15.75 from $15 with a “sector perform” recommendation. The average is $16.32.
“An active NCIB program and strong performance in the residential segment are driving NAV/unit. H&R is making progress with asset sales with $400-million sold or under binding agreements with capital being redeployed into the residential segment. NAV conviction, in our view, rests on further sale of non-core assets and/or broader inflation/interest rate stability,” said Ms. Ma.
* Raymond James’ Brad Sturges trimmed his Killam Apartment REIT (KMP.UN-T) target to $22, below the average by 15 cents, from $24 with an “outperform” rating, while Scotia’s Mario Saric cut his target to $23 from $23.75 with a “sector perform” rating.
“Killam completed $116-million in various multifamily property acquisitions in 2022 year-to-date, including $87-million of transactions in 2Q22,” he said. “As part of its 2Q22 release, Killam noted that it intends to take a more cautious approach to pursuing external acquisition growth opportunities in 2H22. Instead, we expect Killam to focus on further building upon its operating and leasing momentum, and to continue to advance its ongoing and planned near-term development project pipeline.”
* In response to a “light performance” in the second quarter. National Bank Financial’s cut his Lassonde Industries Inc. (LAS.A-T) target to $141 from $161 with an “outperform” recommendation. The average is $141.50.
“We believe that Lassonde is a mature and well-managed company, with potential to grow through continued organic vectors (market share gains) and future acquisitions,” he said. “Though there remains near-term uncertainty surrounding labour challenges, persistent inflation, and consumer health, we maintain a positive view on the stock given favourable valuation (6.5 times NTM [next1 12-month] EBITDA vs. the 5-year average of 8.7 times) and expectations of improving H2 performance.”
* RBC’s Ken Herbert trimmed his MDA Ltd. (MDA-T) target to $13 from $15 with an “outperform” rating. The average is $12.75, while BMO’s Thanos Moschopoulos cut his target to $10 from $11 with a “market perform” rating.
“MDA posted 2Q22 results slightly above expectations, with total revenues of $155-million (up 22 per cent) and adj. EBITDA of $35-million (a 22.4-per-cent margin),” he said. “Both revenues and EBITDA were ahead of our expectations. However, the company materially lowered its full year 2022 guidance due to delays in each of its flagship programs, but primarily driven by the removal of the Telesat Lightspeed program from the 2022 guidance. While Lightspeed funding remains uncertain, we believe investor reaction to the clearing event is net positive.”
* Scotia Capital’s Mark Neville reduced his Neo Performance Materials Inc. (NEO-T) target to $24 from $25 with a “sector outperform” rating. The average is $24.79.
* National Bank Financial’s Zachary Evershed Park Lawn Corp. (PLC-T) target to $38 from $45 with an “outperform” rating. Others making changes include: CIBC’s Scott Fromson to $40 from $43 with an “outperformer” rating and Scotia’s George Doumet to $37 from $42.50 with a “sector outperform” rating. The average is $43.97.
“We revise our estimates following Q2/22 results to reflect quarterly results, a stronger USD, management commentary, and a change in our outlook on COVID-19, assuming a fairly stable endemic 400-500 daily deaths, replacing our prior assumption for continued waves,” said Mr. Evershed. “We forecast low single digit increases in average spend in coming quarters and bake in mounting volume headwinds based on the assumption that we will not see additional COVID-19 waves easing the difficult comparable periods in Q3/22e, Q4/22e and Q1/23e. We also factor in a modest lingering hangover from lower pre-need property sales into the third quarter.”
* National Bank Financial’s Don DeMarco lowered his target for Pan American Silver Corp. (PAAS-T) to $33 from $39 with an “outperform” rating, while BMO’s Ryan Thompson cut his target to US$23 from US$27 with an “outperform” rating. The average is $25.50.
* Credit Suisse’s Kevin McVeigh cut his Q4 Inc. (QFOR-T) target to $6 from $7.50 with an “outperform” rating. The average is $8.38.
* RBC’s Alexander Jackson raised his Russel Metals Inc. (RUS-T) target to $42 from $39, keeping an “outperform” rating, while Scotia Capital’s Michael Doumet cut his target to $37.50 from $38.50 with a “sector perform” rating. The average is $39.21.
“We continue to like Russel for its leverage to the North American steel market through its cost plus business model and have revised our estimates to reflect an improved outlook for the company’s Energy segment ... We expect the company to generate an attractive return on its invested capital and strong FCF to fund further growth in the Metals Service Center business (“MSC”) and the shares present an attractive risk/reward trade off in our view,” said Mr. Jackson
* CIBC’s Scott Fromson bumped his Sienna Senior Living Inc. (SIA-T) target to $16.25 from $15.75 with a “neutral” rating, while National Bank Financial’s Tal Woolley raised his target to $16 from $15 with an “outperform” rating. The average is $16.14.
* Scotia Capital’s Michael Doumet cut his Stelco Holdings Inc. (STLC-T) target to $43 from $45 with a “sector perform” rating. The average is $51.47