Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Chris Li expects Dollarama Inc.’s (DOL-T) second-quarter 2023 financial results to be driven by “strong” same-store sales growth of 11.0 per cent, “benefiting from the COVID-19-related ban on the sale of non-essential products in Ontario last year, strong demand especially for consumables in the high-inflation environment, and price inflation.”
In a research report released Monday previewing the Sept. 9 earnings release, he said he expects the Montreal-based discount retailer to raise its fiscal 2023 guidance to a range of 6-7 per cent from 4-5 per cent previously based on those sales gains. That falls in line with both his projections and the expectation on the Street, implying “solid” same-store sales growth of 4.0‒4.5 per cent in the second half of the year.
“We believe it will also likely guide to the high end of its 13.8‒14.3-per-cent SG&A rate target due to regional wage pressures,” he said. “We continue to expect FY23 gross margin to decline 50 basis points year-over-year (midpoint of management’s guidance), with a larger decline in 2H from higher logistical costs as inventory processing activities due to shipment delays in 1H normalize.”
Mr. Li is now expecting EBITDA for the quarter of $356-million, rising from a previous forecast of $294-million. His earnings per share estimate jumped to 64 cents from 48 cents.
His full-year 2023 EPS estimate rose by a penny to $2.65, implying a 21.6-per-cent year-over-year increase. His 2024 projection increased 2 cents to $3.07, up 15.9 per cent from the previous year.
Maintaining his “positive long-term view,” Mr. Li raised his target for Dollarama shares to $86 from $82 with a “buy” rating. The average on the Street is $81.15, according to Refinitiv data.
“We believe the premium valuation (28 times forward P/E vs 24‒25-times average) is supported by solid operating momentum and investor preference for safety,” he said. “We raised our target to $86 (28 times FY24 P/E) from $82. Our low-$90 upside valuation reflects stronger contribution from higher price points and slowing cost inflation next year resulting in SSSG and margin upside. Our mid-$70 downside valuation reflects rotation out of safety.”
In a separate note, Mr. Li raised his full-year earnings expectations for Alimentation Couche-Tard Inc. (ATD-T) ahead of Tuesday’s release of its first-quarter 2023 results, predicting rising fuel margins south of the border will continue to boost profitability.
“We expect 1Q to reflect strong U.S. fuel margins, partly offset by continuing fuel volume pressures, temporary fuel margin softness in Europe and elevated SG&A expenses,” he said. “We remain constructive on ATD’s longer-term growth potential, supported by a robust pipeline of organic growth initiatives (fuel and merchandise). Its strong balance sheet (1.4 times net debt/EBITDA vs 2.25 times target) is valuable, especially in the current market, supporting capital return with M&A optionality (more than US$10-billion of acquisition capacity).”
Mr. Li is forecasting adjusted earnings per share for the quarter of 71 US cents, which is just a penny below the consensus expectation on the Street.
While he raised his full-year EPS estimate to US$2.63 from US$2.49, the analyst said “the key to further share price appreciation is mainly predicated on earnings power in FY24 as record high fuel margins presumably normalize.”
“We expect U.S. fuel margins to moderate to 36 US cents per gallon in FY24 from 43 US cpg in FY23, partly mitigated by a recovery in U.S. fuel demand to 10 per cent below pre-pandemic levels in FY24 from 15 per cent in FY23,” he added. “We also expect continuing growth from merchandise, driven by various initiatives and improvement in macro conditions. Our FY24 EPS is largely unchanged at US$2.76. Longer-term, we believe ATD is well-positioned to achieve 10-per-cent-plus organic EPS growth, driven by a strong pipeline of organic growth initiatives in both merchandise and fuel (see inside for more details) and share buybacks. There is upside from M&A as ATD puts its strong balance sheet to work.”
Maintaining a “buy” rating for Couche-Tard shares, Mr. Li raised his target to $63 from $60. The average on the Street is $65.11.
“With our increased confidence in ATD’s ability to offset significant SG&A growth nearterm with higher fuel margins and sustain solid earnings growth longer-term, we have raised our target P/E to 17.5 times (FY24) from 17.0 times,” the analyst said.
Elsewhere, JP Morgan’s John Royall bumped his target to $55 from $54 with an “overweight” rating.
Credit Suisse’s Joo Ho Kim sees near-term pressures lingering for Canadian Western Bank (CWB-T) following weaker-than-anticipated third-quarter financial results.
On Friday, shares of the Edmonton-based bank fell 2.2 per cent after it reported core cash earnings per share of 90 cents, matching the consensus forecast on the Street but below the analyst’s expectation by 1 cent. He attributed the miss to lower revenue ($271.7-million, up from $263.2-million in the same quarter last year) despite higher provisions for credit losses and a lower tax rate.
“CWB’s Q3 results somewhat underwhelmed our expectations, particularly given the funding pressure on margins, which seemed more acute for the bank on a relative basis,” he said. “As well, lower guidance on loan growth (and earnings and PTPP growth) for F2022 suggests continued pressure in the near term results, in our view. That said, the bank’s progress towards AIRB implementation is encouraging, and we believe better clarity on timing could be a catalyst. Despite the shares’ underperformance this year, we remain on the sidelines for now.”
The analyst reduced his EPS estimates for 2022 to $3.62 from $3.68 and 2023 to $3.93 from $3.98, citing “a more modest NII growth assumptions in both years, partly offset by lower expenses in F2023E (AIRB and digital in particular).”
Reiterating a “neutral” rating, he cut his target for Canadian Western Bank shares by $1 to $29. The current average on the Street is $35.
Elsewhere, thinking catalysts are further away than he had previously anticipated, Scotia Capital’s Meny Grauman downgraded the bank to “sector perform” from “sector outperform” with a $30 target, down from $37.
“The good news is that CWB’s Q3 results did in fact deliver on Management’s assertion that Q2′s large EPS miss was weighed down by timing-related issues rather than something more fundamental,” he said. “The bad news is that despite ‘mission accomplished’ on that front, this result still pushes us to reevaluate near-term catalysts for the shares. We certainly do not believe anything is broken here, and continue to view CWB as a very impressive risk manager, but it has become clearer to us that heightened macro uncertainty, modest upside to rising rates, lagging commercial loan growth versus peers, and a still unclear timeline for AIRB transition all mean that the shares’ wide valuation gap to the group is unlikely to close over the coming quarters.”
“WB shares remain inexpensive by historical measures, but for this stock to work it needs to be able to outgrow the peer group. An outcome which we simply do not believe is likely to happen as we head into F2023.”
Other analysts making target adjustments include:
* Desjardins Securities’ Doug Young to $33 from $36 with a “buy” rating.
“Adjusted pre-tax, preprovision (PTPP) earnings were 1 per cent above our estimate, with lower non-interest expenses more than offsetting lower revenue. Of note, NIMs were below our estimate and consensus, while loan and PTPP earnings growth guidance for FY22 was tempered. We reduced our estimates,” he said.
* RBC’s Darko Mihelic to $35 from $38 with a “sector perform” rating.
“Q3/22 results were lower than our estimates as CWB’s NIM did not expand as much as we expected. CWB lowered its 2022 guidance again this quarter and now expects its 2022 core EPS to decline mid-single digits, down from the previous guidance of a low- to mid-single-digit reduction. We reduce our estimates following Q3/22 results and assume lower NIM than we did previously,” said Mr. Mihelic.
* Barclays’ John Aiken to $31 from $32 with an “overweight” rating.
“Overall, we view CWB’s Q3 as a resilient quarter in a tough environment, but it may not be enough to fight off the bears. And, juxtaposed against the persistent high inflation and rising recessionary concerns, we anticipate CWB’s valuation could continue to be challenged coming out of the quarter,” he said.
* CIBC’s Paul Holden to $29 from $30 with a “neutral” rating.
“CWB is largely an NII story and we expect NII growth to lag the big banks, including lower loan growth and less NIM expansion. Combined with a tight capital position and no excess credit allowances, we find it hard to get positive on the stock. Valuations are depressed with a P/E of 6.8 times (NTM consensus) and P/BV of 0.8 times. That keeps us at a Neutral rating,” said Mr. Holden.
* BMO’s Sohrab Movahedi to $35 from $39.50 with an “outperform” rating.
* TD Securities’ Mario Mendonca to $38 from $39 with a “buy” rating.
Believing the P&C insurance industry is “well positioned” for 2022, Scotia Capital analyst Jaeme Gloyn said Trisura Group Ltd. (TSU-T) remains at the top of his pecking order after hosting a U.S. marketing tour with CEO David Clare last week, citing “a rapid growth outlook and valuation upside.”
“We gained increased confidence in our rapid growth and profitability outlook: i) TSU has significantly de-risked earnings; ii) brokers and fronting hold the key to persistent rapid Canadian growth; iii) secular trends in the U.S. MGA market support continued rapid growth south of the border; iv) growth initiatives such as expansion into admitted lines and U.S. Surety lines are advancing nicely; and v) the recent equity raise strongly positions TSU to execute on all these growth drivers,” he said in a research note.
Mr. Gloyn reiterated an “outperform” recommendation and $62 target for Trisura shares. The current average is $55.34.
“Our target valuation premium reflects i) our view TSU will execute on our robust revenue/earnings growth forecasts, ii) premium valuations in the insurance peer group, and iii) premium valuations ascribed to specialty lines focused companies delivering consistent double-digit ROE/EPS growth,” the analyst said. “We reiterate that significant valuation upside remains as i) the U.S. fronting platform continues to prove out its industry-leading growth trajectory and expands its share of TSU profitability and ii) Canada maintains strong momentum as market share gains, new products and persistent hard markets support equally impressive growth and even stronger profitability. The company’s recent equity raise reaffirms our confidence in the rapid growth outlook.”
Touting its “multi-state, multi-site expansion opportunities,” H.C. Wainwright analyst Kevin Dede thinks Toronto-based Digihost Technology Inc. (DGHI-Q, DGHI-X) offers investors “an attractive risk-reward” proposition.
In a research note released Monday reviewing the Aug. 16 release of the bitcoin miner’s second-quarter results, he reaffirmed his bullish stance, citing “an established growth trajectory, avenue for expansion and ... the straight value of its assets.”
“Despite significant downward pressure through the bitcoin mining ecosystem, Digihost has ramped its mining capacity targeting 2.0 EH/s year-end 2022 expanding from roughly 650 PH/s mid-August and 450 PH/s mid-May,” he said. “With plans to increase its hashing power by adding mining facilities in Alabama energizing the first 22MW this year, of an eventual 55MW operating by 1Q23, and a new 25 acre land buy in North Carolina, heavily supported by a crypto mining bellweather as we understand development, Digihash, with both Alabama and North Carolina, could add 255MW of power, deployed to customers as a mix of self-mining and hosting. Not only has positioning improved geographically in breaking the reliance on two sites in New York State, Digihost should have the ability to deliver 2 EH/s towards the end of this year.”
Though he maintained a “buy” rating for Digihost shares, Mr. Dede, currently the lone analyst covering the stock, cut his target to US$2.50 from US$5 “in accordance with the bitcoin mining environment.”
“Against even our conservative assumptions, we find Digihost’s current share price deficiently presenting the value of the underlying business: $43 million in hard assets, most likely carried on the books below market value, against a $27 million market capitalization. On our $31.1 million revenue assumption this year, the stock is trading at roughly 0.9 times sales,” he said.
In other analyst actions:
* Touting “substantial U.S. opportunity” after its recent acquisition of Nutrawise, TD Securities analyst Derek Lessard upgraded Jamieson Wellness Inc. (JWEL-T) to “action list buy” from “buy” with a $50 target, exceeding the $45.43 average on the Street.
* BMO Nesbitt Burns’ Ryan Thompson trimmed his Bear Creek Mining Corp. (BCM-X) target to $1.60 from $2.70 with an “outperform” rating. The average is $3.04.
“We have not made changes to our Mercedes model, however, given the challenging market and Peruvian political environment, we have trimmed our Corani NAV multiple as we see a lower probability of achieving financing in the next twelve months (our target price horizon).
* Scotia Capital’s Patricia Baker lowered her target for Canadian Tire Corp. Ltd. (CTC.A-T) to $258 from $273. The average is $215.60
“CTC.A headline Q2 EPS of $2.43 fell short of expectations, with consensus sitting at $3.60,” she said. “However, there were a number of items that clouded the picture for Q2 and indeed the underlying operating performance was far better than the headline numbers indicated. Firstly the company took the strategic decision to have its Helly Hansen business exit the Russian market in Q2, which resulted in a $36.6-million charge. In addition, expenses associated with the company’s Operational Efficiency program totaled $10-million in the quarter. Combined these two items impacted EPS by $0.58, delivering a normalized EPS of $3.11. It is also worth noting that strong receivables growth (up 15 per cent) at CTFS prompted higher ECL allowances in Q2 (up $26-million), which also impacted EPS growth. Looking truly at pure operating performance, the Q2 results were in fact pretty close to consensus. CTC.A continues to see strong demand across its banners and categories and although certain categories experienced y/y declines, these are more attributable to unseasonal weather patterns than demand destruction. CTC’s broad product portfolio served it well in Q2 as strong demand in other categories offset declines elsewhere, delivering a solid 3.9-per-cent same-store sales at CTR.”
* Ms. Baker raised her target for Metro Inc. (MRU-T) to $78 from $76, maintaining “sector outperform” recommendation. The averages is $74.30.
“Despite ongoing labour issues (impacting the industry more broadly), cost inflation, and unprecedented levels of food inflation leading to trade-down, MRU is navigating the current backdrop ably. We believe that continued strong merchandising execution, good expense control, and return of cash to shareholders will continue to support MRU’s premium multiple,” she said.
* TD Securities’ John Mould raised his Capital Power Corp. (CPX-T) target to $57 from $55 with a “buy” rating. The average on the Street is $50.81.
* Scotia Capital’s Mark Neville cut his Neo Performance Materials Inc. (NEO-T) target to $22 from $24 with a “sector outperform” rating. The average is $24.79.
We view Oaktree’s sale as a positive as, in our opinion, the ownership stake represented an overhang on NEO’s share price as Oaktree was never planning to be the long-term owner of the assets and had been a seller of stock since the IPO in 2017 (at $18.00, $12.10, $15.75, $19.75, and $19.25),” said Mr. Neville. “The fact that the buyer, Hastings Technology Metals Ltd. (HAS-ASX; not covered), is a strategic also creates interesting potential longer-term partnership opportunities – i.e., it would potentially create a fully vertically integrated ‘mine-to-magnet’ rare earth company, where Hastings would help further diversify Neo’s feedstock supply. As per the release: ‘Hastings confirms it has no current intention to make a takeover offer for Neo nor to acquire any more shares in Neo’. While we’ll take the comments at face value, again, we do think longer-term arrangements/partnerships could potentially make sense.”
* Scotia’s Meny Grauman increased his Sagicor Financial Company Ltd. (SFC-T) target by $1 to $10 with a “sector outperform” rating. The average is $7.84.
“Sagicor’s acquisition of Toronto-based insurer ivari provides the company with a beachhead into Canada, but we view the benefits of this deal as less geographic and more financial,” he said. “The fact that the firm is able to finance this transaction with no new equity, and in fact will see equity head higher given that it is acquiring the company at a steep discount to book value, makes the deal highly accretive to both EPS and BVPS. It will also have the tangential benefit of boosting the company’s credit rating given that it takes the share of assets that are investment grade to over 80 per cent.”