Inside the Market’s roundup of some of today’s key analyst actions
While he thinks Laurentian Bank of Canada (LB-T) is making “solid progress” on its strategic initiatives, Credit Suisse analyst Joo Ho Kim warns “some moderation” in growth is likely.
On Friday, shares of the Montreal-based bank jumped 6 per cent after it core cash earnings per share for its fourth quarter of $1.31, exceeding Mr. Kim’s estimate by 8 cents and the consensus forecast by 5 cents. The beat was driven largely by lower-than-expected expenses (a 14-cent gain) and tax benefits (5 cents), however revenue came in weaker than anticipated ($257.1-million versus the Street’s expectation of $266.6-million).
“LB’s Q4 results beat both consensus and our estimates, but that was largely attributable to lower expenses and taxes, as revenue missed on our expectation,” said Mr. Kim. “The bank’s net interest margin performance was weaker than expected (funding cost pressure remained) and LB is guiding to some caution around the outlook for NIMs ahead. On the positive side, commercial loan growth was strong (even excluding the FX benefit on inventory/equipment financing), and overall the bank is wrapping up a solid year that showed strong trajectory against many of its strategic objectives. Despite this strength, we believe the bank’s guidance for the year ahead suggest some modest headwinds in the near term relative to our expectations.”
To reflect his expectation for lower margins and low growth, the analyst cut his core cash earnings per share estimate for fiscal 2023 by 2 per cent to $4.83 from $4.92. His 2024 projection increased by a penny to $4.97.
Keeping an “underperform” rating for Laurentian shares, Mr. Kim raised his target by $1 to $34.
Elsewhere, National Bank Financial’s Gabriel Dechaine trimmed his target to $44 from $46 with a “sector perform” rating, calling the quarter “mixed” and seeing net interest margin “weakness” as “no surprise at this point.”
“LB’s NIM was down 6 basis points quarter-over-quarter and 6 bps below our forecast,” he said. “The bank was impacted by the lag between loan and deposit re-pricing. Similar to what other banks (e.g., CWB) faced, the Prime-CDOR [Canadian dollar offered rate] spread tightened as CDOR rose ahead of Prime, while other products have embedded lags in terms of when adjustments to Prime are effective. On the bright side, half of the bank’s 18-per-cent year-over-year deposit growth comprised demand & notice deposits. The bank expects NIMs to remain under pressure until central bank rates stabilize.”
Others making target adjustments include:
* Scotia Capital’s Meny Grauman to $39 from $37 with a “sector perform” rating.
“While we stand by our initial take that LB’s Q4 result was softer than the 6-per-cent EPS beat suggests, there is no doubt that the bank closed out the year on a more constructive footing that where it left off in Q3,” said Mr. Grauman. “At the heart of this more positive outlook was a stable CET1 ratio, as Management delivered on its guidance to keep its key capital ratio at about 9.00 per cent. LB was able to accomplish this by continuing to slow down its sequential RWA [risk-weighted asset] growth, a task that we expect to be easier next year given our outlook for a slowdown in commercial loan growth. Like we saw at a number of its peers, Laurentian Bank’s earnings are being pressured by margin compression due to a spike in funding costs. The good news is that the bank does expect loan repricing to catch up once base rates stop moving higher, an outcome that we believe is realistic to expect over the next few months. For the time being we continue to see more upside at LB’s larger peers, but there is no doubt that this bank is moving in the right direction as we head into a new fiscal year.”
* RBC’s Darko Mihelic to $55 from $53 with an “outperform” rating.
* TD Securities’ Mario Mendonca to $43 from $41 with a “buy” rating.
* BMO’s Sohrab Movahedi to $43 from $45 with a “market perform” rating.
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RBC Dominion Securities analyst Sabahat Khan is now predicted a “softer” end of the year for Roots Corp. (ROOT-T), continuing to expect the ”impact of the uncertain macro backdrop to impact results over the near- to medium term.”
Shares of the Toronto clothing retailer plummeted over 11 per cent on Friday with the premarket release of third-quarter 2022 results.
Consolidated sales fell 8.5 per cent year-over-year to $69.8-million, below both Mr. Khan’s $78.3-million estimate and the consensus projection of $78.4-million. Along with weaker-than-anticipated gross margins and higher expenses, adjusted EBITDA of $7.3-million also fell short of expectations ($19.8-million and $17.2-million, respectively).
“Inventory was up $18-million quarter-over-quarter (a rise of 33 per cent), of which 2/3 was driven by cost increases,” the analyst said. “Management noted they expect cost increases (primarily related to Roots’ shift to organic cotton) and softer sales trends to drive a higher year-end inventory balance. Given that a significant portion of the inventory reflects ‘core products’ (e.g., sweatpants), which can be sold in future periods, we do not expect meaningful promotional activity through early-2023 to clear the excess inventory (Roots has shown an ability to sell-through older inventory that they have carried forward in the past).”
“Despite the elevated promotional activity in the market (discounts in the 30-40-per-cent range at some peers), Roots has remained disciplined on its promotional activity thus far (with markdowns typically limited to seasonal categories). Although this has impacted Roots’ sell-through to-date, management believes that the company can recoup the lost sales opportunities at full prices in future quarters. Further, management noted that in-store traffic levels have been increasing over the past quarter (heading toward pre-pandemic levels, with a significant increase in tourist and urban locations), which we view as a positive amidst the uncertain macro environment.”
Given the results and turbulent retail climate, Mr. Khan lowered his revenue and earnings estimates for 2022 and 2023. He’s now forecasting full-year earnings per share of 24 cents and 38 cents, respectively, down from 68 cents and 59 cents.
Maintaining a “sector perform” rating for Roots shares, he cut his target to $3 from $4. The average on the Street is $3.06.
Elsewhere, TD Securities’ Brian Morrison downgraded Roots to “hold” from “buy” with a $3.25 target, down from $4.50, while Canaccord Genuity’s Matthew Lee trimmed his target to $2.75 from $3.50 with a “hold” rating.
“Roots delivered a Q3 meaningfully below our estimates and consensus on both revenue and EBITDA,” said Mr. Lee. “The combination of macroeconomic weakness, an increasingly competitive promotional environment, and a shift of consumers from comfort to lifestyle all impacted the top line. In terms of profitability, gross margins were down 430 basis points year-over-year, which reflects increasing unit costs associated with the move to organic cotton in tandem with some promotional activity at its stores. Our key takeaway from the quarter was that weakness will likely continue into Q4 and H1/23. Despite this, management remains confident in its pack-and-hold strategy, which we believe is prudent given the firm’s solid liquidity position and the high proportion of core products in its inventory. We have lowered our estimates for Q4 and F23, given the changing economic climate, which reduces our target .... We maintain our HOLD rating despite our view that the long-term brand value of Roots remains substantial.”
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The valuation gap between Canadian and U.S. railway companies persisted in the fourth-quarter, according to RBC Dominion Securities analyst Walter Spracklin, pointing to the “solid operating performance at the Canadian rails in Q3 as well as driven by strong 2023 Canadian rail outlooks.”
In a research report released Monday previewing fourth-quarter results for the sector, Mr. Spracklin said shares of Canadian Pacific Railway Ltd. (CP-T) continue to “represent an attractive investment opportunity” despite its valuation remaining elevated versus peers. He sees “significant upside potential” from its “transformational” acquisition with Kansas City Southern, which he thinks “sets the stage for significant growth and a material upward valuation re-rate” and is not currently “appropriately reflected in consensus expectations.”
“We have a highly positive view on the CP-KCS combination and believe the merits of the deal are extensive,” he said. “We believe the network advantage is by far the most compelling merit providing the combined entity with an unparalleled network reach that would cover Canada, the U.S. and Mexico; and we point to significant new opportunities in Grain, Fertilizer, Intermodal, Auto and Crude. Moreover, the improved network reach provides an increased diversification that comes on both a business line and a geographic basis. Finally, we view the US$1-billion in announced synergies as conservative, and we expect the company to adjust higher the expected synergy target when the deal closes, expected early 2023. In addition, we consider CP management to be one of the top teams in North America and have strong confidence in the ability of this team to execute on the integration of this deal and achieve (or exceed) the targets announced.”
Mr. Spracklin trimmed his fourth-quarter earnings per share estimate for CP to US$1.11 from US$1.20, below the US$1.15 consensus, due to weaker-than-anticipated potash and intermodal revenue ton mile results.
However, he raised his target for CP shares to $122 from $115 with an “outperform” rating. The average on the Street is $112.64.
“We have a highly positive view on the CP-KCS combination and believe the merits of the deal are extensive,” the analyst said. “We view the network advantage as the most compelling factor, and also view positively the increased diversification on a business and geographic basis. Finally, we view the $1-billion in announced synergies as conservative, and therefore see upside to consensus expectations.”
For rival Canadian National Railway Co. (CNR-T), he maintained his estimates for the fourth-quarter as well as 2023 and 2024.
“Our Q4 estimate remains unchanged into the quarter due to in line quarter-to-date volume as well as resulting from offsetting increases to yield reflecting strong pricing and expenses driven by higher stock-based compensation,” said Mr. Spracklin. “We also had a chance to catch up with management into the quarter who noted that pricing remains very strong, in line with the results of our Shipper Survey, a likely tailwind into 2023. Our Q4 EPS estimate remains unchanged at $2.10, in line with consensus $2.12. Our 2022 estimate also remains unchanged at $7.46 (cons. $7.50), and represents EPS growth of up 26 per cent year-over-year, in line with guidance for EPS growth of 25 per cent.”
With an unchanged “sector perform” rating, he increased his target to $170 from $161. The average is $161.79.
“Our $170 price target is based on applying a P/E multiple of 19 times to our $8.95 2024 estimated EPS,” he said. “Our EPS forecast assumes a strategic refocus and subsequent meaningful O/R [operating ratio] improvement. We model for an O/R of 58 per cent in 2024. The 19 times target multiple is above the peer group to reflect CNR’s network advantage, diversified revenue mix, and superior growth opportunities
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Following an “extremely volatile” 2022, Desjardins Securities analyst Brent Stadler sees “a good setup” for power and utility companies heading into the new year.
“In 2023, we expect investors to shift back to focusing on growth and the defensive attributes of our coverage names, potentially as fears around recent rate hikes and a looming recession shift the focus to forecasts calling for rate cuts in late 2023,” he said. “This, coupled with our expectation for more positive newsflow as countries potentially implement policies to remove red tape and accelerate renewable energy, create an attractive setup for our coverage names.”
“While we expect some clarity on interest rates this week with the Fed’s meeting, we are not trying to call the macro but current forecasts suggest the bulk of the rate hikes are behind us; it is possible that as higher rates work their way through the global economy, we could see rate cuts near the end of the year. Additionally, we believe a number of countries seeking to achieve energy security and independence will potentially put forth new policies that drive the acceleration of renewables—which should benefit our coverage names. Overall, we forecast 5-per-cent EBITDA growth in 2023 following a strong 2022 for results given the historically high power prices.”
In a research report released Monday, Mr. Stadler reaffirmed Northland Power Inc. (NPI-T) as his “top pick” in the sector.
“We remain extremely bullish on offshore wind,” he said. “There are limited ways to play this space, and NPI has the largest relative ‘secured’ growth pipeline in the space (4.6 net GW), providing financing flexibility and growth.”
“We expect some significant near-term catalysts for NPI, which could remove some overhang in the stock through providing further funding clarity over the next 12–18 months and potentially unlocking value within its development portfolio (specifically in Taiwan). The near-term catalysts we are looking for include: (1) winning a project from the Taiwan round 3 auction (500–600MW); (2) successfully completing a selldown of its Taiwan assets (potentially more than just Hai Long); and (3) reaching financial close on Hai Long. The big catalyst in our view is the selldown, which could flow from winning another project in Taiwan. We continue to believe NPI’s offshore wind assets are attracting strong interest and should thus fetch a healthy premium.”
Mr. Stadler has a “top pick” rating and $49 target for Northland shares. The average on the Street is $47.47.
He also named Boralex Inc. (BLX-T) and Capital Power Corp. (CPX-T) as “preferred names.”
He has a “buy” rating and $47 target for Boralex shares. The average is $46.31.
“BLX had an impressive 2022 ... proving that it is able to continue to organically source growth in all of its core markets (Canada, the US and EU),” said Mr. Stadler. “In our view, BLX is one of the best at organically sourcing new projects above and beyond investor expectations, which we expect will continue in 2023. While France is expected to be a key part of its growth, BLX has shown that it has significant growth potential in all of its core regions.
For Capital Power, he has a “buy” rating and $57 target, exceeding the $52.31 average.
“We view CPX as the value and dividend growth player within our space,” he said. “It is currently trading at 6.6 times EV/EBITDA compared with renewables peers at 11.9 times; while a discount is warranted, we believe the spread is too wide at current levels—which suggests CPX is mispriced. Additionally, given its solid payout ratio (sub-40 per cent) and below-peer debt levels (2.3 times net debt/EBITDA), its balance sheet is in very good shape, which supports its 6-per-cent annual dividend growth guidance out to 2025.”
Looking back on 2022, he added: “Based on total returns, our IPP coverage has performed largely in line with the resource-heavy S&P/TSX Composite Index. The top performer within our coverage in the year to date for the second year in a row is CPX (up 28.6 per cent). It is outperforming its renewables peers, likely due to its favourable valuation and exposure to Alberta, which has seen strong power prices for the past two years; this is expected to continue into 2023 and we believe investors are beginning to recognize the need and value of gas assets for grid reliability and the proliferation of renewables. BLX is the second-best performer (up 9.9 per cent). In our view, BLX had an excellent year, fortifying its balance sheet through selling a 30-per-cent stake in its France platform for a high more than 15 times multiple, contracting a 1.2GW onshore wind project in Québec, winning 550MW from the New York solar auction and announcing 600MW of bid-eligible projects for the upcoming Ontario RFP. The third-best performer in the year to date has been NPI (up 2.8 per cent). NPI has also been very active this year, which started with its winning 2.3GW of offshore wind projects from the ScotWind auction, being successful with 100MW in the New York solar auction and announcing the 250MW Godewind offshore wind project with its partner RWE. It also reported strong results and our expectation is that it is likely to win another ~500MW project in Taiwan by the end of the year. Overall, the top performers in the space have been the more catalyst-rich companies with exposure to strong power markets (Europe and Alberta).”
Based on modelling updated and valuation changes, Mr. Stadler trimmed his targets for three stocks. His changes are:
* Algonquin Power & Utilities Corp. (AQN-N/AQN-T, “hold”) to US$10 from US$11.50. Average: US$10.82.
* Brookfield Renewable Partners LP (BEP.UN-T, “hold”) to $46 from $48. Average: $52.58.
* EverGen Infrastructure Corp. (EVGN-T, “buy”) to $4 from $8. Average: $5.75.
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After a “difficult” year in 2022 for Canadian software companies, CIBC World Markets analyst Stephanie Price expects further turbulence in the coming year.
“Rising rates coupled with inflation and an uncertain macro environment led the stocks under our coverage to decline 31 per cent year-over-year,” she said in a note released Monday. “At this point, we see signs of a bottom for tech stocks, with SaaS names now trading at an average EV/Sales multiple that is roughly in line with mature software names. That being said, the timing of a recovery remains uncertain and hinges on greater certainty on the timing and extent of a shift to a more dovish rate posture.”
In 2023, Ms. Price expects “debt/equity-fuelled consolidators will continue to underperform unless they can prove integration abilities, and even in an improving tech market, investors will focus on profitability.”
“Our tech names staffed up for growth in 2021 but, given an increased cost of capital in 2022, many companies under coverage have reprioritized profitability and cash flow,” she noted. “DCBO turned EBITDA positive in Q3/22, slightly ahead of schedule, while QFOR and DND announced workforce restructurings. While firms refocused on profitability, fundamental demand in the sector remains solid, with the Street forecasting 13%-per-centrevenue growth in 2023E (down 5% from expectations at the beginning of the year) and 22-per-cent margins (down 80 bps).”
“Our universe accelerated its M&A spending in 2022, with transformational deals from OTEX, CSU and TIXT. We believe the focus at these companies will turn towards integration in 2023 to drive top-line growth and margin improvement. That being said, with 40 per cent of our coverage universe in a net cash position and 70 per cent at sub-2 times leverage, we expect M&A to continue into 2023 as firms take advantage of attractive valuations and put their cash to use.”
Citing the sector’s uncertainty, Ms. Price said she’s “taken a barbell approach” to her top picks for 2023.
“We include two defensive, mature software and services names (Constellation, CGI) and balance them with two more growth-oriented, profitable SaaS names with multi-year secular tailwinds (Kinaxis and Magnet),” she said..
She raised her targets for all four stocks:
* CGI Inc. (GIB.A-T, “outperformer”) to $140 from $135. The average on the Street is $129.15.
“CGI is benefiting from digitization tailwinds and a client base that is looking for cost savings through managed services and IP solutions. CIBC’s revenue growth expectations for F2023 are supported by a solid LTM book to bill (1.09 times), which is trending slightly higher than the historical average (1.07 times). We expect F2023 revenue growth of 4 per cent and an adjusted EBIT margin of 16.3 per cent, up 20 basis points year-over-year as the company continues to upskill workers and increase its offshore headcount to offset wage inflation,” said Ms. Price.
* Constellation Software Inc. (CSU-T, “outperformer”) to $2,450 from $2,300. Average: $2,472.61.
“Constellation has renewed its focus on capital deployment, spending $1.329-billion on M&A year to date in 2022 versus its prior record spend of $726-million over the same period in 2021. We foresee upside to 2023 estimates as Constellation integrates Altera and we consider Constellation as well positioned to continue M&A in 2023,” she said.
* Kinaxis Inc. (KXS-T, “outperformer”) to $200 from $190. Average: $209.22.
“Kinaxis is well positioned to benefit from accelerated technology spending and supply chain digitization,” she said. “We believe that potential clients put large-scale digitization efforts on hold through recent supply chain disruptions and we foresee upside as spending resumes post-supply-chain-related disruptions. In the interim, Kinaxis continues to see growth through its RapidStart program, which allows customers to select targeted RapidResponse implementations. We believe that the RapidStart program provides Kinaxis with a strong sales pipeline for broader implementations once the environment normalizes.”
* Magnet Forensics Inc. (MAGT-T, “outperformer”) to $50 from $33. Average: $43.46.
“Magnet is well positioned, in our view, to benefit from accelerated cybersecurity spending. We expect 34-per-cent revenue growth in 2023 as the company continues to benefit from secular tailwinds driving demand for its solutions. We also expect stronger term license revenue in 2023, forecasting it to increase by 40 per cent year-over-year to $39.2-million as the company transitions its user base off of perpetual licenses. We expect high-margin license revenue will also benefit adjusted EBITDA margins, which we expect to rise 510 basis points year-over-year to 22.6 per cent,” she said.
She also raised her target for Docebo Inc. (DCBO-T, “outperformer”) to $66 from $54. The average is $70.75.
Ms. Price lowered her targets for these companies:
* Converge Technology Solutions Corp. (CTS-T, “neutral”) to $5.25 from $7. Average: $8.77.
* Q4 Inc. (QFOR-T, “neutral”) to $2.75 from $4.25. Average: $4.33.
* Softchoice Corp. (SFTC-T, “neutral”) to $16 from $20. Average: $23.
* Telus International Inc. (TIXT-N/TIXT-T, “neutral”) to US$30 from US$36.50. Average: US$27.91.
“We see tech sector valuations as near bottom and expect greater certainty on the rate hike path and inflation to lead to a recovery in the sector. Given the uncertainty of the recovery, we have taken a barbell approach to our top picks for 2023. We include two defensive, mature software and services names (Constellation, CGI) and balance them with two more growth-oriented, profitable SaaS names with multi-year secular tailwinds (Kinaxis and Magnet),” she concluded.
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In other analyst actions:
* Canaccord Genuity’s Carey MacRury raised his Aris Mining Corp. (ARIS-T) target to $7.50 from $6.50 with a “buy” rating. The average is $8.22.
* Stifel’s Cody Kwong trimmed his target for Crescent Point Energy Corp. (CPG-T) by $1 to $16 with a “buy” rating. The average is $14.75.
* CIBC’s Jamie Kubik started Lucero Energy Corp. (LOU-X) with a “neutral” rating and 85-cent target, below the $1.12 average.
* RBC’s Wayne Lam cut his target for Marathon Gold Corp. (MOZ-T) to $1.50 from $2.25 with an “outperform” rating. Others making changes include: Canaccord Genuity’s Michael Fairbairn to $2.75 from $3.50 with a “speculative buy” rating and CIBC’s Anita Soni to $1.65 from $1.75 with a “neutral” rating. The average is $1.97.
* Resuming coverage after its $85-million equity offering, Desjardins Securities’ Kyle Stanley trimmed his Nexus Industrial REIT (NXR-UN-T) target to $12.75 from $13.25 with a “buy” rating, while Echelon Partners’ David Chrystal reduced his target to $13 from $13.50 with a “buy” rating. The average is $12.43.
“The proposed transaction of three high-quality, new-vintage distribution assets advances the REIT’s newly refined strategy of expanding and high-grading the portfolio in core industrial nodes in Central Canada,” Mr. Stanley said.
* Viewing the feasibility study on its Windfall gold project located in Quebec “positively,” Canaccord Genuity’s Michael Fairbairn reduced his Osisko Mining Inc. (OSK-T) target to $6 from $6.25 with a “speculative buy” rating. The average is $5.29.
“Although the project’s initial CapEx estimates came in higher than anticipated, we point investors to the stronger production profile, robust economics, and the potential for continued infill drilling to convert additional ounces,” he said.