Inside the Market’s roundup of some of today’s key analyst actions
Heading into fourth-quarter earnings season for Canadian diversified financial companies, National Bank Financial analyst Jaeme Gloyn is maintaining his favourable outlook for the property and casualty (P&C) insurance sector, pointing to “persistent hard market conditions across most business lines and higher interest rates driving sustainably higher investment income.”
“While we remain cautious on the effects of inflationary pressures, levels of catastrophe losses and the increasing incidence of vehicle thefts, we believe the insurance sector remains well positioned for 2024, given persistent hard market conditions,” he added. “We observe hard markets across commercial lines and firming markets in personal lines. U.S. Excess and Surplus lines markets continue to post solid mid-teens premiums and filings growth. For personal lines insurers IFC and DFY, we continue to observe lower inflationary pressures in Canada vs. the U.S.. Looking into 2024, we expect price increases will continue to outpace loss cost trends, particularly in Personal Auto where we believe an inflection point is imminent (or already reached). In addition, still high interest rates likely drive increased investment income again in 2024. Also, the potential for M&A catalysts in 2024 amplifies an already strong set-up for 2024.
“Notably, we see solid performance, with strong top-line growth and steady combined ratios from insurance peers that have reported Q4 2023 results thus far.”
In a research report released Monday, Mr. Gloyn said he expects three catalysts to drive share prices higher: “significantly” increased operating income; valuation re-rate, and potential S&P/TSX 60 Index inclusion.”
“We believe solid Q4-23 results and robust outlook commentary will support this view,” he added.
He focused on a pair of “topical names (with upside),” expecting auto insurers will likely show “signs the inflection point of earned rates exceeding inflation costs has appeared.” They are:
* Trisura Group Ltd. (TSU-T) with an “outperform” rating and a Street-high $64 target, rising from $62. The average is $51.43.
“We expect strong operating performance and clean financials - two keys on the path to rebuilding investor confidence,” he said. “In particular, we expect costs tied to the Q4-22 run-off program and industry-related issues with Vesttoo will remain manageable, in line with management’s previous guidance. In addition, we do not foresee any “new risks” emerging with Q4 results. We expect management will reiterate a solid top-and bottom-line growth outlook in 2024. We believe these factors will lead to a favourable AM Best rating outcome sometime in 2024. Lastly, our Q4-23 estimates are below consensus as we build in conservatism for what can be a seasonally weaker quarter. Overall, we see potential for TSU to deliver a solid recovery year in 2024 following a transition year in 2023 (including our softer view of Q4-23). At approximately 14 times 2024 consensus EPS, significant upside remains to specialty insurance peers that trade at an average 21 times.”
* Goeasy Ltd. (GSY-T) with an “outperform” rating and $190 target, up from $185 but below the $191 average.
“:We expect GSY will deliver another quarter of solid execution on loan growth, revenue yields and credit quality despite the persistent overhang of recession risks and a strained Canadian consumer,” he said. “In fact, we expect management will upgrade its three-year guidance given the strong results in recent quarters (including Q4-23). Moreover, we anticipate GSY will deliver shareholders a healthy dividend increase, potentially above the 2023 EPS growth rate of 22 per cent year-over-year. That said, the two-month share price jump of 33 per cent could limit upside.”
Mr. Gloyn made these other target adjustments:
- Definity Financial Corp. (DFY-T, “outperform”) to $57 (Street high) from $54. Average: $43.75.
- Fiera Capital Corp. (FSZ-T, “sector perform”) to $6 from $5.50. Average: $6.46.
- First National Financial Corp. (FN-T, “sector perform”) to $41 from $39. Average: $42.
- IGM Financial Inc. (IGM-T, “outperform”) to $46 from $44. Average: $41.17.
- Intact Financial Corp. (IFC-T, “outperform”) to $240 from $235. Average: $226.07.
- TMX Group Ltd. (X-T, “sector perform”) to $37 from $34. Average: $34.
Concurrently, Mr. Gloyn adjusted his rating for Tricon Residential Inc. (TCN-T) in response to its US$3.5-billion deal to be acquired by Blackstone Inc. (BX-N), moving it “tender” from “sector perform” with a $15.17 target, up from $11. The average is $12.42.
“The deal includes a ‘right to match’ provision in favour of Blackstone such that TCN pays a $123-million break fee and a $526-million reverse break fee in favour of TCN if BX were to terminate the deal,” he said. “Both amounts represent substantial terms for another bidder to consider if one were to emerge. Additionally, the proposed takeout price of US$11.25 is near the valuation range proposed by activist investor Land & Buildings. Therefore, we believe shareholders will be supportive of the transaction. The transaction is expected to close in Q2 and requires the approval of at least two thirds of votes cast by shareholders. We rate the shares Tender given the unanimous approval of the arrangement by the board and special committee.”
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RBC Dominion Securities analyst Luke Davis thinks Parkland Corp.’s (PKI-T) base business is “in good shape heading into 2024 and remains well positioned to achieve prior guidance” despite a recent refinery disruption at its Burnaby facility.
However, he downgraded the company’s shares to “sector perform” from “outperform” ahead of the release of its fourth-quarter 2023 financial results later this month, citing “strong” recent performance and seeing “elevated uncertainty” related to recent board departures at Simpson Oil, which is its largest shareholder.
“While specific details have not been made public, we believe the dispute is likely strategic in nature, though we do not expect a material shift in corporate strategy at this point,” said Mr. Davis.
In a research note released Monday, the analyst raised his fourth quarter EBITDA estimate to $475-million from $458-million, exceeding the consensus on the Street of $$469-million, “with the primary drivers being Canada and USA, though modestly offset by the Refinery.”
“Parkland’s $2-billion EBITDA target appears achievable despite the recent refinery outage,” he said. “Management remains focused on synergy capture, progressing towards its $100-million MG&A cost reduction target, organic growth, and continued supply chain optimization. Our updated estimates place 2024/25 EBITDA at $2.0-billion/$2.0-billion.”
“We believe Parkland is poised to reach 2.6 times/2.3 times leverage by year-end 2024/25, not inclusive of buybacks; the company has been active, repurchasing $26-million in stock during Q4. Management previously outlined an automated program, which we believe will be opportunistic but managed in the context of corporate leverage targets. Additionally, we continue to watch for progress on dispositions, with management previously outlining a $500 million target.”
Mr. Davis maintained a target of $54 for Parkland shares. The average target on the Street is $52.77.
Elsewhere, National Bank’s Vishal Shreedhar raised his target to $50 from $47 with an “outperform” rating.
“PKI’s current strategy, which we are supportive of, seeks to: (i) focus increasingly on synergy capture, organic growth and drive ROIC and cash flow, (ii) divest non-core assets, and (iii) deleverage and return excess capital to shareholders. PKI’s indications are that it will broadly continue along these themes towards 2028, although acquisitions could come back into focus,” said Mr. Shreedhar.
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Stifel analysts Cody Kwong and Michael Dunn think the fourth quarter of 2023 was “relatively drama free” for Canadian energy exploration and production (E&P) companies.
In a research report ahead of earnings season, they predicted there will be few surprises, expecting most companies to have executed plans as forecasted. However, they warn 2024 budgets may “come under pressure.”
“With the weakness in the natural gas and crude oil price complexes since the end of 2023, we do observe some attrition in our 2024/2025 industry outlook,” they said. “Alongside the revisions that impacted earnings power and FCF of these businesses, are commensurate target price reductions that average 8 per cent across our Canadian E&P coverage universe. While there is still cause for optimism over the medium to longer term with the start-up of TMX and LNG Canada on tap for later this year, the remainder of winter and into the spring could be choppy trading territory for industry.”
With their target adjustments, the analysts revealed their top picks in the sector.
For oil-levered stocks, they prefer:
* Athabasca Oil Corp. (ATH-T, “buy”) with a $5 target, up from $4.75. The average is $5.07.
* Crescent Point Energy Corp. (CPG-T, “buy”) with a $14 target, down from $15.50. Average: $13.35.
* Headwater Exploration Inc. (HWX-T, “buy”) with a $8.50 target, down from $9. Average: $9.18.
* Tamarack Valley Energy Ltd. (TVE-T, “buy”) with a $4.75 target, down from $5. Average: $5.46.
For natural gas-levered stocks, they selected:
* Advantage Energy Ltd. (AAV-T, “buy”) with a $13 target, down from $14.50. Average: $12.43.
* Peyto Exploration & Development Corp. (PEY-T, “buy”) with a $16 target, down from $17. Average: $5.70.
“Given the soft near-term natural gas price outlook and a very volatile crude oil price tape, we will watch to see if more companies elect to moderate 1H24 or overall 2024 activity levels to preserve financial flexibility, dividend sustainability, and opportunistic share buyback programs,” the analysts said.”We have already seen several companies take a more conservative approach to 2024 investment vs the preliminary view out of names like ARX, CPG, BIR, HWX and OBE, and we would expect this list to continue to grow on receipt of year-end reports.
“Companies well positioned to take advantage of recent share price softness. At current strip prices, we expect ATH, ERF, NVA, LOU and PXT to be best positioned from a balance sheet and FCF perspective to be the most active with buybacks in 2025. Remember, a 2-per-cent share buyback Canadian federal tax kicked in on January 1st, 2024.”
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A recent rally in Canadian energy services companies is supported by reduced risk profiles across the sector, according to ATB Capital Markets analysts Tim Monachello and Waqar Syed.
“Canadian energy services have been fast out the gates in 2024 with ATB’s custom Canadian energy services index up 10 per cent year-to-date, vs the TSX composite which is up roughly 1 per cent,” they said. “The strong performance of energy services companies has been alongside a rally in crude prices that had seen WTI rise over US$78 per barrel before capitulating back toward US$72/bbl. While we believe this rally contributed to improving sentiment, we also believe that fundamental improvements in risk on both an absolute (improved balance sheets) and a relative basis (significantly improved ex ante beta vs the index) provide justification for multiple expansion across the sector .... Overall, we believe there remains meaningful upside for energy services stocks, and we recommend investors overweight the sector.”
Heading into fourth-quarter 2023 earnings season, the analysts maintained their view that outperformance will come from companies that possess “some combination of minimal U.S. cyclical exposure, high-cash returns to shareholders, and company with leverage to alpha opportunities.”
After make modest adjustments to their target prices for many of the stocks in their coverage universe, they named a pair of top picks for the sector:
* Total Energy Services Inc. (TOT-T, “outperform”) with a $17 target, up from $15.75. The average is $15.38.
“Compelling Small Cap Risk/Reward: TOT shares are up roughly 5 per cent since October 1, 2023, up 24 per cent year-to-date and 10 per ent below 52-week highs, but we believe it remains one of the most undervalued companies in the energy services sector,” they said. “TOT’s diversified exposures to four primary business lines (contract drilling, well servicing, rentals & trucking, and gas compression and processing) and three countries (Canada, USA, and Australia) helps to both diversify risk and provides opportunity for capital allocation optimization between service lines.”
* Enerflex Ltd. (EFX-T, “outperform”) with a $12 target, up from $11. Average: $10.73.
““Laggard to Leader Opportunity: We believe EFX shares have turned a corner after rebounding roughly 25 per cent from 52-week lows and moving roughly 11 per cent higher year-to-date, still we believe sizable upside remains especially in the context of EFX shares still being off 38 per cent from 52-week highs despite only a 10-per-cent reduction in 2024 consensus EBITDA estimates from peak levels in May 2023,” they said. “Still, we believe the market remains somewhat hesitant to fully reengage given 1) negative revisions to FCF expectations alongside its Q2/23 earnings, and 2) the sudden departure of its recently appointed CFO in October that spread fear of major unexpected internal problems across its investor base which we believe were largely unfounded. Still, we believe 2024 will include many catalysts that could drive a rerating; for instance, EFX’s mid-January operational update, highlighted by news that EFX had repaid roughly $160-million in total debt in Q4/23, is an early indication that EFX is progressing in a positive direction operationally. In terms of 2024 KPIs that could drive a rerating, we believe the market will be most keenly focused on EFX’s ability to deleverage its balance sheet, and improve longer-term visibility for investors — both of which should materialize as EFX completes the integration of its transformative acquisition of Exterran and as its large Kurdistan ES project is commissioned in H2/24 and transitions from a use of cash to a source of cash contributing roughly $15-$20-million/quarter (ATBe) over a five-year payment period.”
Their other target changes are:
- Akita Drilling Ltd. (AKT.A-T, “outperform”) to $3.30 from $3.25. Average: $3.25.
- Ces Energy Solutions Corp. (CEU-T, “outperform”) to $5 from $4.75. Average: $5.17.
- North American Construction Group Ltd. (NOA-T, “outperform”) to $46 from $44. Average: $43.83.
- PHX Energy Solutions Corp. (PHX-T, “outperform”) to $12 from $11. Average: $9.80.
- Questor Technology Inc. (QST-T, “sector perform”) to $1 from $1.10.
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Alongside the release of “strong” fourth-quarter 2023 financial results, the confirmation from Brookfield Business Partners L.P.’s (BBU-N, BBU.UN-T) management of a plan for an initial public offering for Clarios International Inc. was “a pleasant surprise,” according to Desjardins Securities analyst Gary Ho.
Brookfield abandoned a US$1.8-billion IPO for the car battery manufacturer, which is co-owned with Caisse de dépôt et placement du Québec, in 2021.
Brookfield names Anuj Ranjan as head of private equity unit
“This is a significant near-term catalyst; we estimate Clarios accounts for 60 per cet of BBU’s current price yet only 25 per cent of its US$39-plus intrinsic NAV [net asset value],” he said. “An end to the tightening cycle should also benefit BBU’s valuation, creating a better monetization, financing and trading environment.”
Mr. Ho said Brookfield Business Partners’ quarterly beat was largely driven by outperformance from Clarios, which reported earnings before interest, taxes, depreciation and amortization (EBITDA) of US$167-million, up 17 per cent year-over-year and 16 per cent above his US$144-million projection.
“Increased demand for higher-margin advanced battery sales and cost optimization (65 per cent through its US$400-million target) contributed to strong performance. BBU confirmed Clarios could IPO later this year if the market is supportive —a significant catalyst. A smaller IPO of less than US$1-billion should boost valuation vs 2021′s US$2-billion attempt. At 9.5 times our FY24 Clarios EBITDA, we peg Clarios’ valuation at US$13.50/BBU share (or 60 per cent of BBU’s price today). (3) Strong Sagen results — EBITDA of US$60-million was 9 per cent above our US$55-million, benefiting from resilient Canadian home prices, which contributed to higher insurance revenue.”
Seeing it trading at an attractive level versus peers with similar margins, Mr. Ho raised his target to US$32 from US$31 after raising his 2024 and 2025 financial expectations, reiterating a “buy” rating. The average is US$28.57.
“Our thesis is predicated on: (1) Clarios IPO headline surfacing value; (2) a secular shift in investor appetite for private alts — BBU offers a unique way to gain PE exposure without liquidity constraints; (3) a solid investment return track record and attractive valuation; and (4) BBU’s ability to leverage BAM’s extensive platform,” he said.
Other analysts making changes include:
* RBC’s Robert Kwan to US$33 from US$29 with an “outperform” rating.
“Our report title [Crouching Tiger, Hidden Dragon] refers to the disconnect between BBU’s substantial 30-per-cent discount to NAV and what we think could be substantial valuation upside in the near term (strong NAV growth + significant narrowing of the discount to NAV) if they continue to execute generating growth in their portfolio and surface value through asset sales/IPOs should monetization markets become more favorable,” he said. “BBU’s Q4/23 results were largely in line with our forecast. While the CEO transition was unexpected, we don’t expect it to impact the company or the share price, in part given Cyrus Madon will still be active in the business (e.g., the investment team, becoming Executive Chair on the Board).”
* National Bank’s Jaeme Gloyn to US$34 from US$33 with an “outperform” rating.
“We believe continued strong results from key businesses (e.g., CDK, Clarios, Modulaire, Sagen) will firmly set BBU on the valuation re-rate path,” said Mr. Gloyn. “While higher interest rates weighed on earnings over the past year, we expect these impacts to fade in 2024 with the current outlook for lower rates. BBU’s successful refinancing of $17-billion of debt with no increase in cost proves its ability to maintain liquidity and access to capital markets. The outlook for lower rates in 2024 presents a potentially attractive monetization environment for BBU as it positions Clarios for an IPO and other large businesses for sale.”
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Echelon Partners analyst Rob Goff sees shares of Alithya Group Inc. (ALYA-T) representing “an attractive investment with potentially aggressive upside over time while downside risk appears modest.”
He initiated coverage of the Montreal-based strategy and digital technology services, which announced a plan last week to voluntarily delist from the Nasdaq Capital Market to focus on its Canadian listing, with a “buy” recommendation.
“Two tough quarters have seen downward forecast revisions as the shares have declined 35 per cent over the past six months,” said Mr. Goff. “While investors await a return to 5-per-cent-plus organic growth levels, we see an attractive opportunity where the shares reflect depressed valuations against baseline forecasts. Where industry forecasts call for growth to push upper single digits or greater, the Alithya consensus forecasts reflect organic-only growth at sub-market growth levels despite compelling arguments in favour of a return to market or the above-market growth targeted by management.”
Seeing an enticing opportunity following a difficult 2023 that saw Alithya shares fall 13 per cent versus a gain of 22 per cent for its peers in the consulting space, Mr. Goff emphasized what he sees as both momentum and value moving forward.
“While timing is an art, we look for the shares to recover as confidence builds that ALYA will return to 5-10 per cent organic growth enhanced with accretive acquisitions,” he said. “Our estimates over the next two quarters and for F2025 are largely in line with consensus. We would put the odds in favour of modest outperformance versus underperformance where efficiency moves support greater odds of EBITDA and FCF outperformance. With limited seasonality, we forecast revenues and EBITDA to turn positive quarter-over-quarter for the next reporting period (FQ324) while year-over-year gains are established with FQ225. While our focus is on re-establishing organic growth, we could see management execute accretive, strategic tuck-in acquisitions in C2024.
“Our view that ALYA shares offer modest downside considers that the Company’s cumulative F2024-F2027 free cash flow (FCF) forecast at $150-million or $1.57 per share ensures the financial flexibility to acquire where improved target valuations together with platform efficiencies and revenue synergies support value and FCF accretion. The strong FCF provides ALYA with the ability to pursue more aggressive share repurchases either within or beyond its existing NCIB (5 per cent).”
The analyst set a target of $2.70 per share. The current average is $2.66.
“We forecast baseline three-year CAGR for revenue/gross profit/EBITDA at 5.1 per cent/6.9 per cent/19.5 per cent across F2024-27,” said Mr. Goff. “We believe strong financial performance by ALYA will support a material, positive revaluation where its shares narrow the current premium extended to its digital consulting peers. The $0.35 in EBITDA/shr generates significant revaluation leverage. In a market focused on revenue growth and margins, our revaluation thesis considers gross profit/EBITDA margins moving from 29.8 per cent/6.7 per cent for F2024 to 31.4 per cent/9.8 per cent for F2027 as ROE/ROIC moves from negative 15.8 per cent/negative 5.2 per cent to 10.9 per cent/20.0 per cent.”
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In other analyst actions:
* Bernstein’s David Vernon raised his targets for Canadian National Railway Co. (CNR-T) to $191 from $187 with an “outperform” rating and Canadian Pacific Kansas City Ltd. (CP-T) to $117 from $112 with a “market perform” rating. The averages on the Street are $173 and $116.08, respectively.
* CIBC’s Paul Holden bumped his Definity Financial Corp. (DFY-T) target to $43.50 from $42.50 with an “outperformer” rating. The average is $43.75.
“We expect DFY to report a strong Q4 result supported by benign winter weather, normalizing personal auto claims inflation, rate momentum across all business lines and growth in investment income. We are forecasting a dividend increase of 10 per cent this quarter. The 2024 outlook is also positive given premium rate momentum, reinvestment rates and potential deployment of excess capital,” said Mr. Holden.
* Piper Sandler’s Charles Neivert increased his Methanex Corp. (MEOH-Q, MX-T) target to US$50 from US$49 with a “neutral” rating. The average is US$54.55.
David Leeder