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

National Bank Financial analyst John Shao sees U.S. private equity giant Thoma Bravo’s $1.8-billion acquisition of cybercrime software maker Magnet Forensics Inc. (MAGT-T) as “game changer.”

On Friday, shares of Waterloo, Ont.-based Magnet Forensics jumped 13.9 per cent following the announcement of the deal, which will see Thoma Bravo pay $44.25 per share to holders of subordinate voting stock. That is a 15.4-per-cent premium to closing price Thursday.

Thoma Bravo plans to combine Magnet Forensics and Grayshift LLC, which it acquired majority control of in July 2022.

In a research report released Monday titled A Short but Pleasant Journey, Mr. Shao moved his rating for Magnet Forensics to “tender” from “outperform,” citing the “deal structure, fair valuation, unlikely occurrence of a superior bid,” and believing the deal is on track to closing based on the board and the major shareholders’ “attitude.”

“Magnet Forensics, with the assistance of Morgan Stanley, conducted a market check subsequent to the receipt of an initial proposal from the Purchaser that did not result in any proposal that was superior to the Transaction,” said Mr. Shao.

“In our view, while the implied valuation is robust, what’s more important for the Management team who are also the major shareholders of the Company is the opportunity to merge with its long-time business partner to potentially become the industry’s #1 player. In a niche market with a limited number of players, we believe it would be rare for another bidder to propose a similar opportunity, both financially and strategically – effectively reducing the probability of another proposal being superior.”

The analyst thinks the deal is likely to spark further M&A activity in the sector in the near term

“In our industry note (Another Case for Tech) published in mid-2022, we identified Magnet Forensics as one of the three potential takeover targets, along with Docebo and Kinaxis, all of which have checked the boxes of being ideal candidates,” he said. “We recommend you revisit that note as we believe our methodology and conclusion are still relevant today and it’s our view that we will likely see more of a similar announcement within 12 to 24 months.”

Mr. Shao moved his target for Magnet Forensics shares to $44.25 from $50 to match the deal price. The average target on the Street is currently $44.89, according to Refinitiv data.

Elsewhere, others making changes include:

* Canaccord Genuity’s Doug Taylor to “hold” from “buy” with a $44.25 target, up from $42.

“We see the combination as a largely vertical integration between two close partners vs. competitors, suggesting little regulatory risk,” said Mr. Taylor. “Magnet’s directors and certain officers have agreed to vote in favour of the transaction, and shareholders with 96.5 per cent of the voting interest have signed support agreements. While a vote by minority shareholders is required, in our view the full valuation should limit any shareholder dissent.

“The friendly deal was negotiated with oversight and participation from a special committee of Magnet’s independent directors and has received unanimous approval from both the committee and board of directors. The committee underwent a market check that, in its view, did not yield a superior bid. Thoma Bravo, for reasons noted above, brings strategic synergies other potential suitors would not. We believe this transaction would alter the competitive landscape significantly for the other major market participant, Cellebrite (CLBT-Q| Not rated). With that said, the relative size and large valuation discrepancy (Cellebrite’s market cap is $1.2-billion and trades at 2.3 times EV/Sales on consensus 2023E) would seem to limit its ability to get involved.”

* Eight Capital’s Christian Sgro to “tender” from “buy” with a $44.25 target from $40.

“Our view is that at this valuation and on these terms (to Thoma Bravo), the transaction unlocks strategic value and full upside for shareholders,” said Mr. Sgro

* Stifel’s Suthan Sukumar to “hold” from “buy” with a $44.25 target from $44.

“We see the deal as a good fit, with Thoma Bravo as a deep-pocketed financial backer and Grayshift expanding MAGT’s product suite with deeper mobile extraction capabilities for a more complete, end-toend digital forensics workflow proposition, which on a combined basis should drive an enhanced competitive profile. We believe at this stage a higher bid emerging is unlikely, and see the current deal price as a positive outcome for shareholders,” he said.

* RBC’s Paul Treiber to “sector perform” from “outperform” with a $44.25 target from $38.

“While the takeout brings the MAGT story to a quicker than expected end for public investors, we believe the transaction is a positive outcome for public investors. The takeout multiple is well above peers and the all cash consideration provides certainty amidst an uncertain market,” said Mr. Treiber.

* BMO’s Thanos Moschopoulos to “market perform” from “outperform” with a $44.25 target from $34.

“In our view, the premium relative to the enterprise SaaS universe, which is currently at 5.4 times CY2023 EV/ sales, sufficiently reflects MAGT’s strong growth profile and profitability,” he said. “We believe it’s unlikely that a higher offer will be forthcoming, given the valuation and the fact that the initial proposal from Thoma Bravo was received in early October—which has presumably provided the company some time to explore alternatives (the press release notes that MAGT’s advisors had conducted a market check).”


Stifel analyst Ingrid Rico downgraded Franco-Nevada Corp. (FNV-T) to “hold” from “buy” on Monday, citing “the ongoing overhang” from its unresolved dispute with the Government of Panama over the final terms of a revised concession contract at its flagship Cobre Panama mine.

“For FNV the gold/silver stream on Cobre Panama represents approximately 19 per cent of our 2023 revenue estimates, and 17 per cent of our FNV NAV [net asset value],” she said.

Ms. Rico’s target for the company’s shares dipped to $204 from $206. The average is $207.37.

The changes was concurrent with the release of the firm’s fourth-quarter earnings preview for precious metals companies.

“We are expecting to see a stronger Q4 for some miners under our coverage, with lighter Q3 results deferring production, with language from management teams indicating a strong end to 2022,” the firm’s Global Metals & Mining research team said.

“Closing out the year with production and cost updates: Miners finishing 2022 with a heavier production weighted Q4, following a lighter Q3 for some companies under coverage; on cost, companies finishing the year off at the upper end or slightly above 2022 guidance ranges, (2) 2023 guidance and update outlooks - particular focus will be on cost expectations given the inflationary pressure on consumables seen in 2022. We are also seeing a developing theme of increasing capex budgets as reinvestment takes center stage for the rolling 5 to 10-year mine plans, and (3) reserve / resource updates – 2022 saw robust exploration budgets, which for the most part should translate into replacement of mine depletion.”

Analysts made these other target changes:

  • Americas Gold and Silver Corp. (USA-T, “hold”) to 90 cents from 80 cents. Average: $1.23.
  • Dundee Precious Metals Inc. (DPM-T, “buy”) to $11.50 from $11. Average: $11.89.
  • Eldorado Gold Corp. (ELD-T, “buy”) to $16 from $16.50. Average: $14.15.
  • MAG Silver Corp. (MAG-T, “buy”) to $27.75 from $28.25. Average: $25.08.
  • Osisko Gold Royalties Ltd. (OR-T, “buy”) to $20 from $19.50. Average: $22.50.
  • SilverCrest Metals Inc. (SIL-T, “buy”) to $13.50 from $13.25. Average: $13.11.
  • Steppe Gold Ltd. (STGO-T, “buy”) to $2.60 from $2.80. Average: $2.72.
  • Wheaton Precious Metals Corp. (WPM-T, “buy”) to $66 from $64. Average: $66.


Desjardins Securities analyst Brent Stadler expects “tough hydro conditions” to weigh on the fourth-quarter 2022 financial results for Brookfield Renewable Partners L.P. (BEP.UN-T, BEP-N).

“We are reducing our 4Q estimates on expectations that the Canadian and U.S. hydro segments could miss long-term averages by 20 per cent, however, we generally recommend long-term investors look through potential weather-related beats/misses,” he said. “We also expect some modest FX and interest expense headwinds coupled with some other small adjustments to our forward assumptions, which also slightly reduce our forward estimates.”

Ahead of the Feb. 3 quarterly release, Mr. Stadler is now projecting EBITDA of US$449-million, down from US$479-million and 8 per cent below the consensus of US$490-million. His funds from operations per unit estimate fell to 31 US cents from 36 US cents, which is the current average on the Street.

“In our view, 2023 and 2024 consensus FFO/unit estimates could be a bit optimistic,” he added. “Our FFO/unit estimate of US$1.69 in 2023 and US$1.83 in 2024 are a bit below (4–5 per cent) the Street at US$1.76 and US$1.92, respectively. Our estimates imply a solid 11-per-cent and 8-per-cent growth rate, respectively.”

“With 4Q results, we will be looking for (1) a 5-per-cent distribution increase, (2) further discussion on M&A, (3) a development update (expect ~300MW net of projects to COD in 4Q22, adding US$19-million of annual FFO), and (4) some commentary on capital recycling initiative.”

With his estimate revisions, Mr. Stadler cut his target for Brookfield Renewable units to $44 from $46, reiterating a “hold” recommendation. The average is $52.58.


Calling its Lapland Project in Northern Finland a “large, high-grade, high-confidence resource,” iA Capital Markets analyst Ronald Stewart initiated coverage of Rupert Resources Ltd. (RUP-T) with a “speculative buy” recommendation on Monday, seeing catalysts ahead and “momentum assured.”

“One of the hallmarks of a good gold discovery is the length of time between discovery and a Preliminary Economic Analysis (PEA),” he said. “For Rupert Resources it took just two and a half years from the initial discovery drill hole to a published PEA on its 100-per-cent-owned Lapland Project in northern Finland. The PEA demonstrates a best-in-class economic forecast of the project’s development potential. It boasts an industry leading low-cost profile with AISC [all-in sustaining cost] estimated at less than US$500 per ounce over the initial 11 years of a 22-year mine. Total gold production is estimated at 4.25 million ounces and is expected to average around 200,000 ounces per annum.”

Mr. Stewart thinks the outcome of the PEA is “very attractive.”

“The project has an estimated NPV@5% of US$1.6-billion and an Internal Rate of Return (IRR) of 46 per cent with the development capital paid back in the first two years,” he said. “With estimated gold production of 200K oz/a, RUP’s Lapland Project is bound to be on the radar of investors and producers alike.”

“To date, Rupert has completed 73,000 metres of drilling and has another 73,000 metres of infill and exploration drilling planned for Ikkari and proximal targets on its more than 700 square kilometre land package. The Company will move forward with a pre-feasibility (PFS) study and associated Environmental Impact Assessment (EIA) with a full feasibility study to follow. As at August 31, 2022, the Company had $36.5-million in its treasury and $34.1-million in working capital. The Company’s year end is February 28 and results for its third quarter ending November 30, 2022, are expected to be released before the end of January.”

Believing there’s upside to the company’s financial model, Mr. Stewart set a target of $8 per share. The current average is $8.25.


Seeing “strong and visible growth,” Scotia Capital analyst Robert Hope raised his target prices for a group of utility stocks in his coverage universe on Monday after introducing his 2025 financial projections.

“We believe this group’s highly visible and resilient growth profile could be attractive to investors longer-term as well as during periods of market uncertainty as we are experiencing now,” he said. “

“For the utility group, we see an average 2023-2025 estimated EPS CAGR [earnings per share compound annual growth rate] of 6 per cent, which is in-line with our three-year outlook from last year. However, given the numerous tailwinds for the group, we believe there is an upward bias to our estimates. Overall, our favourite utility names are AltaGas and Emera.”

His changes include:

* AltaGas Ltd. (ALA-T, “sector outperform”) to $31 from $30. Average: $31.38.

Analyst: “AltaGas remains our favourite utility stock. It should not only benefit from an above average rate base growth outlook (8-10-per-cent CAGR out to 2027) but also low capital, higher return midstream projects. At this point, we are not including meaningful midstream expansion projects in our estimates and valuation, which provides an avenue of upside. Even still, we see AltaGas as having the strongest growth profile of the utilities. Clarity on midstream margins in 2023 could be a catalyst for the shares in addition to progress on the Mountain Valley Pipeline and asset sales.”

* Emera Inc. (EMA-T, “sector outperform”) to $61 from $59. Average: $58.53.

Analyst: “Emera is our favourite ‘pure-play’ utility. We see its Florida electric utility (TECO) as the key driver of income growth, contributing an 8-per-cent year-over-yearincrease (USD) in 2025. We also see its gas distribution operations maintaining their above average income growth rates of 9 per cent (USD) in 2025. However, the regulatory situation in Nova Scotia remains an overhang on the shares. While a minor source of income, the muted returns tighten Emera’s credit metrics. We see income growth and the recovery of 2022 fuel costs as helping credit metrics in 2023. Any asset sales would also be viewed positively.”

* Fortis Inc. (FTS-T, “sector perform”) to $58 from $57. Average: $57.13.

Analyst: “Fortis remains a go-to, core utility pick for many investors given its track record, strong management team, and liquidity. Looking back at 2022, we believe the shares were held back by investors’ view on regulatory risk. Its Arizona rate case continues to be a focus for 2023, but we view the changes to the regulatory commission in late 2022 as well as recent staff testimony as a slight positive. We believe valuation could improve as the company continues to show earnings growth and there is additional colour on the Arizona rate case.”

* Hydro One Ltd. (H-T, “sector perform”) to $36 from $34. Average: $36.75.

Analyst: “Hydro One enters 2023 with an attractive, low-risk, visible growth profile. We believe our estimates have a positive bias as we are not fully reflecting the potential growth in its broadband business over the next few years and there is the potential for incremental transmission investment. In 2023 specifically, we assume only 50 basis points of over-earning at its businesses, which could turn out to be conservative. With its strong balance sheet and easy to execute funding plan, we believe Hydro One should trade at a premium to its peers. That said, at recent levels, we view it as fairly valued.”


National Bank Financial analyst Vishal Shreedhar predicts MTY Food Group Inc. (MTY-T) will benefit from “resilient” demand in the fast food industry when it reports its fourth-quarter 2022 results in mid-February.

“We model solid trends in Canada and the U.S. supported by inflation, adequate consumer health and acquisitions,” he said in a note released Monday.

“Investors will focus on outlook commentary and the consumer backdrop given ongoing macroeconomic concerns.”

For the quarter, Mr. Shreedhar is projecting adjusting earnings before interest, taxes, depreciation and and amortization (EBITDA) of $48.9-million, up from $42.8-million during the same period a year ago and above the $48.6-million consensus estimate. System sales and revenue are expected to rise to $1.175-billion and $231-million, respectively, from $963-million and $146-million, both also topping the Street’s forecasts ($1.114-billion and $207-million).

”Our review of commentary from North American peers suggests that demand remains resilient, and average check remains healthy,” he said. “Government data indicates that sales at U.S. restaurants and eating places are higher by 12.1 per cent year-over-year in Q4 while sales at Canadian full-service restaurants and limited service eating places are higher by 15.2 per cent year-over-year in Q4. Relative to 2019 (pre-pandemic), sales at U.S./Canadian restaurants are higher by 35 per cent/14 per cent, respectively (U.S. data up to Nov. 2022 and Canada data up to Oct. 2022).”

Mr. Shreedhar also thinks MTY’s announcement last Wednesday of a 19-per-cent raise to its quarterly dividend (to 25 cents from 21 cents) is “a favourable signal” of its outlook.

He also touted the future contributions from its recent US$207-million acquisition of Wetzel’s Pretzels, noting, “We are constructive on the transaction given that it adds a well-established brand to MTY’s portfolio, while diversifying further into the snack category with minimal seasonality.”

Maintaining an “outperform” rating for MTY shares, he raised his target to $67 from $65. The average is $67.29.

“We remain constructive on MTY given attractive valuation, expectations of improving operational performance (menu innovation, marketing, data analytics), and supportive capital allocation outcomes such as acquisitions,” said Mr. Shreedhar. “That said, we also acknowledge heightened risk related to inflation, supply chain, labour and general macroeconomic conditions.”


Scotia Capital analyst Ben Isaacson thinks the fundamentals for the lithium space “remain outstanding” and “near-term speed bumps” are priced in.

“We have initiated coverage on the lithium space with an increasingly bullish view the further out we look,” he said in a report released Monday.

“While the year ahead has a slight chance to see temporary softness in lithium spot prices, beyond ‘24 we are stumped as to where supply will come from to satisfy demand. This is especially true with an inflation-based step-change to lithium project capex, not to mention higher costs of funding that capex (i.e., both debt and equity). Unless we see (1) a slew of new advanced-stage projects moving to construction imminently; (2) a holy grail for the industry to improve recovery rates (direct lithium extraction technologies are promising); and/or (3) an unprecedented pivot to improved secondary supply from recycling, it’s hard to justify why prices should moderate toward the cost curve over the next five-plus years. That said, unless we show rapid moderation of our price deck, valuations make little to no sense. Simply put, we think the recent sell-off of the lithium space is mostly (but not fully) unjustified and offers both near- and long-term investors an opportunity to re-enter the sector much closer to the ground floor than before.”

Mr. Isaacson set a “sector perform” rating and US$36 target for shares of Lithium Americas Corp. (LAC-N, LAC-T), which he named one of his top picks (along with Sociedad Quimica y Minera de Chile, SQM-N). The average target on the Street is US$36.39.

“We think Lithium Americas has all the ingredients to outperform its peers in ‘23,” he said. “First, LAC is now weeks away from becoming the world’s newest lithium producer, as it commissions its 40K mt (100-per-cent basis) Cauchari-Olaroz lithium carbonate project. Second, its U.S.-based Thacker Pass project (2 x 40K mt) is construction-ready, with preliminary work already underway. Third, there are several advanced-stage development projects that have been de-risked enough to receive at least some credit in the share price. Finally, we think the separation of LAC into two public companies could act as another positive catalyst for the shares.”


TD Securities analyst Vince Valentini downgraded a trio of stocks on Monday.

They are:

  • AcuityAds Holdings Inc. (AT-T) to “hold” from “buy” wiht a $2.75 target, down from $3.75. Average: $3.46.
  • BCE Inc. (BCE-T) to “hold” from “buy” with a $65 target (unchanged), exceeding the $63.48 average.
  • VerticalScope Holdings Inc. (FORA-T) to “hold” from “buy” with a $10 target, down from $13. Average: $14.36.


In other analyst actions:

* Predicting the enterprise adoption of Shopify Plus should accelerate in 2023 and allow it to outpace overall U.S. e-commerce growth, Deutsche Bank’s Bhavin Shah upgraded Shopify Inc. (SHOP-N, SHOP-T) to “buy” from “hold” with a US$50 target, up from US$40 and above the US$41.74 average. with a price target of $50, up from $40.

* Expecting a “fine” quarterly earnings season for Canadian auto parts manufacturers and a reiteration of 2023 guidance, Raymond James’ Michael Glen raised his Martinrea International Inc. (MRE-T) target to $16.50 from $13.50 with an “outperform” rating. The average is $15.06.

“In our view, things are going to be fine in 2023 for auto volumes in both North America and Europe,” he said. “We have heard the bear case: recession, credit concerns, pressure in the used car market … we get it, there are hurdles. But as we step back and think about an industry that has already faced THREE years of depressed sales and production, we think that 2023 ultimately turns out to be ok. Over the past 3 years, the global auto industry has seen two large influencing factors: 1. COVID-related shutdowns in early 2020 having a very abrupt and severe impact on production levels; and 2. Chip and supply chain constraints that built through 2021 and extended into 2022. These two factors have constrained production levels in an environment where demand in North America has remained consistent (stress consistent). This has led to a situation of still low inventory levels coupled with high average transaction prices and low incentives. We think this latter item, still very high average transaction price and low incentives offer the OEMs a powerful lever in 2023 if they need to stimulate volume (and we ultimately believe these tools will be used). If the OEMs start to reduce volume and increase incentives, there is very real basis to believe this will trigger a demand response, and we think this ultimately plays out in 2023.”

* Citing its valuation after recent share price appreciation and downside risk to earnings estimates, Scotiabank analyst Konark Gupta cut Chorus Aviation Inc. (CHR-T) to “sector perform” from “sector outperform” with a $4.40 target, up from $4 but below the $4.67 average.

* Mr. Gupta raised Mullen Group Ltd. (MTL-T) to “sector outperform” from “sector perform” and increased his target to $17.50 from $16. The average is $16.30.

* Vertical Research Partners’ Robert Stallard downgraded Bombardier Inc. (BBD.B-T) to “hold” from “buy,” maintaining a $66 target, while Barclays’ David Strauss hiked his target to $60 from $45 with an “underweight” rating. The average on the Street is $69.53.

* Citing wavering consumer discretionary spending and recent share price appreciation, TD Securities’ Brian Morrison downgraded Gildan Activewear Inc. (GIL-N, GIL-T) to “hold” from “buy,” seeing a decline in year-over-year earnings per share through the first half of 2023, although his mid-term outlook remains positive. target is now US$36, below the US$37.63 average, from US$43.

* Scotia Capital’s Michael Doumet hiked his target for Ag Growth International Inc. (AFN-T) to $65 from $55, exceeding the $57 average, with a “sector outperform” rating.

* CIBC World Markets’ Mark Jarvi cut his Boralex Inc. (BLX-T) target by $1 to $48, keeping an “outperformer” rating. The average is $47.54.

* Barclays’ John Aiken raised his IGM Financial Inc. (IGM-T) target to $38 from $36 with an “underweight” rating. The average is $42.25.

“We are anticipating a significant year-over-year earnings retracement , on average, for the asset managers driven by lower asset levels when compared to last year. That said, period end AUM rebounded in-quarter and came in ahead of our expectations, leading to increased estimates heading into reporting,” he said.

* CIBC’s John Zamparo increased his Sleep Country Canada Holdings Inc. (ZZZ-T) target to $26.50 from $24 with an “outperformer” rating. The average is $27.75.

“We foresee few possible positive catalysts until mid-year, and expect Q4 and Q1 results will reveal significant declines from peak earnings periods due to soft consumer confidence and weak housing sales, but we remain constructive on the stock for the medium term. Other highlights from our conversation were that elevated margins could be stickier than previously anticipated, potential exists for more M&A or exclusive brand partnerships, and capital returns should remain robust. We increase our price target,” said Mr. Zamparo.

Follow David Leeder on Twitter: @daveleederOpens in a new window

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