Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Adam Shine expects BCE Inc. (BCE-T) to continue to benefit from wireless sector tailwinds with a “further boost from elevated immigration levels,” however, seeing slowing growth in wireline subscriptions and other “pressures,” including a further drop in advertising for its radio and television stations, he lowered his earnings expectations for both 2023 and 2024 on Monday.
“Reductions to 2023/2024 estimated EBITDA trumped valuation being pushed out six months and now being based on averages of 2023/2024 DCF & 2024/2025 NAV, with implied EV/EBITDA 8.8 times 2023 & 8.5 times 2024 (ex future spectrum),” he said. “2H EBITDA needs to grow by approximately 5 per cent to hit our/Street’s 2023 estimate (up 2.5 per cent year-over-year), as we await 2H promotional activity starting with back-to-school later this summer.”
In a research note previewing the telecommunications company’s second-quarter results, expected to be released on Aug. 3, Mr. Shine said he’s now projecting revenue of $6.05-billion, up 3.2 per cent year-over-year, and consolidated EBITDA of $2.63-billion, a gain of 1.6 per cent. At the same time, he expects adjusted earnings per share to fall 10 cents, or 11.4 per cent, to 77 cents.
“We moved up Revs as we expect greater Product sales, but pushed our EBITDA from above to below consensus as we pruned back Service Revs and margins in each segment,” he said. “On June 14, the elimination of 1300 positions was announced which will reduce Media and overall Bell positions by 6 per cent/3 per cent, result in a roughly $70-million charge in 2Q, and produce annualized savings of $70-million-$75-million likely starting by 4Q.”
For its crucial Wireless segment, Mr. Shine is now estimating revenue of $2.395-billion, up 7.2 per cent year-over-year and in line with the Street’s forecast of $2.375-billion.
“While we anticipate ongoing strong sub loading, we see ARPU flattish given slowing roaming gains, promotions (more 4Q22 than 2Q23), and enlarged data buckets eating into overage revs,” he said.
His Wireline revenue projection is $2.932-billion, a gain of 1.3 per cent and narrowly below the consensus of $2.948-billion.
“We expect Residential revs to show less growth than 1Q given rate hikes in January this year & March 2022 and as incremental promotions offset some of the evolving benefits of market share gains, while enterprise capitalizes on sales of managed services,” he said.
Also anticipating a revenue and earnings decline in its Media segment due to “a tougher TV advertising comparable,” Mr. Shine trimmed his target for BCE shares by $1 to $62, keeping a “sector perform” recommendation. The average target on the Street is $65.27.
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In reaction to last week’s announcement of the termination of its UK joint venture plan, BMO Nesbitt Burns analyst Michael Markidis downgraded NorthWest Healthcare Properties REIT (NWH.UN-T) to “market perform” from “outperform.”
“Despite the recent sell-off, we believe the heightened uncertainty surrounding the REIT’s capital structure, liquidity, and distribution will likely be an overhang for the foreseeable future,” he said.
Mr. Markidis sees the possibility of a “domino effect” with the potential for the execution on other initiatives to be “negatively impacted.”
" NWH will continue to source an alternative partner to recapitalize its UK portfolio,” he said. “The reboot of this process may negatively impact NWH’s ability to recapitalize the U.S. portfolio before the end of this year. Execution risk on non-core assets sales ($340-million at a weighted average cap rate of 5.75 per cent before the end of this year) is less of an issue, in our view.
“Leverage and variable rate debt exposure are elevated. Had it proceeded as planned, the UK JV was expected to reduce proportionate leverage by 400 basis points (57.6 per cent at the end of Q123). Approximately 35 per cent of NWH’s $3.8-billion debt is not fixed. Future monetary policy tightening could put further upward pressure on interest expense in the near term.”
He dropped his target for Northwest units to $7 from $10. The average is $9.21.
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Ahead of the release of its fourth-quarter 2023 financial results after the bell on Tuesday, Desjardins Securities analyst Chris Li raised his revenue and earnings forecast for Alimentation Couche-Tard Inc. (ATD-T) through fiscal 2024.
“While we do not necessarily expect 4Q results to be a catalyst due to tough year-ago comps for fuel margins, potentially softer consumer spending and high near-term SG&A expenses, we believe the investor day in October could be a catalyst by reaffirming attractive long-term growth targets (organic and M&A), supported by strong FCF and the balance sheet,” he said. “Valuation is in line with the average forward P/E of 17 times, supported by potential funds flow to staples, with torque to an economic recovery next year.”
For the quarter, Mr. Li is now forecasting revenue of US$16.777-billion, up from US$16.435-billion a year ago and above the Street’s projection of US$16.133-billion. His adjusted earnings per share estimate of 47 US cents is a decline of 8 US cents year-over-year and 2 US cents under the consensus.
“We believe the focus will be on the U.S. given concerns about softening consumer spending,” he said. “Recent results from peers have been mixed. On the one hand, 7-Eleven USA’s merchandise SSSG [same-store sales growth] has decelerated from mid-single digits in the beginning of the year to approximately 2 per cent in recent months. On the other hand, solid results from CASY, MUSA and ARKO suggest the c-store business remains resilient, supported by its convenience nature and foodservice. We believe ATD is benefiting from the strong momentum of Fresh Food, Fast, with SSSG of 23 per cent in 3Q FY23. The recently launched US$5 pizza and fresh-baked cookie programs are doing well, partly offset by continued softness in tobacco. We expect largely stable merchandise gross margins in all geographies.”
“We expect continued work-from-home trends and fuel-rebranding activities to weigh on [fuel] volumes, especially in the U.S. (10 per cent below pre-pandemic levels). We expect continued strength in fuel margins, especially in the U.S., to mitigate softness in fuel volume. We are forecasting US37 cents per gallon (in line with OPIS) and meaningfully higher levels vs before the pandemic.”
Updating his estimates to also reflect its recently announced acquisition of 2,193 retail sites from TotalEnergies, Mr. Li raised his 2023 and 2024 earnings per share projections to $2.89 from $2.79 and $2.81, respectively.
He kept a “buy” rating and $72 target. The average is currently $74.74.
“Our positive view is based on attractive growth (organic and M&A) supported by a strong financial position,” said Mr. Li.
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While Canaccord Genuity analyst Matthew Lee thinks 2023 could bring “some softness related to customer inventory levels and acquisition integration,” he sees the investing thesis for envelope manufacturer SupremeX Inc. (SXP-T) as “compelling,” pointing to its “substantial cash flow generation, organic growth opportunity in packaging, and M&A track record.”
Calling its valuation “attractive” given its shift towards packaging, he initiated coverage with a “buy” recommendation on Monday.
“Supremex is a Quebec-based envelope and packaging firm that we believe offers investors a solid combination of growth and cash flow buttressed by its prudent M&A strategy,” he said. “The envelope segment provides traditional mailing envelopes to large corporate clients primarily focused on billing and direct advertising. The packaging segment centres on specialized containers built for consumer products. In our view, the combination of Supremex’s two businesses allow the firm to generate substantial cash flows, which can then be reinvested into areas of secular growth”
Mr. Lee set a target of $8.50 per share. The current average on the Street is $9.91.
“The envelope business has counteracted secular industry declines by wielding its 90-per-cent Canadian market share to protect rates while growing the U.S. footprint to offset volume losses,” he said. “On the packaging front, SXP has built out a robust product suite through acquisitions, which we expect will benefit from the longterm growth of the industry and expanding North American market share.”
“SXP trades at a reasonable 3.5 times EV/ F23E EBITDA, which we believe could be fair for a declining envelope business but likely understates the value of packaging, with comparables trading at 7.5 times. As SXP continues its shift towards packaging, we expect a meaningful revaluation could occur.”
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Calling it a “top-tier operator with high margin,” Scotia Capital analyst Ovais Habib resumed coverage of Lundin Gold Inc. (LUG-T) with a “sector perform” recommendation on Monday.
“Lundin Gold is an excellent operator that has consistently generated strong margins and cash flow since achieving commercial production and has continued to incorporate best practices and operational improvements at the FDN mine to maximize profitability,” he said. “The company plans to continue to use its more than $300-million annual free cash flow at spot prices to pursue growth opportunities, return capital to shareholders and aggressively eliminate debt and optimize its balance sheet. This includes the full repayment of its gold prepay facility of $208-million in Q1/23 and a plan to buy back 50 per cent of its 7.75-per-cent stream in June 2024 for $150-million. LUG is listed on the TSX and the Nasdaq Stockholm, and 32 per cent of its shares are held by Australian-based Newcrest Mining (NCM), which also appoints two directors on the company’s board.”
Mr. Habib set a target of $19 per share. The current average is $20.64.
“Due to the high-quality FDN orebody, its relatively long 12-year reserve mine life, demonstrated operating track record, stable cost profile with AISC [all-in sustaining costs] below $1,000 per ounce, and strong FCF of more than $300-million at spot prices, LUG shares trade at a P/NAV5-per-cent of 0.92 times and 6.7 times 2024 estimated P/CF, a premium relative to peers trading at 0.71 times and 4.8 times, respectively,” he said.
“We rate Lundin Gold a Sector Perform in view of (1) the stock’s full valuation of FDN current mine life (using reserves and 25 per cent of M&I resources) and (2) our opinion that Lundin Gold may seek to diversify its single-asset and above-average political jurisdictional risk through acquisition to minimize its ‘single country, single asset’ risk profile. We believe that Lundin Gold is an attractive and very profitable gold producer, run by a strong management team focused on advancing the company’s production growth prospects and would be buyers on any significant pullback in the share price.”
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IA Capital Markets analyst Naji Baydoun thinks NiSource Inc.’s (NI-N) US$2.2-billion sale of a minority interest in its Northern Indiana Public Service Co. LLC subsidiary provides a “strong utility valuation data point” and highlights the portfolio value of Algonquin Power & Utilities Corp. (AQN-T, AQN-N).
“NI’s deal provides another data point that validates (1) strong interest in infrastructure assets (despite the challenging macro-economic and interest rate environment), and (2) valuation premiums being awarded to select utilities,” he said. “Although we would not expect AQN’s own utilities to transact/trade at such high valuations (due to fundamental business differences such as growth rates and ROEs), we believe that these types of deals help investors triangulate to AQN’s utility platform value. As previously noted ... we believe that AQN’s portfolio of assets is worth well above where the current share price is trading.”
In the wake last week’s announcement of NiSource’s deal with Blackstone Inc. (BX-N), Mr. Baydoun does not expect Algonquin to sell its utilities, however he thinks a “corporate simplification supports a re-rating.”
“As enticing as private market valuations have been relative to public ones for certain assets, we do not see AQN pursuing utility monetizations at this time,” he said. “Nevertheless, the Company is undertaking a strategic review of its renewable power platform to optimize its cost of capital and refocus on its regulated assets. An update on this process is expected by the Q2/23 earnings call; with healthy valuations awarded to contracted, low-risk operating renewable assets, we see the potential for AQN to unlock value from its portfolio via capital recycling/monetization initiatives (including the concurrent Atlantica Sustainable Infrastructure’s [AY-Q, Not Rated] strategic review.”
Mr. Baydoun maintained a “speculative buy” rating and $13 target for Algonquin shares. The average on the Street is $9.38.
“AQN offers investors a mix of growth and income with (1) a diversified business model (regulated utilities & non-regulated power), (2) healthy medium-term growth (approximately 5-8 per cent per year Adj. EPS and FCF/share growth potential), (3) an attractive dividend profile (5-per-cent yield, 80-90-per-cent long-term Adj. EPS payout target), and (4) upside from new growth initiatives (including M&A; excluded from estimates/valuation),” he said. “The NIPSCO transaction is supportive of the utility sector’s valuations and emphasizes the short-term disconnect between AQN’s share price and its intrinsic value, which we anticipate could narrow if management can execute on near-term strategic initiatives.”
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In other analyst actions:
* Credit Suisse’s Andrew Kuske raised his Brookfield Corp. (BN-N, BN-T) target to US$42 from US$41, keeping an “outperform” rating. The average on the Street is US$48.30.
“We update aspects of Brookfield Corporation’s (BN) activities with a focus on the raise, deploy and return cycle along with a revisitation of the Net Asset Value,” he said. “Brookfield’s (broadly) contrarian and value-oriented approach to investing creates an interesting duality with some market dislocations enhancing investment potential; however, negative marks along with overhangs associated with certain holdings. For various reasons, a major focus exists on Brookfield’s broad-based real estate exposure – both directly held by BN and via Brookfield Asset Management (BAM) funds. That topic is addressed in past work and we mark Brookfield Property Group at a fraction of BN’s carrying value. Moreover, we largely regard the first and possibly second iterations of the exposure as being priced into the stock at the current valuation.”
“BN’s core franchise continues to be positively positioned on a longer-term basis from a legacy of value-oriented investing. The current valuation looks to buffer issues associated with near-term real estate marks.”
* TD Cowen’s Vivien Azer cut her Canopy Growth Corp. (WEED-T) target to 70 cents from $3.40 with a “market perform” rating, while Piper Sandler’s Michael Lavery lowered his target to 50 US cents from US$1 with an “underweight” rating. The average is $2.27.
* Scotia Capital’s Michael Doumet raised his Finning International Inc. (FTT-T) target to $50 from $46 with a “sector outperform” rating. The average is $44.44.
“We hosted investor meetings with FTT’s CEO, Kevin Parkes, and IR Director, Ilona Rojkova, last week,” said Mr. Doumet. “FTT shares are making new highs – and are doing so with a trough P/E multiple. The company’s organic growth and margin performance have not yet shown any of signs of strain. And, it might not – mining strength, share gains, and operational improvements are masking the few areas of softness. FTT is buying back shares at the fastest pace in its history (aiming for 10 per cent of s/o with NCIB) and, we believe, increased visibility into the 2H23 raises the probability of FTT exceeding $4.00 of EPS in the near term. Macro risks loom, but the flip side is continued self-help, infrastructure programs, and the energy transition support favorable trends in the medium term. With the view that EPS is likely to exceed our/Street estimates in the near term and medium term, we argue that FTT’s trading discount is too steep.”
* Expecting its revenue in China to double this year with better store productivity and heightened demand, Piper Sandler’s Abbie Zvejnieks lifted her Lululemon Athletica Inc. (LULU-Q) target to US$450 from US$445 with an “overweight” rating, seeing it favorably positioned compared to North American peers due to direct-to-customer model amid challenging wholesale environment. The average is US$414.50.
David Leeder