Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial Adam Shine thinks the “opportunity, threat, and hype of AI” was spotlighted last week, prompting a steep share price drop for several online learning providers, including Thomson Reuters Corp. (TRI-N, TRI-T).
“Even before TRI reported its Q1 on May 2 and talked about its history with and investment in AI, Chegg Inc. [CHGG-N], an online tutoring company, disclosed its Q1 late on May 1 and reduced its outlook citing a ‘significant spike in student interest in ChatGPT,’” he said. “This elevated concerns about the threat of AI. Chegg shares nearly halved on May 2, while UK educational publisher, Pearson [PSON: LSE] fell 15 per cent. Contagion spread, with European information publishers (TRI peers) RELX Group [RELX: LSE] down 8.0 per cent and Wolters Kluwer [WKL: AMS] down 9.5 per cent for the week after rising 15.6 per cent and 22.9 per cent year-to-date through May 1. TRI similarly fell 10 per cent after being up nearly 16 per cent in 2023 pre-Q1 reporting.”
In a research report released Monday, Mr. Shine said that pullback in Thomson Reuters shares was “overdue,” however he thinks its Westlaw legal research service and database for lawyers and legal professionals has a “stronger moat” than competitors. Accordingly, he raised his recommendation for the company’s shares to “outperform” from “sector perform” previously.
“Students jumping on new technology and seeking services for free isn’t a surprise,” he said. “Can we really juxtapose that so easily to the legal business? Court rulings are public and accessible. TRI has lawyers doing editorial markups & headnote summaries and then incorporates these annotations for its industry-leading indexing system which includes 110K legal terms compared to LexisNexis at 18K. Westlaw’s secret sauce includes its editorial content, the granularity of its indexation or taxanomy, and its deep historical understanding of how lawyers work to help increasingly offer speed and accuracy in delivering on-point precedent cases. AI needs content for training and experts to do this training otherwise accuracy will be lacking. TRI can train legal models better than anyone else and isn’t sharing its content. It’s dominant in legal search, but can use AI in future to do better with drafting and workflow solutions. We expect to hear more on this in 2023.”
Mr. Shine maintained a target price of $184 for Thomson Reuters’ TSX-listed shares. The current average on the Street is $173.24, according to Refinitiv data.
“We downgraded TRI at $165 on Feb. 27 as we saw it ahead of itself based on our then 2023 estimated NAV [net asset value],” he said. “TRI steadily re-rated higher after on no news, with this gap up more than dissipated last week. Post-Q1 reporting and using FX of 1.35 instead of 1.30 plus greater growth for LSEG shares, we now see fair value at $160, with our target straddling 2024E/2025E NAV. AI will strengthen Westlaw and help newer players, but it’s unlikely TRI’s legal search moat gets easily breached so quickly.”
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In response to its first-quarter earnings miss and now seeing a limited return compared to peers, ATB Capital Markets analyst Nate Heywood downgraded TransAlta Renewables Inc. (RNW-T) to “sector perform” from an “outperform” recommendation.
On Friday before the bell, the Calgary-based company reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $128-million, down from $139-million during the same period a year ago and 9 per cent below Mr. Heywood’s $140-million estimate. Earnings per share of 17 cents was up 2 cents year-over-year but 5 cents below the analyst’s projection.
“The KHW outage remains a near-term headwind looking into Q2/23; however, management remains confident in a full return to service for the site in H2/23, with 13 of 50 towers fully reassembled as of this update,” he said. “The growth outlook remains modest in the near term, with 48 MW and a transmission expansion project under construction. The aggregate growth pipeline consists of 775 MW of projects, with the majority being early-stage renewable developments. We expect RNW to continue to demonstrate the resiliency of its contracted cash flows, but we expect limited growth for the business through our current forecast window.”
“Looking forward, we expect the diverse generating assets and operating regions to offer varying levels of cash flows to RNW; however, all are supported by stable long-term contracts with a weighted average remaining life of ~11 years. The Company continues to demonstrate a willingness to distribute returns to shareholders, with a long-term target payout ratio of 80-85 per cent and a current dividend yield of 7.5 per cent. However, given the high near-term payout ratio and expectations for near-term cash tax headwinds, we see limited opportunity for growth investments and dividend increases.”
Lowering his earnings expectations for 2023 and 2024, Mr. Heywood cut his target for TransAlta Renewables shares to $14 from $15.50. The average target is $13.33.
Elsewhere, others making changes include:
* National Bank’s Rupert Merer to $13 from $13.25 with a “sector perform” rating.
“RNW is in a challenging position and until we have clarity on a path forward, we would remain on the sidelines,” said Mr. Merer.
* TD Securities’ John Mould to $12.50 from $12 with a “hold” rating.
For parent company TransAlta Corp. (TA-T), Mr. Heywood raised his target to $18 from $17.50, keeping an “outperform” rating. The average is $15.88.
“Segment results were strong across the board, largely driven by the strong Alberta power spot pricing and Mid-C pricing in the U.S.,” he said. “The conference call largely focused on the strong fundamental outlook and the long-term growth opportunity set, including a potential interest in M&A for both renewables and contracted thermal assets. The current growth pipeline consists of 4.3 GW, and TA is targeting a 2025 pipeline of 5 GW. Management pointed towards sanctioning roughly 500 MW of new projects by YE2023, and the Company currently has 374 MW of advanced stage renewable growth in its existing pipeline. We remain supportive of TA’s growth aspirations given the current balance sheet position, with >$2bn of liquidity (cash of $1.2-billion) and a TTM net debt to Adjusted EBITDA ratio of 1.8 times.”
Other target adjustments include:
* Scotia’s Robert Hope to $17 from $16 with a “sector outperform” rating.
“In our view, TransAlta’s Q1/23 results are by far the largest stand out positive in recent quarters,” he said. “The company beat our EBITDA estimate by 30 per cent and our cash flow estimate by 41 per cent. Given the strong Q1 and a strengthening outlook for the back half of the year, the company increased its EBITDA guidance by 19 per cent (mid-point to mid-point). Our estimates increase, though we note we are towards the lower end of the revised 2023 guidance given what we view to be a conservative take on power prices ($125/MWh for the year, which is at the lower end of TransAlta’s outlook). We believe there is upside to our estimates and the shares if power pricing remains robust.”
* IA Capital Markets’ Naji Baydoun to $16.50 from $18 with a “strong buy” rating.
* CIBC’s Mark Jarvi to $17 from $16.50 with an “outperformer” rating.
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After a “strong” first quarter from Magna International Inc. (MGA-N, MG-T), RBC Dominion Securities analyst Tom Narayan thinks “all eyes” are on its proposed US$1.5-billion purchase of Veoneer LLC’s active safety division.
“While [Friday’s] results were a positive, focus shifts to the Veoneer transaction which is set to close mid-year,” he said. “On the call, management said it plans to give a revised 2023 outlook including transaction impacts when it reports Q2 results in August and then possibly do a supplementary investor update with more color. We expect dilution from the deal could bring 2023 numbers lower as a result. Deal synergies could bring estimates higher in the outer years however.”
Shares of the Aurora, Ont.-based vehicle and parts maker jumped 6.3 per cent on Friday after it reported better-than-expected quarterly results. Revenue rose 11 per cent year-over-year to US$10.67-billion, well ahead of both Mr. Narayan’s US$9.938-billion estimate and the consensus projection of US$9.903-billion. Earnings per share slipped 13 per cent to $1.11 (from $1.28) but topped the 87-US-cent expectations of both the analyst and the Street.
“The result came as a surprise especially since management called for a sequential decline in Q1 earnings at its Q4/22 results call,” he said. “The opposite happened. On [Friday’s] Q1 call, Magna called out better than expected auto production in North America and Europe in the quarter. Body Exteriors & Structures (BE&S), Seating, and Complete Vehicle (CV), all saw EBITDA margins come in above consensus expectations, helped by better volumes. Power and Vision (P&V) came in at 2.5 per cent however, below consensus’ 3.8 per cent. Net warranty costs of $32-million were partly to blame (3.4 per cent ex-warranty).
With the beat, Magna raised its 2023 revenue and EBIT guidance mid-point by US$600-million and US$148-million, respectively, leading Mr. Narayan to increase his projections as well as his target for Magna shares to US$54 from US$52, keeping a “sector perform” recommendation. The average is US$64.19.
Elsewhere, citing “improved visibility,” TD Securities’ Brian Morrison upgraded Magna to “buy” from “hold” and increased his target to US$64 from US$62.
“The share price has declined 20 percent since our downgrade, and we are now of the view that we have reached an inflection point in its financial profile,” he said. “Should we continue to see sequential improvement in its financial performance as we now expect and Magna meets/exceeds its 2023 guidance, this should heighten investor confidence in Magna’s outlook and lead to positive revisions to both consensus and its applied multiple. While it remains early, achieving these targets would go a long way to improving sentiment toward Magna’s 2025 guidance that if achieved would imply material upside from the current share price.”
Others making target changes include:
* Citi’s Itay Michaeli to US$57 from US$53 with a “neutral” rating.
“We’re encouraged by Magna’s Q1 progress, which evidenced improve execution and a solid GoM,” said Mr. Michaeli. “Looking ahead, we still see a balanced NT risk/reward in the shares as the company continues to execute, but with an improving H2 setup on stronger expected exit margins and greater line-of-sight towards 2025 targets, when Magna should see significant reductions in investment spend concurrent with margin expansion.”
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After “strong” first-quarter results, Raymond James analyst David Quezada said he continues to see Hydro One Ltd. (H-T) as one of the “highest-quality companies” in his Energy Infrastructure coverage universe, pointing to its “strong 5-year earnings guidance, low earnings volatility and a variety of large-scale, longer-term opportunities.”
On Friday, it reported adjusted earnings per share for the quarter of 47 cents, a penny above Mr. Quezada’s estimate but down 9 per cent year-over-year due largely to higher expenses.
“With the recently announced Waasigan line extension, as well as discussions surrounding additional long range transmission necessities, we see potential for the IESO [Independent Electricity System Operator] to step up the pace of planning long term transmission investments in Ontario,” he said. “While early to judge, we expect this would represent a material lift in the pace of Hydro One’s capex beyond the company’s 5-year capital plan (5 of 6 lines awarded are not included in the current plan, while others could also be awarded). With the company’s 50/50 partnership with First Nations groups in Ontario, we believe Hydro One has solidified its position as the builder of new transmission projects in the province having secured the last six transmission opportunities.
“We are big fans of Hydro One’s low risk footprint, strong expected rate base growth and supportive regulatory backdrop. H’s current capital plan supports self-funded rate base growth of 6 per cent primarily related to maintenance of the company’s footprint. However, we note this does not factor in several high probability opportunities outside the current capital plan including large scale transmission projects (discussed above), broadband investments, and LDC consolidation which we believe could ultimately support rate base growth approaching 8 per cent. We believe the political climate in Ontario is amenable to LDC consolidation while other broader trends toward automation, electrification, and cybersecurity, also support this trend; one the company believes could represent $100-$200-million of annual capex.”
Maintaining a “market perform” rating for Hydro One shares, Mr. Quezada raised his target by $3 to $38.50. The average is $39.19.
“All things considered, our neutral stance is primarily a function of H’s premium valuation (sitting at 21.5 times 2024 estimated P/E vs. peers at 18.6 times), however, we expect the company will continue to deliver shareholder value in the long run,” he said.
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While acknowledging Li-FT Power Ltd.’s (LIFT-CN) flagship Yellowknife project is in its early stages, Canaccord Genuity analyst Katie Lachapelle called it “one of the most exciting lithium exploration land packages in Canada, the scale of which we expect to be better defined over the next 12 months.”
On Monday, she became the first analyst on the Street to initiate coverage of the Vancouver-based exploration company, giving it a “speculative buy” recommendation.
“The project comprises minerals leases that contain numerous lithium pegmatites that make up what is known as the Yellowknife Pegmatite Province (YPP),” said Ms. Lachapelle. “The pegmatites in the YPP area are prominent, with strike lengths up to 1,800 metres and widths up to 40 metres, many of which are large enough to be seen from satellite imagery. Based on exploration work completed in the 1970s and 1980s, the Yellowknife Project is believed to have the potential to host one of the largest hard rock lithium resources in the Western World.”
She also emphasized “encouraging results from historical exploration work” and believes “significant nearby infrastructure could fast-track development.”
Also touting the potential from its portfolio of projects in the James Bay region of Quebec, Ms. Lachapelle set a target of $13, representing almost 65-per-cent-upside from Friday’s close of $8.91.
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In other analyst actions:
* After “strong” first-quarter results that exceeded his expectations, TD Securities’ Tim James upgraded Magellan Aerospace Corp. (MAL-T) to “buy” from “hold,” believing its shares “offer long-term upside due to the company’s low valuation, exposure to commercial aviation recovery, and strong balance sheet.” He hiked his target to $12, above the $11.25 average, from $8.
“While supply-chain issues are limiting the industry’s ability to ramp up production and may lead to incremental costs for Magellan in advance of the corresponding revenue in 2023, we believe Magellan’s valuation already reflects this impediment to growth,” he said. “Over the long term, we believe industry production challenges could prolongthe commercial aircraft recovery cycle as OEMs require additional years to meet airline demand for new aircraft. We believe this will ultimately drive earnings growth through 2025, and Magellan’s cash, $150 million unused credit facility (of which $75 million is committed), and low leverage (total debt to EBITDA of 0.9 times) provide an opportunity for accretive M&A.”
* Barclays’ Kannan Venkateshwar reinstated coverage of Rogers Communications Inc. (RCI.B-T) with an “overweight” recommendation and $74 target, above the $73.45 average on the Street.
“Post the Shaw deal, Rogers has the potential to expand its industry leading margins and invest it to grow wireless further while stabilizing its broadband business,” he said.
* Mr. Venkateshwar trimmed his Telus Corp. (T-T) target to $28 from $31 with an “equal-weight” rating. The average is $31.20.
* Scotia Capital’s Kevin Krishnaratne cut his Altus Group Ltd. (AIF-T) target to $59 from $69 with a “sector perform” rating, while TD Securities’ Daniel Chan lowered his target to $65 from $75 with an “outperform” rating. The average target on the Street is $62.67.
“Altus reported a weaker-than-expected Q1 in its Altus Analytis business as recurring revenue was flat quarter-over-quarter, but more importantly bookings were down 24 per cent year-over-year as the March banking crisis put purchase decisions within VMS on pause,” said Mr. Krishnaratne. “While this dynamic is expected to be just a temporary pause, with interest and engagement with clients remaining high, we think better results may only start to be realized in 2H. Following the 15-per-cent sell-off, we think the stock could trade sideways until there is greater visibility on a bookings rebound. While our estimates for AA move lower, they still contemplate solid recurring revenue growth in the mid-teen range, with the company’s flagship ARGUS product performing well.”
* National Bank’s Tal Woolley raised his American Hotel Income Properties REIT (HOT.UN-T) target to $3 from $2.75 with a “sector perform” rating, while CIBC’s Dean Wilkinson cut his target to $2.25 from $2.50 with a “neutral” rating. The average is $3.24.
* Scotia’s Konark Gupta reduced his Andlauer Healthcare Group Inc. (AND-T) target to $52 from $55, maintaining a “sector perform” rating. The average is $56.25.
“Q1 was a good quarter on an absolute basis and exceeded AND’s business plan, but it missed Street expectations due particularly to the normalization in U.S. truckload premium pricing,” said Mr. Gupta. “Top-line growth remained strong at double digits and beat consensus (missed us) while margins compressed year-over-year and quarter-over-quarter, missing expectations. However, management noted that business hasn’t changed at all as it continues to target mid- to high-single-digit organic revenue growth with relatively steady margins, while it remains focused on M&A with a new corporate development executive and a solid balance sheet. We have trimmed our 2023-2025 EBITDA outlook by 5-7 per cent.”
* National Bank’s Travis Wood increased his Arc Resources Ltd. (ARX-T) target to $23, above the $22.72 average, from $18.50 with an “outperform” rating, while Desjardins Securities’ Chris MacCulloch raised his target to $27 from $26 with a “buy” rating.
“We are increasing our target on ARC ..., reflecting positive revisions to estimates following its solid 1Q23 financial results,” said Mr. MacCulloch. “Although we were already modelling Attachie Phase I, the project is expected to come online two quarters ahead of our forecast and with $100-million less capex when factoring in the $65-million of capital for future development phases, which further enhances economic returns. Meanwhile, investors get paid to wait through an enhanced dividend and more aggressive buybacks.”
* Stifel’s Cody Kwong reduced his target for Baytex Energy Corp. (BTE-T) to $6.25 from $7 with a “hold” rating. The average is $7.40.
* Desjardins Securities’ Gary Ho lowered his Brookfield Business Partners L.P. (BBU-N, BBU.UN-T) target to US$29, above the US$27.43 average, from US$32 with a “buy” rating. Other changes include: IA Capital Markets’ Matthew Weekes to US$24 from US$27 with a “hold” rating and Scotia’s Phil Hardie to US$27 from US$26 with a “sector outperform” rating.
“Q1/23 EBITDA was roughly in line with Street expectations but a touch ahead of our forecast and saw robust growth over last year, benefiting from active capital deployment and continued growth across its portfolio companies,” said Mr. Hardie. “The results demonstrate the resilience of BBU’s operating businesses. That said, the overarching drivers for the stock appear to be the macro outlook, investor risk appetite, and monetization activities.
“This part of the market cycle has been challenging and has created a rough ride for BBU’s share and unit holders. We expect conditions to improve over the coming 12 months given indications that inflation may have peaked and interest rates may soon follow. We believe BBU’s wide NAV discount already reflects a high degree of risk and offers a good entry point for investors looking for an attractive value play.”
* Desjardins Securities’ Brent Stadler bumped his Brookfield Renewable Partners L.P. (BEP.UN-T, BEP-N) target to $46 from $45 with a “hold” rating. The average is $45.78.
“We boosted our estimates to reflect the significant hydro outperformance, which highlighted closer to run-rate levels,” said Mr. Stadler. “BEP continues to execute on its development pipeline and is on track to complete 5GW (1GW net) in 2023. Given its scale and deep access to capital, BEP remains well-positioned to capitalize on the global decarbonization and energy security push and expects to exceed its five-year capital deployment target of US$6–7-billion.”
* CIBC’s Dean Wilkinson increased his Chartwell Retirement Residences (CSH.UN-T) target to $12, exceeding the $11.60 average, from $11 with an “outperformer” rating.
* National Bank’s Don DeMarco raised his Dundee Precious Metals Inc. (DPM-T) target by $1 to $14.50 with an “outperform” rating. The average is $12.92.
* Scotia’s George Doumet increased his George Weston Ltd. (WN-T) target to $183 from $181 with a “sector perform” rating. The average is $196.14.
* RBC’s Paul Quinn cut his Interfor Corp. (IFP-T) target to $32, below the $33.33 average, from $35 with an “outperform” rating.
“Interfor Corporation reported Adjusted EBITDA of $26-million, which was roughly in line with our $29-million forecast and slightly ahead of FactSet consensus at $22-million,” he said. “We view Interfor’s geographically diversified but lumber-focused business as an attractive way to play a potential pick-up in residential construction (particularly given its I-joist, stud, and MSR lumber exposure).”
* BMO’s Alexander Pearce trimmed his Labrador Iron Ore Royalty Corp. (LIF-T) target to $30 from $32 with a “market perform” rating. The average is $35.57.
* CIBC’s Krista Friesen increased her target for NFI Group Inc. (NFI-T) to $9 from $8.50 with an “underperformer” rating. The average is $11.75.
* PI Financial’s Ben Jekic initiated coverage of Nouveau Monde Graphite Inc. (NOU-X) with a “buy” rating and $8.50 target. The average is $10.39.
* Ahead of Wednesday’s post-market earnings release, TD Securities’ Michael Tupholme cut his Nutrien Ltd. (NTR-N, NTR-T) target to US$80 from US$88, keeping a “hold” rating. The average is US$92.85.
“Since NTR reported Q4/22 results in mid-February, benchmark fertilizer prices have been mixed (although, in terms of impact, relevant price declines have outpaced the extent to which certain prices have risen/held steady, in our assessment),” he said. ”In the U.S., urea prices have rallied and potash prices have been flattish (both seen benefiting from spring demand). However, ammonia prices have declined sharply, while phosphate prices and offshore potash prices have continued to trend lower. We have made a variety of adjustments to our model. Overall, our estimates for both Q1/23 and subsequent quarters have decline.”
* Scotia’s Kevin Krishnaratne hiked his Open Text Corp. (OTEX-Q, OTEX-T) target to US$50 from US$43 with a “sector outperform” rating, while Eight Capital’s Adhir Kadve raised his target to US$50 from US$45 with a “buy” rating. The average is US$48.
“We remain bullish OTEX, which continues to deliver on its financial objectives and is ahead of plan with Micro Focus,” said Mr. Krishnaratne. “Q3 demonstrated another quarter of strength with cloud momentum and outperformance from Micro Focus during its first 2 months. Micro Focus adds new products in Cybersecurity, AI, and Analytics among other new technologies that are poised to drive new customer use cases and expand share of wallet, with expectations of a continued acceleration in organic growth over the near-term (and a return to organic growth at Micro Focus in FY25).”
* Stifel’s Cole Pereira raised his Pason Systems Inc. (PSI-T) target to $15.50 from $15 with a “hold” rating, while RBC’s Keith Mackey cut his target to $19 from $20 with an “outperform” rating. The average is $17.02.
* RBC’s Pammi Bir trimmed his target for Plaza Retail REIT (PLZ.UN-T) to $4.75, matching the average, from $5 with a “sector perform” rating.
“Our stable outlook for Plaza is largely intact, post Q1 results that were marginally light,” he said. “Set against a slowing economy, we believe its basic needs retail portfolio sets up well to deliver steady, moderate organic growth. As well, we expect its substantial pipeline of developments to provide a complementary source of earnings and NAV upside over the next two years, while the recent improvement in leverage provides additional funding capacity.”
* Mr. Bir also cut his Slate Grocery REIT (SGR.UN-T) target to $11, below the $11.42 average, from $12 with a “sector perform” rating.
“Post results that were short of our call, our stable view of SGR is largely intact,” he said. “Operationally, we expect its defensive, grocery anchored portfolio to remain resilient in the face of broader anticipated economic headwinds. Recent financing activities are also encouraging in the context of a tighter lending environment. Coupled with a moderate earnings growth outlook, valuation seems reasonable.”
* RBC’s Irene Nattel raised her Saputo Inc. (SAP-T) target to $46 from $45 with an “outperform” rating. The average is $42.63.
“Forecasting EPS $0.41 (up 59 per cent year-over-year), in line with consensus (range: $0.37-$0.43) when SAP reports FQ4 on June 8,” she said. “Key elements that characterized year-to-date earnings recovery should also underpin FQ4 performance, notably pricing initiatives, efficiencies gains and order fill rate improvements. While sharp improvement in the spread, partly offset by operating leverage/inventory realization headwinds could drive upside to our U.S. segment forecasts, F24 forecasts remain unchanged reflecting a reversal in the commodity backdrop since quarter end.”
* Oppenheimer’s Ken Wong raised his target for Shopify Inc. (SHOP-N, SHOP-T) to US$70, above the US$57.66 average, from US$65 with an “outperform” rating. Other changes include: Piper Sandler’s Clarke Jeffries to US$50 from US$45 with a “neutral” rating and Citi’s Tyler Radke to US$65 from US$51 with a “neutral” rating.
* TD Securities’ Graham Ryding raided his Sprott Inc. (SII-T) target to $55 from $53, which is the current average, with a “hold” rating.
* TD Securities’ Daniel Chan moved his Thinkific Labs Inc. (THNC-T) target to $2.50 from $2.25 with a “hold” rating. The average is $4.09.
* TD Securities’ Daryl Young raised his Westshore Terminals Investment Corp. (WTE-T) target to $28 from $27 with a “hold” rating, while Scotia Capital’s Konark Gupta increased his target to $26.50 from $25.50 with a “sector perform” rating. The average is $27.90.
* National Bank’s Shane Nagle bumped his Wheaton Precious Metals Corp. (WPM-T) target to $80 from $72.50 with an “outperform” rating. Other changes include: TD Securities’ Greg Barnes to US$62 from US$60 with a “buy” rating and BMO’s Jackie Przybylowski to US$56 from US$54 with an “outperform” rating. The average is $75.
David Leeder