Inside the Market’s roundup of some of today’s key analyst actions
“Things are looking up” for Pembina Pipeline Corp. (PPL-T), according to Citi analyst Spiro Dounis, who raised his full-year forecast for the Calgary-based company to reflect an “improved cash flow outlook supported by the ‘23 EBITDA guidance raise and flow-through impact.”
“Marketing continues to outperform; management acknowledged the $0.2-0.4-billion run rate EBITDA guidance may be too conservative,” he said in a research note. “We expect the company to guide at or above that range with its December annual update. Looking ahead, we model ‘24 to be slightly FCF negative to reflect the impending Cedar LNG FID. That said, over a multi-year period we expect PPL to generate an average of $0.7-billion in excess cash flow annually (potential TMX purchase excluded). Our updated valuation implies a 9.7 times multiple on 2025 estimated EBITDA, a 1-times premium to large-cap peers that we believe appropriately reflects PPL’s stable cash flows and growth outlook.”
Mr. Dounis raised his fourth-quarter earnings per share forecast by 9 cents to 78 cents with his full-year expectation jumping to $2.71 from $2.54. His 2024 and 2025 projections decline to $2.61 and $2.81, respectively, from $2.72 and $2.91.
Maintaining a “neutral” recommendation for Pembina shares, Mr. Dounis hiked his target to $46 from $42. The average target on the Street is $50.77, according to Refinitiv data.
“PPL boasts a growth backlog of high-quality and low-carbon projects; however, the company already trades at a premium to peers and likely reflects most of these positive attributes,” he concluded. “PPL offers investors a unique dual track: a low-risk growing base business and one of the most holistic approaches to low-carbon growth among our coverage. PPL’s base business take-or-pay earnings profile bests its peers. Its growth backlog of low-carbon projects also stands out.
“That said, PPL already trades at a premium, reflecting its lower risk profile. Its energy transition projects have the potential to offer new revenue streams, but are in early stages and present execution risk. PPL trades at a high-single-digit FCF yield, which is in-line with peers and offers comparable growth forecast.”
Elsewhere, JP Morgan’s Jeremy Tonet increased his target to $50 from $49 with a “neutral” rating.
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ATB Capital Markets analyst Martin Toner thinks Real Matters Inc. (REAL-T) is “especially interesting for investors expressing a positive view on lower interest rates.”
“We believe Real Matters is well placed to benefit from a rate-cutting cycle,” he said. “The Company has proven it can remain profitable under worst-case conditions, setting up an asymmetric relationship with interest rates. We think REAL investors will be disproportionally rewarded when rates decline from here, and not hurt much when rates increase. REAL is likely the only profitable appraisal management company (AMC), positioning it well to gain share. Structurally lower costs suggest REAL’s margin profile will show improvement when volumes recover.”
On Friday before the bell, the Markham, Ont.-based online mortgage services firm reported fourth-quarter net revenue of $11.2-million, down 22 per cent year-over-year and narrowly lower than the Street’s $11.6-million estimate as its U.S. Title and Appraisal businesses dropped 40 per cent and 23 per cent, respectively. Adjusted EBITDA $0.6-million was in line with the consensus forecast, while adjusted net income of $0.8-million topped expectations ($0.1-million).
“The end of FY23 marks a historically challenging year for the real estate industry,” said Mr. Toner. “In its fiscal year, REAL estimates 2.7 million purchase transactions and 0.6 million refinance transactions took place, which would be half the volume of the worst year of the past 28 years. During Q4, the 10-year Treasury yield continued to tick upwards, and the spread between the 10-year and the 30-year fixed-rate mortgage (FRM) continued to hover at 300 basis points, more than 130 basis points above the historical norm. While conditions have not improved and are expected to continue to have an impact on mortgage originations, industry leaders, such as the Mortgage Bankers Association (MBA), and Company management believe that conditions will materially improve in H2/FY24. The MBA stated that according to its sensitivity analysis, a 100-basis-points decrease in rates would improve volumes by 40 per cent, but a 100-basis-points increase in rates would result in flat volume, underscoring its belief that the market has troughed. In FY24, management believes it has three tailwinds; market factors such as the spread improving, internal changes such as its lower cost base and margin expansion, and Tier 1 lenders winning back share against the market.”
“Rates remain stubbornly high, and industry sources have pushed back forecasts of a recovery until H2/24. In the near term, management expects the next two quarters to resemble FY23, before ramping activity into the second half of the fiscal year. Management expects the net revenue margin in U.S. Appraisal to hover at the current 27.5-per-cent level, having already reached its FY25 target in the segment. In U.S. Title, the Company expects net revenue margin to significantly increase once refi volumes normalize, a scenario the Company expects to play out as rates move down and the 15 per cent of current mortgages over 5 per cent start refinancing.”
Pointing to a slower-than-expected recovery in macroeconomic conditions, Mr. Toner lowered his revenue estimates for both 2024 and 2025. He’s also forecasting negative adjusted EBITDA for the first two quarters of the next fiscal year followed by a profitable second half.
“If interest rate cutes are executed in 2024, as expected, we believe REAL will be well positioned to scale higher volumes without adding significantly to its cost base,” he said.
Reiterating an “outperform” recommendation for Real Matters shares, Mr. Toner trimmed his Street-high target to $9 from $9.50. The average target is $6.86.
“The current macroeconomic environment and housing market estimates add a layer of complexity to our DCF [discounted cash flow valuation],” he said. “We now forecast a slow retreat to ‘normal’ levels beginning in FY2024 and thereafter. We remain constructive on the purchase mortgage market, which we believe has strong long-term fundamentals. We believe the shares currently undervalue REAL’s future cash flow as mortgage volumes recover to normal levels. The impact of another ‘refinance wave” is not contemplated, either. We view mid-cycle EBITDA for Real Matters as being between $25-million and $50-million, under conservative market share assumptions. At the current valuation, we believe the mid-cycle multiple of 5-10 times undervalues Real Matters long-term potential for market share gains, and attractive EBITDA and FCF margins on higher net revenues.”
Elsewhere, others making target changes include:
* National Bank’s Richard Tse to $6.50 from $7 with a “sector perform” ratin
“In the face of the challenging market, Real Matters continues to strengthen its position; the Company launched one new lender and one new channel with a Tier 1 lender in U.S. Appraisal and two new lenders and one new channel with a Tier 1 lender in U.S. Title,” said MR. Tse. “In addition, Real Matters launched three new clients in Canada. That said, we’d note its annual disclosure showed lost market share in Refinance Appraisals (10.4 per cent from 12.1 per cent in F22) and Title & Close (0.5 per cent from 1.2 per cent in F22). It appears those share declines are attributed to a mix shift in its customers’ business (previously tied to refinance); a normalizing environment would suggest share gains to continue. Most important, Real Matters continues to hold the line on profitability with a 5-per-cent Adj. EBITDA margin in the quarter, despite the shortfall in revenue vs. our and consensus estimates. For reference, Real Matters Adj. EBITDA margins averaged approximately 36 per cent from FY’19-FY’21, suggesting potential torque once the market inflects. With $42.4-million in cash, no debt and a low burn rate (down $57k in FQ4), we believe Real Matters is poised to benefit when originations turn with ample capacity to scale volume under the current cost base.
“Bottom line, Real Matters continues to execute well on what’s within its control; that said, the market outlook for mortgage volumes remains challenging. At 4.9 times EV/S (F24E), REAL looks reasonably valued against the current backdrop.”
* TD Securities’ Daniel Chan to $6 from $7 with a “hold” rating.
“Real continues to execute well in a highly volatile market,” said Mr. Chan. “Although market volumes continued to fall on already-weak year-over-year comps, reflected in Real’s gross revenue declining 28 per cent year-over-year, the company’s disciplined operations managed to drive breakeven EBITDA. Many of these efficiency improvements are permanent and could drive material operating leverage when the market recovers. There are signs that F2024 could be a better year than F2023, as: 1) industry forecasts call for a recovery in mortgage originations next year; 2) Real recently launched a second channel with its tier-1 (T1) Title & Closing (TC) customer; and 3) T1 TC RFP activity could start early next year.”
* Canaccord Genuity’s Robert Young to $5.25 from $6.25 with a “hold” rating.
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Citing higher production costs and deferred guidance on an increase to its computing power, H.C. Wainwright analyst Mike Colonnese downgraded Vancouver-based Hive Blockchain Technologies Ltd. (HIVE-Q, HIVE-X) to “neutral” from “buy” following last week’s release of second-quarter fiscal 2024 financial results that fell below his expectations.
“Management postponed its calendar year-end 2023 hash rate guidance of 6 EH/s [exahashes per seconds] out one year to 2024 in its presentation,” he said. “The delay in incremental hash rate deployment (beyond the 4.3 EH/s currently operating) could result in HIVE losing share leading up to the April 2024 halving event, as we see it, given the network hash rate continues to rise at a rapid pace. Meanwhile, HIVE’s direct production costs have risen considerably over the past three quarters and came in at $22,639 per BTC [bitcoin] mined in F2Q24, which represented a 21-per-cent quarter-over-quarter jump, largely driven by the abolishment of a reduced energy tax for data center operations in Sweden by the Swedish Parliament, which took effect in July. ... We estimate HIVE’s all-in cash cost to mine a coin in F2Q24 was over $27,000/BTC vs. an average BTC price of $28,000. HIVE’s high production costs and relatively low fleet efficiency (over 30 joules per terahash), could leave the company in a precarious position when the block reward miners receive is halved next April.
“As such, we believe it is prudent to move to the sidelines until we see greater revenue contribution from the high-performance computing (HPC) business, abating production costs, or higher BTC price levels.”
After cutting his full-year 2024 revenue projection, pointing to “a higher network hash rate alongside lower hash rate estimates for Hive,” Mr. Colonnese dropped his target to US$3.50 from US$7. The average is US$4.78.
“With that said, we acknowledge HIVE’s continued operational prowess as measured by consistently high up-times across its facilities, while the company is making a concerted effort to acquire newer generation rigs to improve fleet efficiency, as evidenced by HIVE’s recent purchase of 4,800 S19K [miners] pros equipped with 23 J/TH [joules per terahash] of efficiency.”
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Raymond James analyst Brad Sturges expects units of Slate Office REIT (SOT.UN-T) to face further near-term selling pressure as it “experiences a churn in its investor base” following the decision to suspend its monthly distribution.
Last Tuesday, the Toronto-based REIT announced the move, which is projected to save $10.2-million in cash annually with the goal of reducing debt and funding of ongoing business operations. It came alongside the introduction of a “Portfolio Realignment Plan” that involves the divestment of “non-core” assets consisting of approximately 40 per cent of gross leasable area, which is meant to “reposition the REIT’s portfolio for long-term stability and performance and raise liquidity.”
“Once completed, SOT intends to have repositioned its global office portfolio towards long duration, less capital intensive newer build office assets that are similar in terms of quality, occupancy, tenant profile with in-place leases with credit-quality office users, and generate higher unlevered yields,” said Mr. Sturges.
“Given the volatility in the interest rate market, and due to the lack of transaction activity and pricing discovery in the Canadian office real estate market, for now, we have not assumed any executed non-core dispositions in our 2024E and 2025E FD FFO/unit and AFFO/unit estimates.”
After lowered his 2023 and 2024 adjusted funds from operations projections to 15 cents and 17 cents, respectively, from 19 cents and 23 cents and introducing a 2025 projection of 17 cents, Mr. Sturges trimmed his target for Slate Office units by 10 cents to $1, keeping a “market perform” rating. The average is $1.20.
Elsewhere, others making target changes include:
* RBC’s Tom Callaghan to $1 from $1.75 with a “sector perform” rating.
“While Slate Office’s Q3 financial performance fell below our outlook, the REIT posted a solid quarter operationally. More importantly results were accompanied by announcement of a number of initiatives aimed at improving financial flexibility. This includes significant non-core asset dispositions, as well as suspension of the distribution. While asset sales should help improve liquidity and leverage, we see visibility with respect to the execution, as well as ongoing refinancings/credit amendments as poor amid the challenging macro backdrop. Accordingly, we maintain our Sector Perform recommendation, but have added a Speculative Risk qualifier,” he said.
* Cormark Securities’ Sairam Srinivas to 80 cents from $1.20 with a “reduce” recommendation.
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After “another weak quarter,” Scotia Capital analyst Orest Wowkodaw sees near-term uncertainty lingering in the copper market.
“The Q3/23 reporting season was largely overshadowed by several material corporate updates from our largest miners, including TECK’s disappointing late stage QB2 capex increase but new all cash plan to fully divest its HCC business, FM’s heightened Cobre Panama operating and fiscal uncertainty, and the closing of CCO’s WEC acquisition after more than a year of regulatory scrutiny,” he said. “With these major events and Q3 results behind us, we revisit the Cu equities in the context of current spot prices under several key relative metrics: (1) value, (2) growth, (3) leverage, and (4) capital return potential. Given the challenge in building new large-scale Cu capacity, we anticipate a heightened M&A environment, supporting elevated multiples.”
In a research report released Monday, Mr. Wowkodaw emphasizing three key takeaways from the quarter, pointing to “(1) The current operating environment remains challenging (FM, NEXA, and TECK cut 2023 production guidance); (2) Cost pressures are not materially easing as expected (ERO, FCX, and FM increased 2023 cost guidance); moreover, we believe consensus cost expectations for 2024 are likely to move higher; (3) Growth execution appears challenged, with most miners (excluding IVN) experiencing schedule and/or cost pressures (notably CS, ERO, NEXA, and TECK). Since our Q3 preview note, our 2023-2025 EBITDA estimates for the mid-and large cap miners decreased by an average of 0 per cent, 2 per cent, and 4 per cent, while our 8-per-cent NAVPS’s decreased by 4 per cent. ... We forecast elevated average 2023 all-in sustaining costs of $2.46 per pound copper for our coverage, up 6 per cent from $2.33 per pound in 2022 and up 31 per cent from $1.88 per pound in 2021. However, cash margins remain positive for most miners given a $3.70 per pound spot price.”
Mr. Wowkodaw also said he expects the copper market to be “essentially in balance” through 2025 “before the emergence of large structural deficits.”
“We note that despite demand weakness, total global visible Cu inventories remain at a critically low approximately 4 days, in our view, largely due to ongoing supply side underperformance,” he said. “While demand uncertainty in both China and ex-China markets continues to overhang the near-term outlook for copper, a potential end (and possible future reversal) to the current global (ex-China) interest rate hiking cycle could positively impact sentiment for growth and by extension, most commodity prices.”
Revisiting his valuations for copper equities, he made these target price adjustments:
- Altius Minerals Corp. (ALS-T, “sector perform”) to $20 from $21. The average is $23.88.
- Champion Iron Ltd. (CIA-T, “sector outperform”) to $7 from $6.50. Average: $7.46.
- Ero Copper Corp. (ERO-T, “sector perform”) to $22 from $24. Average: $24.82.
- Ivanhoe Electric Inc. (IE-N/IE-T, “sector outperform”) to US$16 from US$18. Average: US$17.50.
“All copper equities are likely to move higher if Cu prices improve, or lower if Cu prices weaken,” he said. “While more modest than last quarter, valuation multiples remain somewhat elevated in the context of current spot prices; however, this is likely supported by the very constructive medium to long term fundamental picture, the energy transition thematic, and by ongoing M&A speculation. We note that margins for most producers remain solid (spot Cu of $3.70 per pound vs. average AISC of $2.46 per pound) although FCF generation appears muted.”
“Overall, TECK and CCO remain our top picks, while CS and FCX are our other preferred picks for Cu exposure; we also recommend CIA, HBM, and IVN. Among the developers (within our coverage), we recommend IE. Among the royalties, we prefer ECOR. Our Sector Outperform-rated equities currently have an attractive 12-month average implied return of 44 per cent.”
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In other analyst actions:
* Canaccord Genuity’s Yuri Lynk raised his target for AtkinsRéalis (ATRL-T) to $51 from $50, keeping a “buy” recommendation. The average target on the Street is $50.25.
* Jefferies’ Lloyd Byrne cut his Cenovus Energy Inc. (CVE-T) target to $34 from $36 with a “buy” rating. The average is $32.91.
* In a report titled Why We Expect Chemtrade to Remain Rangebound, Scotia Capital’s Ben Isaacson trimmed his target for Chemtrade Logistics Income Fund (CHE.UN-T) to $9.50 from $10 with a “sector perform” rating. The average is $11.86.
“We struggle to build a convincing case for CHE outperformance near-term ... ‘24 EBITDA is expected to fall 15 per cent to 20 per cent year-over-year, on weaker merchant acid and sodium chlorate demand, water solutions margin compression, and while caustic prices could remain weak (we’re cautiously optimistic improved housing in ‘24 can pull up PVC demand, such that chlorine production outpaces caustic demand),” he said. “None of this is a huge deal for a commodity chem enjoying record-high EBITDA. Of course, stocks rarely work when commodity prices/margins are weakening, but that’s also not the issue. The pre-issue, is how this will impact leverage. Based on ‘24 Street EBITDA of $410-million, and assuming no change to net debt, leverage should deteriorate to 2.2x – but even that alone isn’t a concern. If we extrapolate, CHE could get caught in its ability to fund its growth narrative vs. avoiding the impact of rising leverage on the value of its equity. As a reminder, the Casa Grande JV is on hold until returns improve (via CHIPS Act?). Beyond the Q1 start of the ultra-pure expansion in Cairo, as well as some initiatives in water solutions, we don’t see what catalysts in ‘24 that will propel the stock forward.”
* Barclays’ Dave Anderson raised its Computer Modelling Group Ltd. (CMG-T) target by $1 to $8 with an “underweight” rating. The average is $10.80.
“CMG’s FY2Q24 EBITDA of $11.2-million came in above estimates, with up 20 per cent or more year-over-year in nearly every region,” he said. “Energy transition continued to represent a high proportion of software rev at 22 per cent (mostly carbon capture) - a natural extension of its reservoir simulation/modeling capabilities. CMG also closed the $22-million Bluware acquisition.”
* RBC’s Pammi Bir reduced his target for Crombie REIT (CRR.UN-T) to $15, below the $15.11 average, from $17 with a “sector perform” rating.
“On the back of underlying Q3 results that were largely in line with our call, our stable view on CRR is intact. Operationally, the portfolio remains well-positioned to navigate economic headwinds, backstopped by its significant weighting in defensive grocery anchored assets. Indeed, we expect organic growth to remain at healthy levels over the N12M. Mixed-use initiatives also advanced, although frankly, we would prefer a larger margin for error at Marlstone,” said Mr. Bor.
* To reflect the non-binding proposal from its majority shareholder Fairfax Financial Holdings Ltd. (FFH-T) to acquire the common shares it doesn’t already own, National Bank’s Richard Tse moved his target for Farmers Edge Inc. (FDGE-T) to 25 cents from 10 cents, keeping a “sector perform” rating. The average is 18 cents.
* Scotia’s Mario Saric reduced his H&R REIT (HR.UN-T) target to $11.75 from $13.25 with a “sector perform” rating. The average is $10.96.
“We maintain our SP rating following an in-line recurring FFOPU [funds from operations per unit] quarter,” he said. “Our key estimates are 2 per cent – down 11 per cent vs. down 0-9 per cent sector avg.. Bottom-line, no meaningful change in our neutral investment thesis, which should improve meaningfully in 2H/24 as two unit price catalysts draw near. In the near-term (i.e., next 3-6 months), we think there is no urgency to build positions, despite the cheap valuation. We think the primary unit price catalysts = improved U.S. Sun-Belt sentiment and fundamentals on peak supply absorption (we suspect Lantower sentiment likely not better until late 2024 or early 2025) and disposition of Office properties re-zoned with residential intensification (again, a year out; see below). Improved U.S. Sun-Belt sentiment is particularly crucial in our view given H&R’s strategic plan is largely driven by making Lantower (Residential) a much bigger part of the H&R story (Office and Retail ... less) ... we think investors need to want U.S. Sun-Belt multi-family exposure for H&R unit price to move materially higher.”
* TD Securities’ Aaron MacNeil, currently the lone analyst covering Next Hydrogen Solutions Inc. (NXH-X), cut his target to 80 cents from $1.05 with a “hold” rating.
“We continue to believe that Next Hydrogen’s electrolyzer has the potential to reduce the cost of ‘green’ hydrogen production and has secured various project awards and government grants, supporting the company’s operations to the end of 2024, in our view. However, the outlook for meaningful revenue growth and positive gross margins remains longer dated, and we estimate that Next Hydrogen will likely require additional external sources of financing to support its operations beyond the 2024 timeframe. In this context, we are maintaining our HOLD rating and reducing our target price,” said Mr. MacNeil.
* Canaccord Genuity’s Carey MacRury moved his Osisko Gold Royalties Ltd. (OR-T) target to $24.50 from $25 with a “buy” rating. The average is $24.21.
* Mr. Bir cut his Plaza Retail REIT (PLZ.UN-T) target to $4.25 from $4.50 with a “sector perform” rating. The average is $4.33.
“On the back of largely in-line Q3 results, our stable view on PLZ is intact,” he said. “From our lens, the REIT’s predominantly everyday needs and value-focused portfolio is in good shape to navigate uneven terrain as economic headwinds form. As well, a strong year of development deliveries and still significant pipeline of active projects should support incremental earnings and NAV upside through our forecast period. In short, we see valuation as well-supported.”
* Mr. Bir lowered his Sienna Senior Living Inc. (SIA-T) target to $13 from $14 with a “sector perform” rating. The average is $13.17.
“From our perspective, Sienna’s Q3 results reflect the continued stabilization of the operating environment in both LTC and retirement. Indeed, we’re particularly encouraged by progress on cost controls, with the material reduction in agency staffing costs. Looking ahead, we believe the overall portfolio remains in good position to register strong organic growth over the next 12 months. As well, we expect the development pipeline to provide incremental upside in earnings and value over the mid- to longer-term horizon,” the analyst said.
David Leeder