Inside the Market’s roundup of some of today’s key analyst actions
Scotia Capital analyst Mark Neville sees ABC Technologies Holdings Inc.’s (ABCT-T) US$255-million acquisition of dlhBOWLES Inc. from MPE Partners as a good “strategic” fit with multiple potential benefits.
However, expressing concern over the magnitude of the dilution required to fund the deal, he lowered his rating for the Toronto-based company’s shares to “sector perform” from “sector outperform” on Thursday.
“The proposed acquisition of dlhBOWLES is large (approximately 45 per cent of ABCT’s enterprise value) and looks to have been done at a highly dilutive multiple (at approximately 2 times sales vs. ABCT trading at less than 1 times), although we would argue ABCT’s multiple is overly discounted,” said Mr. Neville in a research note. “Financing of the deal will also see the share count more than double, with trading liquidity unlikely to improve materially as Apollo and Oaktree are providing the private placement and backstopping the rights offering – and will own more than 80 per cent of ABCT’s equity (at a minimum) following the close of the transaction/financing.”
Mr. Neville did acknowledge the gains brought by the Ohio-based leader in the North American market for camera and sensor cleaning systems, windshield washer systems, sunroof drains, powertrain and chassis solutions.
“On a positive note, the acquisition (i.) adds scale to ABCT’s operations (increasing sales by approximately 15 per cent), (ii.) will add complementary products, including vertically integrating in water systems, (iii.) should provide for cross-selling and geographic expansion opportunities, (iv.) is expected to be EBITDA-margin accretive, (v.) will improve leverage ratios given the financing structure, and (vi.) should provide for synergy and sharing of best practice opportunities,” he said.
However, he cut his target for ABC shares to $9 from $11, falling below the $9.43 average on the Street, according to Refinitiv data.
“We expect ABC to benefit from the recovery in North American vehicle production as supply-chain pressures abate,” said Mr. Neville. “The company also has a track record of outgrowing the industry, supported by its overweight exposure to faster-growing parts of the market (i.e., light trucks) and secular trends (i.e., lightweighting) – trends that, in our opinion, are here to stay. We also expect ABC to augment this growth by leveraging its balance sheet and its ability to generate robust FCF to pursue M&A opportunities. However, the company’s current trading multiple makes it challenging to do deals accretively, as evidenced by the proposed acquisition of dlhBOWLES. In our opinion, ABCT’s trading multiple is being negatively impacted by its limited trading liquidity, a situation we do not expect to improve in the near-term.”
Though she warned “used-equipment supply is entering the second year of tightness,” TD Securities analyst Cherilyn Radbourne upgraded Richie Bros Auctioneers Inc. (RBA-N, RBA-T) to “hold” from “reduce” on Thursday, citing recent share price weakness.
“Global supply-chain constraints/congestion [are] weighing on Caterpillar and Deere’s capacity to produce in line with strong end-user demand,” she said. “Ritchie Bros. has fared relatively well thus far, with gross transaction value up 3 per cent year-over-year for the nine months ending Q3/21, with exceptionally strong used-equipment pricing offsetting fewer lots. However, negative mix (older machines, etc.) could become more of a factor in 2022, as auctioneers/dealers/brokers compete for an already thinned-out used equipment supply. Meanwhile, Ritchie Bros.’ secular growth initiatives, such as the IMS, although promising, are far too early-stage to provide a material offset, and the company’s margins have likely set a short-term peak, as select events return to a live format and travel/entertainment resumes.”
Ms. Radbourne cut her target for Richie Bros shares to US$64 target from US$69 and below the US$70.86 average.
“Ritchie Bros.’ new earnings definitions have increased forecast difficulty/reduced comparability between analysts; therefore, we expect to rely more heavily on FCF to gauge valuation,” she said. “Our new target price equates to an 5-per-cent 2023 estimated FCF yield, which we see as relatively generous, given that the North American rails, which have much more durable franchises vs. Ritchie Bros., in our view, are trading at 4-5-per-cent 2022/2023 estimated FCF yields, particularly when we consider how much FCF Ritchie Bros. reinvests in M&A. We view the stock as relatively fully valued, but we are increasing our rating.”
In response to a “strong” recent share price performance, TD Securities analyst Linda Ezergailis lowered her rating for Fortis Inc. (FTS-T) to “buy” from “action list buy.”
“We are rolling forward our target-price calculation by a quarter to be fully based off 2023 estimates, and as a result, our target price increases by a dollar to $65.00,” she said. “Note that our financial forecasts have not changed. However, as a result of the recent strong price performance leading to a low return to target, we are downgrading the stock to BUY from Action List Buy. It is important to note that this downgrade is driven entirely off of the company’s strong stock-price performance and is not indicative of any material change that we are aware of in the fundamentals of the company. FTS’ share price has outperformed its peers and the broader market since we last published a company note after FTS reported its Q3/21 results. We are planning to next reassess our estimates and target price, after the company reports its Q4/21 results.”
Ms. Ezergailis’s new target of $65 exceeds the current consensus on the Street of $58.97.
She added: “FTS’ five-year capital outlook provides visibility of a 6-per-cent rate-base CAGR to 2026, and supports a 6-per-cent dividend CAGR through 2025. The company’s initiatives to reduce carbon emissions will require renewable and storage investments, which, in our view, extends the visibility of growth beyond the current five-year planning horizon. We expect that the bulk of investments will continue to be in regulated utilities, and that non-regulated energy infrastructure projects will substantially be supported by commercial attributes similar to those seen in utilities. We continue to view FTS as a core holding as the largest, highly regulated, investor-owned utility in Canada. We believe that investors will find the company’s low-risk and utility-dominated business model attractive over the long term.”
She also made these target changes:
* AltaGas Ltd. (ALA-T, “buy”) to $30 from $29. Average: $30.43.
“We believe ALA embedding sustainable practices into its strategic and operational plans should allow for continued growth in the long term. Exporting LPG off the west coast of North America is the cornerstone of a differentiated midstream offering to WCSB producers, in our view, facilitating synergies across facilities and potential expansion in the long term. The utility segment appears to have a relatively high medium-term rate-base growth outlook when compared with its peers. In our view, the company is providing a diversified energy infrastructure investment opportunity for investors with a medium risk tolerance looking for above-utility-average potential returns,” she said.
* Emera Inc. (EMA-T, “buy”) to $66 from $64. Average: $62.03.
“We believe that EMA’s investments in reducing the carbon intensity of its portfolio and growing its utilities will contribute to the company’s ability to grow in the long term. In addition, we like EMA for its relatively low-risk business model and initiatives to invest in emerging technologies related to decarbonization, renewable energy, and storage,” she said.
Though Canadian real estate investment trusts remain “well positioned for strong financial performance,” Canaccord Genuity’s Mark Rothschild and Christopher Koutsikaloudis warn they are unlikely to maintain the pace of gains seen in 2021.
After the S&P/TSX Capped REIT Index generated a total return of 35 per cent last year, exceeding the TSX Composite Index’s return of 25 per cent, the equity analysts are projecting an average increase of 14 per cent for the next 12 months.
“Our outlook for 2022 is based on the expectation of rising interest rates, continued fund flows into real estate and no material change in operating fundamentals,” they said. “While there is some uncertainty regarding the longer-term outlook for some asset classes, we expect that fundamentals for most property types will remain stable or improve in 2022. Residential and industrial REITs should continue to deliver the strongest operating performance, although we are also confident in the ability of high-quality retail REITs to achieve modest organic growth while advancing development projects.”
In a research note released Thursday, the analysts said their top picks for the year “include REITs in sectors benefitting from strong fundamentals and for which current valuations are attractive relative to peers and private market values.”
“Brookfield Asset Management (BAM) is a global alternative asset manager with a focus on property, renewable energy, infrastructure, and private equity. In addition, BAM meaningfully expanded its credit platform through the acquisition of Oaktree in 2019. More recently, Brookfield has added new areas of focus including insurance, growth investing (technology), transition funds and secondaries. Raising larger funds has led to substantial growth in management fees, carried interest, and cash flow. Along with the new areas of focus, we expect continued growth in both assets under management and cash flow,” he said.
At the same time, Mr. Rothschild upgraded InterRent Real Estate Investment Trust (IIP.UN-T) to “buy” from “hold” with a $19.50 target. The average on the Street is $20.
The analysts also made a series of target changes:
- European Residential Real Estate Investment Trust (ERE.UN-T, “buy”) to $5.75 from $5.25. Average: $5.46.
- Killam Apartment Real Estate Investment Trust (KMP.UN-T, “buy”) to $26.50 from $25.50. Average: $25.79.
- Choice Properties Real Estate Investment Trust (CHP.UN-T, “buy”) to $16.50 from $16. Average: $15.94.
- First Capital Real Estate Investment Trust (FCR.UN-T, “buy”) to $22 from $21. Average: $21.50.
- RioCan Real Estate Investment Trust (REI.UN-T, “hold”) to $25 from $24.50. Average: $25
- StorageVault Canada Inc. (SVI-X, “buy”) to $8 from $7.25. Average: $7.43.
- Tricon Residential Inc. (TCN-T, “buy”) to $16.75 from $16.25. Average: $20.
- Dream Unlimited Corp. (DRM-T, “buy”) to $46 from $40. Average: $40.67.
- BSR Real Estate Investment Trust (HOM.U-T, “buy”) to US$20.50 from US$19. Average: US$20.02.
- Granite Real Estate Investment Trust (GRT.UN-T, “buy”) to $115 from $110. Average: $108.30.
- Dream Industrial Real Estate Investment Trust (DIR.UN-T, “buy”) to $21 from $19.50. Average: $19.22.
- American Hotel Income Properties REIT LP (HOT.UN-T, “buy”) to US$5 from US$6. Average: US$4.31.
Desjardins Securities analyst Kevin Krishnaratne sees “multiple opportunities for upside” from Stingray Group Inc.’s (RAY.A-T) “compelling” retail technology offerings following its acquisition of InStore Audio Network, the largest in-store network in the U.S..
He said the $59-million deal for New Jersey-based ISAN strengthens its retail stack and adds $20-million of high-margin revenue to drive its Stingray Business unit to a $70-million run rate.
“At less-than 5 times EBITDA (calendar 2021), we view the deal as attractive,” said Mr. Krishnaratne. “It expands a revenue stream for RAY to capitalize on audio ad trends within the retail media sector.”
“We have included ISAN’s contributions starting in 4Q FY22 and assume almost 15-per-cent year-over-year revenue growth in FY23. We assume incremental location adds, CPM lift leveraging RAY’s leading programmatic ad tech stack (via Hivestack) and higher ad inventory levels given the demand for audio ad placement in retail. eMarketer forecasts 11-per-cent growth in US audio ad spend in CY22 to US$6.2-billion, while global retail media is poised to reach US$50b (per Forrester). We understand that the opportunity for potential grocery/pharma/retail locations in the U.S./Canada alone is 300,000+. Given RAY’s unique retail tech bundle of in-store ad, music, digital display and insights (Chatter), we see strong potential for upside to our forecast.”
Calling ISAN’s operating profile and the deal metrics “attractive,” Mr. Krishnaratne raised his target for shares of Montreal-based Stingray to $9.25 from $9 with a “buy” recommendation (unchanged). The average is $8.88.
Leede Jones Gable analyst Doug Loe, who focuses on healthcare and biotechnology, named a pair of TSX Venture Exchange-listed stocks as his top picks for the first quarter of the year.
His selections are:
* Sernova Corp. (SVA-X) with a “speculative buy” rating and $2.50 target, matching the average on the Street.
“The stock is up 554 per cent since we initiated coverage in early December of 2020 and our price target corresponds to a one-year return of 29.5 per cent,” he said. “The firm’s core technology to which we ascribe market value is still Cell Pouch, a subcutaneously-implantable and vascularizable cell reservoir for preserving function of regenerative cell therapies deployed within it including but not limited to insulin-producing pancreatic islets. The firm has already published impressive preclinical data and for which ongoing clinical testing in a seven-patient Phase I/II hypoglycemia unawareness trial at the University of Chicago has already generated equally-impressive interim safety/efficacy data.”
“The firm has sustained both organic and acquisitive growth in its U.S. respiratory therapy niche throughout our coverage history of the firm, invariably while preserving EBITDA and margin growth in the process,” said Mr. Loe. “Our forecasts and the firm’s own revenue/EBITDA run-rate guidance is consistent with the view that profitability trends should continue over the timeframe that our Top Pick designation applies. Our PT corresponds to a one-year return of 101 per cent.”
Analysts at National Bank Financial made a series of target increases to energy stocks in their coverage universe on Thursday
Dan Payne’s adjustments include:
- Advantage Energy Ltd. (AAV-T, “outperform”) to $10 from $9. The average on the Street is $9.06.
- Headwater Exploration Inc. (HWX-T, “outperform”) to $7.70 from $7. Average: $7.32.
- Nuvista Energy Ltd. (NVA-T, “sector perform”) to $9 from $7.50. Average: $8.65.
- Paramount Resources Ltd. (POU-T, “outperform”) to $30 from $28. Average: $28.90.
Travis Wood made these changes:
- ARC Resources Ltd. (ARX-T, “outperform”) to $20 from $18.50. Average: $18.13.
- Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $76 from $69. Average: $63.30.
- Cenovus Energy Inc. (CVE-T, “outperform”) to $25 from $22. Average: $20.29.
- Crescent Point Energy Corp. (CPG-T, “outperform”) to $13.50 from $12.50. Average: $9.50.
- Enerplus Corp. (ERF-T, “outperform”) to $19 from $17. Average: $15.44.
- Freehold Royalties Ltd. (FRU-T, “outperform”) to $17 from $15.50. Average: $15.71.
- Imperial Oil Ltd. (IMO-T, “outperform”) to $58 from $50. Average: $48.68.
- MEG Energy Corp. (MEG-T, “sector perform”) to $18.50 from $15. Average: $15.07.
- Peyto Exploration & Development Corp. (PEY-T, “outperform”) to $14 from $15. Average: $13.64.
- Prairiesky Royalty Ltd. (PSK-T, “sector perform”) to $18.50 from $21. Average: $19.12.
- Suncor Energy Inc. (SU-T, “sector perform”) to $45 from $39. Average: $40.45.
- Vermilion Energy Inc. (VET-T, “outperform”) to $30 from $19. Average: $16.75.
- Whitecap Resources Inc. (WCP-T, “outperform”) to $14 from $12. Average: $10.95.
After Credit Suisse raised its oil price forecast for the next two years on Thursday, equity analyst Manav Gupta increased his targets price for a series of large-cap energy stocks.
The firm is now projecting 2022 Brent and WTI of US$75 and US$72 per barrel, respectively, rising from a previous estimate of US$69 and US$66. Its 2023 forecast moved to US$68 and US$65 from US$62 and US$59.
“We see tighter supply-demand fundamentals in the near to medium term,” it said. “While the current news cycle is focused on omicron, we believe its impact on demand will be less than delta variant as each successive iteration of the virus is less and less impactful to product demand. Our long-term (2024+) Brent/WTI forecasts are unchanged at $62/$59.”
At the same time, it lowered its 2022 natural gas forecast, expecting a weaker-than-anticipated first quarter based on weather, noting: “While winter 2022 gas prices surged more than $6.00/MMBtu in October in anticipation of a potentially severe inventory shortage, the much warmer than usual start to the withdrawal season has effectively eroded the bull case around winter storage: since September, temperatures in the US have been 10-15 per cent higher than historical averages, and storage inventories have now flipped to a modest surplus vs. the five-year average. Thus we are lowering our 1Q22 natural gas price forecast to $4.00 (from $5.25 prior), which reduces our full year 2022 estimate to $3.70 (from $4.00).”
With that view, Mr. Gupta made these changes:
- Canadian Natural Resources Ltd. (CNQ-T, “neutral”) to $63 from $59. Average: $63.30.
- Cenovus Energy Inc. (CVE-T, “outperform”) to $22 from $20. Average: $20.29.
- Imperial Oil Ltd. (IMO-T, “neutral”) to $51 from $48. Average: $48.68.
- Suncor Energy Inc. (SU-T, “outperform”) to $45 from $42. Average: $40.45.
Seeing its shares as “undervalued,” Echelon Capital Markets analyst Gabriel Gonzalez initiated coverage of GR Silver Mining Ltd. (GRSL-X), a Vancouver-based focused on its 100-per-cent-owned Plomosas Project in Mexico, with a “speculative buy” rating.
“The Plomosas Project currently hosts a combined 46.3Moz AgEq [silver equivalent] Indicated and 33.0Moz Inferred (79.3Moz AgEq total) resource at the San Marcial, Plomosas and San Juan Mine Areas, located within less than 7km of each other,” he said. “Given the pervasive hydrothermal breccia and vein hosted mineralization throughout the Plomosas Project, we see continued attractive resource growth potential for the Company.”
Mr. Gonzalez set a 60-cent target. The current average is $1.09.
“GR Silver shares are heavily discounted and trading at an EV/oz [enterprise value per ounce] of just US$0.31 per ounce AgEq versus the earlier-stage explorer/developer peer group average of US$0.89 per ounce AgEq (measured at current metal prices), despite GR Silver’s better comparable grades versus many other peers,” he said. “Visibility on a growing property-wide resource and improved grade at the Plomosas resource could help to catalyze an increase in the Company’s EV/oz value relative to peers.”
In other analyst actions:
* Seeing limited near-term upside, BoA Securities analyst Jason Kupferberg lowered his rating Telus International Inc. (TIXT-N, TIXT-T) by two levels to “underperform” from “buy” with a US$35 price objective, down from US$38. The average is US$39.85.
“We downgrade TIXT to Underperform from Buy due to a combination of valuation, absence of near-term catalysts, potential margin pressures from wage inflation, and limited upside potential to estimates, all of which we think could keep shares range bound,” he said. “While we aren’t questioning TIXT’s ability to execute on its long-term organic revenue growth targets of mid-teens, we now see shares as more fully discounting that outcome. TIXT now trades at 29 times calendar 2022 P/E and has modestly outperformed the S&P500 since going public on Feb. 2, 2021. To be clear, we are not negative on TIXT’s fundamentals, but among CX outsourcers we cover, we prefer TASK, which we upgraded to Buy from Neutral today and has significantly higher growth at a more palatable valuation than TIXT, in our view.”
* In response to its deal to sell its 13.9-per-cent interest in ChinaAMC to IGM Financial Inc. (IGM-T) for $1.15-billion, Scotia Capital analyst Phil Hardie raised his Power Corporation of Canada (POW-T) target by $1 to $50, topping the $47.38 average, with a “sector perform” rating. He also bumped up his IGM Financial target to $57 from $56 with a “sector perform” rating. The average is $55.78.
“We view the development positively as the transaction further advances management’s strategic goal of simplifying POW’s corporate structure and provides another example of the value creation opportunities embedded within its private stub,” he said. “We had anticipated a scenario of a swap between POW’s interest in ChinaAMC for part of IGM’s stake in GWO as an opportunity for further value creation potential for the company although the agreed-upon value of POW’s stake in the announced transaction came in higher than our original expectations.
“We continue to believe that holding POW shares offer investors better value and embedded optionality than owning its underlying publicly-traded holdings. POW shares have significantly outperformed the S&P/TSX Composite Index through 2021. This was driven by not only solid performance across its publicly-traded subsidiaries but also by the value crystallization from a number of its private holdings and the narrowing of its NAV discount. Despite these factors, we continue to see upside given potential for NAV accretion and tightening discount.”
* In a fourth-quarter earnings preview, TD Securities analyst Michael Aelst raised his Loblaw Companies Ltd. (L-T) target to $115 from $110, maintaining a “buy” rating. The average is $105.27.
“Elevated inflation and strong demand as the pandemic lingers is expected to keep competition rational,” he said. “Combine this with improving in-store/merchandising execution and the anticipated gradual traffic recovery in discount banners, and we expect Loblaw to deliver 12-per-cent EPS growth in 2022, top among the grocers.”
* Mr. Aelst also increased his Metro Inc. (MRU-T) target to $72, exceeding the $68.90 average, from $70 with a “hold” rating.
“While we believe that the shares can appreciate to our new $72 target over 2022, the return does not hit our hurdle rates for a Buy rating.,” he said.
* He also raised his George Weston Ltd. (WN-T) target by $5 to $175 with a “buy” recommendation. The average is $154.86.
“Assuming that investors are willing to invest in both retail and real estate, we have a clear preference to own Weston (23-per-cent expected total return) over Loblaw (13-per-cent expected total return), as it offers incremental upside from the expected narrowing of the holdco discount from the current 13 per cent down to 5-7 per cent once the funds from the sale of Weston Foods are returned to shareholders.,” the analyst said.
* RBC Dominion Securities analyst Steve Arthur lowered ECN Capital Corp. (ECN-T) to “sector perform” from “outperform” with a $5.50 target, down from $12.50. The average is $6.
“Following the recent pipeline updates including the HM239 acquisition and APTO-253 discontinuation, we updated our model to reflect the latest pipeline programs by adding HM239 in AML and removing APTO-253 – we also adjusted the revenue projections including launch year for luxeptinib based on the latest development strategy and progress and the interplay with HM239 in the AML patient population,” he said. “We see APTO as a show-me story in 2022 to gain investor appreciation and traction and look to data updates from the two programs throughout the year as well as company updates regarding clinical strategy and path forward. We made incremental tweaks to our model to reflect the gradual ramp of capital resources.”
* CIBC World Markets analyst Sumayya Syed cut her target for H&R Real Estate Investment Trust (HR.UN-T) to $15.50 from $19.50 with an “outperformer” rating, while National Bank’s Matt Kornack lowered his target to $17 from $21.50 with an “outperform” rating and BMO’s Jenny Ma trimmed her target to $16 from $19 with a “sector perform” rating. The average is $16.61.
“Post spin-off of the enclosed mall portfolio, H&R offers exposure to strong industrial and U.S. multi-residential fundamentals, at a more attractive valuation vs. pure-plays. Moreover, H&R has formulated a distinct strategy for each asset class in the near, mid, and long term. We believe these actions could also help alleviate investor concerns and we expect the NAV discount to narrow with retail winding down,” said Ms. Syed.
* Canaccord Genuity analyst Yuri Lynk hiked his AirBoss of America Corp. (BOS-T) target to $58 from $51 with a “buy” rating. The average is $55.17.
“We view Airboss as a catalyst-rich story with meaningful upside potential that will ultimately depend on its success harvesting Air Boss Defense Group’s (ADG’s) large and growing $1.5-billion sales pipeline,” he said. “We view long-term recurring revenue opportunities, such as Blast Gauge and sales of PPE consumables, as potentially helpful to valuation as they would improve visibility.”
* IA Capital Markets analyst Neil Linsdell increased his GDI Integrated Facility Services Inc. (GDI-T) target to $72.50 from $70 with a “buy” rating in response to its deal to acquire IH Services Inc. The average is $68.21.
“Given the expectation of increased demand for cleaning services and enhanced air quality systems for the foreseeable future, and GDI’s dominant position in Canada and growing presence in the US, we continue to like the GDI story, said Mr. Linsdell.