Inside the Market’s roundup of some of today’s key analyst actions
Stifel analyst Martin Landry thinks Dollarama Inc.’s (DOL-T) “strong” same-store sales growth of 10.8 per cent year-over-year in its third-quarter of fiscal 2023 suggests “wallet share gains of discretionary spending by Canadians.”
He said it’s a trend that was not surprising and likely to continue “as Canadians fight inflation by trading down and taking advantage of Dollarama’s deep value offering.”
“The company continues to benefit from consumers trading down, which resulted in an SSS growth of 10.8 per cent year-over-year, driven by a 10.3-per-cent increase in number of transactions and a 0.4-per-cent increase in transaction size,” Mr. Landry said. “SSS growth was positive across all product categories (i.e. consumables, general merchandise and seasonal), a positive in our view. The strong same-store sales growth is impressive, especially when compared to Walmart Canada at 5.2 per cent, an outperformance of 560 basis points, suggesting market share gains for Dollarama.”
Deeming the quarterly results “good” overall, Mr. Landry sees “favourable” gross margin trends heading into its next fiscal year, believing the supply chain environment “continues to normalize.” He’s now projecting fourth-quarter EPS growth of 12 per cent year-over-year.
Dollarama hikes sales forecast as high inflation drives shoppers to seek cheaper groceries, household goods
“Container rates have dropped more than 75 per cent vs. last year’s peak and nearing prepandemic levels, while lead times for products continues to improve,” he said. “This will create margins tailwinds for Dollarama’s in FY24 and management appears confident in their ability to grow gross margins next year. We currently model a gross margins expansion of 24 basis points year-over-year in FY24.”
“We expect another strong quarter of double digits EPS growth in Q4FY23. Dollarama is in a strong inventory position ahead of the key holiday season compared to the previous year, which should drive SSS growth in our view. It is still too early to tell how Christmas will fare this year for Dollarama but we believe the company’s value offering will resonate well with consumers who are increasingly looking for value.”
Also seeing “improving visibility” on its Dollarcity stores in Latin America, calling its results “very strong” thus far this year, Mr. Landry raised his target for Dollarama shares to $94 from $88.50, keeping a “buy” recommendation and calling it a “market leader with [a] sustainable competitive advantage” with an “attractive business model with significant control over margins.” The average target on the Street is $88.69.
“Investors have rewarded Dollarama with healthy valuation multiples reflecting the strong execution, low risk profile, high share liquidity and scarcity of quality large capitalization discretionary companies in Canada,” he said. “However, Dollarama’s shares are up 33 per cent year-to-date, a significant outperformance vs the S&P TSX index, which is down 14.5 per cent year-to-date. Hence, Dollarama may be a source of funds under a sector rotation scenario at some point in 2023. Near-term we do not see this as a risk but as we progress into calendar 2023, the likelihood of this scenario may increase.”
Elsewhere, other analysts making target adjustments include:
* Desjardins Securities’ Chris Li to $93 from $91 with a “buy” rating.
“Strong sales reaffirm our view that industry fundamentals are favourable, underpinned by the shift to discount and rational competition. We maintain our positive long-term view,” he said. “The forward P/E of 27 times is above the 24 times long-term average but we believe it is supported by DOL’s outsized EPS growth, upside from higher price points and scarcity premium in the small Canadian market. The key risk is likely funds flow out of defensives, with downside of $75 if the forward P/E reverts to its long-term average.”
“We maintain our positive long-term view. While valuation is above the long-term average (27 times forward consensus P/E vs 24 times), we believe it is supported by the shift to discount, its outsized EPS growth, upside from higher price points and scarcity premium in the small Canadian market.”
* Canaccord Genuity’s Derek Dley to $82 from $80 with a “hold” rating.
“Looking into next year, we expect gross margins to be slightly higher than this year, given the relief we have witnessed on freight costs and timing, partially offset by an unfavourable currency environment and continued strength in lower-margin consumable sales,” said Mr. Dley.
* National Bank’s Vishal Shreedhar to $90 from $88 with an “outperform” rating.
“We continue to hold a positive view on DOL’s shares given its strong cash flows, solid balance sheet and resilient sales performance. We believe Dollarama is well-positioned to grow earnings given network expansion, favourable sssg and ongoing development of DC,” he said.
* RBC’s Irene Nattel to $95 from $93 with an “outperform” rating.
“Results supportive of our constructive view, investment thesis, and DOL premium valuation,” she said. “Results reflect DOL’s strong value positioning for consumers, particularly sought after in the current high inflation environment, and management focus on productivity and efficiency.”
* CIBC’s Mark Petrie to $84 from $82 with a “hold” rating.
“Dollarama posted blowout Q3 same-store sales (SSS), though a greater mix of lower-margin consumables and higher SG&A led to EPS in line with the Street. DOL is clearly benefitting as a destination for value in a highly inflationary environment, and we expect stronger SSS momentum to sustain into F2024. Higher rates clip EPS growth, but lower freight costs will support GM% expansion,” said Mr. Petrie.
While continuing to like Mercer International Inc. (MERC-Q) over the long term, RBC Dominion Securities analyst Paul Quinn said near term headwinds “dampen” his “enthusiasm” for its shares over the next year.
That prompted him to lower his recommendation for the Vancouver-based pulp producer to “sector perform” from “outperform” on Thursday.
“Electricity price cap puts a dent in our estimates,” he said. “As of its update with Q322 results, Mercer had expected its electricity production in Germany to be subject to an EU price cap of €180/MWh starting December 1, 2022. However, management confirmed at our recent Forest Products Conference that it expects to be subject to a new German €130/MWh cap (structured as a windfall tax).”
Mr. Quinn also sees pulp “heading in the wrong direction.”
“North American NBSK prices have slipped from a peak of $1,805 per ton in August to $1,745 per ton in November, and we expect them to continue to ease to an average of $1,600 per ton in 2023 and $1,445 per ton in 2024,” he said “Input costs are also a challenge; management stated that it expects fiber costs in its German pulp business to continue to rise sequentially into Q4 (after rising approximately 20% from Q2 into Q3), driven by strong demand for pulpwood (mostly from heating pellet manufacturers and for firewood given the ongoing energy crunch on the continent). Sawmill curtailments in BC could also result in higher cost wood chips.”
Despite the downgrade, Mr. Quinn said he sees “plenty to like about Mercer over the longer term,” including a growing opportunity for its cross-laminated timber (CLT), benefits from its recent acquistion of Holzindustrie Torgau in Germany and seeing its modern mills “competitively positioned from a conversion cost perspective.”
He lowered his target to US$14 from US$17, below the average of US$17.30.
In response to recent share price appreciation and pointing to a variety of “ramp risks,” BMO Nesbitt Burns’ Peter Sklar downgraded Maple Leaf Foods Inc. (MFI-T) to “market perform” from “outperform” on Thursday.
“While Maple Leaf Foods reported a disappointing Q3/22 result of a loss $0.01 per share on November 8 before the open, at the time we maintained an Outperform rating in large part due to the compelling valuation,” he said. “Since 2015, Maple Leaf has generally been valued within a range of 8-12 times forward EBITDA. With the stock closing that day at $22.01 (up 12 per cent on the day), the implied value for the corporation was 8.7 times our 2023 EBITDA estimate, which valued the company towards the low end of the range.
“Since that time, the stock has rallied a further 9 per cent to the $24 level, and the current valuation is 9.2 times our 2023 EBITDA estimate. Since the recent low for the stock at the November 7 close of $19.58, the stock has now appreciated by 23 per cent and at the current valuation there is a modest return to our $26 target (unchanged). We are downgrading Maple Leaf.”
Mr. Sklar said his new rating for the Toronto-based company also takes into account several “risk factors.” They include “the inability of the core Meat Protein segment to achieve targeted margins and the large greenfield London poultry facility to achieve run rate earnings within expected time frames, and the prospect that the Plant Protein segment is unable to achieve break even next year.”
He maintained a target for Maple Leaf shares of $26, below the $32.17 average on the Street.
Tamarack Valley Energy Ltd. (TVE-T) continues to offer investors “a long runway for top-decile inventory,” according to Raymond James analyst Jeremy McCrea.
However, its 2023 budget, released before the bell on Wednesday, indicates a “more modest” growth rate than what he had anticipated, leading him to lower his recommendation for its shares to “outperform” from “strong buy” previously.
“TVE continues to execute on two of the most attractive plays in Canada focusing primarily on its Clearwater and Charlie Lake assets,” said Mr. McCrea. “With the company announcing its formal budget, investors can expect to see a continued disciplined growth strategy over the near term, coupled with a meaningful return of capital (with both higher dividend payments and buybacks to come as debt is repaid). TVE reiterated its focus on generating sustainable free cash flows followed by various steps to reduce costs in the long-run. As detailed in the budget, waterflood initiatives and investing in various infrastructure projects will aid towards that goal.”
Tamarack Valley predicts annual production of 68,000 to 72,000 barrels of oil equivalent per day, unchanged from its preliminary guidance announced in September, however its capital budget rose 6 per cent to a range of $425-million to $475-million.
We still expect to see further shareholder friendly items appearing as the company restated prior debt target goals, however with the volatility in commodity prices recently, these goals may take longer to achieve,” the analyst said.
He trimmed his target for the Calgary-based company’s shares to $6 from $6.50. The current average is $7.33.
Elsewhere, other analysts making changes include:
* Stifel’s Cody Kwong to $6.50 from $6.25 with a “buy” rating.
* Cormark Securities’ Garett Ursu to $6 from $6.50 with a “buy” rating.
IA Capital Markets analyst Matthew Weekes warns the macro environment for Brookfield Business Partners LP (BBU.UN-T, BBU-N) “remains challenging,” however he thinks the “high quality” of its business should “support resilient operations.”
“BBU has faced headwinds in certain areas of its operations, but most of its portfolio consists of large-scale, market-leading operations and essential services which we believe will continue to show resilience to economic pressures and inflation,” he said. “BBU is focused on investing in businesses that possess some combination of (a) provision of essential services, (b) high barriers to entry, (c) market-leading position, and (d) stable cash flow streams.”
Following a discussion with the company’s management on Tuesday, Mr. Weekes “modestly” raised his 2023 adjusted EBITDA projection, seeing higher growth for certain business. However, he cut his target for its TSX-listed units to $30 from $33, below the $32 average on the Street, following a “conservative refresh” of its net asset value projection.
“BU has achieved solid internal per unit growth and returns,” he said. “BBU has generated free cash flow (FCF) per share CAGR [compound annual growth rate] of 30 per cent since 2016, and in the past few years has increased the EBITDA margin from its businesses from 10 per cent to 18 per cent, driven by both acquisitions and same-store EBITDA growth from business improvement plans. Additionally, BBU estimates that it has monetized assets at an average IRR of 30 per cent.
“… But the units have lagged in the market. BBU estimates its NAV at $39.00 per unit, which puts today’s trading price at an 55-per-cent discount, by far the widest discount in BBU’s history. Our NAV estimate is lower and includes deductions for the EV of corporate costs and preferred shares issued to Brookfield Asset Management (BAM-N, Not Rated). We see the units trading at an 40-per-cent discount to our NAV. While we admit that valuation is a fairly subjective exercise for BBU, we believe the value case is compelling at these levels.”
Given that view, Mr. Weekes reiterated his “buy” rating for its shares, which he said is supported by: “a) BBU’s track record of generating per unit growth and strong IRRs on investments, (b) the quality of BBU’s businesses which are 75-per-cent weighted toward large-scale, market-leading operations, (c) future growth potential driven by value creation opportunities in existing businesses, capital recycling opportunities, and strong global deal origination capabilities, and (d) discounted value in the units.”
Stifel analyst Cole Pereira has a “positive view” of the recently restructured Western Energy Services Corp. (WRG-T), believing “improved financial position should lead improved financial performance for the company and its equity holders.”
“From 2017-2021 the company struggled with an elevated leverage profile, which negatively impacted its market share and utilization,” said Mr. Pereira. “However, the company completed a debt restructuring mid-2022 and we have a positive view of the restructured WRG, with management now able to focus on running its business.”
“We highlight four key points for investors: 1) its leverage and free cash flow outlook is now at its strongest since 2014; 2) its lower relative utilization provides an opportunity, which could drive meaningful shareholder upside; 3) however, its valuation screens as elevated relative to peers; and 4) its stock illiquidity is likely to remain a hurdle for institutional investors in the interim.”
He initiated coverage of the Calgary-based company, which operates the fourth largest contract drilling fleet and the third largest service rig fleet in Canada, with a “hold” recommendation and $4.50 target on Thursday. The average on the Street is $5.
“Catalysts that could see us revisit our investment thesis include stronger relative improvements in utilization and market share, a normalization of its valuation and/or corporate actions such as M&A that could increase its overall size, scale and trading liquidity. We would also highlight that WRG’s utilization should benefit materially from positive developments relating to Blueberry First Nations lands,” the analyst said.
With investors concerns about a potential recession and stagflation remaining “strong” heading into the new year, Desjardins Securities analyst John Sclodnick and Jonathan Egilo expect gold to regain investor interest, pointing to its “tendency to outperform other asset classes in either of these environments.”
In a research report released Thursday previewing 2023 for gold and copper equities, the analysts predicted a retreat in the U.S. dollar from recent peaks, helping commodities.
“The U.S. dollar is the primary driver of the gold price, and with dollar strength seeming to lose steam in the last couple of weeks, this has been helpful for gold,” they said. “In 2023, we believe the U.S. dollar could give back some more gains and help make gold more attractively priced for global buyers. Looking to the markets, they appear to have begun positioning themselves for the Fed to wind down the rate hike cycle through the first quarter or two of 2023, which is in line with the consensus view of FOMC members. Higher interest rates in the U.S. have been a primary driver of U.S. dollar strength, but we expect that rates peaking in 2023 before declining in 2024, combined with slowing growth, will lead to weakness in the US dollar and the currency subsiding from peak levels, resulting in a stronger gold price.”
The analysts said their projections for copper “remain relatively balanced,” but they warned price volatility is likely based on “news headlines and macroeconomic data.”
“Despite the near-term market balance, we believe copper could see a continuation of the recent positive momentum, driven by the potential easing of COVID-19 restrictions in China and low in-country warehouse levels, in conjunction with the potential for global interest rates to peak shortly,” they said. “We remain bullish on copper’s long-term outlook, driven by increased demand as global policies turn toward electrification, set against a backdrop of a dearth of new discoveries.”
The analysts also picked their top stocks for 2023. They are:
Karora Resources Inc. (KRR-T) with a “buy” rating and $6.50 target. The average on the Street is $6.01.
“Karora remains our favourite gold producer for its fully funded growth profile in a top-tier jurisdiction; this has been significantly derisked since its acquisition of the Lakewood mill and development of the second decline at Beta Hunt, which is ahead of schedule for completion in 1Q23,” they said. “The company remains on track to achieve its goal of doubling production to approximately 200,000 ounces in 2024 from 2020 levels and bringing AISC [all-in sustaining costs] down to US$900 per ounce (2022 AISC guidance of US$1,100–1,200 per ounce). Additionally, Karora released a PEA on the nickel resource at Beta Hunt, which would see average nickel by-product credits of US$50–70 per ounce of gold. The company controls a massive land package in Western Australia with significant expansion potential and is surrounded by larger producers. The stock currently trades at 0.68 times NAV vs peers at 0.62 times. With its operations consistently meeting or exceeding expectations, we believe that a significant premium valuation to peers is warranted.”
GoGold Resources Inc. (GGD-T) with a “buy” rating and $3.35 target. The average is $3.98.
“We believe 2023 could be a transformative year for GoGold, driven by the company’s recent acquisition of the Eagle concession,” they said. “The company’s focus is now on developing Eagle as an initial, high-grade underground mine with a low-capex build and quick payback period, which would in turn self-fund the remaining 250moz Ageq within the Los Ricos district. The upcoming year should be catalyst-heavy. Eagle is returning the best assays ever seen at Los Ricos and we anticipate regular exploration updates from this target, in addition to the Los Ricos South main deposit, which is being reconceptualized as an underground mine rather than an open pit. Management plans to expedite development at Eagle, with the possibility of beginning construction of a 1,000–1,500tpd underground mine by the end of next year. The stock trades at a P/NAV of 0.65 times vs silver producers at an average of 1.19 times.”
ATEX Resources Inc. (ATX-X) with a “buy” rating and $1.20 target. The average is $1.47.
“We are excited for the initial results of ATEX’s Phase III drill program,” they said. “Thus far, the high-grade 1-per-cent Cueq core of Valeriano has been intercepted twice, with intercepts of 272m and 550m, spaced 250m apart. While Valeriano’s footprint has already proven to be massive (we calculate nearly 1b tonnes in scale), our focus (and we believe that of the market) lies completely with expanding the high-grade core. Based on the first two holes, we estimate 80Mt of 1-per-cent Cueq material has been defined. We anticipate that 200Mt would need to be defined to justify Valeriano as a standalone project. With the Phase III drilling massively stepping out by 200m in both directions along strike, in addition to targeting a potential second high-grade trend, we believe Phase III has the potential to meet or exceed our 200Mt hurdle. While we recognize our NAVPS is effectively a bullcase scenario that assumes the high-grade core grows to 200Mt, we believe that as this scenario is proven out, the stock could begin to re-rate closer to our NAV; the stock currently trades at 0.23 times our NAVPS estimate.”
BMO Nesbitt Burns analyst Ameet Thakkar thinks Ballard Power Systems Inc.’s (BLDP-Q, BLDP-T) focus on mobility “likely means a longer and potentially more difficult path towards realizing positive margins and EBITDA.”
Accordingly, while seeing the Burnaby, B.C.-based company as the “best way to gain exposure to the fuel-cell based medium-heavy duty mobility market, he initiated coverage of Ballard with a “market perform” rating.
“The company is in the midst of a transitional period that has made building near-term conviction difficult,” said Mr. Thakkar. “We forecast robust growth longer term, but for now elect to apply our ‘wait-and-see’ approach, despite a 50-per-cent decline in BLDP shares year-to-date.”
“Ballard’s PEM fuel cell technology, policy support, and key Chinese and European commercial relationships make it a leader in the hard-to-decarbonize heavy-duty mobility sector. Despite these positives, we see heavy-duty mobility as the last rung of the emerging hydrogen economy that is dependent on substantial upstream development of hydrogen production, transport storage, and eventually refueling infrastructure, which is reflected in our estimate of positive EBITDA not achieved until FY 2028.”
Seeing “mobility as one of the ‘last-miles’ of the energy transition,” he set a target of US$5.50. The average is US$9.12.
“While we believe that Ballard’s products and technology should eventually allow it to come out on the other side of this transitory period as a key OEM to the rapidly growing commercial FCEV markets of China, Europe, and the U.S., the lack of nearterm revenue and operational performance visibility makes it difficult for us to build conviction,” the analyst said.
In other analyst actions:
* TD Securities’ Menno Hulshof cut his Baytex Energy Corp. (BTE-T) target by $1 to $7.50 with a “hold” rating. The average is $9.14.
* Barclays’ Raimo Lenschow cut his Descartes Systems Inc. (DSGX-Q, DSG-T) target to US$58 from US$60 with an “underweight” rating. Others making changes include: Stephens’ Justin Long to US$85 from US$83 with an “overweight” rating, CIBC’s Stephanie Price to US$76 from US$71 with a “neutral” rating BMO’s Thanos Moschopoulos to US$71 from US$74 with a “market perform” rating and Laurentian Bank Securities’ Nick Agostino to US$82 from US$80 with a “buy” rating.. The average is US$76.70.
“We remain Market Perform on DSGX following Q3/23 results — which were slightly below consensus on both revenue and revenue calibration, due to FX, but slightly ahead on both EBITDA and EBITDA calibration,” said Mr. Moschopoulos. “We’ve trimmed our FY2024 estimates slightly, bringing our numbers closer to consensus. We think DSGX can continue to execute successfully on its strategy of delivering consistent EBITDA growth and believe that a tougher macro backdrop might be more conducive for M&A. However, we think that decelerating organic growth could weigh on the stock’s multiple in the near term.
* Morgan Stanley’s Ioannis Masvoulas increased his target for First Quantum Minerals Ltd. (FM-T) to $22 from $19, below the $29.88 average, with an “under-weight/in-line” recommendation.
* CIBC’s Mark Petrie raised his North West Company Inc. (NWC-T) target to $37 from $35, keeping a “neutral” rating, while BMO’s Stephen MacLeod increased his target to $40 from $38 with a “market perform” rating. The average is $38.60.
“North West reported better-than-expected Q3/22 results but reiterated that the elimination of government support payments and cost pressures are expected to lead to sales and earnings headwinds (Q4 down, but to a lesser degree than year-to-date),” said Mr. MacLeod. “Management is optimistic on 2023E, in light of expected government transfer payments and infrastructure investment in Indigenous communities; however, earnings visibility remains low in light of inflationary pressures, labour shortages, and supply chain disruptions. We rate the stock Market Perform but think NWC could appeal to incomeoriented investors (4.2-per-cent yield).”
* Mizuho’s Siti Panigrahi raised his Shopify Inc. (SHOP-N, SHOP-T) target to US$40 from US$33, below the US$40.86 average, with a “neutral” rating.
* Cowen and Co.’s Jason Seidl raised his TFI International Inc. (TFII-N, TFII-T) target to US$125 from US$123 with an “outperform” rating. The average on the Street is US$117.43.
* Raymond James’ Andrew Bradford bumped his Trican Well Service Ltd. (TCW-T) target to $5.25 from $5 with an “outperform” rating. The average is $5.98.