Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Lorne Kalmar thinks the combination of supply constraints and obsolescence has created a “compelling fundamental backdrop” for the Canadian seniors housing sector.
Also emphasizing an acceleration in the population aged over 75, he sees occupancies and net operating income margins exceeding pre-pandemic levels and providing “a long runway of earnings growth.”
“The long-term care sector is also seeing green shoots, with many homes now at full occupancy and waitlists for beds continuing to grow,” he added. “There is also an enhanced focus from the provincial governments on improving the funding model from both an operational and development perspective, which should benefit operators and residents alike.
“While staffing shortages — which were severely exacerbated by the pandemic—continue to impact the industry, larger operators have been able to mitigate the impact through the implementation of new recruiting and retention programs, as well as a more structured approach to agency usage. This has translated into a dramatic decrease in agency costs, with both CSH and SIA reporting that these costs returned to pre-pandemic levels in 4Q23.”
In a research report released Thursday, Mr. Kalmar initiated coverage of Chartwell Retirement Residences (CSH.UN-T) and Sienna Senior Living Inc. (SIA-T) with “buy” recommendations, seeing further upside despite a “strong” performance since the beginning of 2023 “as the sector continues to recover from the pandemic, particularly considering their relative performance since the beginning of 2020, their relative valuation vs U.S. peers and the fundamental set-up.”
“As two of the largest and most sophisticated seniors housing operators in Canada, we believe both CSH and SIA are well-positioned to capture the anticipated acceleration in demand while continuing to successfully navigate the complex operating environment, high grade their portfolios and generate strong earnings growth,” he said.
For Mississauga-based Chartwell, Mr. Kalmar set a target of $15, representing 15-per-cent upside from its Wednesday closing price and exceeding the average target on the Street of $14.60, according to LSEG data.
“CSH is Canada’s only publicly traded pure‐play retirement homeowner/operator,” he said. “The trust offers investors exposure to an asset class which is still in recovery post‐pandemic and is well‐positioned to generate outsized earnings growth over the medium term. Demand is expected to be supported by an aging population, while the threat of new supply is currently at a minimum owing to the rise in construction and financing costs. We also see further upside through the trust’s acquisition, capital recycling and development programs. Despite the significant outperformance of its unit price in 2023, we believe its current valuation still represents a compelling entry point to gain access to a high‐quality retirement residence portfolio with a 25-per-cent forecast two‐year FFOPU CAGR [funds from operations per unit compound annual growth rate] and further upside potential as fundamentals continue to improve.
Mr. Kalmar set a $15.50 target for Toronto-based Sienna, topping the $14.23 and pointing to a potential gain of 18.1 per cent.
“SIA owns and operates a combined portfolio of retirement residences and long‐term care (LTC) homes (50/50 NOI split). Geographically, SIA’s portfolio is heavily concentrated in Ontario, where approximately 80 per cent of its suites/beds are located, while the rest of the portfolio is split between B.C. and Saskatchewan,” he said. “In our view, SIA’s portfolio mix presents investors with a compelling risk/reward balance, as exposure to the higher‐margin retirement segment is partially hedged by its exposure to the more stable LTC segment. While investors may not have all the upside of a pure‐play retirement home portfolio, there is downside protection via its LTC portfolio. SIA also offers investors access to one of the largest seniors housing operating platforms in Canada and we view the recent rebranding of its retirement and LTC platforms favourably. We also see additional upside through its development and acquisition programs. We believe the current valuation represents a compelling entry point to gain access to a high‐quality, balanced seniors housing portfolio capable of generating mid‐single‐digit OFFO growth and well‐positioned to benefit from both an acceleration in retirement fundamentals and a growing focus on improving the LTC model.”
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While Cascades Inc. (CAS-T) is poised to benefit from a “pause” in the rise of OCC (old corrugated containers) prices, National Bank Financial analyst Zachary Evershed cautioned it is too late to help its first-quarter results.
“While not indicative of the entire market, the benchmark linerboard index’s response to the US$70-per-ton hike announced by major containerboard players in January remains uninspiring, reflecting only US$40 per ton in February and stalling out in March,” he said. “As we had previously hoped for a further US$20 per ton, the reduction in our Containerboard estimates sees our target fall.”
Ahead of the May 9 quarterly release, Mr. Evershed is now projecting total sales of $1.189-billion for the Kingsey Falls, Que.-based company, up 4.7 per cent year-over-year and above the consensus estimate of $1.146-billion. However, he sees adjusted EBITDA and earnings per share falling by 12.1 per cent and 87.4 per cent, respectively, to $102-million and 3 cents (versus the Street’s expectations of $103-million and a loss of 1 cent).
“On the cost side, OCC in particular has been subject to low generation levels over the last several months, which in combination with ramping demand from newly-commissioned containerboard plants in 2023, has seen OCC costs rise a substantial 238 per cent in the 12 months ending in March,” he said. “Thankfully, the grind upward took a pause in April with a flat month-over-month reading at US$110 per ton.
“Pulp prices have been on another tear since October 2023 with NBSK clocking in at US$1,510 per ton (up 18.9 per cent since October). Though year-over-year comparisons remain in favourable (negative) territory for now, we flag the recent strength in pulp prices as a wave of industry curtailments and exits curb North American capacity, with limited relief from production across the pond given recent strike action.”
Adjusting his Containerboard estimates to reflect current pricing, Mr. Evershed cut his target for Cascades shares to $11 from $13.50, keeping a “sector perform” recommendation. The average target on the Street is $13.25.
“We maintain our cautious stance given volatility in the operating environment underscored by recent reports of peer market-related downtime in containerboard,” he said.
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CIBC World Markets analyst Hamir Patel lowered his estimates for the wood products companies further heading into first-quarter earnings season, pointing to “given weaker-than-expected benchmark prices and lower volume/higher cost assumptions” following recent channel checks.
However, seeing it advancing an additional revenue stream from carbon credit sales, he upgraded Acadian Timber Corp. (ADN-T) to “outperformer” from “neutral” with a $20 target, rising from $17. The average target on the Street is $17.83.
“Last month, Acadian announced an agreement for the sale of nearly all of its currently registered carbon credits (768,571 credits) for $19-million,” said Mr. Patel. “We expect almost all of these proceeds to translate into EBITDA this year, boosting our ADN EBITDA forecast for the year by 90 per cent to $38-million (vs. $21-million in 2023), and boosting EBITDA in subsequent years by at least $5-million annually (20-per-cent uplift from our prior estimates).”
Mr. Patel also made these target adjustments:
- Adentra Inc. (ADEN-T, “outperformer”) to $52 from $45. The average is $49.50.
- Canfor Corp. (CFP-T, “outperformer”) to $22 from $23. Average: $22.67.
- Cascades Inc. (CAS-T, “neutral”) to $12 from $14. Average: $13.25.
- CCL Industries Inc. (CCL.B-T, “outperformer”) to $83 from $82. Average: $80.90.
- Interfor Corp. (IFP-T, “outperformer”) to $24 from $25. Average: $28.
- Mercer International Inc. (MERC-Q, “neutral”) to US$11 from US$9. Average: US$9.25.
- Stella-Jones Inc. (SJ-T, “neutral”) to $86 from $85. Average: $90.71.
- West Fraser Timber Co. Ltd. (WFG-T, “outperformer”) to $140 from $131. Average: $138.15.
“Despite our top pick CCL’s strong performance in recent months, we continue to favor the large cap packaging company across our forestry/building products/packaging coverage universe,” said Mr. Patel. “We believe CCL’s diversified global platform and end-market exposure should support steady top-line growth over the cycle. With leverage of only 1.1 times, the company is well positioned to continue to be opportunistic on the M&A front. ...
“On the wood products side, our preferred name is West Fraser given its exposure to OSB (half the company’s business), a commodity which has seen a steep pricing rally year-to-date (up 30 per cent to up 65 per cent) given healthy new res demand (57 per cent of OSB consumption) and the delayed start-up of two large mills that were supposed to come online in Q4/23 and Q1/24. We also have Outperformer ratings on Canfor and Interfor. Although mid-cycle valuations remain compelling for the LumberCos, Q1 earnings are likely going to show further balance sheet deterioration across the group. At the same time, lumber prices continue to erode (particularly in the normally lucrative U.S. South where mills are barely above breakeven right now). On the building products side, Outperformer-rated Doman and ADENTRA are both gaining market share, with improving M&A prospects.”
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Seeing its near-term risk-reward “diminished” after notable share appreciation over the last three months, Raymond James analyst Steve Hansen downgraded Toromont Industries Ltd. (TIH-T) to “market perform” from “outperform,” given a limited return to his target.
“As indicated, TIH shares have enjoyed an outsized move over the past 3 months (up 16.8 per cent), handily outperforming the Canadian market (S&P TSX Comp.: up 5.8 per cent), and leaving the stock just shy of our $135.00 target (unchanged),” he said. “TIH’s forward P/E multiple has also expanded, now perched at 20.2 times FY25 Street estimates, and a near-record premium to its closest peer Finning . Coupled with incremental concern over eastern Canada’s economic outlook, we believe the near-term risk-reward proposition has weakened, hence our decision to step to the sideline.”
Believing economic risks are rising and the rental market is “likely softer,” Mr. Hansen added: “While clear pockets of strength still exist Infrastructure, mining, power), several factors/variables underpin our rising concern over eastern Canada’s economic outlook, including: 1) persistent/elevated interest rates; 2) slowing Ontario housing starts; 3) falling Toronto crane counts; and 4) softer year-over-year equipment rental rates — just to name a few. We will continue to monitor accordingly.”
His $135 target remains below the average on the Street of $136.11.
“While we continue to admire the firm’s fortress balance sheet, intense operating discipline, and long-term growth prospects, we believe the near-term risk-reward has diminished following the stock’s healthy surge (T3M [trailing three months]: up 16.8 per cent) and corresponding multiple expansion,” said Mr. Hansen.
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Despite seeing challenges facing Canada’s telecommunications sector “getting priced in,” Desjardins Securities analyst Jerome Dubreuil thinks its “near-term prospects are eclipsed by difficult 1Q fundamentals.”
“It is difficult to recommend adding exposure to telecoms ahead of what we believe will be a tough quarter as we anticipate there could be additional downward estimate revisions,” he said. “However, we would advise investors that are underweight the sector to start reconsidering their positions as 1Q reporting could provide attractive entry points toward marketweight in some instances (eg RCI). .... RCI remains our top pick in Canadian telecoms, followed by QBR and T.”
In a research report released Thursday previewing the coming earnings season, Mr. Dubreuil argued the higher end of the companies’ 2024 is now looking “optimistic” and lowered his wireless net addition forecasts “as a result of the new immigration policy.”
“Telecom companies issued their 2024 guidance in January/ early February—a period characterized by lower competitive pressure in the wireless market,” he said. “Competition has intensified since then, leading us to adjust our estimates toward the lower end of the companies’ guided ranges. Contributing factors include the addition of roaming in plans, the lapping of restriction-free travel post-COVID-19, larger data allowances affecting what remained of overage fees and aggressive add-a-line promotions. Additionally, aggressive device subsidies returned toward the end of 1Q.”
“Although we expect strong net additions in the quarter, the new policy suggests material downside risk for industry wireless net additions even under the assumption of elevated penetration gains. We recognize that negotiations between the federal and provincial governments are not yet complete—therefore, our new estimates do not fully reflect the potential new situation.”
With the changes to his financial forecast, the analyst cut his targets for stocks in the sector.
“We see no obvious place to hide from industry headwinds in the quarter. While we continue to see challenges in Canadian telecoms going forward, we believe the recent pullback in industry valuations makes it less attractive to be underweight Canadian telecoms post 1Q24 results,” he said.
For his top pick, Rogers Communications Inc. (RCI.B-T), Mr. Dubreuil lowered his target to $75 from $79. The average is $73.33.
“We have reduced our media forecast for the quarter, but note that investors do not generally put as much focus on media operations,” he said. “We also highlight that we see significant outperformance potential, with the stock trading 40 per cent below our one-year target price of $75.”
His other changes are:
* BCE Inc. (BCE-T, “hold”) to $50 from $55. The average on the Street is $52.90.
Analyst: “Despite the company’s recent underperformance, we still recommend being underweight the name as we believe there is further room for downward estimate revisions given BCE’s guidance is not conservative, in our view.”
* Cogeco Communications Inc. (CCA-T, “hold”) to $68 from $70. Average: $71.20.
Analyst: “T-Mobile and Verizon have begun to scale back their FWA promotional efforts as they seek to maximize the monetization of the remaining subscribers they can load on their FWA product before reaching capacity constraints — T-Mobile indicated it can grow the business to 7–8m customers (from ~5m currently). It also mentioned that it expects FWA net adds of 400,000 in 1Q, a 25-per-cent year-over-year decline as new pricing and capacity limits in certain sectors affect the pace at which it can add customers. We believe the pace of FWA net adds has likely plateaued already. However, we note that AT&T has recently intensified its FWA efforts and probably has a longer capacity runway than its peers as it started its FWA journey only recently. We also note that fibre-building could continue to affect the U.S. cable industry for several years.”
* Quebecor Inc. (QBR.B-T, “buy”) to $40 from $42. Average: $38.85.
Analyst: “We continue to see a long runway of growth for QBR, but note that a positive development on the MVNO [Mobile Virtual Network Operator] file would make us more confident in the near-term performance of the stock.”
* Telus Corp. (T-T, “buy”) to $26.50 from $28. Average: $25.78.
Analyst: “We believe the future is bright for T thanks to the prospect of further capex reductions and an eventual recovery in tech ventures. However, the company’s (deserved) higher valuation is a cause for concern ahead of an expected difficult earnings season.”
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National Bank Financial analyst Adam Shine thinks Cineplex Inc. (CGX-T) is poised to exceed the Street’s expectations when it reports first-quarter results on May 9, benefitting from strong box office results in March.
“CGX reported that January box office was down 18 per cent year-over-year and 72 per cent of 2019 level, while February was down 24 per cent year-over-year and 67 per cent of level in 2019,” he said “BoxOfficeMojo indicated that North American box office in March was over 17 per cent higher year-over-year, driven by several titles but anchored by the second Dune movie. In addition to likely outperforming on the latter, CGX had the benefit of several international films which we believe helped drive its March box office near $58-million (up 43 per cent year-over-year, 93 per cent of 2019). While we think in-cinema advertising was lower year-over-year, overall Media revs are forecast to have been relatively flat as Cineplex Digital Media began ramping up on its new Cominar mandate. We have LBE [Location-Based Entertainment] revs at down 0.5 per cent.”
The analyst is currently projecting total revenue from continuing operations of $292.597-million, up 0.4 per cent year-over-year and above the Street’s projection of $272.4-million. Adjusted EBITDA is expected to slide 4.6 per cent to $50.315-million, also exceeding the consensus ($44.3-million).
“Last year’s Hollywood strikes impacted the release schedules of many films in 2023 and 2024,” he said. “CinemaCon runs this week through [Thursday], with studios showcasing upcoming titles and exhibitors expressing optimism about momentum ahead, especially as more movies get added to this year’s slate - 32 films have been added over the past 3+ months bringing total anticipated wide releases to 110 like 2023 (119 in 2019). The Hollywood Reporter recently reported that “things are looking slightly better than expected” and the “2024 global box office forecast [is] up slightly [but] still below last year”. We moved our box office estimate for CGX to down 3.7 per cent year-over-year from down 5.2 per cent in 2024, while keeping an increase of 15 per cent for 2025. So far the AMPTP is averting any IATSE strikes.”
Mr. Shine maintained an “outperform” recommendation and $12.50 target for Cineplex shares. The current average is $12.88.
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In a Thursday report titled Green Shoots on the Horizon for Natural Gas, Scotia’s Cameron Bean upgraded Paramount Resources Ltd. (POU-T) to “sector outperform” from “sector perform” previously, seeing its “ep resource position, growth potential, torque to oil prices, and discounted valuation outweighing those risks.”
“With our shift to a more bullish call on oil prices (our long-term WTI forecast is up US$10/bbl to US$70/bbl), we believe the time is right to buy POU,” he said. “The stock has the highest sensitivity to WTI price changes among our Canadian coverage names, a pristine balance sheet, and strong growth potential from the Willesden Green Duvernay project beginning in late 2025. Moreover, we have the stock trading below 3.0 times its 2025 estimated debt-adjusted cash flow, with a solid dividend yield of approximately 5 per cent. Our updated valuation mix points to a more than $40 per share valuation, resulting in a solid entry price below $30 per share. We are fully aware of the risks with the name. The company’s recent operations update was negative
Mr. Bean raised his target to a Street-high of $42 from $29, representing a potential gain of 42.1 per cent based on its Wednesday closing price. The average on the Street is $35.
He made the move alongside an update to the firm’s commodity price deck and subsequent updates to his valuation price decks to align with a long-term price assumptions of US$70/bbl WTI and US$4.00/mmtu [per million British thermal units] Henry Hub).
“We have also made housekeeping tweaks to our financial estimates, added several additional natural gas price hubs to our commodity price file, and revamped our NAV models,” he added. “We believe NYMEX prices have bottomed and will slowly trend up over the summer, before strengthening in Q4/24. We expect a rougher ride for AECO prices, with potential carnage during the summer, but see the startup of LNG Canada creating significant slack in the system in 2025 and 2026.
“Our stock selection process continues to favour companies with (1) track records of prudent capital allocation, (2) a high degree of financial flexibility, (3) deep high-return drilling inventories, (4) high cash flow margins, and (5) compelling ‘rate-of-change’ stories. Our best ideas are AAV, TOU, and PEY for Canadian natural gas exposure, EQT for U.S. natural gas exposure, TPZ for balanced / oil levered exposure, and LGN for growth and premium take-out potential.”
Mr. Bean made these target changes for Canadian companies:
- Advantage Energy Ltd. (AAV-T, “sector outperform”) to $19 (Street high) from $17. The average is $12.96.
- ARC Resources Ltd. (ARX-T, “sector outperform”) to $33 (Street high) from $27. Average: $27.25.
- Kelt Exploration Ltd. (KEL-T, “sector outperform”) to $9.50 (Street high) from $8. Average: $8.30.
- Spartan Delta Corp. (SDE-T, “sector outperform”) to $6 from $5.50. Average: $4.79.
- Topaz Energy Corp. (TPZ-T, “sector outperform”) to $33 (Street high) from $30. Average: $26.96.
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In other analyst actions:
* Calling it “a roll-up story with a wide moat,” Scotia’s Himanshu Gupta assumed coverage of FirstService Corp. (FSV-Q, FSV-T) and lowered the firm’s recommendation to “sector perform” from “sector outperform” based on a deceleration in organic growth due to “tough” comps and its premium valuation. His target rose to US$170 target from US$166. The average is US$177.
“We expect organic growth of 3 per cent in 2024, versus an average of 10 per cent over the last three years. However, we expect organic growth to re-accelerate in Q4/24 and beyond.”
“We don’t expect multiple expansion from here as FSV is trading slightly above its historical average valuation multiple.”
He added: “Why FSV stock has meaningfully outperformed the S&P/TSX Composite over a long period of time FSV is a unique roll-up story with a wide moat, leadership position in a highly-fragmented market, and significant cost of capital advantage over mom-and-pop operators. The company has a proven management team with skin in the game.”
* TD Cowen’s Brian Morrison upgraded Roots Corp. (ROOT-T) to “buy” from “hold” with a $3.25 target, exceeding the $3.12 average.
“[Wednesday’s] quarterly results exceeded expectations illustrating Roots brand strength/resiliency, the strong annual FCF has the balance sheet in a financial position of strength, the valuation with the share price decline as compelling, in our view, and we maintain there is a free option with respect to a potential monetization event,” said Mr. Morrison
* Jefferies’ Laurence Alexander cut his Lithium Americas Corp. (LAC-N, LAC-T) target to US$8, below the US$10.44 average, from US$19 with a “buy” rating.
* RBC’s Sabahat Khan raised his North West Company Inc. (NWC-T) target to $40 from $38 with a “sector perform” rating. Other changes include: BMO’s Stephen MacLeod to $41 from $40 with a “market perform” rating and TD’s Michael Van Aelst to $45 from $44 with a “buy” recommendation. The average is $41.50.
“The North West Company delivered a solid finish to 2023 punctuated by strong performance on the margin front, which helped deliver higher than expected Adjusted EBITDA. Thematically, Canadian sales should be supported by settlement payments in 2024/25 (exact timing subject to some uncertainty), while we expect continued pressure in International markets given the uncertain macro backdrop,” said Mr. Kwan.
David Leeder