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Inside the Market’s roundup of some of today’s key analyst actions

RBC Dominion Securities analyst Andrew Wong expects “weak” first-quarter results from Nutrien Ltd. (NTR-N, NTR-T), leading to downward guidance revisions to reflect “a slow start to 2023.”

“However, we think ag and fertilizer market fundamentals remain favourable and recent weakness has already been priced into shares which could set up for an H2 rally as fertilizer markets improve and FCF remains solid (11-per-cent/10-per-cent yield in 2023/2024) with a potential bump if potash capex plans are delayed further,” he said in a research report released Thursday.

Mr. Wong is now projecting earnings before interest, taxes, depreciation and amortization of US$1.6-billion, down from US$2.439-billion a year ago and below the consensus estimate on the Street of US$1.7-billion.

“Demand was slower than expected through Q1 despite favourable ag/fertilizer fundamentals, resulting in continued price declines and slow sales,” he said. “Nitrogen in particular was weaker than expected while potash also declined. Retail activity was also impacted, likely pushing out sales into Q2 while margins are likely to see a Q/Q decline as crop nutrient margins normalize and no longer benefit from a rising price environment..

“Despite a strong set-up, demand has been slow to start in 2023, with buyers hesitant to step into a declining price environment, previous high-priced inventory still taking time to clear, and higher carry-costs discouraging purchases. The North American spring season should still see strong volume movement, but price peaks may disappoint relative to earlier-year expectations. However, we continue to see a constructive environment for ag/ferts with crop prices still 30-40 per cent above historical levels, crop profitability near record highs, significant planted acreage, and favourable fertilizer affordability. On supply, potash continues to see restricted exports from Belarus/Russia and nitrogen marginal costs remain high, even if these pressures have eased a bit from 2022. We have lowered our 2023/2024 Brazil potash price forecasts by 10 per cent, while our US NOLA urea price forecasts for 2023 and long-term were reduced by 10-15 per cent.”

In response to slower demand and lower prices, Mr. Wong cut his full-year EBITDA estimate to US$8.05-billion from $9.01-billion previously and below the company’s guidance of US$8.4-billion to US$10-billion.

“While this is a steep cut, we think downward estimates revisions are largely expected by investors based on recent industry feedback and shares trading at 6 times EV/EBITDA on our new estimate (vs. 8-9 times average historical),” he said.

“We continue to see solid cash generation at 11 per cent and 10 per cent in 2023 and 2024 ($3.9-billion and $3.6-billion). We also see potential for potash capex spend to be delayed further as demand remains slow, which could add $300-500-million to our FCF forecasts.”

With his forecast adjustment, Mr. Wong cut his target for Nutrien shares to US$100 from US$110 with an “outperform” rating. The average on the Street is US$94.65.

Concurrently, Mr. Wong lowered his target for peer The Mosaic Co. (MOS-N) to US$50, below the US$53.82 average, from US$55 with a “sector perform” rating.

“We expect Q1 to reflect potash weakness even as phosphate held steady, while going forward the dynamic could flip with phosphates weaker and potash recovering,” he said. “However, if phosphate prices continue to hold steady while ops improve, there may be upside to estimates. We also think Mosaic’s plan to return cash to shareholders has been well-received and is supported by solid cash generation (13-per-cent/11-per-cent yield in 2023/2024), but we see shares as fairly valued for now.”


Brookfield Infrastructure Partners LP’s (BIP.UN-T/BIP-N) “accretive, large-scale” US$13.3-billion acquisition of Triton International Ltd. (TRTN-N) adds an established transport platform and bolsters near-term growth, according to iA Capital Markets analyst Naji Baydoun.

“TRTN is the world’s largest owner and lessor of intermodal shipping containers, providing transportation logistics services to clients globally under long-term leases which support highly contracted and stable cash flows (6-7-year average remaining lease duration; 60 per cent of containers on life-cycle leases; multi-decade client relationships),” he said. “TRTN also boasts a highly utilized asset base with a diversified and high-quality shipping clientele, supporting its business performance despite softening near-term market fundamentals (e.g., lower trade volumes and normalizing freight rates). TRTN’s scale, market leadership position, investment-grade financing structure, and highly contracted portfolio are some of the key attributes that make it an attractive investment for BIP. The business has a long and established track record of sustained mid to high single-digit fleet and asset base growth as well as strong profitability/returns.”

TSX-listed units of Brookfield Infrastructure slipped 0.3 per cent on Wednesday following the announcement of the deal, which will see it invest almost $1-billion in equity into the deal through Brookfield Infrastructure Corp. (BIPC-T) class A exchangeable shares.

“The issuance of BIPC highlights how the shares enhance BIP’s access to capital, particularly as they traded at a wide premium to the BIP units,” said Mr. Baydoun. “We calculate forward transaction valuation multiples of 9 times EV/EBITDA and 8-10 times P/AFFO, which compare favourably to (1) BIP’s own trading multiples (13 times EV/EBITDA and 12-13 times P/AFFO), (2) valuation multiples ascribed to BIP’s Transport operations (12-14 times EBITDA), and (3) precedent transactions for similar assets (12-20 times EBITDA). We estimate that BIP’s investment in TRTN could generate $0.05-0.10 of AFFO/share accretion, or 2-3-per-cent AFFO/share accretion compared to our estimates.”

Maintaining his “strong buy” recommendation for Brookfield Infrastructure, Mr. Baydoun bumped his target to US$47 from US$46. The average on the Street is US$42.31.

“We view BIP as a unique and diversified way for investors to play the broad long-term infrastructure investment theme, with (1) access to a global, large- scale infrastructure investment platform (ownership interests in more than $70-billion of assets), (2) defensive cash flows (approximately 90 per cent of FFO regulated/contracted), (3) visible and sustainable organic cash flow growth (6-9 per cent per year, CAGR [compound annual growth rate] 2022-27), (4) potential upside from accretive M&A, and (5) attractive income characteristics (4.5-per-cent yield, 60-70-per-cent long-term FFO payout, and a 5-9 per cent per year dividend growth target). We are increasing our price target to reflect the incremental value from the Triton investment.”


While he acknowledged “heightened risk related to macroeconomic factors,” National Bank Financial analyst Vishal Shreedhar remains “constructive” on MTY Food Group Inc. (MTY-T) following its “solid” performance in the first quarter, pointing to a “good valuation, expectations of improving operational performance (digital, menu innovation, marketing, analytics, etc.) and medium-term acquisition optionality.”

On Wednesday, the Montreal-based restaurant franchisor reported revenue of $286-million, up from $140.5-million and ahead of both Mr. Shreedhar’s $282.7-million estimate and the consensus forecast of $231.3-million. Earnings before interest, taxes, depreciation and amortization (EBITDA) rose to $62.9-million from $35.6-million a year ago, also topping projections ($56.7-million and $54.6-million).

Both benefitted from the recent acquisitions of Wetzel’s Pretzels and Sauce Pizza and Wine, which helped contribute to a 69-per-cent year-over-year increase in system sales south of the border and a 32-per-cent gain in Canada.

“Outside acquisitions and pandemic-related restrictions year-over-year, MTY commented on growth being aided by traffic; pricing was below inflation (less than 10 per cent),” said Mr. Shreedhar. “It also commented on improving trends at Papa Murphy’s.

“While EBITDA margin declined year-over-year (22.4 per cent, lower by 300 basis points year-over-year) due to more corporate-owned stores, mostly from BBQ, segment margins improved, reflecting traction with MTY’s improvement initiatives.”

While the analyst noted MTY’s leverage remains elevated, he expects to see an improvement, projecting net debt-to-EBITDA of 4.0 times declining to 3.3 times by the end of fiscal 2023. He does not expect a “sizable” transaction during that time.

Maintaining an “outperform” rating for MTY shares, Mr. Shreedhar raised his target to $74 from $72. The average is $70.93.

Elsewhere, others making changes include:

* Scotia Capital’s George Doumet to $68.50 from $75 with a “sector perform” rating.

“MTY reported a second consecutive quarter of strong results, supported by healthy internals,” he said. “Adj. EBITDA beat our estimate by 6 per cent (and the Street by 17 per cent), driven by higher revenues and a stronger contribution from the corporate segment. There were some puts and takes in the quarter, but overall we expect organic top-/bottom-line growth to remain robust in the near term.

“Current valuation (on EV/EBITDA) is 15 per cent below historical averages – and, while we are encouraged by the showing of healthy internals, we would need to see sustained improvements in comps and net store closures, in addition to balance sheet deleveraging, before we see a re-rating in the shares (in our view).”

* Raymond James’ Michael Glen to $66 from $65 with a “market perform” rating.

“Overall, we would characterize the results as mixed with our forecast,” he said. “While we acknowledge that MTY’s valuation, which is sitting at roughly 9.0 times forward EBITDA on a pro-forma basis (including M&A), is reasonable in the historical context, we would opt to be more opportunistic in selecting an entry point on the shares. From that perspective, and as we assess and gauge investor interest in the name, we believe that there are two things in particular that would benefit the stock: 1. A committed and communicated plan to repurchase shares consistently every quarter; and/or 2. Communication of a capital investment program that will include explicit targets for net store openings and organic sales growth. On the first point, while MTY did renew its 5-per-cent NCIB on June 28, 2022, given recent M&A activity and pf leverage more than 3 times we do not expect any share repurchase activity to take place. On the second point, management has only committed to an improvement overall in net store closings during 2023, noting lingering delays in acquiring permits and performing final inspections in certain areas. We believe an explicit goal or target would offer investors a metric to measure against.”

* CIBC World Markets analyst John Zamparo to $69 from $73 with a “neutral” recommendation.


With office real estate fundamentals remaining “in flux,” CIBC World Markets analyst Dean Wilkinson downgraded a pair of real estate investment trusts in his coverage universe on Thursday.

“The need for ‘traditional’ office space has and continues to change, there’s no arguing that,” he said. “The question we find ourselves asking (and one that’s often asked of us) is: have conditions deteriorated such that we must question the long-term profitability and, indeed, viability of office real estate to the extent market volatility would suggest? The answer, as usual in all things real estate, is nuanced. ... We revisit our price targets for our coverage of the Canadian office REITs, taking a view that is perhaps rooted more so in investor sentiment than the underlying fundamentals. It should be acknowledged that our analysis is purely reflective of our view that the office REITs will likely continue to trail the broader group within the context of target horizon window, one on which our price targets are predicated.”

His changes are:

* Allied Properties Real Estate Investment Trust (AP.UN-T) to “neutral” from “outperformer” with a $30 target, down from $35. The average on the Street is $35.15.

* Dream Office Real Estate Investment Trust (D.UN-T) to “neutral” from “outperformer” with a $17.50 target, down from $20 and below the $18.63 average.

Mr. Wilkinson also lowered his target for these equities:

* Slate Office REIT (SOT.UN-T, “neutral”) to $3 from $5. Average: $3.77.

* True North Commercial REIT (TNT.UN-T, “neutral”) to $4 from $5. Average: $4.45.

“We have broadly reduced our price targets across our office coverage to account for erosion in both sentiment (which took effect rather quickly and which we expect to reverse over the longer term) and fundamentals, and have thusly embedded modest discounts to our NAV estimates,” said Mr. Wilkinson. “Concurrent with our price target revisions, we are downgrading Allied Properties and Dream Office from Outperformer to Neutral. Post our revised estimates, our total return expectations for the sector are still positive; however, from a relative perspective we favour more defensive asset classes within the retail or industrial sectors and the Apartment REITs.”


Despite its profitability improving in its second quarter, the “path to revenue growth remains unclear” for Goodfood Market Corp. (FOOD-T), according to Stifel analyst Martin Landry.

“Goodfood reported a Q2FY23 miss on revenues offset by a strong EBITDA beat,” he said. “Profitability improved significantly with gross margins reaching a record 42.2 per cent, while SG&A reduction continued, allowing the company to generate positive Adj. EBITDA of $3 million compared to a loss of $13.6 million in Q2FY22, a meaningful improvement over a short period of time. The balance sheet position has strengthened following the recent financing, and Goodfood’s cash position appears sufficient to sustain operations for at least the next 18 months. Despite these improvements, revenues continue to be under pressure and growth potential remains unclear. Valuation multiples within the sector are near all-time lows, which limits the upside potential on FOOD’s share price.”

Before the bell on Wednesday, the Montreal-based company reported sales of $42-million, down 43 per cent year-over-year and below Mr. Landry’s $44-million estimate. He attributed the miss to “(1) price sensitive customers leaving due to recent price increases; (2) a less aggressive customer acquisition strategy, resulting in new customer additions not being sufficient to offset the natural customer churn; and (3) market share loss.”

While an increase in average revenue per user and improved gross margins helped the EBITDA beat offset the revenue decline, the analyst emphasized Goodfood’s growth potential “remains unclear.”

“The company is limited in terms of its ability to deploy capital on incentives to attract new clients and faces strong competition from better financed peers,” said Mr. Landry. “Hence, the company is focusing on acquiring and retaining higher value customers through differentiated product offering, such as Paleo and Keto meals, or by partnering with Michelin star chefs. The company has also hinted at the possibility of introducing a wider selection of ready-to-eat meals and also lower-priced meal kits to attract a different customer base. However, this may add more complexity to the business and put pressure on profitability as seen in the past. Nonetheless, with the exit of the ‘On-Demand’ completed, Goodfood should be able to refocus its marketing dollars towards growing its legacy meal kit business, which could create traction with customers.”

Maintaining a “hold” rating, the analyst raised his target for Goodfood shares by 5 cents to 65 cents, matching the average on the Street.

“Goodfood has shown significant progress from a profitability standpoint in the last 12 months and Q2FY23 marked the first positive EBITDA quarter since the COVID boost 8 quarters ago,” he said. “Nonetheless, the company remains in cash burn mode and visibility on top line growth potential remains limited. Valuation multiples of meal kit companies are low with HelloFresh and Blue Apron trading at 0.5 times and 0.2 times forward EV/Sales, respectively, leaving limited potential for Goodfood’s valuation multiple to expand, in our view.”


Scotia Capital analyst Jason Bouvier thinks “years of underinvestment and continued capital discipline have laid the groundwork for a structurally positive view of Canadian commodity prices.”

However, he updated his estimates and target prices for Canadian E&P companies in his coverage universe in response to changes to the firm’s commodity price forecast. Its 2023 Brent and WTI estimates fell to US$83 per barrel and US$78 per barrel, respectively.

“Near term oil prices will continue to be adversely impacted by the turmoil in the global banking sector as speculators trade on the headline news, creating difficulties to sustain any meaningful oil price rally until the market is convinced that situation is under control,” Scotia said. “All things considered, we continue to believe Brent prices will trade in the range of $70 to $100 over the next 12-18 months with strong downside protection at $70-$75.”

Mr. Bouvier’s target changes include:

  • Baytex Energy Corp. (BTE-T, “sector perform”) to $6.50 from $8. The average on the Street is $7.52.
  • Canadian Natural Resources Ltd. (CNQ-T, “sector perform”) to $87 from $86. Average: $91.55.
  • Cenovus Energy Inc. (CVE-T, “sector outperform”) to $28 from $31. Average: $31.83.
  • Crescent Point Energy Corp. (CPG-T, “sector outperform”) to $14 from $13. Average: $14.40.
  • Enerplus Corp. (ERF-T, “sector perform”) to $23 from $25. Average: $23.88.
  • Freehold Royalties Ltd. (FRU-T, “sector perform”) to $17 from $18. Average: $20.11.
  • Imperial Oil Ltd. (IMO-T, “sector outperform”) to $79 from $72. Average: $79.
  • MEG Energy Corp. (MEG-T, “sector perform”) to $26 from $22. Average: $25.58.
  • Ovintiv Inc. (OVV-N/OVV-T, “sector outperform”) to US$55 from US$62. Average: US$56.58.
  • Parex Resources Inc. (PXT-T, “sector perform”) to $29 from $26. Average: $33.66.
  • Suncor Energy Inc. (SU-T, “sector perform”) to $47 from $50. Average: $53.11.
  • Vermilion Energy Inc. (VET-T, “sector perform”) to $26 from $29. Average: $28.65.


In other analyst actions:

* CIBC’s Kevin Chiang lowered his targets for Air Canada (AC-T, “outperformer”) to $30 from $31, Chorus Aviation Inc. (CHR-T, “outperformer”) to $4.50 from $4.75 and TFI International Inc. (TFII-N/TFII-T, “outperformer”) to US$134 from US$135. The averages on the Street are $25.50, $4.50 and US$136, respectively.

“Heading into Q1 earnings season, the focus will be on any commentary on demand trends, inflationary pressures, and supply chain bottlenecks,” said Mr. Chiang. “We expect the resurgence of macro concerns to continue to outweigh companyspecific narratives. With this backdrop, we prefer more defensive names/sectors (Canadian rails, waste, CAE) or names we view as being sufficiently de-risked (CJT, AC).”

* In an earnings preview for Canadian telecom companies, CIBC’s Stephanie Price reduced her targets for Cogeco Inc. (CGO-T, “neutral”) to $64 from $67 and Cogeco Communications Inc. (CCA-T, “neutral”) to $75 from $79. The averages are $87 and $85.29, respectively.

“We expect the focus in Q1 will be on industry competitive dynamics post the Shaw and Freedom transactions, which closed in early Q2,” she said. “On a fundamental basis, we expect limited ARPU gains in Wireless, although see continued subscriber growth driven by immigration and population growth. Within wireline, we see a somewhat more promotional residential broadband market and have reduced our estimates for Cogeco and BCE slightly given the expectation of increased marketing spend. We have reduced our price target on Cogeco Communications to $75 (prior $79) and retain our Neutral rating, with a price target change for Cogeco Inc. to $64 (prior $67) as a result of the price target change for CCA. Within our coverage universe, we expect average Q1 EBITDA growth of 5 per cent within our coverage universe. Our top picks heading into earnings are TELUS, Rogers, and Quebecor.”

* Following a tour of its U.S. Midwest manufactured home community portfolio, Raymond James’ Brad Sturges bumped his Flagship Communities REIT (MHC.U-T) target to US$21 from US$20.50 with an “outperform” rating. The average is US$20.92.

“We believe Flagship is well positioned to generate high-single-digit 2023 SP-NOI [same-property net operating income] growth year-over-year, driven by a 7.8-per-cent average same-lot rent increase implemented at the start of the year, and higher same-property average occupancy rates year-over-year,” he said. “Importantly, we believe Flagship’s capital light, value-add investment model is poised to generate attractive long-term, risk adjusted returns.”

* Canaccord Genuity’s Matt Bottomley lowered his Organigram Holdings Inc. (OGI-T) target to $2.25 from $3.25 with a “speculative buy” rating. Other changes include: Stifel’s Andrew Partheniou to $1.25 from $1.50 with a “buy” rating, ATB Capital Markets’ Frederico Gomes to $2.25 from $2.50 with an “outperform” rating and Haywood Securities’ Neal Gilmer to $1.25 from $1.60 with a “hold” rating. The average is $1.79.

“OGI reported mixed Q2FY23 results, missing revenues but with the highest gross margin in three years. In addition, non-recurring working capital changes mainly drove a sequential reversal to an operating cash burn position that was significantly higher than we previously expected,” said Mr. Partheniou. “Stepping back, it appears REC flower value competition is being sold at negative gross margin, irrational behaviour that may persist in the medium term but one that management has chosen not to follow as it focuses on sustainably profitable growth through innovation. Towards that end, OGI recently launched value products seem to have been well-received thus far, with additional introductions expected in FY23. Management also expects its efficiency improvements to sustainably result in better gross margin going forward, despite a normalization in high margin international sales. Matched with likely working capital reversal resulting in better OCF over the next few quarters, we believe OGI’s bright outlook remains intact.”

* After a first-quarter miss, National Bank’s Endri Leno lowered his Theratechnologies Inc. (TH-T) target to $2.25 from $3.25, keeping a “sector perform” rating. The average is $4.65.

“Our forecasts remain unchanged (in line with guidance) given the fQ1 prescription growth – the latter is expected to contribute to results in coming of quarters,” said Mr. Leno. “However, given the risk associated with the catch up to achieve guidance, we lower our target multiples for both EGRIFTA and Trogarzo.”

* Credit Suisse’s Andrew Kuske reduced his Tidewater Midstream and Infrastructure Ltd. (TWM-T) target to $1.30, below the $1.39 average, from $1.50 with an “outperform” rating.

Follow David Leeder on Twitter: @daveleederOpens in a new window

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