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

“Tough” markets weighed on the third-quarter financial results for National Bank of Canada (NA-T), according to Credit Suisse analyst Joo Ho Kim, who lowered his expectations for the remainder of fiscal 2023 as well as 2024.

Shares of the bank slid 3.9 per cent on Wednesday after it reported core cash earnings per share of $2.21, missing both Mr. Kim’s estimate of $2.42 and the Street’s forecast of $2.37. He attributed the miss to “lower-than-expected other revenue that more than offset the NII beat, as well as lower expenses and PCLs.” While pre-tax, pre-provision earnings were flat year-over-year, they missed the analyst’s projection by 7 per cent.

“NA’s Q3 results were dragged down by a surprisingly soft performance from the bank’s trading business, where revenues were impacted by low volatility and a domestic skew in the business that was unfavorable this quarter, in our view,” said Mr. Kim in a note. “The bank remained confident that this quarter was not the new norm in terms of its earnings power from the business, and while market conditions have certainly improved post-Q3, we remain a bit more cautious in the near term. Another area that we are watching is credit trends at ABA given the weaker macro outlook in Cambodia, though the bank did maintain its impaired PCLs guidance for F2023E (bottom half of 10-20bps). In that regard, we continue to highlight the bank’s conservative positioning on allowances as a key positive in light of normalizing credit conditions. Separately, while NA noted its expectation for regulatory changes to negatively impact CET1 ratio by 35-40bps in Q1, our forecast still suggests the bank remaining second highest of the group that quarter.

“Taking it all together, although we do model some conservatism in our near-term forecast, we continue to like NA’s defensive positioning, given the balance sheet strength and favorable mix.”

A breakdown of the big banks’ third-quarter earnings so far

The quarterly miss and the expectation for lower trading revenue in the fourth quarter led Mr. Kim to lower his 2023 core cash EPS estimate by 3 per cent to $9.43. His 2024 estimate declined by 2 per cent to $9.78.

Maintaining his “outperform” recommendation for National Bank shares, Mr. Kim lowered his target to $108 from $112. The average target on the Street is $104.09, according to Refinitiv data.

Elsewhere, other analysts making changes include:

* Scotia Capital’s Meny Grauman to $105 from $107 with a “sector outperform” rating.

“Unlike many peers, NA did not have the advantage of low expectations heading into reporting – at least on a relative basis,” said Mr. Grauman. “That setup would have presented a challenge for the stock even if results has looked better, but certainly a 7-per-cent miss to the Street (and a 6-per-cent miss on PTPP) did not bode well for the shares on earnings day. We do acknowledge that the miss was largely driven by trading, and to some extent elevated PCLs, and that both items do not materially change our forward estimates. However, even if we look beyond those two drivers we see signs of slowing momentum in key business lines including Wealth and ABA Bank. The P&C unit continues to hold up well excluding a step-up in provisions, but even there flat Q/Q margins came in at the low end of the peer-group this earnings season. National Bank continues to be in a strong capital position with a CET1 ratio of 13.5 per cent, but the guidance that the combined impact of the FRTB and CVA capital reforms will lower the bank’s CET1 ratio by 35 to 40 bps certainly lowers our estimate of excess capital.”

* Desjardins Securities’ Doug Young to $103 from $105 with a “hold” rating.

“Adjusted pre-tax, pre-provision (PTPP) earnings were 7 per cent below our estimate, a sizeable miss,” said Mr. Young. “The bank maintains a defensive stance, holding excess capital and liquidity. Its strategic focus remains unchanged — growing the Canadian franchise and staying poised for opportunities.”

“We like NA, but see greater potential total returns elsewhere.”

* Cormark Securities’ Lemar Persaud to $107 from $109 with a “market perform” rating.


National Bank Financial analyst Vishal Shreedhar expects “solid” second-quarter results and a “favourable” guidance revision from Dollarama Inc. (DOL-T) when it reports on Sept. 13 before the bell.

“We continue to hold a positive view on DOL’s shares given its defensive growth orientation supported by strong cash flows, a solid balance sheet and resilient sales performance,” he said. “Over the medium term, we believe that Dollarama will be well positioned to grow earnings given anticipated network expansion, favorable sssg [same-store sales growth] and ongoing development of the international business. In addition, we believe that acquisitions are a possibility.

“Given premium valuation amidst an increasingly competitive backdrop, a key investor question is can Dollarama outperform. We think it can, provided fundamental performance remains strong. In our view, Dollarama is a well-managed retailer, and we expect the company’s growth to remain solid. That said, we acknowledge that DOL’s performance will also be governed, to some degree, by market demand for stocks with defensive properties.”

Mr. Shreedhar is forecasting earnings per share for the discount retailer’s second quarter of fiscal 2024 of 78 cents, a penny above the consensus estimate on the Street and up 12 cents from the same period a year ago. He said that 18.0-per-cent year-over-year growth stems from “mid-teens revenue growth (new stores, low-double-digit same store sales growth), share repurchases over the last 12 months and gross margin expansion, partly offset by higher SG&A.”

He projects same-store sales growth of 11.3 per cent, down from 13.2 per cent a year ago, with basket growth of 1.2 per cent year-over-year and transaction growth of 10.0 per cent. His total sales estimate of $1.404-billion also tops the consensus of $1.395-billion and is up from last year’s result of $1.217-billion.

“We expect the outlook to be favorably revised as part of the release of Q2/F24 results given our expectation of continued sales strength,” the analyst said. “In particular, we believe that the F2024 sssg outlook of 5-6 per cent is low (NBF is 8.4 per cent), given: (i) strong Q1/F24 sssg of 17.1 per cent, (ii) DOL’s indication that the 2-year stack of Q2/F24 intra-quarter sssg was in line with Q1/F24, and (iii) comments from the grocers that the discount segment has maintained strength.

“We note Dollar Tree’s upwardly revised sales and sssg expectations in its Q2/F23 earnings release, reflecting expectations of improved sales performance. We view this to be a constructive sales readthrough to Dollarama.”

In a note released Thursday, Mr. Shreedhar said his recent review of the changes to Dollarama’s inventory of items was “incrementally favourable” and reflects “resilient pricing and a gradual increase of SKUs at higher price points.”

“Our review of retailer commentary indicates a carryover of themes from prior quarters: (i) Pressured consumer spending; (ii) A focus on value; and (iii) Particular softness in discretionary categories. We believe that DOL is gaining market share against the broad retail segment,” he added.

Reiterating his “outperform” recommendation for Dollarama shares, Mr. Shreedhar raised his target to $97 from $95 to reflect an advancement in his valuation period. The average target on the Street is $91.32.


IA Capital Markets analyst Amr Ezzat thinks a “golden opportunity awaits with small cap Canadian tech equities,” declaring “the terrain hasn’t been this fertile in 15 years.

“Small cap Canadian tech equities are trading at an unprecedented discount to larger cap Canadian and U.S. tech counterparts,” he said. “Consider the following: • Canadian software and high-visibility players are currently trading at an 65-per-cent discount to U.S. counterparts. This pricing is a dramatic scene-setter, not seen since 2008; • Within Canadian tech, small cap peers are trading at an 59-per-cent discount versus large cap counterparts.”

“So why now? We argue that current market conditions create a rare opportunity for outsized returns. We also argue that small doesn’t have to be a bad word. In a ‘flight to safety’ attempt, investors indiscriminately shunned small cap stocks (both quality operators and speculative ones), creating a unique opportunity to go cherry-picking for quality at a steep discount. Safe havens do in fact exist within the small cap tech universe, with some small cap stocks providing better safety and more quality at much more attractive valuation levels.

In a research report released Thursday titled Mind the Gap: Small Cap Tech Valuation Disconnect too Wide to Ignore. Terrain Ripe for the Picking, Mr. Ezzat initiated coverage of five of his “favourite” Canadian small cap tech names. They are:

* Computer Modelling Group Ltd. (CMG-T) with a “buy” rating and $9.50 target, equating to a 17.1-per-cent total return. The average on the Street is $8.30.

Mr. Ezzat: “The story behind CMG is one of transformation marked by an unprecedented resurgence of growth after years of relative stagnation. Four successive quarters of double-digit year-over-year core Annuity & Maintenance (’A&M’ or ‘recurring revenues’) growth driven by pricing increase strategies, the acquisition of clients in cutting-edge sectors like carbon capture and storage, and a successful entry into other energy transition areas have steered the Company’s course back to growth. On the inorganic growth front, the recent appointments of CEO Pramod Jain, Board Chair Mark Miller, and new Head of Corporate Development Mohammad Khalaf reflect a concerted effort towards M&A – we don’t think it’s unreasonable to assume a scenario in the near future in which we see a dividend cut (currently $16-million outflow per annum) to fuel the ambitious growth strategy. The margin side of the story is equally as compelling with a best-in-class margin profile epitomized by 15+ years of EBITDA margins in the 40-per-cent-plus range. Together, the new management and Board Chair refresh illuminate a compelling narrative of a company poised to unlock further value through a harmonious blend of best-in-class margins, continued organic growth, and a new pursuit for inorganic growth.”

* Calian Group Ltd. (CGY-T) with a “buy” rating and $75 target, equating to a 45.2-per-cent total return. The average target is $77.33.

Mr. Ezzat: “Calian is a quality diversified operation with a deep bench, a debt-free balance sheet, and a solid track record of value creation through acquisition and innovation. Calian has all the bells and whistles an investor would seek in a quality company. Top-of-mind questions for investors are (1) was the hiccup in Q3/F23 merely a transient anomaly or does it foreshadow a recurring challenge? (2) how much capital can Calian deploy into M&A? (3) does the near horizon hold a dividend hike? The misstep in Q3/F23 was largely borne by a turbulent quarter for the ITCS division; the shortfall was due to the lumpy nature of customer spending cycles and infrastructure upgrades. This has impacted sales and disproportionally flowed into earnings. The Company was pro-active in implementing cost reduction measures subsequent to quarter-end that will aim to re-align sales and marketing and delivery capacity with the current run-rate level of its business. We thus expect this to be a short-term blip. .... We believe using an EBITDA/earnings multiple on short-term earnings estimates significantly (and incorrectly) undervalues Calian’s shares as it gives no recognition to the Company’s inorganic growth activity (and indeed, its debt-free balance sheet). Case in point, at the date of writing, the Street has CGY growing top line by 8.0 per cent and 5.1 per cent in F2024 and F2025, respectively, versus the Company’s three-year CAGR [compound annual growth rate] of 14.7 per cent through F2023. So how would ‘slapping’ a multiple on short-term earnings ever yield a correct ‘fair value’?”

* Tecsys Inc. (TCS-T) with a “buy” rating and $45 target, equating to a 68-per-cent total return. The average is $46.33.

Mr. Ezzat: “Reflecting a story of transformation, Tecsys is undergoing a significant change as it continues to shift away from an on-premise model to a SaaS model. While we are fans of the business model evolution, the shift marks a distinct setback. The transition to SaaS has curtailed the larger (but lumpier) on-premise license revenue side of the business, which has historically delivered between 2-3 times the upfront revenues of the SaaS model, considerably understating the recent underlying revival in revenue growth. This together with a model still too reliant on in-house implementation has hampered margins. The silver lining to this strategic shift lies in the creation of a stable, visible, growing recurring revenue stream. Tecsys looks attractive on a sales and gross profit multiples basis. We believe using an EBITDA/earnings multiple on short-term earnings estimates significantly (and incorrectly) undervalues Tecsys’ shares as it gives no recognition to the Company’s expanding margin profile. It’s worth noting that SaaS margins are projected to grow from approximately 50 per cent in F2023 to 70 per cent by F2028, and as such, we encourage investors to adopt a longer-term view when evaluating the merits of investing in Tecsys.”

* Sylogist Ltd. (SYZ-T) with a “buy” rating and $11 target, equating to a 44.7-per-cent total return. The average is $9.83.

Mr. Ezzat: “Guided by a new management team and board of directors (BOD), Sylogist has shifted gears, leaving behind its old MO of a ‘Steady Eddie’ operator with outsized margins, to one seeking to capitalize on growth more aggressively. From an investor’s perspective, we believe the management and BOD refresh was a much-needed stepping stone to revitalize a stagnant business model. The embers of sales growth have been rekindled, igniting a new flame within the Company. But aggressive top-line growth is not without its growing pains. Margins compressed (as expected) as the Company invested to grow, however, we believe they currently sit at trough (or close to trough) levels. We thus believe focusing too narrowly on short-term earnings significantly (and incorrectly) undervalues SYZ shares as they give no recognition to the Company’s evolving margin profile.”

* MDF Commerce Ltd. (MDF-T) with a “speculative buy” rating and $5.50 target, equating to a 64.2-per-cent total return. The average is $4.25.

Mr. Ezzat: “mdf commerce continues to trade at impaired valuation levels, despite the removal of the debt overhang last October through the sale of InterTrade at 5.0 times revenues (versus MDF’s 1.2 times). We believe the multiple capital raises leading up to the Periscope acquisition (as well as trouble digesting said acquisition) together with a turbulent small cap tech market environment have caused investor fatigue and nonchalance vis-à-vis MDF shares. In the meantime, the Company has quietly steered the ship into positive EBITDA territory and Periscope (at long last) is showing signs of growth. We thus believe this to be an opportunistic time to take a fresh look at MDF’s core assets. ... Beyond our 12-month target price, we believe MDF can be a multi-bagger in the longer term”


Seeing a “less favourable risk/reward outlook,” Scotia Capital analyst Orest Wowkodaw downgraded Ero Copper Corp. (ERO-T) to “sector perform” from “sector outperform” after “materially” reducing his life-of-mine and net asset value per share estimates.

“Although the company has an impressive medium-term Cu [copper] growth profile (execution has been excellent to date) and meaningful ongoing Cu-Ni exploration upside (including a planned Ni exploration update in November), we are concerned by a stretched valuation on our lower estimates, along with potential future capex pressures from a strengthening BRL [Brazilian Real],” he said.

“Ero recently disclosed that it anticipates taking an ongoing 5-10-per-cent discount to the LME Cu price to reflect TCRC [treatment and refining charges] costs related to its concentrate,” he said. “These represent material incremental off-site costs ($0.20-$0.40/lb at $4.00/lb Cu) to those already included in reported Cu cash costs ($0.15/lb of $1.60/lb in H1/23) and multi-year guidance. We have confirmed that a similar accounting treatment has been applied to the LOM cost guidance for Tucumã. We believe investors would be better served having all of these off-site costs included in reported cash costs (similar to most peers).”

Lowering his EBITDA projections through 2025, Mr. Wowkodaw reduced his target for Ero Copper shares to $28 from $33. The average on the Street is $28.71.


Given ongoing “macro weakness and low visibility into eLearning projects,” Canaccord Genuity analyst Robert Young lowered his recommendation for shares of Pluribus Technologies Corp. (PLRB-X) to “hold” from “speculative buy” following weaker-than-anticipated second-quarter results.

After the bell on Tuesday, the Toronto-based company reported revenue of $9.1-million, down 4 per cent year-over-year (on negative 11-13-per-cent organic growth) and missing Mr. Young’s $9.4-million estimate. He attributed the miss to “the impacts of deferred workforce development projects within TLN (eLearning) driven by uncertainty around the regional banking crisis and general macro headwinds.” Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $0.9-million also fell below his expectation ($1-million)

“Pluribus reported Q2 results with a modest miss relative to our estimates,” the analyst said. “Revenue growth was flat year-over-year but down low double-digits on an organic basis given weakness in eLearning driven by deferred workforce development projects into H2/23. Other areas of the business including HealthTech and Digital enablement remain steady with strong margins. However, Pluribus’ balance sheet saw further weakness with cash of $3-million and $24-million in debt, with total debt to EBITDA leverage at the higher end of the covenant (4.0-4.75 times EBITDA).

“While management indicated restructuring efforts to align costs with revenue and improve profitability, ongoing macro weakness, deal pushouts, and few levers of liquidity imply that balance sheet risk is incrementally higher, which leads us to downgrade Pluribus.”

Emphasizing its “weak” balance sheet and with M&A activity “on hold,” Mr. Young cut his revenue and earnings expectations for both 2023 and 2024, leading him to reduce his target for Pluribus shares to $1 from $3. The average is currently $1.40.

Elsewhere, Acumen Capital’s Nick Corcoran trimmed his target to $1.80 from $2.50 with a “speculative buy” recommendation.

“We remain cautious until Management can deliver a recovery in eLearning and organic growth,” said Mr. Corcoran.


In a research report titled Big copper in the heart of America, Stifel analyst Alex Terentiew initiated coverage of Faraday Copper Corp. (FDY-T) with a “buy” recommendation, touting “the substantial opportunities for resource and production growth arising from exploration upside potential.”

“With copper increasingly regarded around the globe as a critical mineral (added to the U.S. DOE’s critical minerals list in August), necessary to advance decarbonization initiatives and integral in countless electronic applications, Faraday Copper and its Copper Creek project are ideally positioned to provide North America a major new domestic resource,” he said.

“Situated in Arizona, America’s copper mining state, in a region with a long history of mining, Copper Creek already has a large resource that we expect to grow substantially with each drill campaign, and a development plan that has the potential to create a long-life, profitable, strategic and expandable mine, attributes we view as attractive for both shareholders and potential acquirers that are looking to grow their copper exposure. We expect Faraday’s strong management team to diligently advance permitting, alongside exploration and project development, positioning the project for first production early next decade.”

Mr. Terentiew set a target of $1.50 for the Vancouver-based company’s shares. The average on the Street is $1.67.

“With $22-milllion in cash (as of June 30), the company is well-funded to complete its Phase III drilling culminating in a resource update, potentially by 4Q24,” he said. “With 100-plus-per-cent upside potential to our target and anticipated successful exploration execution in 2023 holding potential for more upside than what is reflected in our current estimates, we have initiated coverage with a BUY rating.”


In other analyst actions:

* Citing “near-term uncertainties,” Stifel’s Ian Gillies downgraded Calgary-based Eguana Technologies Inc. (EGT-X) to “hold” from “buy” and cut his target to 10 cents from 35 cents. The average is 30 cents.

“Eguana’s 2Q23 results did not show the progress we were hoping for on its outstanding A/R balance, which we believe could in turn limit near-term sales given the counterparty is its largest customer while also significantly increasing liquidity risk,” he said. “Positively, management indicated seeing demand recovery in 3Q23, but we believe the demand outlook remains volatile, thus a step change in unit volumes is uncertain. The elevated level of risk as a result of this quarter’s update has led us to reduce our target price to $0.10 (prior: $0.35) based on reduced EV/Sales multiple of 2.5 times (prior: 3.0 times) and 2024 estimated sales. As a result, we are changing our rating to HOLD from BUY.”

* Credit Suisse’s Andrew Kuske cut his Brookfield Corp. (BN-N, BN-T) target to US$41 from US$42 with an “outperform” rating. The average is $44.74.

“We updated forecasts for Brookfield Corporation (BN) following the Q2 2023 results and recent activities,” he said. “We maintain a positive bias towards much of the broader Brookfield Group that is under direct coverage. Naturally, given the ownership relationships, such positives cascade into BN at the “top of the house”. Ultimately, we continue to believe considerable option value exists in the BN stock and the market positioning is among the best witnessed in decades of Group coverage. On a more near-term basis, the fast-approaching September Investor Days look likely to provide positive reinforcement of underlying business dynamics and valuation views.

“On a self-stated basis, BN’s liquidity stood at US$120-billion at the end of Q2 and provides ample flexibility across the portfolio. As with other Group members, some market dislocations may enhance investment potential in a few verticals with the real estate bucket having positive Q2 conference call commentary. Moreover, we believe an acceleration of activity is somewhat likely across the Group.”

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

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