Inside the Market’s roundup of some of today’s key analyst actions
While he viewed its weaker-than-anticipated fourth-quarter 2022 financial results as “tepid,” National Bank Financial analyst Vishal Shreedhar saw Gildan Activewear Inc.’s (GIL-T, GIL-N) outlook for fiscal 2023 as “constructive,” leading him to raise his earnings expectations for the next two years.
“GIL suggested its new 2023 guidance is conservative,” he said. “Key parameters are: (a) Low-single-digit revenue growth (sales lower by low-single-digits year-over-year in North America, more than offset by slight recovery in International, new retail programs and mix); (b) EBIT margin of 18-20 per cent; (c) Capex at the lower end of 6-8 per cent of sales; (d) Strong FCF generation (inventory investment largely complete); and (e) EPS in line with 2022 at $3.11. (2) Also, GIL provided clarity on Q1/23 guiding to lower year-over-year sales reflecting weaker POS and destocking ($75-million impact), partly offset by pricing and mix. GIL additionally guided Q1/23 EBIT margin of 15-16 per cent.”
Before the bell on Wednesday, the Montreal-based company reported revenue of US$720-million, down from US$784-million a year ago and below both Mr. Shreedhar’s US$769-million estimate and the consensus forecast of US$761-million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of US$164-million also fell year-over-year (US$190-million) and missed expectations (US$169-million and US$171-million) due to lower sales and gross margin.
However, shares of Gildan jumped 5.8 per cent in Toronto after it raised its quarterly dividend by 10 per cent to 18.6 US cents and expressed long-term optimism. That led Mr. Shreedhar to bump his 2023 and 2024 earnings per share estimates to US$3.12 and US$3.32, respectively, from US$3 and US$3.19.
Seeing “valuation at a discount,” he raised his target for Gildan shares by $1 to $46 with an “outperform” rating. The average is US$37.09.
“We believe valuation is attractive,” he said. “Specifically, Gildan’s shares trade at 9.7 times our NTM [next 12-month] EPS. Applying a normalized long-term valuation of 17 times NTM EPS suggests the market is looking for EPS to fall to $1.78 (which we believe is too punitive).”
Elsewhere, others making changes include:
* Canaccord Genuity’s Luke Hannan to US$37 from US$39 with a “buy” rating.
“Despite the near-term weakness, management expects growth in GIL’s international markets coupled with new program wins should help offset declines in the company’s North American market, ultimately viewing the company’s guidance as conservative,” Mr. Hannan said. “We don’t necessarily disagree, though we’ll wait until we get better visibility on retailer inventory destocking being firmly in the rearview mirror before becoming more bullish on the outlook.”
“We believe the combination of stronger margins as a result of Back to Basics cost savings, GIL’s low-cost manufacturing footprint, a healthy FCF generation profile, and an attractive valuation creates a favourable risk/reward profile for GIL shares.”
* CIBC’s Mark Petrie to US$38 from US$37 with an “outperformer” rating.
“Gildan reported a modest Q4 miss, but provided a 2023 outlook that was at or better than Street expectations. The healthy Q4 margin stands out most to us, particularly with revenue down 8 per cent. We believe GIL has fundamentally strengthened through the pandemic (sales and asset composition, cost and capital structure) and this resilience gives us greater confidence heading into a period with demand uncertainty. Our forecasts are updated, but with minimal net change,” said Mr. Petrie.
In a research report released Thursday titled Value Hidden in Plain Sight, Scotia Capital analyst Phil Hardie emphasized Canadian-listed asset managers and wealth managers should be enticing options for investors.
“The year-to-date stock performance of a number of the Canadian-listed asset & wealth managers likely demonstrates our thesis that they remain the ‘Classic Beta Trade’,” he said. “Discounted valuations combined with rising AUM and more buoyant market sentiment likely helped drive significant outperformance, led by AGF followed by CI, with IGM also generating positive alpha.
“On the surface, the valuations of Canadian Asset and Wealth Managers likely look discounted, but we believe an even more compelling value proposition reveals itself after making a few simple adjustments.”
Mr. Hardie said the sector continues to undergo a “significant transformation,” focusing on both strategic and core investments to “diversify and add new growth avenues.”
“These activities have included investments in traditional and digital wealth management, alternative asset management and moving toward opportunities beyond traditional domestic markets,” he said. “We believe these investments will ultimately create significant shareholder value and shift the narrative surrounding these companies beyond the domestic mutual fund space. That said, we believe the value of these investments is largely overlooked and not reflected in their share prices.
“We expect 2023 retail fund flows to be relatively weak but improve from 2022, and are more optimistic about a potentially strong setup for 2024 given market sentiment improves. We expect Global asset classes and Alternatives to be among the favoured asset classes when conditions improve. A steady build-up of cash and deposits over the pandemic period could prove to be an eventual surprise windfall for the retail fund industry.”
While he acknowledged “challenging” near-term conditions, Mr. Hardie said he expects asset managers to “continue to develop new offerings and investor solutions to meet the evolving needs and shifting appetite.”
“We believe we have entered a new investing environment that will enable effective stock picking to generate significant outperformance given the major investment tailwinds that categorized the last 10 to 15 years have receded,” he said. “Tailwinds such as the benefits from increased globalization, declining interest rates and consistently low inflation likely help lift a broad range of stocks and indices and favoured low-cost passive investment strategies. Companies are likely going to encounter a more challenging environment over the next decade. Active strategies that are able to successfully separate the leaders from the laggards and identify the standouts are likely to produce significant outperformance over the broader indices and demonstrate their value over the simplistic passive strategies that gained prominence in the recent past.”
After updating his assets under management forecasts across the sector.
He raised his targets for a pair of stocks “which resulted from upward earnings revisions given a stronger-than-expected equity rally and AUM levels to start the year.” They are:
* AGF Management Ltd. (AGF.B-T, “sector perform”) to $9.50 from $9.25. The average is $9.46.
* CI Financial Corp. (CIX-T, “sector perform”) to $20.50 from $19. Average: $19.44.
His target for Fiera Capital Corp. (FSZ-T, “sector perform”) to $10.50 from $11 in order to reflect weaker-than-expected fourth-quarter AUM levels. The average is $10.
Mr. Hardie maintained his Guardian Capital Group Ltd. (GCG.A-T, “sector outperform”) target of $55. The average is $52.
“Using a conventional EV/EBITDA metric, we estimate that the Canadian fundcos trade at a wide discount to their North American peers,” he said. “Applying a simple textbook approach similar to what investors would see through Bloomberg terminals, we estimate the average EV/EBITDA multiple using consensus “Next Twelve Month (NTM)” estimates for the Canadian Fundcos (AGF, CI and IGM) is 31 per cent lower than the North American asset manager peer group (see Exhibits 8 and 9). This compares to the estimated 21 per cent over the last five-years.”
Despite “soft” fourth-quarter results being “largely expected,” Raymond James analyst David Quezada lowered recommendation for Innergex Renewable Energy Inc. (INE-T) to “outperform” from “strong buy” as he does not “currently see a clear catalyst that could cause the name to re-rate relative to peers.”
“We remain constructive on Innergex based on our view of the stock’s attractive valuation, significant portion of long-life hydro assets—and solid growth outlook,” he said.
After the bell on Wednesday, the Longueuil, Que.-based company reported quarterly adjusted EBITDA of $145-million, below both Mr. Quezada’s $159-million projection and the consensus forecast of $152-million.
“While quarterly EBITDA was below consensus, INE did pre-announce that weaker than expected production would place FCF/share below the 2022 guidance target of $0.75 per share due to exceptionally low hydrology levels as well as revenue sharing in France as part of the Supplementary Budget Act (actual FCF/share came in at $0.72 per share),” he said. “As a result of this low hydrology, INE’s total production came in at 82 per cent of Long Term Average levels in 4Q22. While the company had signaled this lower hydrology heading into the quarter, we did not fully account for this in our estimates (as well as lower than expected solar segment performance), resulting in the bulk of the miss vs. our forecasts. On a full year basis, we note INE did come close to key targets with adj. EBITDA proportionate up 20 per cent year-over-year (target 21 per cent), and FCF/sh coming in 4 per cent below target. While INE has typically provided guidance for the coming year in conjunction with 4Q results, the company did not do so this quarter; instead referring to the previously announced 2025 growth targets.”
Seeing its development portfolio continuing to “advance” and expect M&A activity to supplement near-term growth, Mr. Quezada reaffirmed his constructive stance on Innergex, keeping a $24 target, which exceeds the $20.23 average.
“At 10.7 times 2023 EV/EBITDA, we continue to believe shares of INE reside toward the lower end of the stock’s historical valuation range while the company’s attractive pipeline of U.S. development projects is underappreciated, and accretive M&A has driven solid near-term growth,” he said. “We believe discussions with offtakers regarding the 200 MW Palomino Solar, 30 MW Hale Kuawehi Solar, and construction of the company’s storage projects in Chile are on time and budget, and will represent key developments.”
Following in-line fourth-quarter results and a reaffirmation of its 2023 guidance, iA Capital Markets analyst Matthew Weekes continues to expect “strong” near-term growth from Exchange Income Corp. (EIF-T).
After the bell on Wednesday, the Winnipeg-based company, which runs a number of aviation and manufacturing businesses in North America, reported quarterly revenue of $543-million, up 30 per cent and above both Mr. Weekes’s $540-million estimate and the consensus forecasts of $520-million. He attributed the growth to “acquisitions, increased passenger activity, strong charter, rotary wing and medevac activity, increased sales at R1, and contribution from the Netherlands contract at Provincial commencing in the quarter”
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 39 per cent to $124-million, matching the analyst’s estimate and $5-million above the Street’s view. However, free cash flow after maintenance per share slipped 14 per cent to 88 cents, below Mr. Weekes’s 92-cent projection due to shares issued in 2022, higher interest and taxes and a rise in maintenance expenses.
“EIF reiterated its 2023 Adj. EBITDA guidance range of $510-540-million,” the analyst said. “Key drivers include (a) a full year of Northern Mat, (b) a full year of Netherlands ISR contract, (c) increased leasing activity at R1, (d) improved volumes and margins at Quest, and (e) other organic growth initiatives. We also expect a positive contribution from fuel cost and CPI contract adjustments in A&A, as pricing increases lagged sharp cost increases during 2022.”
“EIF sees a robust pipeline of M&A opportunities, noting that it is impressed with the size and quality of certain prospects and that it has added bench strength to support the evaluation of these opportunities. EIF believes that higher interest rates will bring multiples down and increase the Company’s ability to compete with private buyers.”
Mr. Weekes made narrow reductions to his 2023 estimates to “take a more cautious approach to some of EIF’s commentary, namely (a) lower demand anticipated for whole aircraft and engines at R1, and (b) likely some softening of market dynamics for Northern Mat on increased market supply expectations.” He’s now expected EBITDA of $537-million, down from $544-million but remaining up 24 per cent year-over-year. He also introduced a 2024 projection of $592-million, “driven by a combination of (a) tuck-in M&A, (b) organic growth investments, (c) higher margins, and (d) improved activity at Quest, partially offset by (e) easing of market capacity tightness and the completion of key large linear project work at Northern Mat.”
Keeping a “buy” rating for Exchange Income shares, he raised his target by $1 to $57. The current average on the Street is $62.27.
“We reiterate our Buy rating based on (a) EIF’s diversified operations, which mainly consist of essential products and services, serving niche markets and with demonstrated resilience to challenging market conditions; (b) projected double-digit FCF/share growth and continued ROIC improvement in 2023 and 2024 driven by a combination of organic growth, accretive M&A, and margin improvement (primarily in A&A); and (c) reasonable valuation, with the stock currently trading 7.4 times on consensus 2023 estimates and 6.7 times on 2024,” he said
When Maple Leaf Foods Inc. (MFI-T) reports its fourth-quarter 2022 results before the bell on March 8, Canaccord Genuity analyst Derek Dley expects to see sequential improvement in margins due to pricing and labour improvements.
He’s forecasting revenue of $1.174-billion, up 5 per cent year-over-year and narrowly below the consensus estimate of $1.206-billion. His EBITDA projection of $96-million is in line with the Street.
“At the MPG [meat protein group], we are forecasting 5-per-cent growth in revenue year-over-year to $1.134-billion, as the company continues to witness strong demand for its RWA products and healthy growth from the U.S.,” said Mr. Baretto. “Furthermore, Maple Leaf implemented price increase in late September to mitigate the impact of input cost inflation, which should help drive top-line growth. Recall, last quarter, the inability for Maple Leaf to effectively offset inflation led to a 90 bps reduction in EBITDA margins during the quarter. We believe recent pricing actions have fully offset the inflationary headwinds experienced during Q4/22, which should lead to a sequential margin improvement from Q3/22′s 8.4 per cent.
“In addition to a 90 basis points sequential tailwind from pricing during Q4/22, improvement in the company’s labour availability should also add to the sequential margin improvement. Maple Leaf has reduced its open labour positions from 1500 at the peak, to approximately 600 during Q4/22, according to our estimates. This, in our view, should add another 100 bps to the division’s sequential EBITDA margin improvement”
Raising his full-year 2022 revenue and earnings projections, Mr. Dley increased his target for Maple Leaf shares to $31 from $30 with a “buy” rating. The average on the Street is $32.33.
“We believe Maple Leaf continues to offer long-term investors an attractive growth profile at an inexpensive valuation, given the company’s leading market share, strong balance sheet, and high-quality brand portfolio,” he said. “However, the company needs to demonstrate improvement in its MPG margin over the next couple quarters before the shares fully re-rate, in our view.”
Desjardins Securities analyst Frederic Tremblay thinks a “favourable demand environment and internal initiatives look supportive of continued momentum” for 5N Plus Inc. (VNP-T).
“Strong demand in value-added markets, notably renewable energy (doubling shipments to First Solar in 2024 vs 2022 level) and space (AZUR’s backlog has doubled), and the sale of an unprofitable facility underpin a constructive outlook,” he said. “Using the mid-points of ranges provided by management, guidance implies compelling adjusted EBITDA growth of 25 per cent in 2023 and 27 per cent in 2024.”
After the bell on Tuesday, the Montreal-based producer of specialty semiconductors and performance materials reported fourth-quarter EBITDA of US$6.7-million, which was in line with Mr. Tremblay’s US$6.6-million estimate and narrowly below the Street’s US$7.8-million projection. Full-year adjusted EBITDA landed at US$30-million, the high end of its guidance range (US$25-30-million).
“We view the achievement of the upper end of 2022 guidance (in spite of macro challenges), backlog growth (including large contracts with First Solar and Sierra Space announced in 2H22) and the Tilly divestiture as signs that the strategy focused on value-added markets is gaining momentum,” the analyst said. “We believe that the growing positive effects of the strategy are visible in management’s 2023 and 2024 guidance, which calls for significant year-over-year expansion in adjusted EBITDA.”
“VNP introduced solid adjusted EBITDA guidance which was consistent with Street expectations. Guidance for 2023 adjusted EBITDA of US$35–40-million implies 25 per cent year-over-year growth at the mid-point. Significant adjusted EBITDA growth is also expected in 2024 based on guidance of US$45–50-million.”
Mr. Tremblay said the importance of last year’s acquisition of AZUR SPACE Solar GmbH moving forward, saying it’s “reaching for the stars.”
“We are impressed with the strong demand at AZUR, a global leader in multi-junction solar cells for space/satellite applications,” he said. “Market demand is exceeding management’s expectations and has propelled AZUR’s backlog to 2 times its historical level. Consequently, AZUR has increased capacity by moving to 24/7 production (from two shifts per day, five days per week). Management also indicated that some customers are providing VNP with equipment which, in our view, should help meet demand and keep VNP’s capex at a reasonable level.”
Reiterating a “buy” recommendation for its shares, he raised his target by $1 to $4. The average is currently $3.95.
Elsewhere, National Bank’s Rupert Merer bumped his target to $4 from $3.75 with an “outperform” rating.
“VNP has signed material contracts in strategic markets (Te-based materials for thin-film solar and Ge-based semiconductors for satellite markets), enabled by its position as a leading supplier of specialty semiconductor materials and the only significant supplier in its markets from outside of China,” said Mr. Merer. “This should secure its position in the future and also support its entry into new markets. Beyond 2024E, VNP could see growth in other new markets, like PCD semiconductors for the medical imaging market. With government support for renewables (like the U.S. IRA), its solar business could also grow further. "
In other analyst actions:
* RBC Dominion Securities’ Sabahat Khan upgraded Stantec Inc. (STN-T) to “outperform” from “sector perform” with a $84 target, rising from $71. The average on the Street is $79.30.
* BMO Nesbitt Burns initiated coverage of Aris Mining Corp. (ARIS-T) with an “outperform” rating and $6.50 target. The average is $8.66.
* Jefferies’ Zach Weiner raised his Bausch + Lomb Corp. (BLCO-N, BLCO-T) target to US$22 from US$19 with a “buy” rating, while Evercore ISI’s Vijay Kumar increased his target to US$21 from US$20 with an “outperform” rating. The average is US$21.18.
* BMO’s Fadi Chamoun raised his Bombardier Inc. (BBD.B-T) target to $80, above the $71.68 average, from $75 with an “outperform” rating.
* TD Securities’ Arun Lamba lowered his Equinox Gold Corp. (EQX-T) target to $7.50 from $8 with a “buy” rating. Others making changes include: Desjardins Securities’ John Sclodnick to $5.50 from $5.25 with a “hold” rating and Canaccord’s Dalton Baretto to $6.50 from $7.50 with a “buy” rating. The average is $6.38.
“A strong Q4; production in line with our estimate but good cost performance resulted in financial results that were above our (and consensus) forecasts,” said Mr. Baretto. “That said, 2023 guidance was weaker than we had anticipated. Perhaps more importantly, however, the Greenstone project remains on schedule and budget at this time, and management has taken a number of actions to manage liquidity over 2023 (which is being received well by the market).”
* RBC’s Walter Spracklin raised his GFL Environmental Inc. (GFL-N, GFL-T) target to US$39 from US$36 with an “outperform” rating. Others making changes include: JP Morgan’s Stephanie Yee to US$40 from US$39 with an “overweight” rating and BMO’s Devin Dodge to US$35 from US$32 with an “outperform” rating. The average is US$37.60.
* RBC’s Nelson Ng raised his target for Green Impact Partners Inc. (GIP-X) to $14 from $12, keeping an “outperform” rating. The average is $25.
* BMO’s Jackie Przybylowski raised her Lundin Mining Corp. (LUN-T) target to US$8.50 from US$8 with a “market perform” rating. The average is $9.61.
* iA Capital Markets’ Gaurav Mathur cut his Slate Office REIT (SOT.UN-T) target to $4.50 from $5 with a “hold” rating, while Raymond James’ Brad Sturges cut his target to $4.25 from $4.50 with a “market perform” rating. The average is $4.64.
* Scotia Capital’s Ben Isaacson bumped his Superior Plus Corp. (SPB-T) target to $13, above the $12.82 average, from $12 with a “sector perform” rating.
“With a new CEO set to start and a transformative acquisition underway, it’s an exciting time at Superior,” he said. “If we combine EBITDA from Certarus, the legacy business, some organic growth, and synergy captured from previous acquisitions (Kamps, Kiva, etc.), ‘23 EBITDA should settle in the $585-$635-million range, followed by $700-$750-million in ‘24. On valuation, if we take the $610-million mid-point of SPB’s ‘23 EBITDA guide and the five-year average multiple of 8.4 times, it suggests the stock should be worth $12 per share, potentially more given the sale of the chemicals business + the entrance of two key shareholders. But looking further ahead, if SPB is indeed able to achieve $700-$750-million in EBITDA next year, without any incremental debt or equity dilution, then $15 per share should be achievable. As we roll forward valuation to ‘24, we’ve partially offset the jump in valuation from higher expected EBITDA with a cut in our target multiple, such that our PT moves to $13 from $12 per share, for now. That said, as SPB shows the market that run-rate EBITDA can indeed approach the mid-$700-million area, while leaving leverage and share count unscathed, the multiple could de-risk back to more than 8 times, potentially leading the stock 40 per cent higher.”
* TD Securities’ Greg Barnes increased his Teck Resources Ltd. (TECK.B-T) target to $71 from $67 with a “buy” rating. The average is $64.54.
* Scotia Capital’s Mario Saric cut his target for Tricon Residential Inc. (TCN-N, TCN-T) to US$12 from US$12.75 with a “sector outperform” rating. The average is US$10.72.
* Scotia Capital’s Tanya Jakusconek lowered her Triple Flag Precious Metals Corp. (TFPM-N, TFPM-T) target to $17.50 from $18 with a “sector outperform” rating, while Raymond James’ Brian MacArthur trimmed his target to $22 from $23 with an “outperform” rating. The average is $22.77.
“We believe TFPM’s high-margin, scalable business model offers investors exposure to precious metals while mitigating risk. Triple Flag has a high-quality, diversified asset base with a favorable mine life and jurisdictional risk. The company also has near-term growth, longer-term growth optionality, as well as a strong balance sheet to support future investments and its dividend,” said Mr. MacArthur.
* National Bank’s Travis Wood raised his Whitecap Resources Inc. (WCP-T) target to $15.50 from $15 with an “outperform” rating. The average is $14.47.
“A relatively uneventful release given the recent announcement surrounding further high-grading of the portfolio and corresponding dividend increase,” said Mr. Wood. “Our positive outlook remains unchanged, as we continue to believe option value will be unlocked through continued development of the acquired XTO assets (five-year plan with a line-of-sight to 200 mboe/d) and expect the company to provide additional Montney commentary in tandem with Q1 results. As deleveraging towards $1.3 billion is underway (we forecast this by mid-year), the company plans to allocate 75 per cent of FCF to shareholders, implying a dividend increase of about 30 per cent by mid-year (based on our forecast).”