Inside the Market’s roundup of some of today’s key analyst actions
While Desjardins Securities’ Benoit Poirier is maintaining his bullish long-term view on Héroux-Devtek Inc. (HRX-T), he warned “lower visibility on margin recovery” is likely to cause further share price volatility.
That led him to lower his recommendation for the Montreal-based aircraft landing gear manufacturer to “buy” from “top pick” following Wednesday’s release of weaker-than-anticipated third-quarter results, which sent its shares tumbling by 10.9 per cent.
“HRX offers a compelling value proposition in our view, with an attractive valuation and a healthy balance sheet to opportunistically unlock growth opportunities,” said Mr. Poirier. “However, given the challenging operating environment and management’s comments about inflation and supply chain issues, we have reduced our forecasts. We still see upside in the long term and believe the best is yet to come given HRX’s strong reputation built over the years.”
It reported revenue of $141-million, up 7.4 per cent year-over-year but below Mr. Poirier’s $147-million forecast. Adjusted earnings per share fell 72 per cent to 5 cents, missing his estimate by 16 cents.
“Several factors continue to hamper the consistent generation of throughput—longer lead times for procurement of raw materials, increasing financing costs for suppliers and challenging workforce availability,” the analyst said. “In addition, inflation and the continued challenges in the operating environment have increased the cost of deliveries, resulting in lower profitability. When asked about the health of the supplier network and supply chain, management stated that no suppliers have stopped shipping or gone bankrupt, but the pace has slowed. HRX is currently taking the appropriate measures and is prepared to switch suppliers as needed.”
Given the difficult conditions, Mr. Poirier thinks Héroux-Devtek’s focus for the near term is likely to centre on three factors: “(1) restore the health of the supply chain by continuing to qualify new sources and increase its presence in supplier operations; (2) continue to increase automation of its manufacturing process wherever possible; and (3) review pricing with customers to offset the effects of inflation.”
“Stripping out non-recurring FX and labour inefficiency costs, we derive an adjusted EBITDA margin of 12.1 per cent in the quarter,” he added. “Management signalled that it does not have clear visibility on when HRX will return to its historical 15-per-cent EBITDA margin level, although we should expect sequential improvement. Following the results, we now forecast an adjusted EBITDA margin of 11.1 per cent in FY23 (down from 12.9 per cent) and 13.5 per cent in FY24 (down from 15.4 per cent). We are still confident that HRX can return to the 15-per-cnet margin level in the long run.”
Reducing his revenue and earnings expectations through 2024 and introducing his 2025 estimates, Mr. Poirier cut his target to $22 from $25. The average is $18.75.
“Over the long term, our bullish view on HRX has not changed and we still view its valuation discount vs its U.S. peers as unjustified (stronger balance sheet and proven FCF generation capabilities). We believe HRX’s greater exposure to the defence segment, solid operational reputation and experienced management team position the company ideally for the recovery over the next couple of years,” he said.
Elsewhere, TD Securities’ Tim James downgraded the stock to “hold” from “buy” with a $16.50 target, down from $20.
Others making changes include:
* National Bank’s Cameron Doerksen to $19 from $23 with an “outperform” rating.
“Although margins in the quarter disappointed as inflationary costs and ongoing supply chain issues continued to impact the company, we remain bullish on end-market demand in both the Defence and Civil segments, which underpins our positive view on the stock,” he said.
* Raymond James’ Bryan Fast to $18 from $19 with an “outperform” rating.
“Héroux made progress on throughput, rebounding from a difficult start to the year, yet margin pressure remains as the company manages through continued supply chain disruptions and labor availability issues,” said Mr. Fast. “F3Q23 sales were up both year-over-year and sequentially, which is a positive development in itself, yet cost pressures have offset that momentum. We expect the focus in coming quarters will be on improving margins and the cost structure, and are confident in management’s ability to navigate the market as they have proven themselves in the past. As the aerospace markets improve, we believe Héroux is well positioned to capitalize on additional contract wins given their long-standing relationships and track record. In the meantime, the balance sheet remains in good shape and valuation remains supportive of the stock, trading below the long-term average book value. We maintain our Outperform but have reduced our target on revised estimates.”
* Scotia Capital’s Konark Gupta to $17 from $19 with a “sector outperform” rating.
“HRX continued the recent trend of miss/beat every alternate quarter with a miss this quarter (FQ3),” he said. “As we wrote in our note in November, titled “Revenue Stabilizes After Two Years, Margin Recovery Next”, revenue further recovered but margin is taking longer than expected to break the 10%-12% barrier due to ongoing labour and supply chain issues. We think the company was on the right path in FQ3 for a gradual margin recovery but three factors caused a sequential 200 bp compression that negatively surprised us. While we are growing more confident in further revenue recovery, we are tempering our margin expectations to reflect our reduced visibility on challenges facing the industry. That said, we still expect HRX to show a strong rebound in earnings in 2023 and 2024. Meanwhile, the stock remains undervalued, in our view, which could attract further buybacks in the short term. We continue to view HRX as our top small-cap pick with our Sector Outperform rating but are trimming our target.”
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After its second-quarter revenue and earnings fell short of his expectations, National Bank Financial analyst Adam Shine lowered his full-year fiscal 2023 financial forecast for WildBrain Ltd. (WILD-T), leading him to downgrade his recommendation for its shares to “sector perform” from “outperform” previously.
The Toronto-based media company reported revenue of $140.5-million, down 8.3 per cent year-over-year and below the estimates of both Mr. Shine ($160.5-million) and the Street ($155.4-million). Adjusted earnings before interest, taxes, depreciation and amortization of $26-million was a decline of 4.8 per cent and also missed projections ($30.7-million and $31.3-million, respectively).
“Content Production & Distribution was impacted by the timing of distribution deals and a related tough comp plus certain TV productions shifting to 2H, while Consumer Products faced FX headwinds and was hurt by lower royalties from apparel & other partners affected by inventory destocking by retailers,” the analyst said.
With WildBrain, which specializes in children’s entertainment, reiterating its guidance of revenues of $525-$575-million (or growth of 3.5-13.5 per cent) and adjusted EBITDA of $95-$105-million (or 7-18 per cent), Mr. Shine lowered his forecast toward the lower end of guidance from midpoint levels and reduced his fiscal 2024 growth expectations, given the potential for economic turbulence through this year.
“It continues to grow its production pipeline with new deals with key partners contributing to enhanced visibility of future revs and earnings as it switches on more IP in its vault (new Caillou show plus 5 new family specials will be produced for Peacock, Teletubbies relaunched on Netflix, and Sonic Prime, a co-production with SEGA, premiered Dec. 15 on Netflix),” the analyst said. “HBO Max stopped production on a new Degrassi series, with WILD announcing on Nov. 4 that the series will not debut on that service (14-season library of Degrassi: Next Generation continues to stream on HBO Max). WILD still believes that it’s in early stages of a prolific rollout of Peanuts content over coming years which should steadily drive growth in Consumer Products.”
He trimmed his target for WildBrain shares to $3 from $3.50. The average on the Street is $3.51.
Elsewhere, Canaccord Genuity’s Aravinda Galappatthige cut his recommendation to “hold” from “buy” with a $2.75 target, down from $3.25.
“Notwithstanding management indications around a more robust Q3/22, we have revised down our estimates for F2023 and F2024, factoring in not just the quarter, but macro headwinds,” said Mr. Galappatthige. “Higher rates, ad pressure, and possible recessionary conditions and their impact on retail sales combined to lower our forecasts. While our new forecasts still have the company reaching the lower end of their adj EBITDA guidance for F2023, our F2024 estimates fall short of the 12-17-per-cent EBITDA CAGR [compound annual growth rate] outlined during the last investor day for the 2022-2024 period. At a broader industry level, we are also cognizant of the moderation in programming budgets of top streamers.”
“Owing to the revisions to our estimates and with the aforementioned near-term risks in mind ... We value the stock using 4.5 times (EV/EBITDA 2024 estimates) for Television and 9 times for Content. We believe that in the near term, uncertainty around the balance sheet and choppiness in financial results could keep the stock range bound. However, we continue to believe that longer term, as CP gains greater traction and FCF emerges more meaningfully, investor confidence around the story can build.”
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Brookfield Asset Management Ltd. (BAM-N, BAM-T) had “a good start” with its first quarter as a publicly traded company, according to RBC Dominion Securities analyst Geoffrey Kwan, pointing to better-than-forecast fee-related earnings and “continued evidence” of strong fundraising activity.
He was one of several equity analysts on the Street to raise their target price for the asset manager in the wake of reported earnings for the first time as a standalone entity on Wednesday after it was spun off from parent Brookfield Corp. in December.
“BAM is one of our Top 3 best ideas for 2023 in our coverage universe, reflecting positive fundamentals, potential catalyst(s), and some defensive attributes, but attractive upside in a market recovery scenario,” said Mr. Kwan.
For its fourth quarter of fiscal 2022. Brookfield reported FRE per share of 35 US cents, exceeding the analyst’s 33-US-cent estimate based on higher-than-forecast transaction and advisory fees and a lower-than-forecast operating expense ratio. Distributable EPS of 35 US cents was also better than anticipated (30 US cents).
“BAM was positive on the fundraising environment, noting things such as additional closes for its flagship funds in Infrastructure (US$22-billion vs. US$21-billion in its first close) and Private Equity (US$9-billion vs. US$8.4-billion in its first close),” said Mr. Kwan. “In addition, BAM said that it started fundraising for its next flagship Real Estate fund (BSREP 5) and that its first Global Transition fund was more than 50-per-cent invested; we think BAM could be fundraising for its next Global Transition fund this year, and it mentioned that it would likely launch other global transition type funds over the next couple of years. Furthermore, there were other positive disclosures on fundraising progress for a number of BAM’s other strategies.”
Reiterating his “outperform” rating for Brookfield Asset shares, Mr. Kwan raised his target to US$40 from US$35. The average is US$37.24.
“We believe BAM can generate a 16-per-cent compound annual growth rate (CAGR) in Fee Related Earnings (FRE) over the next five years.,” he said. “Furthermore, we think BAM’s FRE valuation multiple is well positioned to benefit as arguably the purest publicly traded private equity/alternative asset manager in North America, reflecting: (1) asset-light, with zero principal investments; (2) debt-free, with US$3.2-billion in cash; (3) initially no accumulated but unrealized carried interest and with material realized carried interest unlikely until 2027, this makes BAM essentially a 100-per-cent fee revenue story in the nearto-medium term; and (4) an asset management business at scale with US$418B in Fee Bearing Capital (FBC).
“We see valuation upside in the near and medium term driven by: (1) mid-teens annual FRE growth; (2) FRE valuation multiple expansion as the macro environment improves; (3) an attractive dividend yield with mid-teens dividend growth potential; and (4) growth in carried interest generated, for which we think the current share price is reflecting little to no value.”
Others making changes include:
* KBW’s Michael Brown to US$36 from US$35 with a “market perform” rating.
* JP Morgan’s Kenneth Worthington to US$39 from US$35 with an “overweight” rating.
* CIBC’s Nik Priebe to US$40 from US$37 with an “outperformer” rating.
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Softening inflation “bodes well” for Premium Brands Holding Corp.’s (PBH-T) outlook, said National Bank Financial analyst Vishal Shreedhar, calling it a “show-me story” ahead of the mid-March release of its fourth-quarter financial results.
“The key themes in the quarter are anticipated to be good consumer demand, price increases, efficiencies and moderate contribution from acquisitions,” he said in a note released Thursday.
“In addition, we expect a favourable 2023 outlook (largely in line with what management indicated last quarter).”
Mr. Shreedhar is projecting quarterly EBITDA for the Vancouver-based specialty food products company of $134-million, up 17.7 per cent year-over-year ($113-million) but narrowly below the consensus of $134-million. Revenue is expected to grow to $1.548-billion, above the from Street’s projection of $1.538-billion and $1.345-billion a year ago.
“We believe demand is relatively solid despite the softening macroeconomic backdrop,” the analyst said. “Also, our review of select key commodities suggests that prices have declined, which should be supportive of margins in the coming quarters.”
“We believe it’s likely that PBH will issue a favourable 2023 outlook. Specifically, last quarter, PBH indicated it was committed to its 2023 sales and adj. EBITDA targets of $6-billion and more than $600-million, respectively. Specifically, we model 2023 revenue of $6.4-billion (cons: $6.3-billion; guidance: $6.3-billion) and EBITDA of $592-million (cons: $584-million; guidance: $614-million).”
Mr. Shreedhar now sees an “attractive entry-point” for investors, raising his target to $124 from $122 with an “outperform” recommendation. The average on the Street is $112.90.
“We believe that PBH’s stock is attractive at current levels,” he said. “We see several positive elements emerging over the next several quarters, including: (1) accelerating organic growth (increased featuring, new contract wins, capacity expansion, etc.); (2) margin expansion (as inflationary pressures fade and improvement initiatives continue to unfold; EBITDA margin expansion to 9.2 per cent in 2023 from 8.4 per cent in 2022); (3) balance sheet improvement (normalization of inventory, EBITDA growth); (4) possible acquisitions as leverage metrics improve; and (5) favourable guidance indications. In addition, we believe that valuation is compelling. PBH currently trades at 12.3 times our NTM [next 12-month] EBITDA compared to the five-year average of 14.0 times. Even if the valuation multiple does not re-rate higher, ongoing growth could drive the stock 12-21 per cent higher in one year.”
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The momentum in Computer Modelling Group Ltd.’s (CMG-T) results “warrants a further valuation bump,” according to Canaccord Genuity analyst Doug Taylor.
After the bell on Wednesday, the Calgary-based software company that produces reservoir simulation software for the oil and gas industry reported revenue for its third quarter of $19.4-million, up 14 per cent year-over-year and above the Street’s expectation of $18.2-million. Earnings per share of 8 cents was a penny higher than anticipated.
“The revenue beat was driven in part by higher professional services fees from consulting projects and early development funding from its joint carbon capture and storage (CCS) research initiative with Kongsberg Digital,” said Mr. Taylor. “With that said, the company also posted a healthy year-over-year uptick in core recurring revenues (up 11 per cent normalized), and end-market indicators continue to support increased spending by potential customers despite moderating energy commodity prices. Following the recent restructuring and partnership announcements around CCS, we await further announcements detailing the company’s ambitions in energy transition modelling.”
The analyst said energy markets remain “buoyant” despite lingering recession concerns, adding: “Despite a recent cooling in oil prices, market expectations remain positive in F2023 with customers well equipped to invest in CMG’s software.”
With increases to his revenue and earnings estimates through fiscal 2024, Mr. Taylor increased his target for Computer Modelling shares by $1 to $7.50, keeping a “buy” rating. The average is $6.55.
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Canadian Utilities Ltd. (CU-T) offers “a low-risk, diversified utility cash flow stream with a focus on Alberta,” according to Scotia Capital analyst Robert Hope.
However, expecting “growth resets” in 2023, he initiated coverage with a “sector perform” recommendation on Thursday.
“We view 2022 as being an abnormally strong earnings year for CU, with an estimated 16-per-cent EPS growth versus 2021,” said Mr. Hope. “This is in part driven by its Canadian electric and natural gas distribution utilities being in their final year of performance-based regulation (PBR). This regulatory framework has allowed these utilities to earn very strong ROEs (over 400 basis points above their allowed levels). With the utilities returning to a cost-of-service framework in 2023, we expect that they will be able to over-earn their allowed ROEs, though to a lesser degree (150 bp). The Australia utility also has its earnings directly tied to inflation, which is a tailwind in 2022, and we assume it moderates but remains elevated in 2023. The amount of overall utility earnings degradation from these assets is a key question, and likely is a reason why there is a greater-than-normal dispersion in consensus estimates. We assume EPS declines 4 per cent in 2023. Partially offsetting this would be the incremental contribution from new Energy Infrastructure projects. Looking out to 2024/2025, we see a more normal 2-per-cent EPS growth for the company, driven by rate base growth (2 per cent) and improved achieved ROEs, partially offset by a normalizing of margins from the Alberta renewable projects. In the longer term, we believe CU has a lower growth outlook than its utility peers, driven by its more muted rate base growth outlook.”
While he sees its energy transition projects bringing the potential for accelerated growth, Mr. Hope sees Canadian Utilities’ valuation discount to its peers “narrowing.” He set a target of $41 per share. The average on the Street is $38.17.
“In 2022, CU was one of the best-performing utilities in our Canadian coverage universe,” he said. “This outperformance recovers meaningful underperformance following the COVID-19 pandemic, which moved its valuation discount to levels beyond what we believe is appropriate. Earnings have also been strong in 2022, driving estimates up and the shares higher as well. Looking ahead, there is potential for further narrowing of the valuation discount for CU relative to its utility peers. However, given its muted growth outlook, limited share liquidity, and control by ATCO Ltd., we believe a discount is warranted.”
Concurrently, in a research report titled Diversification at a Discount, Mr. Hope initiated coverage of Atco Ltd. (ACO.X-T) with a “sector outperform” recommendation and $51 target, above the $49.64 average.
“We believe ATCO provides investors with a way to buy Canadian Utilities Limited (CU-T) at a discount, in addition to potential upside relating to ATCO’s Structures & Logistics (S&L) and Ports businesses,” he said.
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In other analyst actions:
* Desjardins Securities’ Gary Ho raised his target for Chemtrade Logistics Income Fund (CHE.UN-T) to $13.50 from $13 with a “buy” rating. The average is $11.57.
“We recently hosted CHE’s CEO and CFO for a full day of virtual marketing and a well-attended institutional group lunch,” said Mr. Ho. “We are encouraged to hear a refreshed CHE story with greater emphasis on organic growth (especially on exploiting the UPA opportunity) while remaining disciplined on balance sheet strength. We tweaked our estimates, factoring in management’s 2023 guidance.”
“Our positive view is based on: (1) multiple chemicals in CHE’s portfolio having relatively recession-resistant attributes; (2) tremendous ultra-pure and hydrogen opportunities; and (3) consistent execution and a repaired balance sheet should restore investor confidence and warrant a valuation re-rate.”
* BMO’s Deepak Kaushal increased his Enghouse Systems Ltd. (ENGH-T) target to $45 from $44, above the $39.38 average, with an “outperform” rating.
“We are raising our estimates and target price upon closing of the Qumu acquisition, including the introduction of our F2024E estimates and a roll forward in valuation,” he said. “We expect Qumu to breakeven on F2023E EBITDA and be 5-per-cent accretive on F2024, given significant restructuring required near-term. While we recognize valuation has risen recently, we continue to believe Enghouse can meet our expectation of $70 million in capital deployment in F2023 (including $24 million deployed on Qumu), and we estimate $140 million in excess capital to spend post Qumu.”
* BMO’s Devin Dodge raised his Finning International Inc. (FTT-T) target to $43, matching the consensus, from $38 with an “outperform” rating.
“We believe Finning offers a compelling risk/reward. Earnings have room to shift higher, underpinned by continued product support growth, increased market share opportunities (e.g., copper mining in Chile, construction parts and service, etc.), and the demonstrated improvement in cost discipline/execution. Meanwhile, valuation is undemanding, and we believe there is room for the multiple gap with TIH (TIH-T, “market perform”) to gradually narrow,” said Mr. Dodge.
* CIBC’s Dean Wilkinson increased his target for First Capital REIT (FCR.UN-T) to $20 from $19 with an “outperformer” rating, while Canaccord Genuity’s Mark Rothschild raised his target to $19.50 from $19 with a “buy” rating. The average is $18.94.
* TD Securities’ Mario Mendonca raised his Great-West Lifeco Inc. (GWO-T) target to $36, above the $35.70 average, from $34 with a “hold” rating.
* Scotia Capital’s Phil Hardie cut his Intact Financial Corp. (IFC-T) target to $231, remaining above the $222.92 average, from $235 with a “sector outperform” rating.
“Core results were about 10 per cent ahead of expectations, but the stock is likely to see some near-term weaknesses as investors absorb the underlying puts and takes,” said Mr. Hardie. “On the surface, the earnings beat was largely driven by better-than-expected investment income and lower taxes, with underwriting profitability coming in line with expectations. However, a number of issues that, while fundamentally quite manageable, will likely create some unease with investors and are more negative for near-term sentiment. These include: (1) the two key investor touch-point areas, Personal Auto and UK&I, both underperformed Street expectations, (2) the company raised its annual CAT loss guidance, and (3) book value per share fell a bit short of expectations.
“On the more constructive side, the variance in auto was largely due to seasonality, and management noted that auto claims inflation trends were easing with price adjustments working their way through. The team remains confident it can deliver a sub-95 combined ratio for auto in 2023. Further, the pricing environment across almost all lines that Intact operates in remains constructive.”
* Barclays’ Michael Leithead hiked his Methanex Corp. (MEOH-Q, MX-T) target to US$60 from US$48 with an “overweight” rating. The average is US$53.55.
“Methanex has been among the best year-to-date performers (up 39 per cent vs. 7 per cent SPY) which makes sense: high ‘China reopening’ leverage, better oil-gas dynamics, and stepchange in EBITDA/FCF in ‘24 with G3 starting,” he said. “So is it all now priced in? We think no; the stock looks fairly valued on the base business, but does not yet fully
incorporate the G3 contribution + capital deployment opportunity in our view.”
* CIBC’s Scott Fletcher bumped his Stingray Group Inc. (RAY.A-T) target to $7.50 from $6.50 with an “outperformer” rating. Others making changes include: BMO’s Tim Casey to $8 from $6.50 with an “outperform” rating, RBC’s Drew McReynolds to $8 from $7 with an “outperform” rating and Canaccord Genuity’s Matthew Lee to $8 from $7.50 with a “buy” rating. The average is $7.80.
“Stingray reported Q3/23 results with revenue and EBITDA both above our expectations and consensus,” said Mr. Lee. “We were especially encouraged by Stingray’s performance in digital-out-of-home (DOOH) and margin expansion across the Broadcasting and Commercial Music (BCM) segment. Looking forward, we expect BCM to continue delivering high single-digit growth on the back of advertising momentum as RAY fills its DOOH inventory and adds partners. On the SVOD front, Stingray added 45k subscribers this quarter (vs. our 22k estimate), which puts it on pace to reach upwards of 900k SVOD subscribers over the next year. Conversely, radio in the quarter remains somewhat mired with flat revenue and EBITDA (excluding CEWS) year-over-year. We continue to forecast low single-digit radio growth rates in F24, driven by a modest recovery in the automotive industry. RAY currently trades at 6.2 times EV/F24E EBITDA (March 2024 y/e) and offers a 15-per-cent F23E FCF yield, which we believe is attractive given the company’s improving fundamental metrics and current growth initiatives.”
* Evercore ISI’s Thomas Gallagher raised his Sun Life Financial Inc. (SLF-T) target to $76 from $73 with an “outperform” rating. The average is $71.14.
David Leeder