Inside the Market’s roundup of some of today’s key analyst actions
As second-quarter earnings season for Canada’s insurance sector approaches, Desjardins Securities analyst Doug Young thinks investors continue to struggle to understand the impact of the implementation of new International Financial Reporting Standards (IFRS), saying “there is still much to learn.”
“We expect sequential trends (not absolute numbers) to be the main focus and we will be looking to better understand how to gauge the businesses on a go-forward basis under the new accounting guidelines,” he said.
“Based on what we know (1) higher equity markets should be a positive for wealth businesses sequentially; however, results will be pressured year-over-year by lower average AUM [assets under management]; (2) FX movements had a mixed impact; (3) based on our math, the macro environment (equity markets, rates, spreads) had a small mixed impact across the group; and (4) the reopening in Asia should be a positive (for MFC and SLF); however, we expect a bigger impact in 2H23.”
In a research note released Thursday titled Life lessons, Mr. Ho said quarterly results are not comparable to last year, calling 2022 “a transition year according to all of the lifecos.”
“Hence, sequential comparisons are more important for these operations,” he said. “That being said, we expect MFC’s and SLF’s Asia businesses to show improvement (eg in terms of sales) but more so in 2H23. For the wealth businesses, we expect sequential improvements (higher AAUM) but results will be tempered year-over-year. The US dollar depreciated slightly vs the Canadian dollar on an average basis sequentially (relevant for all lifecos), while the British pound and euro appreciated vs the Canadian dollar (relevant for GWO).
“Despite various headwinds, there are several earnings growth drivers for each company for 2023/24 including: (1) SLF — contribution from the DentaQuest (DQ) acquisition, potential turnaround in Asia, and SLC Management; (2) MFC — potential turnaround in Asia, and buybacks; (3) IAG — potential turnaround in U.S. auto sales (implications for its US extended vehicle warranty business), organic growth, digital initiatives, buybacks and leveraging distribution capabilities domestically; and (4) GWO — addition of and growth in MassMutual’s and Prudential’s U.S. retirement businesses.”
Mr. Ho lowered his recommendation for IA Financial Corp. Inc. (IAG-T) to “hold” from “buy” with a $95 target (unchanged). The average on the Street is $98.11, according to Refinitiv data.
“The stock has performed well year-to-date and we fail to see any near- to mid-term catalysts that could lead to outperformance vs peers over the next year,” he said.
The analyst maintained a “buy” rating and $75 for Sun Life Financial Inc. (SLF-T), which remains his “top pick” in the sector. The average is $73.43.
He also kept “hold” ratings for Manulife Financial Corp. (MFC-T, $28 target versus $28.93 average) and Great-West Lifeco Inc. (GWO-T, $39 target versus $39.20 average).
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In a quarterly results preview, CIBC World Markets paper and forest products analyst Hamir Patel made a group of rating changes on Thursday.
He raised his recommendation for Doman Building Materials Group Ltd. (DBM-T) to “outperformer” from “neutral” with a $7.50 target, which matches the average on the Street.
“With the company’s diversified exposure to NA treated lumber markets and Canadian distribution, we believe DBM is well-positioned to benefit from a stronger housing backdrop,” said Mr. Patel. “We note that the shares have lagged Canadian treated peer Stella-Jones by 90 per cent over the past year, and have also lagged other Canadian building product distributors (ADEN and RCH have outperformed DBM by 5-12 per cent over the same period). DBM is trading at a 2.0 times multiple discount to SJ on 2024 EV/EBITDA.”
Conversely, he downgraded these stocks:
* Canfor Pulp Products Inc. (CFX-T) to “neutral” from “outperformer” with a $2.75 target, down from $3.50. The average is $3.75.
Analyst: “. With pulp prices expected to remain challenging over the remainder of 2023, we have reduced our EBITDA estimate by $50-million this year and by 5 per cent next year.”
* Mercer International Inc. (MERC-Q) to “underperformer” from “neutral” with a US$8 target, down from US$10. Average: US$9.90.
Analyst: “With pulp prices expected to remain challenging over the remainder of the year, we have reduced our EBITDA estimates for 2023/2024 by 80 per cent/20 per cent.”
* Stella-Jones Inc. (SJ-T) to “neutral” from “outperformer” with a $69 target. Average: $72.86.
Analyst: “With the shares trading close to their all-time highs, we are downgrading Stella-Jones to Neutral (from Outperformer). While SJ may benefit from potential for a near-term tuck-in acquisition in ties, the story is looking increasingly catalyst-lite in our view, with estimates already reflecting robust pole demand growth through 2024, and limited prospects for material earnings growth in ties and res lumber from current levels. We see a relatively low FCF yield in 2024 of 3.7 per cent, below low-volatility packaging names (CCL/WPK expected to average 5.9 per cent) and well below commodity wood names (we see an 8.2% FCF yield from WFG next year). At the same time, we note signs of increased pole competition emerging, with Valmont increasing its capabilities and capacity in concrete poles.
“With SJ having outperformed the TSX Composite by 95 per cent over the past 12 months, we see better investment opportunities within Materials among our Outperformer-rated commodity wood products names (CFP, IFP) and packaging companies under coverage (CCL, TCL.A and WPK).”
He also made these target adjustments:
* Adentra Inc. (ADEN-T, “outperformer”) to $39 from $34. Average: $43.25.
* Canfor Corp. (CFP-T, “outperformer”) to $29 from $27. Average: $30.
* Interfor Corp. (IFP-T, “outperformer”) to $33 from $30. Average: $34.20.
* Richelieu Hardware Ltd. (RCH-T, “neutral”) to $45 from $43. Average: $46.50.
* West Fraser Timber Co. Ltd. (WFG-T, “outperformer”) to $144 from $126. Average: US$109.07.
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Citing “the strength in core infrastructure, water/environment, and nuclear end-markets,” CIBC World Markets analyst Jacob Bout remains “constructive” on engineering/design companies, expecting “strong top-line growth through H1/23 (continue to see organic hiring).
“In fact, we would not be surprised to see SNC, WSP, and STN raise FY2023 guidance during Q2/23 results,” he added.
In a research report released Thursday, he upgraded SNC-Lavalin Group Inc. (SNC-T) to an “outperformer” rating from “neutral” previously and increased his target for its shares to $44 from $36, exceeding the $41.67 average.
“SNC’s strategy to pivot towards a pureplay engineering/design services company is nearly complete, and we believe there is now enough visibility to feel comfortable that the LSTK drag on earnings/free cash flow will materially reverse entering 2024,” he said. “We are raising our 2023 and 2024 adj. E&C EBITDA estimates to $654-million and $761-million, respectively, vs. $646-million and $754-million previously ... With approximately 75 per cent of SNC’s end-markets tied to public-sector work (higher-than-peer average), we do not see governments pulling back on infrastructure and energy transition spending any time soon, and expect SNC’s core Services business to remain resilient in a possible economic slowdown scenario. We would not be surprised to see the company raise Services revenue growth guidance along with Q2/23 results.”
Mr. Bout also made these target changes:
* Stantec Inc. (STN-T, “outperformer”) to $95 from $86. Average: $91.40.
“STN has seen organic revenue growth in each end-market since Q2/22, and there are no signs of a slowdown,” he said. “Backlog is at record levels and is expected to continue to grow as it has yet to meaningfully reflect upcoming awards from the U.S. $1-trillion IIJA plan (STN is best positioned in our coverage to benefit given its 50-per-cent-plus U.S. presence). Wage pressure has eased as attrition rates have levelled (recall, labour is by far the biggest variable cost for STN), and we believe this should support margin expansion in 2023. We forecast adj. EBITDA margin of 16.4 per cent in 2023 (vs. STN guidance of 16-17 per cent) and closer to 17 per cent in 2024. We would not be surprised to see STN raise its 2023 net revenue growth guidance range (7-11 per cent) slightly higher when it reports Q2/23 results. We are raising our forward estimates slightly to reflect slightly higher organic revenue growth and margin expansion.”
* Westshore Terminals Investment Corp. (WTE-T, “neutral”) to $31 from $29. Average: $29.88.
“Recall that in mid-June, WTE announced that it still expected to load 26.5Mt in 2023, but now expects FY average pricing to be $12.75/t (vs. ~$13.00/t previously),” he said. “We have updated our 2023 estimates to reflect slightly lower pricing, but have raised our 2024 estimate slightly due to a higher volume estimate. We have raised our price target from $29 to $31. While thermal coal prices have currently eased from peaks seen in H2/22, prices remain historically elevated. That said, prices could weaken substantially in a recession (and lower WTE’s volumes/loading rates), and hence we maintain our Neutral rating. We don’t believe that the BC port strike (now over) had a material impact to Q3/23 given WTE has its own collective agreements with its unions.”
* WSP Global Inc. (WSP-T, “outperformer”) to $191 from $188. Average: $194.
“While there are some pockets of weakness (most notably parts of Asia and the Nordics), operating conditions in key regions such as Americas, Canada, Australia, New Zealand, and EMEIA remain healthy,” he said. “North America is performing particularly well, and we expect U.S. backlog to outpace revenue use in 2023 (i.e., bookto-bill above 1x) as the $1T IIJA plan funds continue to be disbursed to state/local governments. We would not be surprised to see WSP move its 2023 adj. EBITDA guidance range higher along with Q2/23 results (we think WSP’s current 2023 organic net revenue guidance of 3-6 per cent is conservative). We are raising our 2023 and 2024 estimates slightly to reflect slightly higher organic revenue growth.”
Mr. Bout added: “While we rate both WSP and STN as Outperformer, STN (our top pick at the start of the year) has now closed the valuation gap with WSP. Note that STN appears likely to be added to the MSCI Index in mid-August. Amongst the equipment names, we continue to prefer FTT over TIH given valuation, both from a relative and historical perspective.”
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While he predicts Dominion Lending Centres Inc. (DLCG-T) will report “weak” second-quarter results next month “driven by tepid housing markets in early 2023 and margin compression,” Desjardins Securities analyst Gary Ho expects a recovery in the second half of the year and through 2024.
That led him to raise his recommendation for the Vancouver-based company on Thursday.
“Housing activity could remain soft given recent rate hikes, but CREA expects housing prices to remain firm due to a lack of supply,” he said. “With the shares off approximately 38 per cent year-to-date and trading at 5.5 times 4QF EBITDA (6-per-cent dividend yield), we are comfortable upgrading the stock to Buy (from Hold).”
“Our investment thesis is predicated on: (1) We believe 1H23 could mark the trough in funded mortgage volumes and the business is set up for a recovery in 2H23; (2) similarly, EBITDA margin likely bottomed in 1H23 and the DLC model has significant torque when mortgage volumes return; (3) there could be further upside in Newton penetration; (4) attractive valuation and 6-per-cent yield; and (5) potential privatization scenario could provide share price upside.”
Trimming his revenue and earnings expectations through 2024, Mr. Ho lowered his target for Dominion shares to $2.75 from $3. The average on the Street is currently $3.38.
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National Bank Financial analyst Endri Leno views DRI Healthcare Trust’s (DHT.U-T, DHT.UN-T) recent $98-million equity financing “positively,” seeing it signal “investor appetite” its DHT’s profile, royalties, and execution.
“In our view, at the current unit price, the market is neither 1) giving DRI credit for its current portfolio whose NAV [net asset value] we estimate at US$9.25 per unit (was US$7.00 per unit); nor 2) pricing in any growth whose NAV we estimate at US$2.25 per unit (was US$2.75 per unit). Thus, in addition to the multiple (macro and company specific) tailwinds and the defensive nature of pharmaceutical royalties, we find the units fundamentally undervalued prompting an Outperform rating.”
Mr. Leno resumed coverage of Toronto-based DRI Healthcare following the financing and acquisition of a second royalty in blood cancer treatment Vonjo from S*Bio Pte Ltd for US$66-million.
“DRI Healthcare, through its external manager DRI Capital, acquires revenue-based royalties on medically necessary pharmaceutical products,” he said It aims to deploy US$850-million to US$900-million for the five years ending in 2025 (US$636-million deployed (plus US$59-million in potential milestones) to date) in the acquisition of pharmaceutical royalties,” he said.
“DRI’s future performance will primarily rely on its ability to replenish the royalty portfolio, which we believe it can due to 1) multiple macro tailwinds (increasing pharma sales and R&D, many new drugs originating and being brought to market by smaller biopharma companies, royalty pharma transactions increasing, etc.); and 2) a highly experienced management team with a strong track record and deal-generating ability.”
Updating his estimates to reflect the recent transactions and growth NAV implications, Mr. Leno set a target of US$11.50 per unit. The average on the Street is $17.05.
Elsewhere, others resuming coverage and making target changes include:
* Canaccord Genuity’s Tania Armstrong-Whitworth to $16.75 from $18.50 with a “buy” rating.
* CIBC World Markets’ Scott Fletcher to $17 from $21 with an “outperformer” rating.
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Previewing second-quarter results for independent power producers, Desjardins Securities analyst Brent Stadler made a pair of target price adjustments:
* Boralex Inc. (BLX-T, “buy”) to $50 from $51. The average on the Street is $47.04.
“We continue to highlight BLX as a top-tier IPP,” he said. “While we expect quarterly variability, long-term investors should look past any blips and view weakness related to poor weather as an attractive buying opportunity. Ahead of 2Q results, we have reduced our generation estimates by 10 per cent across the board to reflect weaker weather. In our view, BLX has enjoyed another solid year of execution, and we look for the company and investors to be rewarded as the year continues and the space falls back into favour.”
“We view BLX as having best-in-class renewables platforms with strong development potential located in some of the hottest wind, solar and storage markets (Canada, U.S., EU). Coupled with relatively significant retained FCF, we expect BLX to continue to leverage its past history of success and drive significant growth over at least the next decade.”
* Northland Power Inc. (NPI-T, “buy”) to $37 from $39. The average is $39.97.
“We are cautious ahead of 2Q results. We expect some noise as a recent regulatory update in Spain is expected to impact NPI’s assets (tempering our 2023–24 estimates) and result in a 2Q retroactive adjustment from over-earnings in 1Q23 — we ballpark $15-million. Further, we estimate that the offshore wind assets could miss LTAs by 5 per cent. Our 2Q EBITDA estimate is now the Street low. Further, we modestly increased our discount rate.”
“We expect significant global offshore wind growth over the next decade and believe NPI is the best way for Canadian investors to play the space. Further, we believe there is valuation upside potential from the offshore wind assets, and look for the story to potentially re-rate as investors see some execution on the large projects.”
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Citi analyst Stephen Trent sees “positive, long-term momentum” for Bombardier Inc. (BBD.B-T).
“Large-cabin business jets saw important momentum during the pandemic, as commercial aviation significantly scaled back both international long-haul service and business/first class,” he said. “As commercial airlines continue to recover from the pandemic, there’s now less capacity per capita — as well as fewer airlines in some regions, vs. what had been the case in 2019. As such, Citi continues to see longer-term tailwinds for large-cabin business jet sales and services, as international long-haul business/first class capacity per capita could take a very long time to recover. This large-cabin tailwind supports the above target multiple increase, with Citi now re-setting Bombardier’s EV/EBITDA fair value range from 7-7.75 times, to a new range of 7.75-8.25 times. The mid-point of the new range is now in-line with the stock’s historical, pre-pandemic average, which we think is reasonable.”
Pointing to “stronger” second-quarter 2023 estimated aircraft sales pricing, higher expected services revenue and lower amortization expense, he raised his full-year 2023 and 2024 earnings per share projections to US$3.05 and US$4.11, respectively, from US$2.81 and $4.
Maintaining a “buy” rating for its shares, Mr. Trent increased his target to $70 from $67. The average is currently $79.54.
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In other analyst actions:
* National Bank Financial’s Dan Payne initiated coverage of Logan Energy Corp. (LGN-X) with an “outperform” recommendation and $1.35 target.
“We believe it offers a substantial value proposition through multiple thematic tailwinds, including deployment of the significance of its funding to high impact development opportunities that should be magnified by operating leverage (low capital efficiency liquids bias compounded by optimization of underutilized regionally owned infrastructure) and offer option value to continued consolidation, and each in support of maximizing shareholder returns,” he said. “The confluence of these themes, as defined within, gives visibility to over 40-per-cent prospective PPS growth and 60-per-cent associated CFPS growth (as it achieves critical mass at 20 mboe/d over a five-year outlook), and which serves to underpin its prevailing valuation, where we see the stock trading at 7.0 times 2024 EV/DACF, but which could be backfilled through organic growth within the context of available resources and liquidity (arguably currently trading at 3-3.5 times its unrisked organic blue sky potential).”
* Canaccord Genuity’s Yuri Lynk increased his target for Adentra Inc. (ADEN-T) to $32 from $29 with a “hold” rating, while Stifel’s Ian Gillies trimmed his target to $45 from $45.50 with a “buy” rating. The average is $43.25.
“We de-risk following a favourable resolution to the trade case against hardwood plywood products produced in Vietnam,” Mr. Lynk said. “We continue to believe ADENTRA’s margins have put in a bottom and the negative organic growth we forecast in the near-term is well understood by investors, in our view. An offshoot of the trade case resolution is that management now has the visibility to resume its successful acquisition program, although we would like to see a lower leverage ratio before any large acquisition is made. When it comes to valuation, however, a lot of these positives appear reflected in today’s stock price. ADENTRA trades at 13 times 2023 estimated EPS, in line with peers.”
* ATB Capital Markets’ Nate Heywood cut his Capital Power Corp. (CPX-T) target to $48 from $50 with a “sector perform” rating to “account for recent Genesee repowering project headwinds and the announced cost creep.” The average is $51.08.
* Stifel’s Cole Pereira raised his targets for Gibson Energy Inc. (GEI-T, “buy”) to $29 from $28.50 and Keyera Corp. (KEY-T, “buy”) to $38.50 from $38. The averages are $25.68 and $35.82, respectively.
“Our selectively bullish view on the Canadian Energy Infrastructure sector is unchanged,” said Mr. Pereira. “We continue to prefer names with Montney exposure, however, a recent shift in market expectations towards a “higher for longer” path for interest rates has seen rising corporate bond yields negatively impact sector valuations in the near term. However, we continue to point to the market pricing in 150 basis points of rate cuts from the U.S. Federal Reserve in 2024 as a catalyst for the equities. In terms of project news, we expect most of the focus to be on whether Pembina announces an FID on Cedar LNG alongside 2Q23 results. Furthermore, we also believe Keyera could potentially announce a dividend increase for the first time since 2019, which could be a positive catalyst for the stock. We have made some minor target price changes, but there are no rating changes with this update. Keyera remains our favourite name in the sector, as well as for a trade into 2Q23 results.”
* Jefferies’ Andrew Barish raised his Restaurant Brands International Inc. (QSR-N, QSR-T) target to US$73 from US$68, keeping a “hold” rating. The average is US$75.78.
* Desjardins Securities’ Gary Ho raised his Superior Plus Corp. (SPB-T) target to $14 from $13.50 with a “buy” rating. The average is $13.42.
“We trimmed our 2Q EBITDA to $40-million from $45-million, adjusting for the timing of the closing of Certarus and continued robust propane margins, offset by warmer weather,” said Mr. Ho. “Consensus of $51-million is not directly comparable (some estimates include a full quarter from Certarus). We believe Certarus is performing well and could reach the higher end of full-year guidance.”
* JP Morgan’s Sebastiano Petti cut his Telus Corp. (T-T) target to $31 from $33, keeping an “overweight” rating. The average is $29.47.
David Leeder