Inside the Market’s roundup of some of today’s key analyst actions
Great-West Lifeco Inc.’s (GWO-T’) sale of U.S. wealth manager Putnam Investments to Franklin Resources Inc. (BEN-N), a global investment management firm that operates as Franklin Templeton, in a deal valued at US$1.8-billion is “a fair price for an underperforming asset,” according to National Bank Financial analyst Gabriel Dechaine.
“Based on the US$136-billion of AUM [assets under management] sold to BEN, this valuation works out to 70 basis points,” he said. “In a prior note (Report dated October 2020), we pegged Putnam’s valuation at 75bps of AUM. If you include contingent consideration of US$375-million payable in installments starting three years after close (subject to revenue growth targets), valuation nears 100bps. Overall, we believe GWO received a fair price for what has been a disappointing investment since Putnam was acquired in 2007 for US$4-billion. We note that initial consideration consists primarily of BEN stock that equates to a 6.2-per-cent ownership stake, 4.9 per cent of which is locked up for 5 years.”
Mr. Dechaine thinks Great-West should likely have sold the Boston-based firm years ago, calling it “an unambiguously sub-par investment”.
“Yes, market conditions and mutual fund industry dynamics (and valuation) are different,” he said. “However, from an operating standpoint Putnam was a consistent disappointment, with recurring losses and a Q1/23 AUM base of US$169-billion that sits approximately 12 per cent below AUM levels when it was acquired in 2007. Without hindsight, we see the transaction as a positive. It removes a distraction for management and investors for a price we view as fair. Moreover, the sale eliminates the (admittedly slim) possibility that GWO could have chosen to make an acquisition in order to address elusive scale issues at Putnam.”
After increasing his financial forecast to reflect income from its new stake in Franklin Resources as well as the elimination of Putnam losses, Mr. Dechaine bumped his target for Great-West shares to $39 from $38, maintaining a “sector perform” recommendation. The average target on the Street is $39.
Elsewhere, CIBC World Markets’ Paul Holden raised his target to $41 from $40 with an “outperformer” rating.
“We have fielded a number of questions regarding the structure of the transaction,” said Mr. Holden. “By no means do we view this a homerun of a deal for GWO. But we don’t think a homerun should have been expected. Putnam was a struggling asset (from a profitability viewpoint) that GWO management had not been able to fix for a decade and a half. We have to assume that management executed on the best sale possible, and that is better than the alternative scenarios of: i) keeping Putnam; or ii) GWO buying more asset management to combine with Putnam. We believe today’s announcement is a good outcome for shareholders.”
While he cautioned the second-quarter report from National Bank of Canada (NA-T) “certainly didn’t blow away” his expectations, Credit Suisse analyst Joo Ho Kim thinks it “delivered good results, especially in the context of the disappointments we saw from its bigger peers last week.”
On Wednesday, its shares slid 2.8 per cent after reporting core cash earnings per share of $2.38, exceeding the Street’s expectation by 2 cents but missing Mr. Kim’s expectation by 2 cents. The miss was driven by lower-than-expected revenue.
“The bank did report softer NIMs results in particular (which is expected to remain relatively stable in Q3), and while expenses were managed relatively well this quarter, we are assuming some pick-up in growth (on a year-over-year basis) in H2/F23,” he said. “Finally, credit also came in better than expected, with the bank expecting impaired PCLs to climb but remain near the bottom half of the guidance range of 10-20 basis points for fiscal 2023.
“The bottom line for us on NA is that we continue to favor the bank’s relative defensive strength especially given the elevated uncertainties on the horizon (despite the recent market moves that seem to suggest otherwise), even as we trim our estimates modestly on the back of this quarter.”
Lowering his estimates for both fiscal 2023 and 2024 by 1 per cent each to reflects lower net interest margins and higher expenses, Mr. Kim cut his target for its shares to $111 from $116, reaffirming an “outperform” rating. The average is $106.25.
Elsewhere, other analysts making target adjustments include:
* Scotia Capital’s Meny Grauman to $109 from $111 with a “sector outperform” rating.
“After listening to NA’s management call we stand by our initial view that the bank delivered a mixed result in Q2 as a (modest) EPS beat, a better-than-expected CET1 ratio, and lower impaired PCL guidance was offset by margin pressure, worse-than-expected performance at ABA and Credigy, and downgraded PTPP earnings growth guidance,” said Mr. Grauman. “After an extended period of outperformance, this quarter we continued to see a number of trends at this bank come back in line with peers, especially the all-bank margin performance which was down 10 bps quarter-over-quarter (albeit after an elevated Q1). Compounding the problem for the stock is the fact that NA is the only other bank in the group besides RY that trades at a premium to the group, and has been a standout outperformer relative to its large peers for the year-to-date. While growth is clearly slowing at National Bank, it is slowing across the group as well. And despite taking our earnings estimates down in both F2023 and F2024, we continue to like NA’s defensive attributes including the second-highest CET1 ratio.”
* Barclays’ John Aiken to $93 from $82 with an “underweight” rating.
“National came in ahead of expectations on the back of strong trading and lowerthan-forecast provisions. Although we expect each of these to moderate, the quarter did reflect NA’s lower relative risk profile with its greater concentration in Canada,” said Mr. Aiken.
* CIBC’s Paul Holden to $108 from $110 with an “outperformer” rating.
“National posted an in-line quarter, but we are reducing our estimates on updated guidance. We believe that National can continue to outperform the group given its strong capital & liquidity position, credit performance & credit provisioning and geographical footprint,” said Mr. Holden.
* Canaccord Genuity’s Scott Chan to $102 from $103.50 with a “hold” rating.
The 7.2-per-cent drop in share price endured by CAE Inc. (CAE-T) following its premarket fourth-quarter earnings release on Wednesday was “overdone,” according to RBC Dominion Securities analyst James McGarragle, who continues to recommend it “on the back of very strong demand and solid execution in Civil.”
The Montreal-based flight simulator company reported adjusted EBITDA and operating income of $291-million and $202-million, respectively, both topped Mr. McGarragle’s estimates ($277-million and $189-million) as well as the consensus expectations on the Street ($282-million and $186-million).
It also reaffirmed its earnings per share guidance for 2022 through 2025 of mid 20 per cent, implying 2025 EPS of $1.63, which is 10 cents higher than the analyst’s previous estimates. However, a lack of an upward revision concerned investors.
“While management pointed to a defense margin inflection in F25, we believe investors were concerned about the lack of near-term visibility toward improvement,” he said. “We also see risk surrounding the timing of improvement and reflect this in our valuation, but we believe the current share price assigns little value to the defense business anyway.”
“.We value CAE shares on a sum of the parts basis and apply a 13 times multiple to Civil to reflect favourable industry dynamics and long-term secular trends. This implies the Civil business is worth roughly $26 per share versus yesterday’s close of $27.76. So despite some margin risk in the defense business, we see very attractive optionality in the shares at current prices.”
Mr. McGarragle trimmed his EBITDA estimate for CAE’s next fiscal year due to the weaker expected margin in its Defense segment, leading him to cut his target for its shares by $1 to $35 with an “outperform” recommendation (unchanged). The current average is $36.
“We believe CAE’s Civil segment is well positioned to benefit from long-term secular tailwinds,” he said. “Our view is that the Civil segment will grow at a pace that meaningfully exceeds the overall economy at an organic growth rate we peg at a mid to high-single digit range out to 2030. Key drivers of this growth are: i) a near- to medium-term recovery in passenger travel; ii) favourable pilot demographics; and iii) specific to the Defense segment, increased spending by NATO members driven by Russia’s invasion of Ukraine.”
“CAE is an industry leader in the Civil Aviation Training market and we note that CAE operates the world’s largest civil aviation training network, which we believe acts as a significant barrier to entry as well as a key differentiator. Our view is that this favourably positions CAE to capitalize on meaningful Civil tailwinds going forward.”
Elsewhere, Canaccord Genuity’s Matthew Lee cut his target to $32 from $35 with a “hold” rating in a note titled Defence improvements will be a marathon, not a sprint.
“CAE reported Q4/23 with revenue and EBITDA both above estimates, primarily driven by Civil Aviation,” said Mr. Lee. “While commercial simulation continues to fire on all cylinders, the defence segment delivered lower than expected mid single-digit SOI margins as the firm works through its ‘drag’ backlog. Looking ahead, management provided guidance that was largely in line with our estimates while noting that capex is expected to move up by $50-million year-over-year, supporting the firm’s civil growth initiatives. We maintain our HOLD rating and reduce our target to $32 (from $35). Our target translates into an 11x EV/NTM+1 EBITDA multiple (from 12 times), in line with defence and training peers that have experienced a ~10% average share price decline over the prior three months.”
Following a period of share price underperformance, Credit Suisse’s Andrew Kuske upgraded Boralex Inc. (BLX-T) to “outperform” from “neutral.”
“For the quarter to date, Boralex Inc. (BLX) delivered weak performance with a negative 9-per-cent return that compared to the Canadian renewable peer group average of 1.3 per cent over that timeframe according to Refinitiv data,” he said. “Even on the year-to-date, BLX achieved a negative 5 per cent versus a flat peer performance. A combination of poor stock performance and, generally, upwardly biased forecasts on re-visited financials creates an interesting risk-reward ... In this context, we upgrade BLX to Outperform from the prior Neutral rating. Largely to the possible future benefit of BLX, we believe more growth potential in the core Québec market may be an underappreciated aspect of the company’s evolution and expansion prospects.
“Given the company’s size, individual project wins can translate into a significant valuation impact, in our view. The team’s positioning, duration and credibility combined with an overall favourable backdrop for many renewable developers should collectively be supportive of value creation potential. We have long regarded BLX as a very high-quality name that typically trades at a premia. That reality remains intact, in our view; however, the current market pricing looks to provide an interesting opportunity for excess return potential.”
Mr. Kuske increased his target for Boralex shares to $50 from $45, above the $46.88 average on the Street.
“Boralex’s growth plan of 4.4GW capacity by 2025 and 10GW-12GW by 2030 is reasonable - albeit ambitiously executable. The ability to deliver this growth and finance the plan along are key to the direction of the share price,” he added.
Despite “mixed macro signals,” Descartes Systems Group Inc. (DSGX-Q, DSG-T) delivered “strong” first-quarter 2024, said Canaccord Genuity’s Robert Young, who expects organic growth to to remain above long-term historical levels.
He was one of several equity analysts on the Street to raise their target price for the Waterloo, Ont.-based technology company following the release of earnings report after the bell on Wednesday.
Descartes reported revenue of US$136.6-million, up 17 per cent year-over-year and above both Mr. Young’s US$132.5-million estimate and the consensus forecast of US$133.1-million. Adjusted EBITDA rose 13 per cent to US$57.7-million also above expectations (US$56.6-million and US$57.1-million, respectively).
“Services revenue organic growth of 9 per cent continued to trend above pre-pandemic levels despite a moderation in freight volumes across key markets at the start of the year,” said Mr. Young. “Areas of strength in the quarter were similar to FQ4, including MacroPoint, last mile, customs compliance, and ecommerce. Descartes highlighted that customers are increasingly implementing real-time visibility across a higher proportion of shipments and also focusing on delivery experience, which implies its real-time visibility and last mile solutions will continue to be drivers of growth in the near-term.
“With GroundCloud’s integration underway, margins will likely remain dampened, although Descartes reiterated its 40-45 per cent (bumped higher in FQ3) annual EBITDA margin guide. Management comments indicated it will maintain the strong pace of accretive M&A with private companies seeing difficulty in funding - a positive signal for M&A negotiations and competition. We believe Descartes’ strong organic growth in a period of macro uncertainty is a testament to its robust business model.”
Mr. Young raised his financial forecast for both fiscal 2024 and 2025, predicting both its organic growth and M&A “momentum” will continue.
“We remain confident on medium-term organic growth due to multiple reasons; 1) continued strong demand benefitting recent organic/inorganic investments in last mile and ecommerce, 2) denied party, sanction and trade compliance at elevated levels driven by geopolitical issues, 3) demand for visibility/tracking remaining high post pandemic, 4) data demand to support ESG goals and strategy/planning as companies retool supply chains, and 5) improving MoM ocean volumes (in line with pre-COVID levels) driven by reduced port delays, China recovery and abnormal replenishment cycles normalizing retailer inventories/ driving freight pricing down,” he said.
“Descartes exited FQ1 with cash of $182-million and an unused $350-million revolver, giving it plenty of liquidity to continue M&A. Management highlighted that private company valuations appear to be moderating and funding sources for new, high growth competitors appear to be weakening, which benefits Descartes on M&A negotiations but also competitively. We expect the company will continue its strong pace of M&A with last mile, global trade, and ecommerce all areas of focus. Given the company’s strong industry knowledge, positive reputation as a buyer and ability to add value with its large customer base, we see Descartes as an advantaged buyer.”
Reiterating his “buy” rating for Descartes, Mr. Young increased his target to US$88 from US$85 with a “buy” rating. The average on the Street is US$83.
“Certainly not cheap, we believe Descartes’s premium valuation is justified by its steady double-digit EBITDA growth, top-of-cohort margins, strong cash flow generation and M&A potential,” he concluded.
Other analysts making changes include:
* Scotia Capital’s Kevin Krishnaratne to US$86 from US$84 with a “sector outperform” rating.
“Descartes delivered a strong start to F2024, with Q1 results featuring a continuation of recent trends that has seen the company benefiting from multiple macro factors driving an increase in logistics and supply chain complexity/uncertainty, and in turn, demand for its solutions which appears to show no notable signs of slowdown,” said Mr. Krishnaratne. “Our target moves higher to US$86 (was US$84) on slightly increased forecast revisions, with our valuation continuing to reflect 25.0 times EV/EBITDA on F25. We maintain our Sector Outperform rating noting potential for further target upside on better-than-expected organic growth trends, in addition to unannounced M&A. We note a strong balance sheet (more than $180-million cash, no debt, access to undrawn $350-million credit facility) and an increasingly favourable environment for M&A given funding challenges for early-stage logistics tech companies that may be well suited for Descartes’ Global Logistics Network.”
* Raymond James’ Steven Li to US$81 from US$73 with a “market perform” rating.
“Solid start to the year,” he said. “Overall organic growth slower at 6.5 per cent at cc (pre-pandemic range 5-6 per cent) Services organic growth at 9 per cent (flattish from 4Q 9.5 per cent). Valuation (at 11.5 times forward revenues and 27 times forward A-EBITDA) has held up better than most, so it’s important for DSGX organic growth to remain above pre-pandemic levels to demonstrate the company’s tailwinds are sustainable (data content ever more valuable, supply chain software, routing software etc).”
* BMO’s Thanos Moschopoulos to US$82 from US$78 with a “market perform” rating.
“We remain Market Perform on DSGX following Q1/24 results — which were above consensus revenue and EBITDA, as was Q2/24 calibration,” said Mr. Moschopoulos. “Organic growth for services (i.e., SaaS & transaction-based) revenue was similar to last quarter, and held up better than we might have expected (remaining above pre-pandemic levels) given the macro backdrop. Net, we’ve made minor changes to our full-year FY24/FY25 EBITDA estimates. We think DSGX can continue to execute successfully on its strategy of delivering consistent EBITDA growth, but on a relative basis, prefer other consolidators in our coverage universe.”
* Barclays’ Raimo Lenschow to US$65 from US$72 with an “underweight” rating.
“Descartes reported healthy results to begin FY24 with the outperformance on services above the level seen in recent quarters, in part to due to volumes from China that continue to improve as the pandemic imposed lockdowns roll off,” he said. “On overall levels, while management noted ocean volumes improved month-over-month since February, they are still tracking below 2021 and 2022 levels which will make it difficult to match the organic growth trends in those years, in our view. We also note that as expected, GroundCloud was an adj. EBITDA margin headwind this quarter and management indicated it will be a slow progression to get the company closer to DSGX margin levels given the higher professional services revenue component in the business. With shares at 27 times CY24E FCF (15-per-cent CY24E FCF growth), we think there is little room for upside in this trade volume environment and maintain our Underweight rating.”
* TD Securities’ Daniel Chan to US$91 from US$90 with a “buy” rating.
* Stephens’ Justin Long to US$93 from US$90 with an “overweight” rating.
In response to the Turkish Ministry of Environment, Urbanization and Climate Change’s approval of its amended Environmental Impact Assessment (EIA) for the Öksüt mine, Raymond James analyst Brian MacArthur raised his recommendation for Centerra Gold Inc. (CG-T) to “outperform” from “market perform” previously.
“While we note 2Q results will still be impacted by the Öksüt mine given the shutdown for most of the quarter, with this announcement, we believe CG will be able to liberate cash from inventory over time and generate more cash from Öksüt going forward. Given the recent correction in the share price and this announcement on Öksüt, we are upgrading our recommendation,” he said.
Mr. MacArthur maintained a $11 target for Centerra shares. The average on the Street is $10.01.
“Centerra offers investors exposure to gold and copper, while generating solid CF. CG also has a strong balance sheet,” the analyst said. “In addition, the company owns 3 molybdenum assets, which offer optionality on molybdenum prices and may be sold to surface value.”
Eight Capital analyst Adhir Kadve called Coveo Solutions Inc. (CVO-T) “a leader within Enterprise Search with a best-in-class platform and a strong value proposition.”
Seeing the Montreal-based tech company “well positioned to capitalize on the massive AI tailwind,” he initiated coverage with a “buy” recommendation on Thursday.
“We see Coveo as one of the only Canadian publicly traded equities, giving investors clear exposure to the AI growth theme,” said Mr. Kadve. “Coveo’s management team and platform have been leveraging the use of AI and Machine Learning for more than a decade, well before the technology re-emerged into the mainstream spotlight. As such, we believe this know-how and expertise place Coveo in a prime position to be able to capture a portion of growing AI focused corporate budgets. Further, the company’s recently introduced “Relative Generative Answering” product leverages the use of Generative AI and LLMs. It is seeing significant interest from customers, and we consider it a key growth driver moving forward.”
While he warned Coveo is currently struggling through lengthening sales cycles due to “macro factors and expected churn from the Qubit acquisition,” he thinks those headwinds are “largely transient.”
“Over the mid-to-long term, we believe that as Enterprises look to harness AI technologies (both Generative AI and others) to drive efficiency and profitability, this should result in higher AIrelated budget spending, and Coveo should be a net beneficiary,” he said. “Further, the ongoing growth of the Commerce LoB, bolstered by the SAP-endorsed partnership, should support a re-acceleration of SaaS growth in FY25. Finally, we believe that the pivot to profitability is a potential key re-rate opportunity for shares. Based on this, we see a strong setup for Coveo moving forward.”
Touting its “attractive business model with high forward visibility,” Mr. Kadve set a target of $12 per share. The current average is $10.88.
In other analyst actions:
* Stifel’s Ingrid Rico raised her target for Integra Resources Corp. (ITR-X) by $1 to $5 with a “buy” rating. The average is $5.03.
“Following a number of corporate events; including the combination of Integra and Millennial Precious Metals, boosting its balance sheet with strategic support from Wheaton Precious Metals and Beedie Capital, and recent share-consolidation, ITR is now ready to deliver on a number of catalysts as it is positioned for dual path of de-risking of its DeLamar (Idaho) and Wildcat & Mountain View (Nevada) projects and uncovering further blue-sky exploration potential,” he said. “We see ITR as having a pipeline of low-risk, low-capital intensity, heap leach projects with a line of sight for future low-cost production of 200koz/yr AuEq.”
* BMO’s Peter Sklar raised his Parkland Corp. (PKI-T) target to $40 from $35 with an “outperform” rating. The average is $40.08.
“We are updating estimates for Parkland Fuel and increasing our target price ... which reflects valuation adjustments in line with newly segmented results,” said Mr. Sklar. “We are also reiterating our Outperform rating. Parkland is undergoing a transition of sorts, taking a pause on inorganic growth, with a near-term focus on reducing leverage and optimizing its current business units.”
* TD Securities’ Aaron MacNeil raised his Shawcor Ltd. (SCL-T) target to $16 from $13.50 with a “hold” rating. The average is $17.44.
*With the completion of its $1.05-billion acquisition of Certarus Ltd., CIBC’s Robert Catellier resumed coverage and raised his target for Superior Plus Corp. (SPB-T) to $13.50, above the $13.27 average, from $12.50 with an “outperformer” rating.
“The acquisition is transformative, adding low carbon fuels to the existing distribution platform and enhancing organic growth,” said Mr. Catellier. “The reasonable valuation paid and strong accretion are major positives offsetting expected flowback from the stock component of the consideration paid.”