Inside the Market’s roundup of some of today’s key analyst actions
While freight markets are “still tough,” National Bank Financial analyst Cameron Doerksen thinks Mullen Group Ltd.’s (MTL-T) outperformance is likely to continue.
“The freight indicators we track, along with recent updates from other North American trucking companies, point to continued softness in the broader freight market,” he said. “Pricing for general and specialized trucking in Canada, Mullen’s primary sectors, has also softened. Mullen, however, has performed well relative to its peers so far this year as economic growth in Western Canada, where the company is more exposed, is expected to outpace the broader Canadian economy in 2023.”
“Mullen’s Specialized & Industrial Services segment, which represents almost 20 per cent of total company revenue, has performed well so far this year supported by more oil and gas drilling activity in Western Canada. We expect the segment to continue its solid results in Q2 as drilling activity levels have held up well so far in the quarter with most weeks showing year-over-year increases in the number of active rigs.”
In a research note released Thursday, Mr. Doerksen upgraded his second-quarter and full-year forecast for the Okotoks, Alta.-based company to incorporate its recent acquisition of B.& R. Eckel’s Transport Ltd., which provides transportation services to Northeastern Alberta.
“We expect Mullen to continue to be active on the M&A front through the remainder of the year as management indicates that its pipeline of targets is full,” he said. “This is consistent with the message from TFI International management in our investor meetings last week in which it noted that this is the best M&A environment the company has seen in a long time. Mullen has also been active on its NCIB this year, repurchasing 1.8 million shares so far in Q2 after repurchasing 2.2 million shares in Q1.”
“We believe Mullen will outperform other North American trucking companies, supported by more resilient economic activity in its core Western Canadian end markets as well as positive results in the company’s Specialized & Industrial Services segment driven by activity in oil field services markets. We also see further M&A upside for the company as leverage remains comfortable (2.2 times at the end of Q1/23). Finally, the dividend yield of 4.7 per cent remains attractive.”
While he sees its valuation remaining “attractive,” Mr. Doerksen maintained a $19 target with an “outperform” recommendation. The average on the Street is $16.73.
“Mullen shares significantly underperformed trucking peers early in the year and, after recently closing the gap with the Dow Jones Trucking Index, are once again lagging as the index is now up over 12 per cent year-to-date compared to Mullen up only 6 per cent (S&P/TSX up 2 per cent year-to-date),” he said.
“On our updated 2023 estimates, Mullen is currently trading at 12.1 times P/E [price-to-earnings] versus the weighted average peer group at 15.9 times and the stock’s five-year average of over 18.0 times. On EV/EBITDA, Mullen is trading at 6.8 times versus the peer group at 7.5 times and the stock’s historical forward average of 7.9 times.”
“This is CPKC’s first investor day since 2018 (pre-merger) and Keith Creel’s second as CEO,” he said. “It will indeed be an important event for railroad investors given CP assumed control of KCS on April 14, 2023, but it will also be relevant to broader freight/macro investors because we believe CPKC has potential to make a positive impact on North America as the only single-line railroad connecting the continent. From a stock perspective, we will primarily focus on long-term EPS outlook, shareholder returns, and updates on integration / synergies – but re-shoring and regulatory environment in Mexico will also be equally important.
“Our 2023-2026 estimate revisions reflect CPKC’s restatement of historical financials (combining KCS), Q2 traffic trends, and our tempered near-term assumptions. Our debut 2027-2028 estimates assume minor additional synergies. Overall, we remain convinced that 2024+ EPS consensus has upside risk (about 5 per cent).”
Maintaining his “sector outperform” recommendation for CP shares, he raised his target by $2 to $124 based on his revised 2026 EPS projection. The average is $118.34.
“We expect CPKC to offer industry-leading double-digit EPS CAGR [compound annual growth rate] over the next five years, driven by its organic growth initiatives and synergies from the KCS acquisition,” he concluded. “Our positive thesis is supported by a proven management team, strong and improving competitive moat, expanding network reach to more deep-water ports, and excess low-cost capacity. We believe long-term investors will also be rewarded with a resumption in dividend growth and share buybacks once the leverage ratio normalizes, likely during 2024. The company is also strengthening its ESG position through various initiatives.”
AGF Management Ltd.’s (AGF.B-T) “strong” second-quarter results will “put a spotlight on [its] private alt platform potential,” according to Desjardins Securities analyst Gary Ho, who predicts “we could see some M&A materialize nearterm.”
On Wednesday, the Toronto-based firm reported earnings per share of 45 cents, exceeding the 31-cent projection of both Mr. Ho and Street. The analyst attributed the beat almost entirely to “sizeable” private alternative contributions ($16.3-million versus his $5.5-million projection).
“Approximately two-thirds of the contributions were from FV pickup of various funds (management appears comfortable with the current valuation marks), and the remainder from monetizations of private credit investments,” he said. “In 2Q, private alts contributed 21 cents in EPS vs 4 cents in 1Q23 and 5 cents in 2Q22. Seed capital increased to $247.3-million ($3.78 per share). A greater private alt mix could result in a valuation re-rate.”
Believing M&A opportunities in private alts, “backed by a strong balance sheet,” could be a near-term catalyst, Mr. Ho raised his 2023 and 2024 EPS projections to $1.31 and $1.25, respectively, from $1.16 and $1.21, leading him to increase his target for AGF shares by 25 cents to $10 with a “buy” recommendation (unchanged). The average is $9.11.
“We foresee a few near- or medium-term positive catalysts: (1) retail net flows trending at or above industry; (2) redeployment of capital for organic/inorganic growth, to seed new private alt strategies and for share buybacks; (3) growth in fees/earnings from its private alt platform; and (4) private alt M&A,” he concluded.
Allied Properties REIT’s (AP-UN-T) $1.35-billion sale of its Toronto data centre portfolio to Japanese telecommunications company KDDI Corp. provides “a significant source of capital, allowing it to strengthen its balance sheet and fund remaining development commitments without requiring additional leverage or equity,” said Canaccord Genuity analyst Mark Rothschild.
“The sale allows the REIT to focus on its core objective of owning high-quality office properties while improving the balance sheet and its ability to fund future growth though its development pipeline,” he said. “However, we note that the UDC [urban data centre] properties had been a significant driver of internal growth over the past several years, as office fundamentals have softened given slowing demand for office properties and a large amount of new supply. As a result, we expect some downward pressure on same-property NOI and cash flow growth in the near term.”
“We note that the portfolio is fully unencumbered and, as a result, proceeds from the sale will be deployed to strengthen the REIT’s financial position and fund growth. In the near term, we expect that proceeds will be utilized to pay down debt and fund remaining development requirements. We note that management indicated that following the repayment of debt, debt to GBV will drop from 36.5 per cent to 32.7 per cent and net debt to EBITDA should decline from 10.5 times to 8.0 times.”
Citing “the continued pressure on office fundamentals and the REIT’s greater focus on core office properties,” Mr. Rothschild cut his target for Allied units to $28 from $30, maintaining a “buy” recommendation. The average on the Street is $30.09.
Elsewhere, others making changes include:
* Scotia Capital’s Mario Saric to $31 from $35 with a “sector outperform” rating.
“We’re surprised with the negative market reaction (AP was down 2.2 per cent vs. down 1.4 per cent for CAD REITs and down 0.4 per cent for U.S. Office peers), with $1.0-billion of the proceeds going towards higher-cost debt repayment,” said Mr. Saric. “While we can see market frustration with the elevated debt during an uncertain time (in part driven by AP acquisitions during said time), the AP balance sheet becomes one of the best, with development completions = lower debt through 2024 (i.e., to 7.5 times). We also get the UDC sale has been discussed extensively, but we still see it as a step in the right direction (accretive debt-reduction). Hitting guided occupancy gains in 2023 and development stabilization = medium-term catalysts, while surfacing value from its unique urban land bank = longer-term catalyst. AP is the only CAD REIT trading at a higher-than-avg. AFFO and implied cap spread to 10-year. The value is compelling, but admittedly, may require patience.”
* Raymond James’ Brad Sturges to $26.50 from $29 with an “outperform” rating.
“Allied’s UDC portfolio disposition pricing is slightly higher than our expectations,” he said. “While we expect macro operating headwinds in the Canadian office property sector to persist near-term, we believe Allied’s high-quality, Canadian urban office real estate portfolio may be well-positioned to benefit from a ‘flight-to-quality’ by prospective office users seeking to high-grade their respective office footprints. Allied’s Canadian office real estate portfolio is also underpinned by underlying urban land value that offers long-term development intensification potential over time.”
After Evertz Technologies Ltd. (ET-T) reported “blowout” fourth-quarter results that featured a “big” beat, Canaccord Genuity analyst Robert Young said a “massive” backlog suggests “strong” upside for the manufacturer of digital broadcast and film products.
On Wednesday after the bell, the Burlington, Ont.-based company reported revenue of $128.9-million, up 11 per cent and “significantly” above both Mr. Young’s $110.3-million estimate and the consensus forecast of $110.9-million “driven by strength in North America and deployments across hardware and cloud along with services and licenses.” Adjusted earnings per share of 24 cents topped the 17-cent projection of both the analyst and Street.
“Evertz also reported a massive backlog of $392-million in FQ4, a record by a wide margin, and driven by two large deals including a $25-million international order and a $152-million Cloud and ProServ order received in April,” said Mr. Young. “Adjusting for these two large orders, backlog was still strong at $215-million, up 22 per cent year-over-year. Evertz sees 50 per cent of the backlog being realized in F24, which supports our raised forward estimates. Management noted that demand for all its products and solutions remains strong, with Cloud a key driver, and believes the company is well positioned despite recent announcement from competitors signaling further investment in Cloud. Evertz did not provide any update on Haivision, although we believe it continues to retain $8-million of its shares based on notes to financialstatements. We see potential for margins to expand slowly, although management reiterated its long-held 56-60-per-cent target range.”
Raising his revenue forecast to account for the “impressive bump” in backlog, the analyst hiked his target for Evertz shares to $19 from $15, reaffirming a “buy” recommendation. The average is $16.67.
“Evertz currently trades at 7.2 times EV/calendar 2024 estimated EBITDA based on our increased estimates,” he said. “Video peers trade at 9.5 times whereas IP peers trade at 9.0 times. While Evertz shares are less liquid, we believe our 12 times EV/NTM [next 12-month] valuation multiple is a reflection of the massive FQ4 beat, record backlog and a growing cloud and services contribution, which could be in the 20-per-cent-plus range as a percentage of revenue. As of last close, Evertz’s dividend yield is 6.6 per cent.”
Elsewhere, BMO’s Thanos Moschopoulos raised his target to $15.50 from $15 with an “outperform” rating.
After meeting with Bombardier Inc. (BBD.B-T’) executives, including chief financial officer Bart Demosky, on Wednesday, Desjardins Securities analyst Benoit Poirier expressed “further confidence” in its ability to meet and potentially exceed its 2025 targets, seeing “strong” demand in the business jet market and “more upside than downside” for fleet operator orders.
“Mr. Demosky stated that following the banking crisis blip toward the end of 1Q, market conditions have rebounded, with the pace of new order booking activity remaining very strong,” he said. “Historically, the book-to-bill ratio improves from 1Q to 2Q, and management stated that current metrics support a book-to-bill ratio of 1 times for the year. Fleet operator flight activity for BBD jets is up 40–50 per cent vs 2019, and Mr. Demosky reinforced that passenger demand on its end remains robust. The pace of activity for used aircraft has slowed slightly to around 5–6 per cent currently (available fleet for sale), but it remains much lower than the historical normalized level of 11–14 per cent.
“An interesting comment that caught our eye was that BBD is best positioned (BBD derives 20 per cent of its backlog from fleet customers whereas Gulfstream and Dassault have little exposure) to benefit from trends that continue to push bizjet users to the fractional/fleet operator side of private travel and away from direct plane ownership. These trends include optimized financial utilization, an investor-friendly climate, smaller upfront payments and maintenance expense, and more privacy from bizjet shaming (eg LVMH chair and CEO Bernard Arnault recently sold his bizjet to avoid his flights being tracked). Overall, we view Mr. Demosky’s comments on current conditions as bullish, as medium- and large-bizjet demand clearly remains strong despite the macro slowdown in spending in other industries like trucking. We believe it is fair to expect a book-to-bill of 1 times plus in 2Q.”
Mr. Poirier sees the risk of a downturn in free cash flow as “overstated” with Bombardier is currently positive at a book-to-bill of 0.9 times in its current state.
“This should improve further between now and 2025 as BBD is targeting a book-to-bill of 0.8 times, and even as low as 0.7 times thereafter,” he said. “Reaching the FCF-neutral level of 0.8 times in 2025 would substantially limit BBD’s downside as the trough for bizjet book-to-bill ratios was 0.7–0.8 times during the worst recessionary periods and stayed there for only 1–2 quarters before rebounding relatively quickly.”
Seeing aftermarket revenue “reaching new record levels with investments nearing completion” and “elevated” potential for its defence segment, which he calls “a clear growth avenue,” Mr. Poirier expects Bombardier’s capital deployment and 2025 objections to be increased further.
“We continue to believe that BBD’s investor day leverage guidance of 2.0–2.5 times by 2025 is on the conservative side,” he said. “We derive 1.6 times, which should drive an investment-grade rating. We still do not factor in any proceeds from the potential real estate divestitures currently being evaluated. Achieving this target could provide BBD with 150–200 basis points of interest rate savings (average coupon today is 7.3 per cent), which would be 100-per-cent incremental upside as it is not built into management’s 2025 guidance assumptions. Additionally, upgrades could open the company to a bigger pool of institutional investors. On capital deployment, several investors had questions surrounding the timing of a clean sheet design, but Mr. Demosky was adamant that a new program will not launch before the company reduces its leverage to the targeted range. Some of the other options at management’s disposal include reinvesting in existing operations and product lines, growing the business through tuck-in M&A transactions, or continuing to evolve and improve the capital structure by further deleveraging or introducing shareholder returns (dividend or share buyback). Management is actively planning the next phase of capital allocation but did state that if it eventually decides to go down the clean sheet route, it sees a whitespace in the market in need of a new program.
“To conclude, we believe the leverage turning point is closer than the market is currently anticipating. The most likely route for capital deployment will be a new program, as BBD has a history of clean sheeting new aircraft instead of stretching/shrinking old platforms like Gulfstream did with its G400 (elevated sticker price and operating costs vs competing aircraft in its class).”
Reiterating his bullish stance, the analyst maintained his $100 target and “buy” rating for Bombardier shares. The average on the Street is
“We believe management is taking the necessary steps to deleverage the balance sheet and is well on track with its key strategic initiatives on margins and revenue expansion. We remain conservative with our valuation method and use an EV/EBITDA multiple of 8.0 times to reflect the somewhat discretionary nature of the bizjet sector in these uncertain times. Our multiple is below the peer average (ERJ, GD, TXT, AM) of 8.5 times, which is justified, in our view, given BBD’s higher leverage, although our multiple could expand as deleveraging continues.”
Jefferies analyst Owen Bennett cut his targets for a group of cannabis stocks on Thursday. His changes are:
- Aurora Cannabis Inc. (ACB-Q/ACB-T, “hold”) to 55 US cents from 96 US cents. The average is US$2.85.
- Cronos Group Inc. (CRON-Q/CRON-T, “hold”) to US$2 from US$2.34. Average: US$3.58.
- Hexo Corp. (HEXO-Q/HEXO-T, “hold”) to 70 US cents from US$1.26. Average: US$1.26.
- TerrAscend Corp. (TER-CN, “hold”) to $5.20 from $7.10. Average: $3.62.
In other analyst actions:
* * Raymond James’ Michael Glen initiated coverage of Pet Valu Holdings Ltd. (PET-T) with an “outperform” recommendation and $39 target. The average is $44.50.
“We see a number of attractive characteristics regarding the business, including the growth opportunity (i.e. 1,200+ stores), predictability (2023 guidance is extremely tight at $230-237-million in EBITDA) and relatively defensive nature of the offering that is seeing long-term positive category growth,” he said..
“We recognize one of the bigger talking points surrounding Pet Valu has been the competitive dynamic. While we understand these concerns, when we look at the Pet Valu business, in particular its efforts and focus on franchising and individual store ownership, we continue to see them as well positioned for gains. In that regard, Pet Valu’s CEO Richard Maltsbarger has extensive experience in U.S. retailing and is very familiar with operating in competitive environments. With that, the company is working to outflank new entrants and emphasize: 1. A local market approach, tailored strongly to smaller / rural markets, which includes an emphasis on franchise ownership that offers a much more personalized in-store experience; 2. A large retail network, including a high number of corporate stores, that benefits from a scaled distribution network and optimized cost structure; 3. A wide variety of premium and proprietary branded products that spans across tiers that allows the company to be very cost competitive.”
* “Looking for continued solid execution,” Scotia Capital’s George Doumet raised his Alimentation Couche-Tard Inc. (ATD-T) target to $76 from $74 with a “sector outperform” rating. The average is $74.74.
“We have updated our Q4 estimates to account for lower fuel margins and other assumptions (lower merchandise margins, offset by higher same-store sales in the U.S., etc.) and are modestly below consensus for the quarter,” he said. “Additionally, we have reflected the recently announced acquisition of MAPCO in our estimates.
“We continue to prefer ATD’s defensive characteristics, improving M&A environment, and healthy balance sheet capacity to fund deals. Furthermore, current valuation, in our view, is undemanding in this environment (shares trading at 17.5 times P/E).”
* RBC’s Paul Treiber increased his Kinaxis Inc. (KXS-T) target to $220 from $210, maintaining an “outperform” recommendation. The average target on the Street is $222.46.
“We attended Kinaxis’ user conference this week,” he said. “The event was the most impactful that we’ve attended, considering: 1) demand appears broad-based and resilient; 2) new products expand Kinaxis’ total addressable market; and 3) partners are scaling Kinaxis into additional verticals and the mid-market. T.”his suggests to us high visibility to Kinaxis seeing SaaS growth accelerate to its mid-term 30-per-cent target.”
“Kinaxis represents a compelling long-term growth story. We believe SaaS growth acceleration may drive valuation multiple expansion.”
* Morgan Stanley’s Ioannis Masvoulas raised his target for Lundin Mining Corp. (LUN-T) to $12.70, above the $11.19 average, from $10.60 with an “overweight” recommendation.
* CIBC’s Mark Jarvi reduced his Northland Power Inc. (NPI-T) target to $37 from $39, below the $40.57 average, with an “outperformer” rating.
“Following the hybrid note offering, the decision to walk away from the Nordsee Cluster JV, and discussions with NPI, we’ve completed a full review of our forecast and assumptions,” said Mr. Jarvi. “The hybrid offering, coupled with announced and assumed transactions that surface additional cash, should cover NPI’s full 2023 equity funding gap based on all of our assumptions. Further, we now see no material equity needs for 2024 since NPI exited the Nordsee Cluster JV. Moreover, in our view NPI’s ability to fund and deliver future growth in assets/cash flows is tempered given the current tightening spread between the cost of capital and achievable returns. The lower assumed future prospective growth and a higher discount rate, given more elevated risk on the name risk, drive a reduction in our price target to $37 from $39. Despite a lower target, there’s still an attractive 38-per-cent total return potential to our target from current levels and we continue to believe NPI can de-risk its two key offshore wind projects, which could unlock value for shareholders. Improved execution and restored belief in growth capabilities could unlock additional upside in the shares.”
* Scotia Capital’s Mario Saric lowered his target for NorthWest Healthcare Properties REIT (NWH.UN-T) to $9.50 from $11, keeping a “sector perform” rating, following the termination of its UK joint venture plan. The average on the Street is $10.
“We believe market perception of NWH asset management franchise may erode (we lowered our value by $120-million to $486-million),” he said. “Bottom-line, while we still believe there is legitimate value in NWH, we don’t see much upside in the next 3-4 months.”
* Stifel’s Cole Pereira initiated coverage of Pembina Pipeline Corp. (PPL-T) with a “buy” rating and $51 target. The average is $52.06.
“We highlight four key points for investors: 1) its leading Montney infrastructure network with potential to drive earnings growth from exiting assets; 2) an attractive current and potential project suite, which could deliver growth into the late 2020s; 3) the meaningful reduction in its leverage levels and ability to self-fund; and 4) its valuation is largely in line with peers despite the points above,” said Mr. Pereira.
* Haywood Securities’ Christopher Jones cut his Spartan Delta Corp. (SDE-T) target to $6 from $19 with a “buy” rating. Others making changes include: Raymond James’ Jeremy McCrea to $6.50 from $19 with an “outperform” rating and Desjardins Securities’ Chris MacCulloch to $7.50 from $18 with a “buy” rating. The average is $11.56.
* Peel Hunt’s Peter Mallin-Jones increased his Wheaton Precious Metals Corp. (WPM-T) target to $74 from $70, above the $56.57 average, with a “buy” rating.