Inside the Market’s roundup of some of today’s key analyst actions
While he expects the slowdown in Metro Inc.’s (MRU-T) earnings over the next fiscal year to be temporary with growth resuming in 2025, National Bank Financial analyst Vishal Shreedhar predicts its shares to “remain range-bound until it shows a path towards growth.”
The Montreal-based grocer dropped 6.8 per cent on Thursday after CEO Eric La Flèche called 2024 a “transition year” with the company seeing “significant headwinds” as it invests in supply chain improvements, including automated distribution centres. It predicts adjusted net earnings per share in the year ahead to be in the range of flat-to-down by 10 cents per share.
Mr. Shreedhar called the quarterly release “negative” given the disappointing commentary. However, he saw Metro’s fourth-quarter 2024 results as “satisfactory.” Earnings per share came in at 99 cents after adjusting for the impact of a labour dispute (a 12-cent headwind) and the impact of an extra week in the quarter (a 12-cent tailwind), falling 4 cents short of the analyst’s expectations. He saw sales as “solid” with food same-store growth of 6.8 per cent (versus his 4-per-cent projection).
Touting its “stability and predictability,” Mr. Shreedhar said: “Metro shares receive a premium valuation in part because of its track record of delivering consistent results through varying economic/competitive conditions. Interestingly, despite the 7-per-cent selloff, a premium still persists. Specifically, we estimate that MRU’s shares impute a WACC [weighted average cost of capital] of 8 per cent versus L at 10 per cent and Empire at 13 per cent. (2) Other grocers have increasingly adopted Metro’s stock philosophy (incl. a credible financial framework); accordingly, we opt to gain grocery/pharmacy exposure at a cheaper valuation.”
After reduction his 2024 and 2025 EPS projections to $4.29 and $4.74, respectively, from $4.60 and $4.92 to reflect heightened supply chain costs, Mr. Shreedhar lowered his target for Metro shares to $81 from $83, reiterating a “sector perform” recommendation. The average target is $78.33.
“We believe Metro is a solid company which has delivered superior long-term returns; however, these attributes are adequately reflected in valuation,” he said.
Other analysts making changes include:
* Desjardins Securities’ Chris Li to $74 from $77 with a “hold” rating.
“MRU’s solid 4Q results were overshadowed by management’s cautious FY24 outlook due to temporary automated DC start-up costs (and not because of concerns around the operating environment),” he said. “While the higher costs will weigh on earnings in the near term, the investments are key to sustaining MRU’s consistent track record of 8–10-per-cent EPS growth over the long term. MRU trades at 16.5 times FY24 EPS (vs 16 times average).”
* Scotia’s George Doumet to $77 from $78 with a “sector perform” rating.
“FY24 will be an investment year and F25 should show outsized EPS growth (well above the 8-per-cent to 10-per-cent EPS algorithm). That said, we continue to see limited upside in the space, especially in the context of what is developing to a more risk-on environment (soft landing over the NTM [next 12 months]),” he said.
* RBC’s Irene Nattel to $83 from $84 with a “sector perform” rating.
“Market reaction to MRU Q4 results (share price down 6.8 per cent) reflects near-term investor focus on downward guide to F24 as the Company brings multiple sizeable capital projects on stream; over time MRU should deliver to 8-10-per-cent EPS growth,” she said. “As for FQ4/F23, MRU delivered a(nother) strong print, with adjusted EPS/EBITDA $0.99 (up 7.6 percent)/$448-million (up 1.5 per cent), without adjustment for $36.7-million ($0.12 per share) direct costs and lost earnings associated with the GTA strike, which was not reflected in our forecasts.”
* BMO’s Tamy Chen to $73 from $77 with a “market perform” rating.
“Management emphasized on our call back that the ramps of the three new DCs are on track. Thus, the F2024 outlook does not appear to be a result of an operational issue at the DCs but rather, a result of previous Street expectations that were too optimistic in the context of such a complex supply chain project. Our industry view is unchanged and we reiterate Market Perform,” she said.
* CIBC’s Mark Petrie to $76 from $80 with a “neutral” rating.
“Metro’s F24 outlook surprised the market with ramp-up and duplicative costs for its distribution center (DC) projects far in excess of expectations,” he said. “Though this will effectively negate earnings growth in F24, we continue to view MRU as a best-in-class operator and Q4 results were strong. Management views the 8-10-per-cent framework as achievable on a five-year CAGR [compound annual growth rate] even after zero growth in F24; our F25 forecast implies 11-per-cent growth.”
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In a research note titled Executing the recipe, RBC Dominion Securities analyst Irene Nattel said the “solid” third-quarter results and commentary from Loblaw Companies Ltd. (L-T) backed up her “constructive view” of the grocer.
She reiterate it as her top idea in the sector with “room to close the valuation gap” with Metro Inc. over time as it “builds a track record of consistent performance.”
“Loblaw delivered another quarter of strong results, with key conference call messaging reiterating the company’s commitment to delivering to its financial framework of 8–10-per-cent EPS CAGR [compound annual growth rate],” said Ms. Nattel. “Q3 results reflect strong positioning, particularly against the backdrop of elevated food/ energy prices and cash-squeezed consumers. Loblaw focused on delivering consistent, predictable performance, notably containing SG&A growth, to deliver its financial framework.”
Loblaw reported revenue of $18.265-billion, up 5 per cent year-over-year and exceeding Ms. Nattel’s $18.158-billion estimate. Adjusted EBITDA grew 4.3 per cent to $1.926-billion, narrowly below her $2.018-billion forecast, while adjusted earnings per share jumped 12.3 per cent to $2.26, missing her projection by 8 cents.
“Another quarter of solid results for 16-week Q3 reinforces Loblaw’s strong positioning and favourable momentum, particularly against the backdrop of elevated food prices and cashsqueezed consumers,” she said. “Gross margins continue to be modestly under pressure as a result of targeted promotion, increased shrink, and absorption of a portion of COGS inflation. SG&A a ficelle above forecast in part due to one-time items not adjusted out of the results.”
Making modest reductions to her earnings expectations through fiscal 2025, Ms. Nattel trimmed her target for Loblaw shares to $170 from $174 with an “outperform” rating. The average target on the Street is $140.56.
“Highly constructive thesis playing out as Loblaw delivers consistent, predictable growth and as key return metrics continue to rise; reiterating OP rating, PT $170 (-$4),” she said. “At 8.0 times calendar 2024 estimated EBITDA, L trades at 2.1 times discount to MRU despite latter’s relative underperformance [Wednesday] on messaging around 2024 EPS. In our view, multiples should converge over time, underpinned by what we view as greater torque on Loblaw’s financial performance.”
Elsewhere, CIBC’s Mark Petrie trimmed his target to $150 from $152 with an “outperformer” rating.
“Q3 results were noisy, with $50-million of non-recurring efficiency costs offsetting further SG&A leverage, and 80 bps of drag on same-store sales from non-food obscuring a return to positive food tonnage,” said Mr. Petrie. “Though the drivers are shifting, management remains confident in achieving its 8-10-per-cent EPS growth framework in 2024 and we expect L will lead the industry. Even still, conditions are getting more challenging and we moderate our target multiple.”
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Following a “noisy” third quarter, the outlook for H&R REIT (HR.UN-T) is “moderating but still showing signs of stability,” according to National Bank analyst Matt Kornack.
After the bell on Tuesday, the Toronto-based REIT reported funds from operations per unit, excluding one-items and straight line rent related to termination income in future years, of 29 cents, up a penny from the same period a year ago and matching Mr. Kornack’s estimate. Occupancy of 97 per cent was up 0.4 per cent from the second quarter and 1.2 per cent year-over-year.
“Operating metrics in Q3 exceeded expectations as geographic diversification at Lantower (and a focus on tenant retention) drove more sustainable revenue growth,” he said. “Smaller off-market transactions continued to move the REIT closer to its targeted disposition levels and also helped on the balance sheet front, reducing interest expense. On the lease maturity profile, management didn’t note any tenants of concern in the IPP portfolio but does expect a hit from de-leasing redevelopment office assets in Toronto.
“Broadly speaking transaction liquidity is constrained as the market grapples with higher interest rates although sporadic interest on specific properties has materialized. That said, the stock is cheap at the moment, reflecting a portfolio discount on top of asset specific discounts implied in the equity markets (this isn’t just an H&R issue, however, larger well-capitalized U.S. apartment names have been under significant pressure). Nonetheless, the torque to the upside on this name is material but timing remains uncertain.”
While he expects same-property net operating income to moderate for the remainder of the year due to “less positive” year-over-year comps and slowing lease growth in Lantower residential segment, Mr. Kornack raised his target for H&R units to $10 from $9.75 with a “sector perform” rating. The average is $11.54.
Elsewhere, others making changes include:
* RBC’s Jimmy Shan to $11 from $13 with a “sector perform” rating.
“H&R REIT reported a largely in line quarter,” said Mr. Shan. “Residential is seeing the supply impact in the sun belts, but the outlook should look better by H2/24. 2024 leasing activities should benefit from industrial leases being renewed at higher rates partially offset by some office leases rolling off. Investment market is choppy, although HR is set to close on $600-million this year. We think the HR story could gain better traction by mid-2024 as the outlook for resi improves and the investment market thaws, catalyzing a narrowing of the sizeable discount to NAV.”
* CIBC’s Sumayya Syed to $12 from $13.50 with an “outperformer” rating.
“Despite the unfavourable macro backdrop, H&R has made progress towards its five-year strategic plan,” she said. “We acknowledge investor appetite for turnarounds is understandably muted in the current environment, however, find it punitive that units have not reflected any credit for the streamlining achieved to date. We view valuation as attractive (approximately 45-per-cent discount to our NAV) and maintain our Outperformer rating, while lowering our NAV.”
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Touting its “unique” business model, Stifel analyst Michael Dunn thinks Kiwetinohk Energy Corp. (KEC-T) should “appeal to investors with a nearer term time horizon given its low equity valuation and suite of power projects that should ultimately deliver even more value to shareholders as they become FID ready and gain partners.”
He initiated coverage of the Calgary-based energy transition company with a “buy” recommendation on Thursday.
“Kiwetinohk offers exposure to both a high growth E&P business fostered by its Duvernay and Montney resource that is supported by significant spare infrastructure capacity, and a power generation business that appears on the cusp of turning proposed projects into sanctioned, self-financed projects,” said Mr. Dunn. “The company was targeting a production growth CAGR [compound annual growth] of more than 30 per cent for the three year period 2023-2025, albeit is contemplating reproducing similar per share growth via slightly lower organic growth and share repurchases, given its low equity valuation.”
Mr. Dunn thinks Kiwetinohk’s current share price is trading well below the value of its proved and probable reserves and barely above its PDP reserve value, “implying no value is being attributed to its unbooked drilling locations nor its Green Energy division.”
“We expect the market will begin to ascribe value to the Green Energy division as projects become FID ready and partnerships and financing arrangements are made in the coming months,” he said. “While lack of trading liquidity is a clear hindrance to the equity price, we would expect an improvement in the share price over time to improve liquidity either indirectly (higher market cap) and/or directly (major shareholder stakes get sold down). We believe KEC’s dual focus on E&P and Green Energy is unique and value additive, but may be resulting in a lower valuation than if KEC was a simple E&P company, as combining the two businesses in one entity is not every investor’s cup of tea, but in our view this leads to an even more compelling valuation discount.”
The analyst set a target of $18 per share, which falls below the current average on the Street of $19.58.
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With Titanium Transportation Group Inc. (TTNM-T) displaying “surprising” margin resiliency given the difficult macroeconomic conditions, Desjardins Securities analyst Benoit Poirier sees its shares offering an “attractive” valuation.
After the bell on Tuesday, the Bolton, Ont.-based transportation company reported “mixed” third-quarter results. Revenue fell 0.6 per cent year-over-year $112.7-million, below Mr. Poirier’s $118.3-million estimate. However, EBITDA and earnings per shares of $13.5-million and 5 cents, respectively, exceeded the analyst’s forecasts of $12.1-million and 4 cents).
To “reflect current market conditions,” Titanium lowered its full-year revenue forecast to $430-$450-million from $450-$470-million, while it maintained its EBITDA margin guidance of 10.5–12.5 per cent.
“TTNM delivered 3Q results which were relatively in line with expectations, but continued freight market softness led to reduced guidance,” said Mr. Poirier. “Margins were surprisingly resilient as cost-control measures are showing positive signs. While investors may be concerned about the ongoing integration of Crane, we reiterate our confidence in management’s capability to derive synergies.”
“TTNM ended 3Q with net debt to EBITDA of 2.6 times, up sequentially from 1.0 times last quarter (we expected 2.1 times), as the company completed the acquisition of Crane. We forecast TTNM’s leverage ratio decreasing to 2.4 times (pro forma basis) next quarter as Crane starts making a larger contribution to TTM [trailing 12-month] EBITDA. For the next 12 months, management now expects capex of only $14-million, as almost no truck replacements are required in the short term.”
Reducing his projections for 2023 and 2024 with the expectation that the market will improve in the second half of next year given supply reductions in the freight market, Mr. Poirier cut his Street-high target for Titanium shares to $6.25 from $7, reiterating a “buy” recommendation. The average target is $5.39.
“We believe TTNM’s shares offer good value for long-term investors at the current level of only 3.8 times EV/FY2 EBITDA,” he said.
Elsewhere, Raymond James’ Steve Hansen lowered his target to $4.50 from $5 with an “outperform” rating.
“We are trimming our target price on Titanium Transportation Group Inc. (TTNM) to $4.50 (vs. $5.00 prior) based upon: 1) modest downward revisions to our estimates associated with lingering freight market headwinds; and 2) broad-based multiple contraction in recent months. Notwithstanding these changes, we reiterate our Outperform rating based upon TTNM’s solid historical track record, clear discipline through all points of the cycle, and recent Crane acquisition that offers compelling growth & synergy opportunities,” said Mr. Hansen.
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With Americas Gold and Silver Corp. (USA-T) continuing to “struggle to make any money,” Stifel analyst Stephen Soock downgraded its shares to “sell” from “hold” on Thursday.
“We continue to see enormous going concern risk for Americas Gold and Silver,” he said. “Even with the regular quarterly injection of a few million dollars, we do not see a path forward for the company with the current cap structure. We continue to see value in the Galena and Cosalá assets that could be unlocked through different ownership that could provide the necessary capital injections to allow them to realize their full potential. Our NAV forecast has decreased by 40 per cent to $0.39 per share, and we arrive at our new target price of $0.25 per share. We are downgrading the stock to Sell.”
Before the bell on Wednesday, the Toronto-based junior precious metals company reported an adjusted loss of 5 cents per share, falling in line with Mr. Soock’s estimate, while cash flow per share of negative 2 cents was a penny worse than expected. That came following pre-reporting of “weak” attributable silver production late last month.
“The company finished Q3 with $890k in cash and working capital deficit of $25.3-million, widening from the $18.1-million deficit reported at the end of Q2,” the analyst said. “Sandstorm injected cash of $2.75-million during the quarter and $2.15-million subsequently, and once again ended up ‘buying their own ounces.’ We continue to see enormous going concern risk for the company. Even with regular quarterly injection of a few million dollars, we do not see a path forward for USA with current capital structure.”
Mr. Soock’s new target of 25 cents, down from 60 cents previously, is a new low on the Street, falling below the $1.15 average.
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In other analyst actions:
* In a report titled Small Cap, but Cash Flowing, BMO’s Rene Cartier initiated coverage of Toronto-based Vox Royalty Corp. (VOXR-Q, VOXR-T) with an “outperform” rating and US$3 target. The average target on the Street is US$5.25.
“Although the portfolio is concentrated in the development and exploration phase of the mine-maturity lifecycle, Vox is generating strong cash flow, and operating on a self-sustaining basis ... Given Vox’s growth track record, intellectual property, and portfolio, we could see the company as a potential tuck-in acquisition candidate,” he said.
* CIBC’s John Zamparo lowered his Aurora Cannabis Inc. (ACB-T) target to 80 cents from 85 cents with a “neutral” rating. The average is 92 cents.
“We are maintaining our Neutral position on ACB, while reducing our price target a touch from $0.85 to $0.80 following recent dilution,” he said. “We consider Aurora to be on a credible path towards progress; however, its improvements in adjusted EBITDA have yet to be followed by FCF, which we continue to believe is necessary in order to attract investors. Additional equity issuance—absent some strategic M&A—looks likely to be in the rear-view mirror now that nearly the entirety of the convertible debt has been redeemed. Valuation at 0.9 times sales and 14 times EBITDA on F2024E compares favourably to similar names, but this is an industry in which execution must be demonstrated before giving conviction to valuation metrics.”
* Barclays’ Kannan Venkateshwar cut his targets for BCE Inc. (BCE-T, “equalweight”) to $55 from $60,Rogers Communications Inc. (RCI-B-T, “overweight”) to US$54 from US$55 and Telus Corp. (T-T, “equalweight”) to $55 from $60. The averages are $56.95, $72.17 and $26.76, respectively.
“Competitive intensity may remain elevated for sometime,” said Mr. Venkateshwar.
* CIBC’s Jacob Bout raised his target for Chemtrade Logistics Income Fund (CHE.UN-T) to $14 from $12.50 with an “outperformer” rating. The average is $11.93.
* Raymond James’ Jeremy McCrea bumped his Crescent Point Energy Corp. (CPG-T) target to $16.50 from $16 with an “outperform” rating. The average is $14.25.
“One of the key attributes to successful investing in Oil & Gas is to recognize pivotal moments,” said Mr. McCrea. “For E&P companies, that typically involves a new play or improved field economics that ultimately gets reflected in a multiple expansion. With Crescent Point’s acquisition of the Duvernay in 2021, followed by their more recent Montney purchases in 2023, these strategic shifts look to significantly transform the future profitability of CPG going forward. The mixed history of corporate leverage and lower performing assets create a unique opportunity for investors, in our view. CPG trades at a discounted valuation because of its past, but with top-quartile Montney assets (and inventory duration as well), the company is at a key turning point that is only starting to be recognized by investors. Despite some claims that CPG ‘overpaid’, that premise is viewed from a cashflow perspective. What Crescent Point really bought was multi-year, Tier 1 inventory, upon which we believe an incredible company will be built upon. Crescent Point is a much better company today and over the course of the next 20 years, we believe 2023 will be seen as that turning point, which likely will mark the low in valuation and share price.”
* Citing an “expected acceleration in top line growth over the next several quarters,” Aegis Capital’s Rommel Dionisio maintained his “buy” recommendation and $3 target shares of Draganfly Inc. (DPRO-Q, DPRO-CN), a Saskatoon-based drone manufacturer, following “mixed” third-quarter results as the opening of a new manufacturing and production facility approaches. The average target is $3.30.
“This new facility should help enable the company to better fulfill the strong order book for its products and solutions, particularly for heavy drones such as the Heavy Lift and Commander 3 XL models,” he said.
“In addition, Draganfly continues to progress in building its business in the Ukraine, a market which has expanded sharply in recent periods due to the ongoing conflict in that region. Draganfly successfully completed training and demonstrations with emergency and first responder agencies in Ukraine, and also expanded its joint venture program with its strategic partner in that region. Finally, Draganfly recently entered into an agreement to provide drone training services to Ministry of Internal Affairs pilots in the Ukraine.”
* TD Securities’ Craig Hutchison cut his Ero Copper Corp. (ERO-T) target to $22 from $23 with a “hold” rating. The average is $25.82.
* RBC’s James McGarragle cut his Exchange Income Corp. (EIF-T) target to $65 from $70, keeping an “outperform” rating. The average is $63.10.
“Last week we had the opportunity to present to Exchange’s Board of Directors in Arizona and received updates from key business leaders on the company’s strategic direction. Overall, we came away positive on the company’s outlook and with a better understanding of its culture, which we view as a key driver of its long-term track record. We lower our estimates to reflect headwinds at Northern Mat, in the line with the new 2024 guidance. With expectations reset, we still flag what we view as an attractive growth opportunity and see meaningful value in the shares at current prices,” said Mr. MacGarragle.
* RBC’s Tom Callaghan cut his Flagship Communities REIT (MHC.U-T) target to US$20 from US$21, reiterating an “outperform” rating. The average is US$20.31.
“Flagship Communities delivered a solid, yet in-line set of Q3 results. We continue to believe the REIT is attractively positioned to deliver above-average organic growth. Concurrently, the long-term, fixed rate nature of Flagship’s debt, coupled with the resiliency of the U.S. manufactured housing sector position the REIT favourably in the current environment,” said Mr. Callaghan.
* National Bank’s Matt Kornack lowered his Nexus Industrial REIT (NXR.UN-T) target to $7 from $7.50, below the $9.34 average, with a “sector perform” rating. Other changes include: BMO’s Michael Markidis to $8.50 from $10 with a “market perform” rating and Raymond James’ Brad Sturges to $9.25 from $8.50 with an “outperform” rating.
“NXR has made solid progress increasing the scale and upgrading the quality of its industrial portfolio this year,” said Mr. Markidis. “Unfortunately, year-over-year earnings comps have been negatively impacted by increased leverage and higher rates. The hedging program should provide some relief in the short term. We are also optimistic that private market conditions will become more constructive and allow NXR to expedite its non-core capital recycling program on favorable terms.”
* Scotia’s Himanshu Gupta trimmed his PRO REIT (PRV.UN-T) target to $6.50 from $7 with a “sector perform” rating. The average is $5.81.
* BMO’s Andrew Mikitchoook raised his Street-high Skeena Resources Ltd. (SKE-T) target to $18 from with an “outperform” rating. The average is $14.14.
“[Tuesday], Skeena released its definitive feasibility study for Eskay Creek with mine life extending by three years and initial capex increasing 20 per cent due to inflation and derisking,” he said. “Additional metallurgical testing defined a simplified flow sheet and increased concentrate grade. Snip was not included in this study however a maiden engineering study is expected in H1/2024. A project financing package is also expected in H1 2024. We have increased our target price.”
* CIBC’s Sumayya Syed cut her target for Slate Office REIT (SOT.UN-T) to $1 from $1.50 with a “neutral” rating. The average is $1.41.
“The success of the realignment plan is contingent on too many uncertain factors: debt markets staying stable, sufficient buyer appetite for Slate’s assets in the near term, and valuations coming in line with book values,” said Ms. Syed. “To the last point, the ‘value’ in loan-to-value is fairly subjective and should lenders’ or buyers’ view of value lie below IFRS values, net disposition proceeds could be insufficient to meet deleveraging goals. For instance, our NAV implies D/GBV of 80 per cent vs. the reported 66 per cent, which materially alters the amount of liquidity that can be generated.
“We expect muted unit performance until the plan shows some sign of success, or until there is broader improvement in the lending environment.”
* RBC’s Pammi Bir lowered his SmartCentres REIT (SRU.UN-T) target to $29 from $31 with an “outperform” rating. The average is $26.43.
“Supported by its defensive assets, continued strength in tenant demand, population growth, and new supply that has not kept pace, we believe the organic growth outlook for SRU sets up stronger than its historical levels. A disciplined approach to development should also drive incremental earnings and value upside. In short, at an 8-per-cent-plus implied cap rate with steady growth, we see good value,” said Mr. Bir.
* TD Securities’ Steven Green cut his Street-high Torex Gold Resources Inc. (TXG-T) target to $30 from $32 with a “buy” rating. The average is $23.79.
* RBC’s Walter Spracklin reduced his target for shares of Westshore Terminals Investment Corp. (WTE-T) to $27 from $29 with a “sector perform” rating, while Scotia’s Konark Gupta cut his target to $26 from $27 with a “sector perform” rating. The average is $27.25.
“WTE reported a solid Q3 beat, driven by better-than-expected volume, pricing and margin. However, the company tweaked 2023 throughput and loading rate guidance, for a net wash, noting weaker-than-expected U.S. rail performance in Q4,” said Mr. Gupta. “Debut 2024 guidance points to y/y decline in coal loading revenue (volume down, pricing up), which came right in line with our prior expectation (slightly ahead of Street). We have trimmed our volume outlook but raised our pricing assumptions, staying above the implied coal loading revenue guidance for both years as we continue to believe that WTE tends to be conservative. Management also provided updates on potash project and labour negotiation. We are rolling forward our valuation to 10 times EV/EBITDA on average 2024E-2025E (was 2024E), which reduces our target to $26 (was $27) given we assume further coal volume normalization in 2025E. We maintain our Sector Perform rating with the stock trading at 8.7 times/ 10.3 times on our revised 2024E / 2025E, roughly in line with its 10-year average of 9.5 times.”
David Leeder