Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Vishal Shreedhar is “moving to the sidelines” on Empire Company Ltd. (EMP.A-T) following a period of share price appreciation, lowered his recommendation for the grocer to “sector perform” from “outperform” on Thursday.
“Empire’s stock is up 8.8 per cent year-to-date, higher than Loblaw (L-T) up 1.6 per cent and Metro (MRU-T) down 6.0 per cent (S&P TSX 60 up 2.9 per cent),” he said in a research note released before the bell.
“Looking forward, we believe EMP has opportunity related to easy comparisons in H2/F24, ongoing improvement initiatives and inexpensive valuation. That said, it has structural deficiencies versus peers including an elevated mix of lower growth conventional stores and less pharmacy exposure (which we believe is a superior business versus grocery). The value gap versus peers is noteworthy; however, we believe it will persist until EMP delivers comparable/sustainable growth versus peers. Empire trades at 6.5 times NTM [next 12-month] EV/EBITDA for the Retail business (5-year average is 7.2 times). For comparison, Loblaw Retail trades at 8.0 times our NTM Retail EBITDA and Metro trades at 10.2 times our NTM EBITDA.”
The rating revision comes ahead of the Dec. 14 release of the second-quarter 2024 financial results for the parent company of Sobeys, Safeway and Longo’s. Mr. Shreedhar is projected earnings per share of 76 cents for the quarter, up 4.1 per cent year-over-year (from 73 cents) and 2 cents above the current consensus on the Street. He attributes the gains to positive same-store sales growth, “slight” gross margin expansion and share repurchases.
“We consider Food Retailing (FR) segment results to be more meaningful than total company results for the purposes of evaluating recurring earnings power (total company results include contribution from the Investments/Other income segment),” he said. “For reference, we model FR EPS of $0.71, 17.0 per cent higher year-over-year.
“We forecast core FR sssg, excluding fuel, of 3.5 per cent versus 3.1 per cent last year. This is below recent peer reporting with Loblaw delivering sssg at 4.5 per cent and Metro delivering sssg at 6.8 per cent (in our view, this is due to a lower mix in the better performing discount grocery segment)
Mr. Shreedhar made modest reductions to his fiscal 2024 and 2025 revenue and earnings expectations for Empire reflect higher depreciation and amortization payments and interest expenses. His earnings per share projections slid to $3.10 and $3.41, respectively, from $3.15 and $3.51.
“Food store inflation (Statistics Canada data) averaged 6.0 per cent during Empire’s Q2/F24,” said Mr. Shreedhar. “Although food store inflation is gradually decelerating, it remains elevated versus the long-term average of 3.3 per cent; food store inflation for October 2023 was 5.4 per cent. We expect consumer trends to remain consistent to prior quarters, including high promotional penetration, trade-down and moderating discretionary purchases.”
“Our review of commentaries from Walmart, Loblaw, Metro and Target suggests: (i) Inflation is stickier in dry grocery versus fresh, (ii) Price increase requests for 2024 from large suppliers are higher than expected, (iii) e-Commerce sales have now settled at a level substantially higher than at pre-COVID levels, and (iv) Trends reflecting a pressured consumer continued: trading down, private label growth and higher promotional penetration (albeit rational).”
Mr. Shreedhar maintained a target price of $44 per share. The average target on the Street is $42.50, according to Refinitiv data.
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Keefe, Bruyette and Woods analyst Mike Rizvanovic is expecting a “noisy” fourth quarter from Canadian banks to end a “challenging” year.
“For the Big Six we forecast flat EPS quarter-over-quarter, on average, and a 3-per-cent decline from last year as PCLs [provisions for credit losses] inch higher, expenses remain elevated, and revenue growth slows further,” he said. “Beyond the quarter, we continue to see a challenging environment for the group heading into F2024 with headwinds related to rising PCLs, risks around a prolonged mortgage renewal cycle, and a rate environment that could drive a deleveraging cycle in consumer lending that would curtail balance sheet growth.”
In a research report released Thursday ahead of next week’s start of the sector’s earning season, Mr. Rizvanovic said he sees a “messy” set up for the quarter, “particularly in the expense line,” and reduced his 2024 earnings per share estimates by 3 per cent for for the Big Six. He also introduced his 2025 forecasts, which imply average growth of approximately 5 per cent.
“Key themes that we expect this quarter include: 1) flattish margins in Canadian P&C Banking, downside in the U.S. lending segment, and further NIB deposit runoff, albeit at a slower pace; 2) weaker loan growth in Canada, particularly RESL, and better performance in non-domestic lending due largely to an FX tailwind from a weaker C$; 3) expense inflation with several banks impacted by severance charges; and, 4) modestly higher PCLs,” he said.
“Our F2024 estimates decline on numerous headwinds, as do our target prices, commensurately. For F2025 our newly-introduced forecasts are premised on: 1) low-single digit NII growth on weaker lending volumes and a roughly flat NIM; 2) loan loss ratios slightly elevated and only down a bit from F2024; 3) modestly positive operating leverage on the back of cost-cutting initiatives; and, 4) no share buybacks except for TD.”
With his forecast changes, Mr. Rizvanovic updated his target prices for stocks in the sector, while he reiterated Toronto-Dominion Bank (TD-T) as his “top-pick among the Big Six” and emphasizing EQB Inc. (EQB-T) is “very compelling among the smaller banks” and “grossly undervalued.”
From Wednesday: CIBC downgrades TD shares
“We believe TD is well positioned to outperform its peers through F2025 as it utilizes its excess capital for buybacks and growth initiatives, which we don’t believe is currently priced into the bank’s multiple. Among the smaller banks we have a strong preference for EQB, which trades at a sizable valuation discount despite its superior medium-term growth trajectory,” he said.
The analyst raised his Street-high EQB Inc. (EQB-T, “outperform”) target by $1 to $102. The average target is $95.88.
Conversely, he reduced his targets for these stocks:
- Bank of Montreal (BMO-T, “outperform) to $128 from $138. Average: $126.21.
- Bank of Nova Scotia (BNS-T, “market perform”) to $63 from $66. Average: $66.71.
- Canadian Imperial Bank of Commerce (CM-T, “market perform”) to $56 from $58. Average: $60.30.
- Canadian Western Bank (CWB-T, “outperform”) to $33 from $34. Average: $32.45.
- Laurentian Bank of Canada (LB-T, “market perform”) to $28 from $33. Average: $32.27.
- National Bank of Canada (NA-T, “market perform”) to $97 from $101. Average: $100.33.
- Royal Bank of Canada (RY-T, “market perform”) to $125 from $127. Average: $134.10.
- Toronto-Dominion Bank (TD-T, “outperform”) to $94 from $95. Average: $91.26.
“As of 11/22/2023, the Big Six Canadian banks traded at a market cap-weighted forward P/E multiple of 9.6 times (on F2024 EPS consensus). That is below the group’s 10-year average multiple of 11.0 times, but a discount that we believe is justified in the current macroeconomic environment with elevated risks related to a prolonged mortgage renewal cycle in Canada. RY and TD are by far the best-valued banks at 10.4 times and 10.2 times, respectively, while CM is by far the least expensive at 8.1 times due to PCL-related headwinds (elevated CRE losses and higher volatility on performing loan PCLs). Among the smaller banks, we continue to see EQB as grossly undervalued, while CWB also trades at an outsized discount despite what we view as a solid near-term outlook. We expect valuations for the group to be range-bound in the near term with little prospect for multiple expansion,” the analyst concluded.
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National Bank Financial analyst Adam Shine was not surprised by Cineplex Inc.’s (CGX-T) decision to divest of its Player One Amusement Group business to Los Angeles-based private equity firm OpenGate Capital for $155-million in cash, calling the segment its “most easily salable asset.”
“The prospect of delevering being accelerated by an asset sale had begun to be discussed earlier this year,” he said. “We wrote in a July 17 highlight that investors may welcome a sale of one or both of CGX’s B2B units, P1AG and Cineplex Digital Media (CDM). We had noted, however, that the latter still needs time to recover following COVID and a pivot in strategy.
“P1AG though had meaningfully recovered in 2022 and was posting record results in 2023. CGX agreed to a sale of P1AG to OpenGate Capital for $155-million (no cash taxes given loss carryforwards). We had expected a price potentially above $200-million later in 2024. CGX has entered into a long-term agreement with P1AG which will continue to supply & service amusement games to its theatres & LBE locations.”
Seeing delevering remaining the focus with further debt reduction moving forward, Mr. Shine trimmed his forecast for Cineplex to reflect both the pending sale as well as lower box office and concession estimates stemming from the impact on the Hollywood strikes on the film slate for early 2024.
That led him to cut his target for the company’s shares by $1 to $13.50, reiterating an “outperform” recommendation. The average target on the Street is $13.10.
Elsewhere, others making target adjustments include:
* Canaccord Genuity’s Aravinda Galappatthige to $13 from $14 with a “buy” rating.
* BMO’s Tim Casey to $11.50 from $12.50 with a “market perform” rating.
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Docebo Inc.’s (DCBO-Q, DCBO-T) CEO transition reinforces a commitment to innovation and leadership on artificial intelligence, according to Stifel analyst Suthan Sukumar.
On Wednesday, TSX-listed shares of the Toronto-based online employee training software provider finished down 2.1 per cent after the premarket announcement founder Claudio Erba is “stepping away” from his role as chief executive officer and a member of the board of directors to become chief innovation officer. Current president and chief operating officer Alessio Artuffo will become the interim CEO effective March 1, 2024.
“DCBO Founder Claudio Erba will be transitioning from his current role as CEO and member of the board of directors to the role of Chief Innovation Officer, effective Feb 29th, 2024, allowing him to step away from day-today management and re-focus efforts on leading innovation, which we believe is an increasingly strategic priority given the opportunity to strengthen DCBO’s AI-leadership across the learning sector, particularly post the AI-focused Edugo acquisition,” said Mr. Sukumar. “Current President and COO Alessio Artuffo will serve as interim CEO, while the board conducts a formal CEO search. That said, we presume Mr. Aruffo’s appointment will be made permanent given our strong view of his impressive track-record of accomplishments over the +10 years at the company, from leading DCBO’s expansion into the U.S. as a Director, International Business Operations, to COO (of North America), President & CRO, and most recently President & COO.”
The analyst also thinks Docebo’s concurrent announcement of a substantial issuer bid to repurchase for cancellation up to US$100-million of its outstanding common shares at a price of US$55 per share (a 10-per-cent premium to Tuesday’s closing price “signals high management conviction on outlook [while] M&A remains a priority.”
“The company closed FQ3/23 with US$170-million of cash, with no debt, and has been positive cash flow since FQ2/22, providing sufficient liquidity to fulfill the SIB,” he said. “Intercap, DCBO’s largest shareholder at 43 per cent of shares outstanding, has expressed interest in participating in the offer, but intends to maintain a minimum 40-per-cent ownership stake.
“While the SIB will impact overall liquidity, which could be a limiting factor for new investors, we believe it signals high management conviction on the growth outlook ahead. Despite the bulk of cash now being allocated to share buy-backs, we still expect DCBO to continue leveraging M&A as part of its growth strategy, but the scale of the SIB suggests that management will remain focused on tuck-in, tech-focused deals that can be funded with FCF and/or equity (consistent with recent acquisitions).”
Seeing its current valuation as “attractive,” Mr. Sukumar hiked his target for Docebo shares to US$60 from US$50 with a “buy” recommendation (unchanged). The average on the Street is US$51.
“DCBO currently trades at 6.6 times fiscal 24 estimates vs. HCM/LMS and Ruleof-40 SaaS peers trading at 6-10 times,” he said. “Our new target price of $60/share (was $50/share) is based on 8 times (was 7 times) F24 estimated sales, near the mid-point to reflect stronger growth rates and expanding profitability, offset by a smaller market cap and lower liquidity. We believe continued strong execution demonstrating consistency in growth and margin expansion will support a re-rate in valuation closer to larger rule-of-40 SaaS peers.”
“We see durable growth tailwinds as recent investments position the company to capture a greater share of an expanding target market as more enterprises look to drive more impactful learning, development and engagement programs at scale, internally with employees and externally with customers/ partners, with potential to generate new revenue streams. We see further upside with more profitable growth, given strong but early days traction via the partner channel, in addition to growing expansion activity within the base from expanding up-sell opportunities with the company’s newly launched product suite.”
Elsewhere, Scotia Capital’s Kevin Krishnaratne also raised his target to US$60 from US$50 with a “sector outperform” rating.
“We view Mr. Erba’s move to focus exclusively on innovation and product along with the potential for Mr. Artuffo, who has over a decade of experience at the company including accelerating Docebo’s U.S. presence, as being named permanent CEO as positive,” said Mr. Krishnaratne. “Additionally, the $100-million SIB signals confidence in the company’s recurring SaaS and increasingly profitable FCF model, complemented by tuck-in M&A to enhance Docebo’s industry leading and strong LMS tech stack, in our view.”
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While Stifel analyst Martin Landry sees the 26-per-cent year-over-year drop in Goodfood Market Corp.’s (FOOD-T) fourth-quarter revenue as “striking,” he said it is “not a major concern,” given it was “offset by a significant reversal of profitability.”
“Looking at FY23, adjusted EBITDA turned positive and came-in at $4.7 million compared to a loss of $41 million in the previous year, an impressive recovery in a short timeframe,” he said. “Focus will now turn to revenue growth as future growth in EBITDA and ultimately positive free cash flow will have to come from top-line growth given most cost-cutting measures are completed. However, our visibility on a return to revenue growth remains limited given the difficult macroeconomic environment.”
Shares of the Montreal-based meal kit company dropped 12.1 per cent on Wednesday in response to revenue concerns, however Mr. Landry said the quarterly results was better than anticipated in his view.
While revenue of $37-million was lower than his $34-million estimate driven by a lower customer count (down 26 per cent year-over-year) and flat average revenue per customer, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $706,000, up from a $1.9-million loss in the same period of fiscal 2022 and above his flat expectation.
“While revenues continue to decline rapidly, profitability improved and Goodfood was able to generate positive adjusted EBITDA despite being in its seasonally weak period (i.e. summer),” said Mr. Landry.
“Goodfood’s profitability improvements realized in FY23 have been impressive. The company generated EBITDA of $4.7 million in FY23, an improvement of ~$45 million compared to the FY22 EBITDA loss of $41 million. This was driven by several initiatives including (1) a reduction of $34 million in annual non-marketing SG&A expenses and (2) a 1380 basis points improvement in gross margin driven primarily by the exit of the grocery on-demand offering. Assuming this new cost structure is sustainable, gross margin of 38-40 per cent combined with adjusted SG&A as a percentage of sales of 34-36 per cent, Goodfood could generate positive adjusted EBITDA margin in the range 2-6 per cent sustainably. This is assuming stable revenues as a further decline in revenues could impact fixed cost absorption.”
While warning Good Food “remains in cash burn mode driven by high financing costs” and “visibility on the inflection point to positive cash generation remains limited,” Mr. Landry raised his 2024 revenue forecast by 2 per cent, expecting an increase in active customer count. He also thinks increased spending on credits and incentives could lead to an increase in customer trials and active users. However, his adjusted EBITDA projection fell 29 per cent, modelling “market reinvestments to return to revenue growth.”
Maintaining a “hold” recommendation for the company’s shares, his target slid to 50 cents from 65 cents. The average target is currently 63 cents.
“We are decreasing our target price ... on the back of lower multiples, reflecting the general market decline in micro-cap companies and lower forecasts,” said Mr. Landry. “We would like to see sustainable free cash flows in order to change our stance on Goodfood.”
Elsewhere, Desjardins Securities’ Frederic Trembay reiterated a “hold” rating and 75-cent target.
“Slightly better-than-expected 4Q FY23 results showed that operational improvements and a leaner cost structure continued to support positive quarterly adjusted EBITDA, even in a seasonally slower quarter,” said Mr. Tremblay. “In FY24, management’s focus will turn more heavily to growth (revenue, profitability, cash flow). In our view, some questions remain about the balancing act between growth and profitability, especially amid challenging macroeconomic conditions.”
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In response to weaker-than-expected first-quarter 2024 results and “commensurate deterioration in balance sheet flexibility,” Raymond James analyst Steve Hansen downgraded Deveron Corp. (FARM-X) by two levels to “market perform” from “strong buy” on Thursday.
“While Deveron’s core soil lab fertility business continues to exceed expectations, a sharp slowdown in the firm’s ancillary carbon business has collided with an elevated cost structure to introduce near-term margin headwinds heading into the company’s busiest quarter,” he said. “While we expect these pressures can be ultimately be rectified, we have elected to step to the sidelines until greater visibility emerges.”
While thinks the opportunity is “still rich,” Mr. Hansen warned near-term execution for the Toronto-based agriculture services and data company is “critical,” reducing his target for its shares to 35 cents from 75 cents, which is the current average.
“We see heightened near-term risks associated with the aformentioned carbon headwinds, cost structure, and deterioration in balance sheet flexibility,” he said. “Fortunately, with the company’s seasonally strongest quarter already in full swing, we expect a healthy boost in near-term cash reserves that should provide the required flexibility to implement swift cost discipline. Still, given the risk associated with this near-term picture, we’ve elected to step to the sidelines until greater visibility emerges.”
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Desjardins Securities analyst Lorne Kalmar sees Primaris Real Estate Investment Trust (PMZ.UN-T) as a “compelling way to play the recovery in Canada’s mall sector.”
He reiterated his bullish view following a recent tour of the REIT’s first acquisition of 2023, Conestoga Mall in Waterloo, Ont. He said the property is “consistent with the quality expected of a Canadian pension-fund-owned mall and emblematic of the REIT’s strategy to high-grade its portfolio via acquisitions.”
“Overall, we came away impressed with the property,” he added. “The mall is in very good condition, with minimal vacancies, and well-located within the city. From a traffic perspective, the property was very busy for a Wednesday afternoon, with the holiday shopping season in full swing. The tour included a presentation by the president & CEO of Waterloo EDC and the executive director of economic development for Waterloo, which highlighted the economic strength, population growth and high levels of investment benefiting the region.”
In a research note released Thursday, he trimmed his funds from operations projections for 2023 through 2025 to reflect Primaris’ $370-million acquisition of a shopping centre complex in Halifax, which was announced on Monday.
“Halifax marks the second acquisition that is expected to be neutral to FFOPU [funds from operations per unit] in year one,” Mr. Kalmar said. “However, we are comfortable with these types of acquisitions, as we see good NOI [net operating income] growth upside in year two and beyond. Given malls are still in recovery mode, we expect the REIT to recognize the same type of NOI growth opportunities that it has highlighted for the rest of the portfolio—namely, converting specialty leases to net leases, improving the tenant mix and focusing on long-term value creation. Further, Halifax Shopping Centre was previously managed by a third party. We see opportunities for additional cost savings as the mall is integrated into the REIT’s operating platform. The mall should also benefit from the REIT’s retailer relationships, a key advantage for a platform of PMZ’s scale. In addition, the REIT’s growing ownership of high-quality Canadian malls is enhancing its negotiating power with current and potential tenants, a dynamic we expect to continue to improve as PMZ adds more high-quality malls to its portfolio. We also believe Halifax could outperform management’s initial expectations, as has been the case with Conestoga thus far.”
Despite his reduced projections, Mr. Kalmar maintained a “buy” recommendation and $16.50 target for Primaris units. The average is $16.84.
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In other analyst actions:
* Ahead of the Nov. 28 release of its second-quarter 2024 financial results, CIBC’s Mark Petrie raised his target for shares of Alimentation Couche-Tard Inc. (ATD-T) to $88 from $79 with an “outperformer” rating. The average target is $86.60.
“We are updating our FQ2 EPS estimate to $0.76 (from $0.68), primarily to reflect stronger-than-expected U.S. fuel margins (was 40 cents per gallon, now 46cpg),” said Mr. Petrie. “We have also updated our model for unfavourable FX, which clips our F2025 EPS estimate by six cents. We also boost our long-term U.S. fuel margin assumption to 40cpg (prior 38cpg) and our price target rises.”
* Canaccord Genuity’s Yuri Lynk cut his Exro Technologies Inc. (EXRO-T) target to $2.25 from $2.75, keeping a “buy” rating. The average is $2.78.
* BMO’s Jackie Przybylowski bumped her First Quantum Minerals Ltd. (FM-T) target to $28.50 from $28, exceeding the $26.11 average, with an “outperform” rating.
* Coming off restriction following its $10-million equity financing, CIBC’s Mohamed Sidibe lowered his Rock Tech Lithium Inc. (RCK-X) target to $2.90 from $3.15 with an “outperformer” recommendation. The average is $3.48.
“The funds are intended to be used to finance the continued exploration and development of the Georgia Lake project, and for corporate purposes as well as the development of the converter project in Canada which is at a very early stage,” he said. “While a Canadian converter is ambitious, we believe investors’ focus remains firmly on first delivering the Guben converter in Germany, which is expected to start construction in 2024 and deliver first production in 2026. We currently do not model any additional converters and are currently waiting for the receipt of the construction permit and financing of the Guben converter project in early 2024 as the next major catalysts.”
* ATB Capital Markets’ Tim Monachello lowered his Shawcor Ltd. (MATR-T) target to $20 from $25 with an “outperform” rating. The average is $21.56.
“We reduce our estimates following MATR’s Q3/23 results on November 13, 2023, which included a view toward transitory headwinds that are expected to persist into H1/24 and an elevated level of non-recurring relocation and start-up costs included in 2024 EBITDA related to four new manufacturing facilities that MATR is currently building for commissioning in H2/24 and H1/25,” he said. “In addition, our modeling now reflects ATB’s recently reduced U.S. rig activity forecasts for 2024 and 2025, lowering our composite pipe estimates over our forecast horizon. All told, 2024 is positioned as a transition year for MATR as it lays the groundwork for its longer-term high-return growth strategy. For context, by 2025, MATR expects to drive at least 10 per cent per year annual EBITDA growth in the medium to long term, at least 20 per cent after-tax IRRs on incremental capital expenditures, EBITDA margin expansion to above 20 per cent (17 per cent in 2023e), and roughly 70-per-cent FCF conversion rates. Although we believe that 1) near-term operational headwinds, and 2) reduced visibility on MATR’s capital structure as a result of the pending sale process for its PPG business, are likely to remain the most prominent drivers of stock performance in the coming months, we believe these risks are well reflected in MATR’s current valuation.”
* In a note titled Strong Finish to Year-end Teed Up, National Bank’s Don DeMarco trimmed his Torex Gold Resources Inc. (TXG-T) target to $18.25 from $19 with a “sector perform” rating. The average is $23.39.
David Leeder