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On today’s TSX Breakouts report, there are 24 stocks on the positive breakouts list (stocks with positive price momentum), and nine stocks are on the negative breakouts list (stocks with negative price momentum).

RankPositive BreakoutsNamePrice, Oct. 5
1ABST CN EquityAbsolute Software Corp. $16.84
2AYA CN EquityAya Gold & Silver Inc. $9.00
3BTO CN EquityB2Gold Corp. $4.67
4CNC CN EquityCanada Nickel Co. $1.77
5DSG CN EquityDescartes Systems Group Inc. $95.52
6DOL CN EquityDollarama Inc. $83.58
7ELD CN EquityEldorado Gold Corp. $9.27
8ERF CN EquityEnerplus Corp. $21.32
9ERO CN EquityEro Copper Corp. $16.26
10FR CN EquityFirst Majestic Silver Corp. $11.83
11FRU CN EquityFreehold Royalties Ltd. $15.95
12XAU CN EquityGoldMoney Inc. $1.71
13IAG CN EquityiA Financial Corp.oration Inc. $75.12
14NVA CN EquityNuVista Energy Ltd. $11.80
15OLA CN EquityOrla Mining Ltd. $4.95
16OVV CN EquityOvintiv Inc. $74.51
17PTM CN EquityPlatinum Group Metals Ltd. $2.43
18PSK CN EquityPrairieSky Royalty Ltd. $19.69
19RFP CN EquityResolute Forest Products Inc. $27.78
20SES CN EquitySecure Energy Services Inc. $6.44
21SCL CN EquityShawCor Ltd. $9.53
22SVM CN EquitySilvercorp Metals Inc. $3.59
23X CN EquityTMX Group Ltd. $136.08
24WFC CN EquityWall Financial Corp. $14.00

RankNEGATIVE BREAKOUTSNamePrice, Oct. 5
1BRAG CN EquityBragg Gaming Group Inc. $5.38
2CRDL CN EquityCardiol Therapeutics Inc. $1.22
3MPCT-U CN EquityDream Impact Trust $4.00
4MHC/U CN EquityFlagship Communities REIT $14.68
5GWR CN EquityGlobal Water Resources Inc. $16.21
6HAI CN EquityHaivision Systems Inc. $3.57
7INE CN EquityInnergex Renewable Energy Inc. $17.13
8SYZ CN EquitySylogist Ltd. $5.40
9TRZ CN EquityTransat AT Inc. $2.71

SOURCES: BLOOMBERG; THE GLOBE AND MAIL

Discussed today is a stock that is on the positive breakouts list – Shawcor Ltd. (SCL-T). Year-to-date, Shawcor’s share price has nearly doubled in value, making it the 10th best performing stock in the S&P/TSX SmallCap Index.

Over the past month, the share price has rallied 23 per cent. Consequently, the stock is currently in overbought territory and the positive price momentum may pause in the near-term in order for the stock to digest these gains. The relative strength index (RSI) is 72. Generally, an RSI reading at or above 70 reflects an overbought condition.

The stock has a unanimous buy call from seven analysts with the stock is trading at a deep discount to its historical average multiple.

A brief outline on Shawcor is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Toronto-based Shawcor serves the infrastructure, energy transportation and water markets through its three main reporting segments: 1) composite systems, 2) automotive and industrial and 3) pipeline and pipe services. Its wide range of product offerings include: composite pipe, underground storage tanks, polymer tubing, onshore and offshore pipeline protective coatings. Its 2021, the composite systems segment represented 33 per cent of total revenue, the automotive and industrial segment represented 23 per cent of total revenue, and the pipeline and pipe services business segment accounted for 44 per cent of total revenue.

In terms of its geographical revenue breakdown, as of June 30, for the trailing 12-months, 77 per cent of revenue stemmed from North America, 15 per cent from Europe, the Middle East and Africa, 5 per cent from Latin America and 3 per cent from Asia Pacific.

On Sept. 12, management announced its intentions to change the company’s name to Mattr, which will likely occur in the first half of 2023. In the news release, the CEO stated, “To many, the Shawcor name is synonymous with pipeline related products or services. As we look to the future, rebranding our Company is an important step to better reflect the energy, creativity and innovation of this organization, and our leadership in providing high value, materials-based products to industrial and critical infrastructure markets.” In the company’s Sept. 2022 investor presentation management said, “Mattr embodies our core competencies in materials science and reflects the significance of our products and solutions. What we do matters – to our employees, our customers, our communities and all of our stakeholders.”

Investment thesis

· Robust earnings growth is forecast by the Street.

· Rising backlog, reflecting strong future revenue growth.

· Strengthening its balance sheet through sales of its non-core assets.

· Stock is trading at an attractive valuation.

· Beneficiary of infrastructure development (aging infrastructure, population growth).

· Potential catalysts: 1) contracts wins; and 2) returning capital to shareholders by reinstating its dividend and repurchasing shares.

Dividend policy

The company currently does not pay its shareholders a dividend. In March 2020, at the start of the COVID pandemic, management announced the suspension of its dividend. Prior to the suspension, the company paid its shareholders a quarterly dividend of 15 cents per share.

Quarterly earnings results and outlook

After the market closed on August 11, the company reported second quarter financial results that beat expectations. Revenue was $307-million, topping the Street’s forecast of $285-million, up slightly from $305.9-million reported during the same period last year. Its composite systems segment as well as its automotive and industrial segment realized strong year-over-year revenue growth of 40 per cent and 19 per cent, respectively. This strength offset the decline in its pipeline and pipe services segment that saw its revenue decline 35 per cent year-over-year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $31.5-million, exceeding the consensus estimate of $26-million. The company’s order backlog, a reflection of future revenue, increased 11 per cent sequentially to $779-million. As of June 30, outstanding firm bids stood at nearly $1.5-billion, up from $946-million reported last quarter. Its balance sheet improved with its trailing 12-months net debt-to-adjusted EBITDA declining to 2 times. Management targets a net debt-to-adjusted EBITDA ratio of 1.5 times.

On the earnings call, president and chief executive officer Mike Reeves provided a positive outlook: “The underlying trends for each of Shawcor’s primary businesses are favorable, and expected to remain so for several years, with particular near-term opportunities in the North American industrial infrastructure and onshore energy markets, and slightly longer-term opportunities in the offshore oil and gas pipeline market…We believe opportunities will exist to make strategic acquisitions that move Shawcor’s composites and automotive and industrial segments further up the value chain, and improve our ability to enable responsible, sustainable, renewal enhancement of critical infrastructure. With improved financial flexibility, we stand ready to take advantage of those opportunities at the appropriate moment. Despite continued cautiousness regarding the impact of geopolitical events, COVID-19, supply chain risks and rising interest rates, we remain very confident our momentum from the first half will continue, and that the second half of 2022 will be substantially stronger than the first.”

Analysts’ recommendations

With a market capitalization of $672-million, this small-cap stock is well covered by the Street. According to Bloomberg, the stock has a unanimous buy recommendation from seven analysts.

The seven firms providing research coverage on the company are as follows in alphabetical order: ATB Capital Markets, BMO Capital Markets, Cormark Securities, Industrial Alliance Securities, National Bank Financial, RBC Capital Markets and TD Securities.

Revised recommendations

In Sept., two analysts revised their target prices –both higher.

· RBC’s Keith Mackey increased his target price to $12 from $8.

· TD’s Aaron MacNeil bumped his target price to $12 from $11.

Financial forecasts

According to Bloomberg, the Street is forecasting robust growth for the company. The consensus revenue estimates are $1.241-billion in 2022 and $1.793-billion in 2023. The Street is forecasting EBITDA of $126.5-million in 2022 rising to $263.5-million in 2023. The consensus earnings per share estimates are 46 cents in 2022 and $1.71 the following year.

Over recent months, earnings estimates have spiked, particularly for 2023. For instance, three months ago, the Street was forecasting EBITDA of $114-million in 2022 and $152-million in 2023. This dramatic jump in expectations came after the company announced in August that it received a $500-million pipe coating contract from the Mexican subsidiary of TC Energy Corp.

Valuation

Analysts commonly value the stock on an enterprise value-to-EBITDA basis. According to Bloomberg, the stock is trading at an EV/EBITDA multiple of 3.3 times the 2023 estimate, well below the five-year historical average multiple of 6.1 times.

According to Bloomberg, the average one-year target price is $12.36, implying there is 30 per cent upside in the share price over the next 12 months. Target prices are quite concentrated. Individual target prices are as follows in numerical order: four at $12, $12.50 and two at $13.

Chart watch

Year-to-date, the share price is up 94 per cent, making it the 10th best performing stock out of 229 stocks in the S&P/TSX SmallCap Index.

Over the past month, the share price has rallied 23 per cent. Consequently, the stock is currently in overbought territory and the positive price momentum may pause in the near-term in order for the stock to digest these gains. The relative strength index (RSI) is 72. Generally, an RSI reading at or above 70 reflects an overbought condition.

In terms of key technical support and resistance levels, there is technical support around $7, close to its 50-day moving average at $7.36. Failing that, there is support around $6, near its 200-day moving average at $5.95. The stock is approaching an initial ceiling of resistance around $10. After that, there is resistance around $12 and then around $15.

ESG Risk Rating

Looking at risk providers Sustainalytics and MSCI ESG Ratings, Shawcorp currently does not have an ESG (environmental, social and governance) risk rating.

Please note that this report is not an investment recommendation.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indices that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

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