Inside the Market’s roundup of some of today’s key analyst actions
The recovery of its Tim Hortons brand is “in place” and should show benefits for Restaurant Brands International Inc. (QSR-N, QSR-T) in the second of half of 2021, according to CIBC World Markets analyst Mark Petrie.
“The Q2 call featured two notable incremental data points,” he said. “First, the TH lunch daypart in June exceeded 2019 sales levels; and second, TH Canada as a whole improved to negative mid-single digits vs. 2019 in July (down 11 per cent in Q2). We acknowledge that work-from-home trends should disproportionately impact TH vs. its closest peers, but we expect TH Canada [same-store sales] to recover to 2019 levels by late 2022. We expect EBITDA to recover to 2019 levels even sooner—by Q1/2022—thanks to international unit openings.”
In a research report released Tuesday, Mr. Petrie called Restaurant Brands’ unit growth and balance sheet “superior to most peers,” but he said that strength is “somewhat offset by less exposure to America’s robust economy and an underperforming domestic Burger King (BK) brand.”
“The underperformance from BK U.S. versus peers is notable,” he added. “While MCD reported a domestic two-year same-store sales growth (SSS) of nearly 15 per cent, BK’s 2-per-cent achievement leaves much room for improvement. Management articulated the top priorities as core menu innovation, growing the breakfast daypart, improved in-store operations and integrating digital. The Ch’King Sandwich launch has achieved more modest results than we anticipated, and breakfast is fiercely competitive, but we do expect Royal Perks (loyalty), increasing digital investments and greater focus on this banner should lead to a three-year stacked comp of up 8 per cent by Q1/22.”
Mr. Petrie emphasized unit growth across its brands is accelerating toward pre-pandemic level “with potential for more.” He’s now projecting 1,400 net new stores annually through 2023, which would be a compound annual growth rate of 5.1 per cent.
“This is an improvement from pre-pandemic levels, and also represents a premium over most quick-service peers. Some of 2021′s achievement thus far is surely spillover from deferred 2020 openings, but still, performance is encouraging, particularly at Popeyes (PLK) and TH China, which we believe has meaningful upside for years to come,” he said.
Seeing the recovery at Tim Hortons still not properly priced into the stock, and viewing the discount to peers “as likely to close as it plays out,” Mr. Petrie raised his target for Restaurant Brands shares to US$78 from US$77 with an “outperformer” rating. The average on the Street is US$73.08, according to Refinitiv data.
Other analysts making target adjustments include:
* Credit Suisse’s Lauren Silberman to US$76 from US$74 with an “outperform” rating.
* RBC’s Christopher Carril to US$80 from US$73 with an “outperform” rating.
After Tuesday morning’s release of “strong” second-quarter results alongside a reduction to its full-year guidance, National Bank Financial analyst Maxim Sytchev raised his rating for shares of Stella-Jones Inc. (SJ-T) to “outperform” from “sector perform.”
“SJ shares are at the same level as in Sept 2015 (!) while EBITDA (ex IFRS) progressed from $265-million in 2016 to now-projected $348-million in 2022,” he said in a research note. “Lumber pricing has been lumpy, and we are still in the process of rolling through the forward estimates that are facing a headwind. That being said, with relatively clean balance sheet (1.7 times net debt to EBITDA), FCF yield of 4 per cent in 2022 and a multiple of 9.7 times on rolling forward basis (although it’s likely closer to 10.0 times as we are pulling consensus forecasts that are a bit stale now given new guidance), this is not a bad setup for a defensive name.
“Resi market will settle as fires and still-robust home renovation market is unlikely to completely derail this vertical; with 16 per cent all-in upside to our target price, we think now is the time to buy SJ shares (that have trailed the market this year – down 2.2 per cent year-to-date vs. TSX up 16 per cent).”
Mr. Sytchev maintained a $52 target. The current average on the Street is $59.94.
Despite seeing its outlook remaining “healthy,” iA Capital Markets analyst Naji Baydoun thinks Capital Power Corp.’s (CPX-T) recent share price appreciation “warrants pause.”
Accordingly, he lowered his rating for the Edmonton-based company to “hold” from a “buy” recommendation following the release of in-line second-quarter financial results, a 7-per-cent boost to its annual dividend and increases to its full-year guidance.
“We continue to expect CPX’s organic growth initiatives and almost $500-million per year capital commitment towards new growth to support healthy mid-single-digit average annual AFFO [adjusted funds from operations] per share, FCF [free cash flow] per share, and dividend growth through 2025, which should support the Company’s 10-12 per cent per year total shareholder return target,” said Mr. Baydoun. “We remain positive on the long-term outlook for the Company and expect further growth catalysts to materialize in 2021. However, the recent strong share price performance has helped CPX’s shares (1) outperform peers year-to-date, (2) close some of the relative valuation discount to peers, and (3) trade slightly above their historical average FY2EEV/EBITDA multiple (almost 9 times 2022 EV/EBITDA vs. 8 times FY2E historically). As such, we are taking a more neutral stance on the shares at this time and would wait for further strategic developments or a better entry point.”
On Friday, Capital Power reported EBITDA for the second quarter of $241-million, matching Mr. Baydoun’s forecast, and adjusted funds from operations per share of 83 cents, which fell 2 cents below his estimate. He called the results “solid,” due largely to strength in the Alberta power market
“CPX’s growth initiatives remain on track, including (1)the Genesee 1 & 2 (G1 & G2) repowerings, and (2) multiple renewable power projects),” he said. “We continue to see the potential for additional growth announcements in 2021 within the Company’s ~$500M/year capital commitment target.”
“Alongside the Q2/21 results, CPX increased its 2021 financial guidance. The revised guidance reflects bothH1/21 results and management’s expectations for a strong H2/21, supported by the continued strength in the Alberta market (in line with our expectations).”
After raising his 2021 and 2022 financial projections, Mr. Baydoun increased his target for Capital Power shares to $44 from $42. The average is $43.23.
“CPX offers investors (1) a mix of contracted and merchant cash flows, (2) long-term leverage to the Alberta power market, (3) healthy growth (mid-single-digit FCF/share growth through 2025), (4) an attractive income profile (5-per-cent yield, 5 per cent per year dividend growth in 2022, with an 45-55-per-cent payout), and (5) a discounted relative valuation versus IPP peers,” he said. “We are (1) adjusting our financial forecasts to incorporate the strong near-term outlook for Alberta power prices, and (2) reducing our equity risk premium assumption by 0.5 per cent (reflecting increased confidence in the overall outlook, including access to capital to fund new growth); accordingly, we are increasing our price target.”
Other analysts making target changes include:
* CIBC’s Mark Jarvi to $43 from $42 with a “neutral” rating.
“While Q2 results were not as strong as we expected (dampened by hedges and outages), results are still trending well and the Alberta power market outlook remains strong, underpinning increased guidance and higher estimates. Existing growth projects are advancing as planned (no material inflation impacts) and we could see new growth announcements before year end,” said Mr. Jarvi.
* Desjardins Securities’ Bill Cabel to $47 from $44 with a “buy” rating.
“While the quarter missed expectations, guidance was much higher than the Street anticipated. We continue to like the story as we see it as a winner from many respects — thermal assets are key to grid reliability and should continue to benefit from the strong Alberta power market in the near term. Longer-term, we expect the valuation to benefit from two solid re-rates,” he said.
* Raymond James’ David Quezada to $48.50 from $44 with an “outperform” rating.
“While shares have staged an impressive rally of late, we believe CPX’s substantial discount to peer and robust outlook, means there is still room to run,” he said.
* RBC’s Maurice Choy to $44 from $41 with a “sector perform” rating.
* Scotia Capital’s Robert Hope to $43 from $41 with a “sector perform” rating.
* National Bank Financial’s Patrick Kenny to $46 from $45 with an “outperform” rating.
* BMO Nesbitt Burns’ Ben Pham to $42 from $41 with a “market perform” rating.
Citing share price weakness, TD Securities analyst David Kwan raised his rating for Dialogue Health Technologies Inc. (CARE-T) to “buy” from “hold” ahead of the Aug. 11 release of its second-quarter results.
“Dialogue’s share price has declined over 40 per cent since we initiated coverage in mid-April 2021, compared with a decline of just over 20 per cent for its closest peer Teladoc, as the share prices of telehealth and other ‘pandemic winners’ have underperformed in recent months,” he said. “Despite the strongest revenue growth profile and a pristine balance sheet, at 5.6 times EV/Sales (calendar 2022 estimate), Dialogue is trading at a significant discount to the telehealth peer-group average of 7.8 times, its closest peer Teladoc at 9.3 times, and also its Canadian SaaS peers at 10.5 times.”
For the quarter, Mr. Kwan is projecting revenue of $17.2-million, in line with the Street’s forecast and up 58 per cent year-over-year. Adjusted EBITDA of a $4.8-million loss is slightly below the consensus (a $4.3-million loss).
“We expect Adjusted EBITDA losses to narrow, particularly in F2022, where we expect Dialogue to turn Adjusted EBITDA positive in Q4/F22,” he said.
The analyst trimmed his target to $16 from $17.50. The average is $18.50.
Though SNC-Lavalin Group Inc.’s (SNC-T) second-quarter financial results fell short of his expectations, ATB Capital Markets analyst Chris Murray concluded the release was “solid,” seeing “management’s efforts to de-risk operations contributing to more consistent performance.”
On Friday before the bell, the Montreal-based firm reported revenue and adjusted EBITDA of $1.78-billion and $158.3-million, respectively, falling short of Mr. Murray’s estimates of $1.87-billion and $201.2-million. Adjusted fully diluted earnings per share from its Professional Services & Project Management (PS & PM) activities came in at 31 cents, also below his forecast (52 cents).
The analyst highlighted a “strong” performance from its Engineering Services business, which saw earnings growth of 10 per cent year-over-year with margins of 9.6 per cent, which was at the high end management’s 2021 guidance.
“We were impressed with the organic growth figure, particularly with peers guiding in the low to mid single digit range for Q2/21, with management adding that end-market demand trends remain strong and the prospect of a large-scale U.S. infrastructure bill adding potential upside,” he said. “While Adjusted EBITDA (Consolidated) of $158.3-million came in below consensus of $176.9-million, the difference was largely due to a $22.2-million (EBIT) loss within the Company’s Infrastructure EPC Projects segment; however, the segment is in run-off mode as SNC has exited the LSTK market.”
He added: “Organic growth and margins within Engineering Services were strong and position the Company hit the higher-end of its full-year margin guidance with continued reimbursable backlog growth boding well for 2022 and beyond.”
Mr. Murray emphasized the sale of the remaining 25 per cent of its Resource business is a “positive” step for SNC as operating risks will diminish and a “higher-quality free cash flow profile” appearing. He also pointed to potential opportunities in the U.S. market for its Engineering, Design and Project Management business, which he sees “boding well for organic growth and book-to-bill trends going forward.”
Keeping an “outperform” rating for SNC shares, Mr. Murray increased his target to $45 from $42. The average on the Street is $41.04.
Elsewhere, CFRA upgraded SNC to “buy” from “hold” with a $38 target, up from $35.
TD Securities analyst Michael Tupholme bumped up his target to $42 from $40 with a “buy” recommendation.
“We continue to be constructive on SNCL Engineering Services’ outlook (SNC’s future focus). Although LSTK project run-off risks remain (particularly in Infrastructure EPC Projects), we see these risks as more than adequately priced into the stock. We continue to view SNC’s valuation as compelling,” said Mr. Tupholme.
Following a “very solid” second quarter, CIBC World Markets analyst Robert Bek said he continues to be “encouraged” by Telus Corp.’s (T-T) “fibre roadmap” and expects a “more pronounced positive effect” on its financials results in the coming quarters.
“The Core TELUS Tech (TTech) operations were solid on the back of strong Mobile Phone Net Adds at 89k (vs. Street at 65k), continued momentum in wireline, good net additions, and excellent churn management across the whole telecom portfolio,” he said. “In Wireless, we expect the company to continue leveraging its bundling opportunities, as consumers are increasingly looking to step up their data plans and upgrade handsets, though the near-term outlook for roaming continues to be bleak versus pre-COVID. In Wireline, the copper-to-fiber migration should anchor continuous digitization and margin opportunities. The B2B segment, which was weak though the COVID quarters, is expected to become accretive to profitability into FY22.”
Mr. Bek sees growth in Telus’ Health and Agricultural businesses as a key “path to unlock hidden value,” adding: “With more performance metrics reported for the Health segment already, TELUS management is also planning to start reporting on Agricultural key performance indicators in FY22. The TELUS Agriculture team now consists of 1,200 members who provide agriculture solutions to six of the top-10 food suppliers globally, and 9 of the top-10 agricultural customers. For FY21, the company’s revenue target for the segment is set at $400-million, two-thirds of which is to come from digital infotech solutions. In our view, the margin contribution to consolidated financials is not material at this point, but the double-digit revenue growth and scalability of recent investments argue for an incremental value not reflected in profitability estimates. For both Health and Agriculture assets, management will consider monetizing the assets at the right time.”
Keeping an “outperformer” rating, Mr. Bek raised his target to $30 from $29,. The average on the Street is $29.75.
“We continue to view TELUS as very well positioned relative to its peers, with strong non-traditional assets providing additional upside to the story. Further visibility on TELUS Health economics should ultimately be incremental to valuations, in our view,” he said.
Elsewhere, Desjardins Securities’ Jerome Dubreuil maintained a “buy” rating and $30 target.
“In our view, T’s stock price does not fully capture the additional value that the company offers shareholders through its large exposure to wireless, advanced FTTP program and ownership of attractive growth platforms,” he said. “We believe its strong, forward-looking management team has positioned the company well for long-term robust growth in connectivity, IT, health and agriculture.”
Desjardins Securities analyst David Newman has high expectations for Boyd Group Services Inc.’s (BYD-T) second-quarter financial results.
“In 2Q21, macro indicators are all pointing toward a strong quarter for BYD, with higher vehicle miles travelled (up 55 per cent year-over-year in April and 29 per cent year-over-year in May) and a significant year-over-year increase in reported vehicle crashes across the most populous states in the U.S. (up 48 per cent on average),” he said. “Canadian light vehicle sales also picked up in 2Q21 (up 52 per cent year-over-year) but remained below 2019 levels. Based on OPIS estimates, fuel demand in 2Q21 saw a surge as the economy reopened, up 53 per cent year-over-year in April (peaked at 60 per cent year-over-year), 30 per cent in May and 9 per cent in June, but remains 12–15 per cent below pre-pandemic levels.”
Ahead of the Aug. 11 release, Mr. Newman is projecting adjusted EBITDA of US$54-million, just $1-million below the consensus estimate on the Street, driven by contributions from new locations and same-store-sales growth of 27 per cent.
“We are encouraged that BYD has resumed its acquisition spree, backed by more than US$875-million in cash and available credit as at the end of 1Q21,” he said. “It acquired 32 collision repair centres and three start-ups (intake centres) in 2Q21. In 3Q21 to date, including the recent acquisition of Collision Works of Oklahoma with 35 locations, BYD has added 36 locations for a pro forma total store count of 814, including 131 in Canada and 683 in the U.S.”
Keeping a “buy” rating for Boyd share, he raised his target to $260 from $240, topping the $254.31 average.
Pointing to its potential return, Stifel analyst Robert Fitzmartyn raised his rating for Gear Energy Ltd. (GXE-T) to “buy” from “hold” following the release of in-line second-quarter financial results.
“The company has left associated 2021 guidance unchanged, as it continues to be focused on deleveraging its balance sheet,” he said.
Mr. Fitmartyn kept a $1 target for Gear shares, which is 9 cents below the consensus.
“We are maintaining our 12-month target price at $1.00/sh, but switching from a HOLD to BUY rating based on implied returns to a 2022 estimated EV/DACF of 3.8 times which screens in line with its peers,” he said.
In other analyst actions:
* Ahead of the release of its quarterly results on Wednesday, * ATB Capital Markets analyst Chris Murray increased his Bombardier Inc. (BBD.B-T) target to $1.75 from $1.15, topping the $1.22 average, with a “speculative buy” recommendation.
“We are revising our estimates for Q2/21 to reflect the Company’s recent deleveraging efforts and strengthening business jets utilization levels, which we see supporting demand trends and positioning the Company for a stronger backlog build beginning in Q2/21,” he said. “With the Company’s near-term liquidity situation now largely satisfied, combined with an improving demand environment, larger support centre footprint, and a pick-up in Global 7500 delivery volumes slated for H2/21, we see improving investor sentiment and the focus shifting towards operational execution and the Company’s ability to meet its longer-term (2025) targets.”
* CIBC World Markets analyst Mark Petrie increased his George Weston Ltd. (WN-T) target to $153 from $141, reiterating an “outperformer” rating, while Desjardins Securities’ Chris Li raised his target to $141 from $137 with a “buy” recommendation. The average is $136.14.
“Weston Foods’ Q2 results fell short of our expectations, owing to cost pressures and greater FX impact. Nonetheless, our thesis is unchanged. The closing of the sale of Weston Foods by year end is on track, and we expect the continued return of cash to shareholders should help to narrow the holdco discount from 16 per cent today,” Mr. Petrie said.
* CIBC’s Bryce Adams cut his target for Copper Mountain Mining Corp. (CMMC-T) to $5.50 from $6, exceeding the $5.15 average, with an “outperformer” recommendation.
* Assuming coverage of Russel Metals Inc. (RUS-T), Laurentian Bank Securities analyst Troy Sun raised the firm’s target to $38 from $30 with a “hold” rating. The average on the Street is $35.04.
“Historically, RUS shares have tracked steel pricing closely. Given 1) low service center inventories, 2) robust steel demand for infrastructure build-out, 3) so far muted prospects on producers adding capacity, and 4) bullish outlook from industry participants, we believe the macro environment is positive. That said, if / when the pricing fortune reverses course, the other side of the trade will be painful,” he said.
“We’re expecting a solid quarter, based on our view that LSPD is benefiting from the re-opening and from the stronger competitive position afforded by its acquisitions of ShopKeep, Upserve and Vend. We also think Street estimates are conservative. Looking further ahead, we believe that LSPD continues to have tremendous runway on Payments and believe that the NuORDER and Ecwid acquisitions should help to significantly expand its TAM,” he said.
* Citi analyst J.B. Lowe cut his Precision Drilling Corp. (PD-T) target to $45 from $55 with a “neutral” recommendation. The average is $56.46.
* National Bank Financial analyst Patrick Kenny raised his target for Atco Ltd. (ACO.X-T) to $45 from $44 with a “sector perform” rating. The average is currently $46.88.
* National Bank Financial’s Michael Parkin hiked his Kirkland Lake Gold Ltd. (KL-T) target to $59 from $56 with a “sector perform” rating. The average is $66.
* JP Morgan analyst Richard Sunderland raised his Fortis Inc. (FTS-T) target to $60 from $58 with a “neutral” rating. The average is $58.83.
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