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Inside the Market’s roundup of some of today’s key analyst actions

In the wake of a “big third-quarter upside surprise,” DA Davidson analyst Linda Bolton Weiser thinks Spin Master Corp.’s (TOY-T) “situation improved,” seeing a pick up in point-of-sale results after several quarters with “severely constrained” retail inventory.

However, in a research report released late Monday, she cut her fourth-quarter sales and earnings expectations for the Toronto-based toy maker, due largely to a “big step-up” in marketing spending.”

On Nov. 3, Spin Master reported revenue of US$715-million, up 25 per cent from the previous quarter and 7 per cent year-over-year while exceeding the Street’s US$612-million estimate. Earnings per share of US$1.26 was an increase of 35 US cents from the same period a year ago and also ahead of the consensus projection of 91 US cents.

“TOY raised its 2021 gross product sales guidance to up mid-teens from up high-single digits, including a $50-million (9 per cent) shift to 4Q from 3Q,” said Ms. Bolton Weiser. “We are maintaining our 4Q21 estimate of up 6 per cent (vs. down 7 per cent in 4Q20), which results in 16 per cent for the full year, an increase from 11 per cent previously. For total revenue growth, TOY raised its 2021 guidance to slightly more than 20 per cent from mid-teens. We are lowering our 4Q21 total revenue to an increase of 7.4 per cent from 8.5 per cent due to a reduction in Digital Games to a rise of 20 per cent from 40 per cent, as kids return to school; our full-year estimate is now up 25 per cent vs. 19 per cent previously. TOY maintained its 2021 EBITDA margin guidance at the upper end of a mid- to high-teens range, which implies a year-over-year decline in 4Q21; we are lowering our 4Q21 estimated EBITDA margin to 8.8 per cent from 11.4 per cent (vs. 10.5 per cent in 4Q20). TOY implemented price increases in early 3Q21, but the magnitude was not high enough to maintain margins in toys. TOY expects a significant portion of annual marketing spending to come in 4Q; we are modeling a ratio of 16.3 per cent of sales vs. 14.3 per cent in 4Q20 and 16.6 per cent in 4Q18. Management admitted their 2021 guidance is conservative.”

In response to the quarterly release, the analyst raised her full-year 2021 EPS projection by 16 per cent to US$1.88 from US$1.62, above the consensus of US$1.79. Her 2022 estimate jumped 11 per cent to US$1.98 from $1.79 (versus $1.92).

However, Ms. Bolton Weiser trimmed her fourth-quarter estimate for this fiscal year to 15 US cents from 24 US cents. The Street expects 6 US cents.

Keeping a “neutral” rating for Spin Master shares, she lowered her target to $48 from $50, The average on the Street is $54.73.

“We remain NEUTRAL - it is unclear whether EBITDA margin (new high of 19.6 per cent in 2021) can improve from here,” she said.


Canaccord Genuity analyst Robert Young sees Dye & Durham Ltd.’s (DND-T) $500-million acquisition of Telus Corp. (T-T) payment processing business as “highly complementary” to its existing Canadian real estate software offering and is “consistent with management’s strategy to consolidate real estate information and workflow in target geographies.”

Shares of the Toronto-based legal technology provider jumped over 9 per cent on Monday in response to the deal, which came on the heels of its new $1.8-billion committed senior secured credit facility.

“The transaction also adds a profitable payments fabric,” said Mr. Young. ”Dye & Durham did not disclose the multiple paid or related financial details. We believe DND may have paid a high teens, 17-20-times EBITDA multiple on an assumption of $25-30-million in trailing EBITDA. Management stated the transaction was consistent with past actions yielding a post-synergy multiple of 5 times. As anticipated, Dye & Durham has wasted no time in deploying its Ares debt facility and has acquired what we see as a strong asset with negligible competition and potential price inelasticity.”

Increased his financial estimates to add the contributions from the acquisition, Mr. Young raised his target for Dye & Durham shares to $70 from $60 with a “buy” rating, expecting it remain active in the M&A market with “ample” liquidity for future moves. The current average on the Street is $58.40.

“Consistent with the strategy communicated at its investor day, Dye & Durham is moving aggressively to consolidate essential elements of process chains it has identified related to real estate conveyancing, mortgage workflow, due diligence, and corporate entity management,” he said. “As Dye & Durham consolidates functions in these high value functions, it becomes more indispensable to its customers and harder to replace. It also builds stronger pricing power and flexibility to bundle functions competitively.

“The acquisition of the TELUS FSB solution adds multiple important and nationwide elements in the real estate conveyancing and mortgage workflow process chains. The first is a digital tool that connects the major Canadian lenders with real estate legal professionals to facilitate mortgage instructions and reporting. The second is a mortgage discharge tool. Together, these real estate tools account for 50 per cent of the acquired economics.”

Elsewhere, Raymond James’ Stephen Boland increased his target to $77 from $63 with an “outperform” rating.

“We had the opportunity to speak to management regarding the deal. Although no EBITDA estimates were disclosed, they are confident they can synergize this acquisition to deliver a mid-single digit EBITDA multiple. DND has a proven track record in this regard. This acquisition has added material EBITDA to our estimates. The company still has ample cash reserves to deploy on further acquisitions, and DND could to be more active in the fintech M&A market moving forward,” he said.


Though its shares rose almost 8 per cent on Monday after a premarket announcement of a 50-per-cent dividend hike, $100-million share buyback program and an increase to its 2022 production guidance was received “favourably” by investors, Desjardins Securities analyst Chris MacCulloch emphasized Crescent Point Energy Corp. (CPG-T) continues to trade at a sharp discount to peers, despite its “strong operational, debt reduction and return-of-capital execution this year.”

“For the second time in three months, we found ourselves caught off guard by the timing of both the dividend hike and the share buyback program, as we expected the company to hold the line on capital returns until mid-2022, particularly on the heels of the recent pullback in oil prices,” he said. “Needless to say, we were pleasantly surprised by the announcement and even more satisfied by the resoundingly positive market reaction. As we have frequently noted, CPG has been one of the greatest outliers in our coverage universe from a valuation perspective, and it was nice to see the stock finally gain traction going into the new year, although it continues to trade at a paltry 2022 EV/DACF [enterprise value to debt-adjusted cash flow] multiple of 2.7 times based on the current strip. We also believe that the enhanced dividend and $100-million buyback program are sustainable while providing ample flexibility to continue aggressively reducing debt levels, highlighting that we still see the company generating $665-million of discretionary FCF at the current strip, which would trim D/CF to 0.8 times by year-end 2022.”

Raising his cash flow and production estimates through 2022, Mr. MacCulloch bumped up his target for Crescent Point shares to $10.50 from $10, keeping a “buy” recommendation. The average is $9.23.

“We continue to see operational catalysts on the horizon for the stock, specifically first well results from the Kaybob Duvernay drilling program,” he said. “An update is expected in early 2022 when CPG will be able to provide IP30 rates from recently completed wells, including those from its previously announced farm-in agreement. However, the company has already delivered a significant reduction in capital costs from the newly acquired assets, which ultimately helped keep the 2022 capex budget flat in the face of rising inflationary pressures.”

Elsewhere, Stifel’s Cody Kwong raised his target to $11.50 from $11 with a “buy” recommendation.

“Crescent Point continues to emerge as one of the most compelling return of capital stories in our coverage universe, capturing the market’s imagination by simply doing what it said it was going to do,” said Mr. Kwong. “Despite commodity price volatility, Crescent Point’s capital plans have remained steadfastly unchanged with unwavering focus on debt repayment so the long term goal of accelerated shareholder returns can be recognized sooner, rather than later. Offering a small taste of what’s to come, the Company increased its base dividend by 50 per cent while committing to buy back $100-million worth of its shares by the end of 2Q22. We believe Crescent Point has both the ability, and the intention, to maximize shareholder returns, with the full impact of this commitment to be recognized early in 2H22.”


In a separate report, Mr. MacCulloch said Whitecap Resources Inc. (WCP-T) is “capping off another solid year of M&A activity.”

Shares of the Calgary-based company jumped over 6 per cent on Monday after announcing a trio of acquisitions, costing a total of $342.5-million, meant to consolidate its core assets within its Central Alberta, Eastern Saskatchewan and Western Saskatchewan business units. It also revealed a plan under its normal course issuer bid to repurchase 19.2 million shares at a price of $6.95 each for total value of $133.7-million.

“From our perspective, the favourable market reaction to the update was warranted given the highly accretive nature of the transactions, which also strengthened the asset portfolio by consolidating core operating areas while providing additional drilling inventory,” the analyst said. “We believe WCP remains well-positioned to continue accelerating returns to shareholders.”

“[Monday’s] announcement of a trio of additional tuck-in acquisitions likely represents the final chapter of another busy year of M&A for the company, which began with the NAL Resources, TORC Oil & Gas and Kicking Horse Oil & Gas transactions. Those deals now feel like half a lifetime ago within the context of a rising commodity price environment, notwithstanding recent headwinds. Either way, the combination of asset tuck-ins and the share buyback helped drive a 6-per-cent increase in our 2022 CFPS estimate, which supported our target price increase. While the large capital outlays resulted in a modest pickup in debt levels, we continue to believe that the balance sheet is well-supported, with D/CF remaining on track to exit 2022 at 0.5 times based on current strip prices.”

With increases to his cash flow estimates, Mr. MacCulloch raised his target for Whitecap shares to $11, above the $10.80 average, from $10. He kept a “buy” rating.

“We expect the company to remain opportunistic both with respect to future M&A and repurchasing the 7.1 million shares remaining on its current NCIB program before expiry in May 2022,” he said. “We also anticipate further progress from the New Energy business development team, which recently signed another MOU with a large CO2 emitter in the Regina/Belle Plaine area. At this point, WCP already has a clear head start in developing a CCS hub in southern Saskatchewan, which could eventually help fill underutilized capacity at the Weyburn CO2 unit. While it’s still early days, we believe this could be a highly attractive business opportunity, particularly if the federal government comes to the table with policy carrots to incentivize CCS for EOR projects, similar to the US 45Q tax credits.”

Others making target adjustments include:

* ATB Capital Markets’ Patrick O’Rourke to $11.50 from $11.25 with an “outperform” rating.

“Overall, we view the event as positive with WCP continuing to flex its muscle as a strong acquirer and consolidator in the Western Canadian Sedimentary Basin in a strategic and accretive way,” he said.

* RBC’s Luke Davis to $11 from $10 with an “outperform” rating.

* Stifel’s Cody Kwong to $11.25 from $10.75 with a “buy” recommendation.


H2O Innovation Inc. (HEO-X) “stands as a prime candidate to benefit from the climate-related tailwinds,” according to Laurentian Bank Securities analyst Troy Sun, calling it “a niche Canadian water play.”

In a research report released Tuesday, he initiated coverage of the Quebec City-based company with a “buy” recommendation.

“The water industry is highly fragmented as one of the world’s largest public players, Veolia (post the Suez takeover), is ‘only’ responsible for an estimated less than 5-per-cent market share,” said Mr. Sun. “Given a healthy valuation delta vs. privately held peers, HEO is in a good position to generate consistent earnings and FCF accretion through a robust M&A strategy. The key, in our view, is to remain pure-play, integrate properly, and patiently execute while minimizing shareholder dilution. In the long run, investors tend to appreciate compounding growth under a steady, a-cyclical business framework (which HEO is already progressing towards given a step-function in recurring revenue generation vs. five years ago.”

Seeing its three-year strategic blueprint (through fiscal 2023) implying 44-per-cent upside to its current share price, he set a target of $3. The average is $3.41.

“All in, given the early-stage nature of the story, we believe the ultimate valuation upside will be predicated on whether management can deliver on a well-executed M&A program (and the ability to effectively integrate acquired assets). A clear focus on growing the Specialty Products and O&M verticals (in other words, expanding recurring revenue generation as a percentage of the overall pie) is also a strategy that makes sense,” Mr. Sun said.


Desjardins Securities analyst Chris Li expects Dollarama Inc. (DOL-T) to report “solid” third-quarter 2022 financial results before the bell on Wednesday, benefitting from “healthy consumer demand, continuing benefits from SKU refresh/mark-ups and lower COVID-19 costs.”

He’s projecting the discount retailer to earning 59 cents per share, up from 52 cents during the same period a year ago and exceeding the consensus estimate on the Street by 2 cents.

“While DOL is lapping strong comps of 7.1 per cent (pull-forward of Christmas sales), we expect solid 1.9-per-cent SSS (vs 1.2-per-cent consensus), supported by strong back-to-school and Halloween (in line with other retailers’ comments),” said Mr. Li. “Our 1.9-per-cent SSS implies a two-year average of 4.5 per cent, in line with the 4.7-per-cent two-year average in 2Q FY22 (excluding impact of COVID-19 restrictions in Ontario). We expect gross margin to be stable vs last year, supported by solid seasonal sales and SKU refresh/mark-ups, offset by inflationary pressures and less scaling benefits. We expect the SG&A rate to decline by 40 basis points year-over-year due to lower COVID-19 costs (we expect the SG&A rate to be largely stable ex COVID-19 expenses).”

Though he trimmed his full-year revenue projection to $4.36-billion from $4.362-billion, Mr. Li raised his earnings per share estimate to $2.16, a rise of 19.7 per cent year-over-year, from $2.14. The Street’s forecast is $2.13.

“We have a positive bias but prefer to wait for better visibility on supply chain and inflationary pressures,” he said. “We and the Street expect strong EPS growth of 20–21 per cent in calendar 2022 (fiscal 2023), supported by: (1) SSS of 4.5 per cent as DOL laps COVID-19 restrictions, and a potential higher price point launch, partly offset by cycling against strong stay-at-home demand; (2) GM percentage decline of 30 basis points (supply chain costs partly mitigated by SKU refresh/mark-ups); (3) 80 basis points improvement in the SG&A rate, driven by reduction in COVID-19 expenses and scaling benefits; (4) growth in Dollarcity; and (5) 5-per-cent share buybacks, supported by solid FCF while maintaining leverage at 2.5-times net debt/EBITDA, slightly below management’s 2.75-times target.”

Mr. Li kept a “hold” rating and $61 target for Dollarama shares. The average on the Street is $62.50.

“DOL is a high-quality company with multiple earnings growth levers. Our Hold rating reflects limited visibility related to higher cost pressures,” he said.


In other analyst actions:

* Evercore ISI analyst David Palmer upgraded Restaurant Brands International Inc. (QSR-N, QSR-T) to “outperform” from “in line” with a US$75 target, above the US$70 average, from US$70.

* BMO Nesbitt Burns analyst David Gagliano initiated coverage of Algoma Steel Group Inc. (ASTL-T) with an “outperform” rating and $17 target.

“In our view, ASTL shares are undervalued, even after assuming declining underlying prices, higher execution risk, and a majority shareholder overhang versus peers,” he said.

“Strategically, in our opinion, Algoma’s upcoming multi-year transformation from BoF-based steelmaking to EAF-based steelmaking will translate to higher volumes, lower costs, and an improved environmental profile, opening the door for additional valuation uplift potential over time.”

* TD Securities analyst Craig Hutchison upgraded First Majestic Silver Corp. (FR-T) to “buy” from “hold” with an $18 target, down from $19.50 and below the $20.34 average.

* Expressing increased confidence the potential for its BLU-5937 treatment of refractory chronic cough and other hypersensitization-related disorders, RBC Dominion Securities analyst Greg Renza raised his target for Bellus Health Inc. (BLU-Q, BLU-T) to US$11, exceeding the US$10.81 average on the Street, from US$9 with an “outperform” rating.

“In collaboration with RBC Elements, we take a deep dive into the positive interim analysis for BLU-5937′s ph.IIb SOOTHE trial and the implications for the upcoming topline readout this month with a proprietary simulation tool, which calculates the possible efficacy levels observed at this recent cut that demonstrated probabilities of trial success at dose levels passing the interim,” said Mr. Renza. “Our analysis, backed by a look at several potential scenarios, strengthens our confidence in the trial outcome where we maintain our positive lean into the data and on the asset’s overall potential and competitiveness. As a result, we increase our probability of ultimate success on the cough program, ahead of the readout.”

* CIBC World Markets analyst Nik Priebe lowered his ECN Capital Corp. (ECN-T) target to $6 from $11.50, maintaining an “outperformer” rating. The average is $8.47.

* After it reported an initial resource estimate at the Caballito copper-gold deposit at its Cerro Quema project in Panama, Desjardins Securities analyst John Sclodnick bumped up his Orla Mining Ltd. (OLA-T) target to $7.50 from $7.25, keeping a “buy” rating. The average is $7.28.

“We expect significant near-term catalysts, including first gold pour at Camino Rojo oxide, a metallurgical update on the sulphide material (which will inform a PEA in early 2022) and a potentially positive permitting update at Cerro Quema, which we hope to see in 1H of next year,” he said.

* Following its update on the impact of the B.C. floods, Raymond James analyst Brian MacArthur cut his target for Teck Resources Ltd. (TECK.B-T) by $1 to $44, keeping an “outperform” rating, while BMO Nesbitt Burns’ Jackie Przybylowski cut her target to $53 from $56 also with an “outperform” recommendation. The average is $42.32.

“We believe Teck offers good exposure to coal, copper, and zinc, and is able to convert EBITDA from its Canadian operations efficiently given its large Canadian tax pools. Given Teck’s long life, low jurisdictional risk, diversified asset base, and valuation, we rate the shares Outperform,” Mr. MacArthur said.

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