Inside the Market’s roundup of some of today’s key analyst actions
Amid heightened volatility across the technology sector, National Bank Financial analyst Richard Tse thinks “a lot is rising” on the coming earnings season for TSX-listed companies.
In a research report released Tuesday, he reaffirmed his view that the sector as a whole offers “outsized relative growth long-term with numerous themes that are just starting to scale.” He thinks any pullbacks will create ”opportunities to wade into those themes.”
However, while expecting few “big thematic surprises,” he also believes the entire group will be “drawn in” by what happens with U.S. mega cap tech names that begin reporting over the next few week.
“It wasn’t that long ago that we were swamped with IPO after IPO,” said Mr. Tse. “How quickly things change. It’s obviously hard to reflect on that given the dramatic turn of fortunes for the group that’s been triggered by the macro environment (rates, inflation, etc.). What we know with a high degree of certainty in over 20 years covering the sector is that valuations have never been static and when it comes to virtually all the names in our coverage universe, the same applies particularly given the rise in external variables impacting the group from interest rates, inflation, a continuing (and moderating) pandemic, and elevated geopolitical risk. The positive is that while valuations are never static on the downside, the same applies on the upside – meaning we’ll eventually see another ‘run’ higher for the group.”
Mr. Tse said investors’ valuations of a number of high-profile Canadian technology initial public offerings over the last two years has changed “as the appetite for short-term (unprofitable) revenue growth began to fade in November 2021.”
“While the past 2 years had stocks driven largely by revenue growth; profitability in addition to revenue growth has become the predominant driver of stock price performance today,” he said. “And while this analysis was limited to those high profile IPOs, we believe the same conclusions applies to our broader coverage universe.”
“We’ve been doing this long enough to be cognizant that long-term can on occasion be used as a copout for hoping strategies play out. That said, we’ve held and continue to hold the view that many of our coverage names will take time to execute their strategies. What’s important is that those names continue to fundamentally execute on their operating and strategic initiatives. When that happens, those stocks generally work out longer-term despite short-term volatility. Take for example two names; Kinaxis and Shopify. We covered those names even before the big run in technology over the past 2 years. While those names have obviously taken big hits since the peak of the market in 2021, they are still up substantially from many years ago (SHOP; initiated March 1, 2017; long-term return since launch: up 676 per cent (49-per-cent annual CAGR) and KXS; initiated August 1, 2014; long-term return since launch: up 870 per cent (34-per-cent annual CAGR). We only point the above out to underscore our approach given the number of early names in our coverage universe. And as of today, we see many names continuing to execute – which drives our confidence that we’ll see those names eventually rewarded in their valuations when valuations eventually re-rate again.”
Mr. Tse made a series of estimate and target revisions to stocks in his coverage universe.
His target changes were:
* Kinaxis Inc. (KXS-T, “outperform”) to $250 from $225. The average on the Street is $216.
“Kinaxis remains one of our favourite names. We expect strong FQ1 results from Kinaxis particularly as it relates to its pipeline. Our view is the continuing global supply chain challenges present a structural market tailwind where Kinaxis’ supply chain planning platform, RapidResponse (RR) sits in the cross hairs,” he said.
“We continue to believe KXS’s valuation does not fully value a ‘normalized’ financial run-rate looking ahead, particularly given what we estimate to be a market share of less than 5 per cent. With our expectations for accelerating momentum beyond the current pandemic.”
“We’re expecting in-line results for Lightspeed in FQ4 with potential upside care of global reopenings. We see the name trading at a compelling valuation of 3.5 times EV/F23 Sales (at time of writing) particularly given an organic growth rate that’s expected to be in the range of 35-40 per cent which makes for an increasingly attractive risk-to-reward profile for investors,” he said.
* MDF Commerce Inc. (MDF-T, “sector perform”) to $3 from $5. Average: $7.
“While we like the plan laid out by Management, whether the Company can successfully execute its plan while concurrently expanding its margin profile on a consistent basis will require some meaningful execution. On that, we think the multiple operating businesses dilutes potential valuation upside,” he said.
* Q4 Inc. (QFOR-T, “outperform”) to $10 from $12. Average: $11.90.
“We’re expecting essentially in-line results from Q4 in FQ1,” he said. “A notable growth driver for Q4 is IPO deal flow as it presents greenfield opportunities to onboard new customers at a low cost given its partnership with NYSE. On that, IPO deal flow was soft in calendar Q1 (down 80 per cent quarter-over-quarter); given that, the absence of that growth driver could moderate Q4′s growth rate. That said, we see that offset by cross-/upselling additional solutions to existing customers, as seen last quarter when Average Revenue per Account (ARPA) for existing customers increased 10 per cent year-over-year - growing operating leverage.
* Real Matters Inc. (REAL-T, “sector perform”) to $6 from $8. Average: $7.93.
“We see an unfavourable setup for Real Matters heading into FQ2 (CQ1). Through the quarter, the 10-yr US Treasury Yield continued to rise, with an average rate of 1.9 per cent (up 62 basis pointes year-over-year),” said Mr. Tse. “Going forward, the Federal Reserve has stated that it plans to engage in quantitative tightening ($95-billion per month) as early as May coupled with more aggressive rate hikes (50 bps vs 25 bps and perhaps 75 bps). That stance has pushed the 30-yr fixed mortgage rate above 5 per cent which caused refinance volumes in the last week of March to fall by 62 per cent year-over-year (per the Mortgage Bankers Association). Given REAL’s correlation with industry volumes, and the 10-yr now trending higher, we believe it will weigh on its underlying performance.”
* Shopify Inc. (SHOP-T, “outperform”) to US$1,000 from US$1,500. Average: $1,531.60.
“We’re expecting an essentially in-line Q1 for Shopify albeit with downside risk,” he said. “That risk reflects a slowdown in overall retail sales which we see having the potential to reflect in Shopify’s GMV, in turn negatively impacting merchant solutions revenue with some risk of 4-6% downside to our estimate based on our analysis. That said, we expect this impact will be at least partially offset by an increasing take rate as the Company continues to expand its merchant services offerings (e.g., financial services offerings such as Capital, Balance, Pay, Installments and Market). We expect margins will be negatively impacted in the short-term as SHOP enters an investment cycle focused on a SFN (fulfillment) strategy to own/run more of the major fulfillment hubs (offer 2-day shipping to 90 per cent of the U.S. population).”
“We continue to believe Shopify is in the early stages of a market that’s structurally changing – shifting increasingly towards eCommerce. We believe Shopify remains a leading eCommerce disruptor and believe upside in the stock will come from a number of different incremental growth drivers.”
On the sector, he said: “Bottom line, on a relative basis for those focused on the short-term, we continue to think investors would be best positioned (on a relative basis) in: Altus, CGI, Kinaxis, Lightspeed, Nuvei, Magnet Forensics, and OpenText due to expectations that are not fully priced in short-term.”
Expressing concern over “downside risk to the 2022 guidance with supply chain challenges unlikely to improve near-term and inflation pressuring margins,” BMO Nesbitt Burns analyst Jonathan Lamers downgraded NFI Group Inc. (NFI-T) to “market perform” from “outperform.”
Mr. Lamers said the impact of cost inflation on the Winnipeg-based bus manufacturer has “become meaningful,” emphasizing the consequences of its short-term exposure from the time orders are booked to the time of build and “the large backlog of options for delivery up to five years out includes some options with price escalators that reference PPI and some options with fixed price escalators (e.g., 2-3 per cent per year).”
“The global supply chain for semiconductors and other components remains unstable and has been further stressed by COVID-19 lockdowns in China and by the war in Ukraine,” the analyst said. “NFI is particularly impacted with Buy America content restrictions limiting alternative supply sources. While NFI’s guidance expects supply issues to lift in H2, we are concerned the issues have not improved and have reduced our estimates.”
“The longer the supply issues continue, the greater the potential dilution risk. Our forecasts indicate NFI will be well offside its quarterly credit covenants beginning Q2, with covenant net debt / EBITDA leverage reaching 17.5 times at the end of Q2. Our base case estimates and target price assume $450-million issuance, similar to the most recent issue in December 2021. This should be sufficient to bring leverage onside the covenants by Q4.”
He lowered his target for NFI shares to $15.50 from $21, below the $18.94 average and more in line with its historical averages.
“We believe a lower multiple is appropriate to better reflect the risk the supply chain situation is extended and given comparable sector multiples have declined as the Fed Rate outlook has shifted to a series of rate hikes,” said Mr. Lamers.
“The stock could offer value longer-term as end markets recover. The issues are: i) the magnitude of the dilution before the eventual recovery, and ii) the longer the supply chain challenges continue, the further the upside is pushed out.”
Desjardins Securities’ energy research team, led by analysts Justin Bouchard and Chris MacCulloch, thinks Canadian energy sector has quickly transitioned from “rags to riches,” admitting the rising in oil prices has exceeded their expectations and also see the set-up for natural gas as “extremely promising.”
“Tightness in global oil markets, coupled with the Russian Federation’s invasion of Ukraine, has pushed benchmark prices to levels not seen since 2014,” they said. “Meanwhile, North American natural gas prices have exploded in recent weeks in response to the expanding U.S. storage deficit.
“Given the supportive price backdrop, producers are poised to report massive FCF prints with1Q22 financial results. We expect accelerated return of capital to remain in the spotlight for the sector as more companies accelerate (or introduce) dividends and share buyback programs.”
In a research report released early Tuesday, the analysts raised their WTI price assumptions to US$100 per barrel for both 2022 and 2023 and their 2022 NYMEX estimate to US$7 per million British thermal units.
“If you roll back the clock two years, nearly every company in the energy sector was under serious pressure: production was being curtailed, capital programs were slashed and any semblance of shareholder returns was shelved,” they said. “Fast-forward to today and the environment has completely changed; nearly every producer under coverage is now projected to achieve its respective debt target by year-end 2022. Capital returns are obviously top of mind—the only question is, what is the best way to put dollars into shareholder pockets? The bottom line is that Canadian energy producers have been handed a once-ina-lifetime opportunity to reinvent themselves as lean, mean, cash-flow-returning machines.”
With that view, the analysts raised their target prices for stocks in their coverage universe.
For large-cap companies, their changes were:
* ARC Resources Ltd. (ARX-T, “buy”) to $27 from $25. The average is $21.89.
* Canadian Natural Resources Ltd. (CNQ-T, “buy”) to $100 from $85. Average: $86.81.
* Cenovus Energy Inc. (CVE-T, “buy”) to $32 from $25. Average: $25.55.
* Imperial Oil Ltd. (IMO-T, “buy”) to $76 from $65. Average: $63.47.
* Suncor Energy Inc. (SU-T, “buy”) to $60 from $50. Average: $49.64.
* Tourmaline Oil Corp. (TOU-T, “buy”) to $75 from $71. Average: $74.27.
National Bank Financial analyst Jaeme Gloyn reiterated his “cautious stance” on the Mortgage Finance sector heading into first-quarter earnings season.
He pointed several factors representing downside risk that will “continue to constrain sector valuations and share price performance near-term,” including rising regulatory and policy uncertainty, the impact of rapid rise of interest rates on mortgage origination volumes, loan growth, and profitability as well as the “headline and actual housing market risk.”
Seeing stocks in the sector trading “closer to crisis average valuation multiples than trough multiples,” Mr. Gloyn thinks this relative underperformance will continue until those factors “visibly diminish.”
Accordingly, he lowered his estimates and target multiples for companies in his coverage universe to “largely reflect a slower pace of residential mortgage origination.”
His changes are:
* Equitable Group Inc. (EQB-T, “outperform”) to $85 from $95. The average is $94.29.
“EQB remains our preferred name within the sector given stronger diversification relative to Mortgage Finance peers: i) asset mix (e.g., commercial, equipment, and decumulation loans), ii) funding mix (e.g., more cost-effective EQ Bank and covered bond channels), and strategy (e.g., digital bank build-out, fintech / open banking relationships, Concentra acquisition, AIRB),” he said. “While these fundamental strengths do NOT provide EQB with immunity, the company is more favorably positioned to manage through the above noted risks in our view.”
* First National Financial Corp. (FN-T, “sector perform”) to $39 from $46. Average: $43.50.
“We remain positive on FN’s industry-leading and diversified origination platform, diversified funding model, limited credit risk, defensive recurring revenue model and capacity to consistently raise the dividend,” he said. “These fundamentals help explain FN’s premium trading multiple of 12 times on 2022 consensus EPS vs. the Big Six Bank average of 11 times. However, FN historically trades at a discount to Big Six Banks, particularly during periods of elevated risks to the outlook. Moreover, FN’s near-term earnings power is more sensitive to sudden shifts in origination volumes.”
* Home Capital Group Inc. (HCG-T, “outperform”) to $45 from $49. Average: $50.29.
“The lower target multiple compared to EQB reflects HCG’s greater exposure to residential mortgages and residential real estate investors,” he said. “While we believe the company’s significant remaining excess capital ($300-million) will continue to drive an improved ROE profile, a more elevated risk backdrop could constrain the company’s ROE potential nearterm.”
* Timbercreek Financial Corp. (TF-T, “sector perform”) to $9.50 from $10. Average: $9.86.
“Our revised price target implies a dividend yield of 7.3 per cent and a spread over 2-year Government of Canada bond yields closer to 500 basis points. TF is currently trading at a 5-year low spread vs. 2-year bonds of 430 basis points. Overall, we believe the portfolio quality remains robust (i.e., a high percentage of multi-unit residential properties, first mortgages, cash-flowing properties, low LTV loans) and will benefit from stable commercial real estate trends in its key segments and geographies (multi-unit residential,” said Mr. Gloyn.
Scotia Capital analyst Phil Hardie thinks economic concerns are likely to weigh on valuations for TSX-listed small-cap lenders through earnings season.
“The mortgage finance and non-prime consumer lending sectors tend to be viewed as highly cyclical,” he said. “Rising recession risk triggered by a central bank policy error of raising rates too far, too soon, amid a myriad of uncertainties has likely fostered a cautious tone and put pressure on multiples across the space with the non-prime consumer lenders experiencing the most significant near-term contraction.
“Further clouding the outlook for the mortgage lenders is a transitioning housing market. We believe strong immigration and solid labour markets are likely to remain supportive to the housing sector. That said, the pace of the rise in mortgage rates is likely to 1) pose risks to how orderly the housing market transitions, and 2) add stress on more leveraged households. We believe that a rapid trajectory of interest rate increases risks putting near-term pressure on net interest rate margins of mortgage lenders that are heavily dependent on GICs. This reflects a timing issue, where we would expect a more rapid response in GIC pricing, while “rate holds” and competitive dynamics are likely to result in a more delayed response of the higher-yielding loans being added to loan book as an offset to the higher deposit costs.”
With that view, he expects lender stocks to be driven “much more by shifts in sentiment and valuation multiples than revisions to the earnings outlook” in the coming months. That’s under his assumption that economic growth will continue through next year and a recession is avoided.
Mr. Hardie trimmed his target prices for stocks to reflect a reduction in his multiples. His adjustments are:
* First National Financial Corp. (FN-T, “sector perform”) to $42 from $44. The average is $43.50.
“FN’s earnings are somewhat volatile given a dynamic approach to funding that shifts based on financial market conditions to optimize the economics,” he said. “This can either pull ahead recognized earnings or defer earnings, putting pressure on near-term profitability but benefiting future periods. We expect Q1/22 mortgage volume to decline by mid-single digits, reflecting a 12-per-cent drop in single-family volumes partially offset by an upper single-digit rise in commercial volumes.”
* Goeasy Ltd. (GSY-T, “sector perform”) to $170 from $200. Average: $218.33.
“GSY stock and the sub-prime consumer lending sector have come under significant pressure over the past few months,” he said. “In the back half of 2021, we estimate the goeasy stock traded at a premium of more than 50 per cent relative to its peers, but now trades at a modest discount. The sub-prime lender stocks have their own unique risks and are economically sensitive, but the valuations are likely looking increasingly out of alignment with fundamentals. That said, reduced risk to the economic outlook and broader shift in investor sentiment and risk appetite is likely needed for the stock to sustain a rebound despite what we view as relative solid near-term fundamentals.”
* Home Capital Group Inc. (HCG-T, “sector perform”) to $47 from $50. Average: $50.29.
“We are expecting HCG’s Q1/22 EPS to come in a bit below expectations,” he said. “We anticipate the quarter to be characterized by strong loan growth driven by a solid rebound in origination volumes, but see some pressure on net interest income reflecting margin compression. Significant share buyback activity in Q4/21 is likely to help support the quarter’s ROE and create a bit of divergence in sequential core earnings and EPS growth.”
* Propel Holdings Inc. (PRL-T, “sector outperform”) to $15 from $16. Average: $15.83.
“We expect to see PRL report a strong q/q rebound in EPS and in profitability margins in Q1/22. This is likely to reflect seasonality where we anticipate lower level of originations to reduce the effective ‘sales strain’ we have seen over recent quarters,” said Mr. Hardie.
In his earnings preview for diversified financial companies, CIBC World Markets analyst Nik Priebe made these target adjustments:
* CI Financial Corp. (CIX-T, “outperformer”) to $28 from $31. The average on the Street is $28.13.
* Fairfax Financial Holdings Ltd. (FFH-T, “outperformer”) to $950 from $825. Average: $842.26.
* First National Financial Corp. (FN-T, “neutral”) to $43 from $45. Average: $43.50.
* Onex Corp. (ONEX-T, “neutral”) to $90 from $100. Average: $115.40.
Seeing it as “a time to reduce beta,” CIBC World Markets analyst Paul Holden is “cautious” on the Canadian lifecos heading into the earnings season, citing the “negative market impacts, the COVID-19-related impact on Asia sales, and U.S. mortality.”
After lowering his financial estimates, he’s now projecting a 7-per-cent quarter-over-quarter decline in earnings per share on average, below the consensus on the Street for each of the four lifecos.
“We see a risk that consensus EPS for 2022 and 2023 will be heading lower in the near term due to ongoing market volatility,”
In a research note released Tuesday, he downgraded IA Financial Corp. (IAG-T) to “neutral” from “outperformer” previously, calling it “a higher beta stock with more pro cyclical business lines.”
His target for IA shares slid to $78 from $87, below the $92.11 average.
Mr. Holden’s target changes were:
* Great-West Lifeco Inc. (GWO-T, “neutral”) to $39 from $41. Average: $41.
* Manulife Financial Corp. (MFC-T, “outperformer” to $25 from $25.50. Average: $31.46.
* Sun Life Financial Inc. (SLF-T, “outperformer”) to $71 from $78. Average: $76.96.
“Valuations have not contracted all that much despite market volatility. Lifecos are trading at 1.3 times P/BV [price-to-book value], on average, in line with the historical average of 1.3 times. Given broader equity market challenges, we would prefer lower-beta names (SLF and GWO) over the higher-beta names (MFC and IAG),” said Mr. Holden.
Seeing “plenty of upside still to go,” Raymond James analyst Jeremy McCrea upgraded Nuvista Energy Ltd. (NVA-T) to “strong buy” from “outperform.”
“A year ago, we highlighted NVA as one of our better investment ideas when the share price was $1.08,” he said. “Although the macro environment has changed since then and some of the catalysts we highlighted previously have come to fruition, our marketing trip with NuVista underscores a few more nuances that we believe are not well understood/known by the market.
“Overall, [we see] four key reasons why NVA could be one of the better performing stocks through to year-end. Out of the Canadian E&P sector, no company is growing and creating as much value as NuVista, especially given a recent change in well placement/completion with its Pipestone wells. With a valuation not reflective of these changing economics and inventory depth, growth trajectory, margin improvement, as well as deleveraging trajectory, there are plenty of fundamental attributes to like. Lastly, as we show with our sentiment gauge, there still exists a disconnect with how investors (and analysts) view the name.”
Mr. McCrea raised his target to $15 from $14.50. The current average is $14.31.
In other analyst actions:
* Seeing a “a favorable risk/reward position” following recent share price depreciation, Research Capital analyst André Uddin raised Profound Medical Inc. (PROF-Q, PRN-T) to “speculative buy” from “hold” with a target of US$11.90. The average is US$19.89.
“Q1 could be a weak quarter and may present a buying opportunity,” he said.
“PRN has been down 73 per cent since it hit its all-time high on Feb. 5th, 2021. We downgraded the stock on April 7th, 2020 – since then it has traded down 52 per cent. Our total calls on PRN have generated a 342-per-cent return.”
* While she expects its momentum to continue into fiscal 2023, TD Securities’ Meaghen Annett trimmed her Aritzia Inc. (ATZ-T) target to $64 from $68, keeping a “buy” rating, ahead of the May 5 release of its fourth-quarter 2022 results. The average is $65.57.
“The mid-term growth outlook for ATZ is unchanged, in our view,” she said. “We continue to see runway for growth in the U.S. As ATZ enters untapped markets and expands its product offering, this should drive growth in eCommerce sales. These drivers, combined with the normalization of investments in growth (SG&A), should support margin expansion over our forecast horizon. The balance sheet is also in a position of strength to support ATZ’s expansion and opportunistic share repurchases.”
“We are maintaining our BUY recommendation. We believe that ATZ is wellpositioned to meet consumer demand and expand the business in F2023 and beyond. The initiation of F2023 guidance could be a positive catalyst to the share price.”
* CIBC World Markets’ Kevin Chiang lowered his CAE Inc. (CAE-T) target to $41 from $43, below the $38.90 average, with an “outperformer” rating.
* Following the US$225-million sale of its Chirano mine in Ghana, BMO’s Jackie Przybylowski raised her Kinross Gold Corp. (KGC-N, K-T) target to US$9.75 from US$9.50 with an “outperform” rating. The average is US$8.22.
“Even correcting for what is potentially a low mined grade in our forecasts, we believe the sale price is a fair value. This transaction also importantly streamlines the Kinross portfolio — Chirano is a relatively small, short-life mine in an operating jurisdiction with no synergies other Kinross assets,” she said.
* Assuming coverage ahead of its May 5 earnings release, TD Securities’ Marcel Mclean cut the firm’s target fpr Trisura Group Ltd. (TSU-T) to $55 from $61 with a “buy” rating. The average is $54.86.
“We expect Trisura to regain momentum, reflecting the company’s strong growth profile and ROE,” he said. “We continue to like the company based on our view of its: 1) relative underlying earnings and price stability as a P&C insurer; 2) rapidly growing earnings profile, especially in the U.S. (early days of launching into admitted market and Surety in the U.S.); and 3) relative valuation compared with peers (KNSL and RLI are trading at higher multiples, but have similar EPS growth and ROE profiles).”