Inside the Market’s roundup of some of today’s key analyst actions
After a steep selloff thus far in 2022, equity analysts at CIBC World Markets see tech stocks reaching oversold levels, providing potential value for investors.
The coverage universe of analysts Stephanie Price and Scott Fletcher is now down 33 per cent year-to-date with the S&P Software Index declined 27 per cent, “significantly underperforming the TSX Index, which was down 5 per cent as investors process interest rate and recessionary concerns.”
“At these levels, we see value in the technology sector, with our coverage trading below five-year valuation averages and at an average ERAG valuation that is close to the GFC trough despite secular tailwinds around digitization and cloud,” they said in a research note released Tuesday.
“The valuation re-rate in the technology sector has been swift and far reaching. Our valuation analysis suggests that the average EV/S adjusted for growth (ERAG) valuation is 0.24 times versus a 15-year average of 0.33 times and a trough of 0.1 times in the midst of the Great Financial Crisis (GFC). At these levels, our software names are already pricing in higher interest rates and a recession.”
Seeing better returns elsewhere, Mr. Fletcher downgraded Dialogue Health Technologies Inc. (CARE-T) to “neutral” from “outperformer” with a $4 target, down from $7 and below the $8.22 average.
“Dialogue has hit the majority of its KPIs while keeping churn at next to zero,” he said. “However, the business remains unprofitable and in a cash burn position. We do have concerns that escalating developer and practitioner costs may push out the timeline to profitability. Dialogue’s growth has also benefitted in recent years from a tight labour market that has seen value in spending on benefits to attract and retain staff. If HR budgets tighten and labour markets relax, we would watch for increasing churn and slowing customer acquisition/expansion.”
Ms. Price lowered her rating for a pair of stocks:
* Softchoice Corp. (SFTC-T) to “neutral” from “outperformer” with a $21 target, falling from $26. The average is $27.43.
“Softchoice has outperformed the sector year-to-date, down 6 per cent versus our coverage down an average of 30 per cent. Given a commercial/SME customer base and a 2022 EBITDA guide that is back-half weighted, we see better relative return in other names under coverage,” she said.
* Q4 Inc. (QFOR-T) to “neutral” from “outperformer” with a $5 target, down from $8 and below the $9.75 average.
“While Q4 has been hitting its KPIs (i.e., solid organic revenue growth, year-over-year gross margin improvement), we don’t expect the company’s earnings to positively inflect until we exit 2023. In the current environment, long-duration growth names such as Q4 have fallen out of favour given the impact of higher rates and a renewed focus on profitability,” she said.
“In a economically weak or recessionary environment, we see Thomson Reuters as a defensive option that should see limited impact to its end markets,” he said. “With 80 per cent of revenue generated from recurring contracts and an economically resilient customer base of law firms, accounting firms and corporates, we believe that our forecast of 5.5% consolidated organic growth is not at risk. Management noted with Q1 results that it has helped offset the brunt of inflationary impacts with price increases and that the cost saving resulting from its ongoing change program remains on track. TRI’s balance sheet is in a strong position, with net debt to LTM [last 12-month] EBITDA of 1.56 times, $4.3 billion of available liquidity and $2 billion in pending pre-tax proceeds from the January 2023 sale of one-third of its LSEG stake. We believe its strong balance sheet should allow it to weather an economic slowdown and remain opportunistic on tuck-in acquisitions as valuations become more compelling.”
He maintained a US$115 target for Thomson Reuters shares, narrowly below the US$118.01 average on the Street.
At the same time, Ms. Price also made these target changes:
- Converge Technology Solutions Corp. (CTS-T, “neutral”) to $7 from $11. Average: $12.40.
- Docebo Inc. (DCBO-T, “outperformer”) to $54 from $63.50. Average: $81.71.
- Magnet Forensics Inc. (MAGT-T, “outperformer”) to $25 from $34. Average: $39.26.
- Open Text Corp. (OTEX-Q/OTEX-T, “outperformer”) to US$51 from US$64.50. Average: US$54.75.
“We see the most value in our high-growth SaaS names, which are trading at a historically narrow discount to the mature software names. We would highlight KXS, DCBO and MAGT as three names that are trading at attractive multiples, with high recurring revenue and solid profitability. If we are heading into a recessionary environment, we see CSU, GIB.a and TRI as best positioned. All of which have exposure to enterprise revenue, recurring revenue and solid balance sheets,” they concluded.
On Monday, Vancouver-based Orla announced it has entered into a definitive agreement Gold Stanard, which is focused on its 100-per-cent owned South Railroad Project in Nevada. It will pay 0.1193 Orla shares per GSV share as well as 0.01 cents in cash.
Pointing to the “merits of the transaction,” Mr. Fairbairn predicted the deal will go through and sees the probability of an interloper as “low.”
With that view, he lowered his rating for shares of Vancouver-based Gold Standard to “hold” from “speculative buy” with a 66-cent target, down from $1. The average on the Street is $1.05.
“For Orla shareholders the transaction provides access to a technically straightforward open-pit, heap-leach oxide project in a top-tier jurisdiction,” the analyst said. “As discussed in our recent site visit not, we see several key advantages associated with the South Railroad Project, including extensive nearby infrastructure, access to supplies, equipment, and skilled labour in Northern Nevada, availability of alternative power sources, and future exploration upside from both near-surface oxide and deeper sulphide targets.
“For GSV shareholders, the acquisition provides an immediate upfront premium, eliminates future financing risks which may have resulted in significant shareholder dilution, and leverages Orla’s strong leadership and construction team, which recently delivered the Camino Rojo Oxide Mine on schedule and under budget. The combined company provides investors exposure to a rapidly growing company with a path towards annual gold production of 500koz at favourable margins. Finally ...we note that increased scale and development stage has been rewarded with higher valuation multiples.”
Elsewhere, BMO’s Andrew Mikitchook cut his target for Gold Standard to 65 cents from $1.50 with an “outperform” rating.
“The deal pairs the South Railroad project with an experienced mine-building team at Orla, who recently put the similar Camino Rojo project into production. In our view, Orla has both the technical expertise and the financial resources to develop South Railroad, giving GSV shareholders exposure to a growing gold producer,” he said.
Desjardins Securities analyst Chris Li sees a “positive” risk-reward proposition for shares of Saputo Inc. (SAP-T) following last week’s earnings release, however he warns “patience is required.”
“As expected, 4Q FY22 results were impacted by industry headwinds. Management confirmed our expectation that FY23 EBITDA should largely recover to FY21 levels, providing some stabilization for the stock,” he said. “Assuming 4Q was the bottom, we expect improving profitability throughout FY23 to support a higher share price. Mid- to high-teens organic EBITDA growth (FY24 and FY25) is compelling, supported by global strategic plan initiatives.”
Following discussions with the Montreal-based company’s management, Mr. Li raised his revenue and EBITDA projections for fiscal 2023, which he expects to a “recovery year.” He pointed to three drivers: “meaningful” prices increases to pass on cost inflation, improved manufacturing efficiencies and “favourable” pricing on “robust” export demand and supply limitations.
“While it was certainly encouraging to sense management’s confidence in a strong recovery this year (a key catalyst), we expect investors to take a ‘wait and see’ approach given limited visibility near-term,” he said. “Uncertainties include the milk–cheese spread (weighed down by high milk costs due to droughts and high feed costs), consumers trading down and retailers pushing back on price increases, intense competition for milk in Australia and ongoing competition, especially in commoditized products such as mozzarella.”
The analyst maintained a “buy” rating and $35 target for Saputo shares. The average is $35.13.
Desjardins Securities’ Benoit Poirier continues to think the 2022 guidance for Bombardier Inc. (BBD.B-T) is “conservative,” seeing it poised for further upside.
“We believe management is well on track with its key strategic initiatives to expand margins and revenue as it reduces debt,” the analyst said in a research note.
Though he expressed concern about the Montreal-based company’s renewal of a collective bargaining agreement with its workers union “hitting some speed bumps,” Mr. Poirier emphasized a recent Financial Times article on the business jet market, which sees “hyper-fuelled demand and stymied supply.”
“The CAGR [compound annual growth rate] for the market between 2022 and 2026 is conservatively projected to be in the high single digits, but the first five months of 2022 have seen doubledigit increases,” he said. “According to WINGX, private flights now account for a quarter of all air traffic in the U.S., around twice their level pre-pandemic. We see this as positive news for Bombardier and is in line with our thesis that the business jet market will continue to grow post-pandemic.”
In response to the company’s 25-to-1 share consolidation, which took effect on Monday, Mr. Poirier hiked his target for Bombardier shares to $80, keeping a “buy” recommendation.
“We remain bullish on the short- and long-term prospects for BBD and recommend investors revisit the story,” he said,
Elsewhere, others making adjustments include:
* National Bank Financial analyst Cameron Doerksen to $65 from $2.65 with an “outperform” rating.
“Our positive view on the stock is supported by strong end market conditions in the business jet segment,” he said. “Furthermore, we believe Bombardier will continue to report improved margins and cash flow in the coming years.”
* RBC’s Walter Spracklin to $56 from $2.25 with an “outperform” rating.
“Bombardier remains one of our favorite top value names,” he said.
Canaccord Genuity analyst Katie Lachapelle sees Uranium Energy Corp.’s (UEC-N) all-share acquisition of Saskatoon’s UEX Corp. (UEX-T) as “slightly positive,” believing it signals a “strengthening” uranium market.
That led her to raise her rating for the Corpus Christi, Tex.-based company to “speculative buy” from “hold”
“Despite being immediately dilutive to UEC shareholders (13.7 per cent), we believe that good longterm value could be surfaced from this transaction; especially as uranium market fundamentals continue to improve (in line with our long-term thesis),” she said.
“The addition of UEX’s portfolio of assets will more than double UEC’s uranium resources in politically stable jurisdictions – Canada and the United States Pro forma, UEC will own approximately 316mlbs U3O8, an 86-per-cent increase vs. its current portfolio. We view this as valuable given recent market signals which suggest that utilities are shifting their preference to North American assets, whether formally sanctioned or not.”
Under the deal, announced before the bell on Monday, UEX shareholders will receive 0.0831 UEC shares, which implies considerations of approximately 43-cents per UEX share or a premium of 50 per cent from Friday’s close.
“UEC is uniquely positioned as one of few U.S. developers that could restart operations and produce in the near term,” said Ms. Lachapelle. “While we see this M&A activity and the recent U1A transaction as value-add in the long term, management has accumulated a very large portfolio over the last 12 months. In our view, there may be multiple competing priorities that management needs to address.
“We continue to believe that UEC should and will be keenly focused on locking in long-term contracts to advance its near-term U.S. assets into production.”
She maintained a US$5.50 target for Uranium Energy shares. The average on the Street is US$6.30.
In other analyst actions:
* RBC’s Wayne Lam cut his Marathon Gold Corp. (MOZ-T) target to $3.50 from $4 with an “outperform” rating. The average is $3.75.
“In our view, Marathon has multiple catalysts ahead with expected completion of the Federal EA process, mid-year resource update, and FS incorporating Berry upside and refreshed cost estimates. We view current valuation as an attractive entry point for investors and could merit a renewed look at potential M&A.,” he said.