Inside the Market’s roundup of some of today’s key analyst actions
The Choice Properties REIT (CHP.UN-T) “story is finally coming together nicely,” according to Scotia Capital analyst Himanshu Gupta.
“72 per cent of the total portfolio is Retail, mostly Loblaw grocery-anchored open air stores, 19 per cent industrial and 9 per cent residential/mixed-use,” he said. “Food-anchored retail strip open air centers are the most desirable property-type in the current market. Office portfolio sale to Allied (AP) was an important catalyst and now CHP is left with one of the largest industrial portfolios in Canada.”
In a research report released Tuesday, Mr. Gupta raised his recommendation for Choice Properties to “sector outperform” from “sector perform” based on three factors:
* A potential re-rating based its industrial portfolio.
“CHP now owns one of the largest CAD-industrial portfolio in the public domain (post recent M&A in the sector),” he said. “We think CHP’s $3.3-billion industrial portfolio valuation could see a re-rating. In a bull-case scenario for the Industrial portfolio, CHP NAVPU [net asset value per unit] can grow to $17.85 (32-per-cent total upside).”
* Viewing it as a “place to hide in case of a recession next year.
“CHP has highest percentage of grocery NOI [net operating income] within the retail peers,” he said. “CHP has better Net Debt/EBITDA of 7.6 times vs traditional peers at 9 times to 11 times, and CHP has 6.5 years WALT with Loblaw. While CHP lags its peers on near-term development pipelines, in the current macro environment (& cost of debt) this could imply a better risk profile.”
* Seeing its valuation as “attractive.”
“CHP is trading at an 11-per-cent discount to NAV and 15.2 times 2024 estimated AFFO [adjusted funds from operations] multiple,” he said. “CHP has top three preferred property types), and a track record of value creation with being #2 best performer among retail peers (after CRT).”
Mr. Gupta also suggested Choice could consider a spin-off of their industrial portfolio through an initial public offering. He called it Choice Industrial Properties (with a CHIP ticker) and sees the potential to take advantage of a lack of pure-pay Canadian industrial entities.
He raised his target for the REIT’s units by $1 to $16. The average is $15.28.
Elsewhere, RBC Dominion Securities’ Pammi Bir bumped his target to $15.50 from $15 with a “sector perform” rating.
“Post in-line Q3 results, our stable outlook on CHP is intact,” said Mr. Bir.” In the face of decelerating economic activity, the portfolio remains well-equipped to deliver steady organic growth, backstopped by its predominantly grocery anchored retail portfolio and growing complement of industrial and mixed-use assets. Indeed, we’re encouraged by advances made in the development program, which should continue to augment CHP’s earnings and NAV growth profile. In short, we see the units as a strong defensive investment amid broader turbulence.”
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TD Securities analyst Mario Mendonca made a pair of rating changes to Canadian banks on Tuesday.
He lowered Canadian Imperial Bank of Commerce (CM-T) to “hold” from “buy” with a $65 target, down from $74. The average target on the Street is $72.47.
Mr. Mendonca upgraded Laurentian Bank of Canada (LB-T) to “buy” from “hold” with a $41 target, below the $42.15 average.
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After its third-quarter financial results exceeded expectations, iA Capital Markets analyst Matthew Weekes sees shares of Shawcor Ltd. (SCL-T) trading closer to the “the low end of potential valuations in a scenario of a successful sale of the pipe coating business.”
He was one of several equity analysts on the Street to raise their financial forecast and target price for the Toronto-based oilfield services company following Monday’s quarterly release, which fuelled a 6.7-per-cent share price jump.
Revenue rose 15 per cent year-over-year to $335-million, exceeding both Mr. Weekes’s $300-million estimate and the consensus forecast of $321-million. Driven by a better-than-anticipated performance from its Composite Systems, adjusted EBITDA increased 26 per cent year-over-year to $34-million, topping the $34-million projections of both the analyst and Street.
“SCL’s Q3/22 results were ahead of estimates, driven by strong margin contribution in the CS segment where we believe the Company’s key growth initiatives are still in the early innings,” said Mr. Weekes. “SCL’s backlog increased to more than $1-billion, sitting at a post-2014 high, with further growth expected as more secured work moves into the NTM [next 12-month] period. We continue to expect significant positive operating leverage as SCL executes on large pipe coating contracts.”
The analyst sees Shawcor’s pipe coating business “poised to generate robust margins,” noting management remains confident in a multi-year upcycle.
“SCL’s backlog increased to $1-billion with the addition of NTM revenues from the SGP project, sitting at a post-2014 high, and is expected to continue to grow as more work flows into the NTM period,” he said. “The PL&PS [Pipeline & Pipe Services] segment has been just below breakeven in recent quarters, which have been some of the lowest in its history, but SCL anticipates that segment margins will pick up into the high-single to low-double digits over the next few quarters and anticipates margins closer to 20 per cent as it begins executing work on the SGP in H2/23. SCL indicated that bidding activity remains strong and it remains bullish on the outlook for pipe coating activity over a multi-year period.”
Also believing the growth potential in core products is “likely being underestimated,” Mr. Weekes raised his expectations for both the fourth quarter and fiscal 2023, leading him to increase his target for Shawcor shares to $14, matching the average on the Street, from $13 with a “buy” rating.
Elsewhere, TD Securities’ Aaron MacNeil lowered his recommendation to “hold” from “buy” with a $13 target, rising from $12.
Others making changes include:
* Canaccord Genuity’s Yuri Lynk to $14.50 from $13.50 with a “buy” rating.
“The core business, which will be 75-per-cent non-O&G derived, continues to exceed growth and margin expectations despite inflationary pressures,” said Mr. Lynk. “In addition, the outlook for the Pipeline & Pipe Services (PPS) segment, under review for sale, has further strengthened. All told, we continue to think Shawcor’s stock looks inexpensive at 4.4 times 2024 estimated EBITDA versus peers at 7 times. We derive our target using a sum-of-the-parts approach for a blended multiple of 5.0 times applied to our 2024 estimated EBITDA less our Q4/2023 net debt estimate.”
* RBC’s Keith Mackey to $15 from $11 with an “outperform” rating.
“Shawcor’s 3Q22 results were ahead of expectations. Despite strong share price performance since August, we believe the stock has more room to run as its self-help activities bear fruit, and it capitalizes on the current up-cycle. We increase our 2023/24 EBITDA estimates by 2/18 per cent,” said Mr. Mackey.
* BMO’s John Gibson to $15 from $12 with an “outperform” rating.
“SCL’s Q3/22 results were above expectations, while the company should see margins continue to improve given significant cost rationalization combined with rising activity levels, particularly in Pipeline and Pipe Services. SCL’s upcoming pipecoating sale also represents a significant catalyst, with a formal announcement expected prior to mid-2023,” said Mr. Gibson.
* ATB Capital Markets’ Tim Monachello to $16.75 from $14 with an “outperform” rating.
* National Bank’s Michael Robertson to $14 from $12 with an “outperform” rating.
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Pricing power has titled back to the benefit of the oilfield services sector, said Canaccord Genuity analyst John Bereznicki, who raised his financial projections following a better-than-expected third-quarter earnings season.
“Given minimal OFS capacity growth since 2014, a tightening supply dynamic is pushing pricing higher as operators scramble to secure capacity,” he said in a note released Tuesday. “While high-spec equipment has generally enjoyed the strongest pricing gains thus far, we believe the mid-tier market is gaining momentum (we were frankly surprised by the cadence and breadth of OFS pricing gains in Q3/22). Service providers have focused on the upgrade of existing equipment (often with customer backing), and some segments of the industry are approaching new-build economics (most notably pressure pumping). However, we don’t expect meaningful new capacity additions for several reasons: i) Chronic labour constraints make it difficult to crew new capacity; ii) Oilfield companies that even contemplate new builds will incur the wrath of investors; and iii) Lead times for new OFS capacity of one year or greater are not uncommon.”
“Through mid-2022 OFS cash flow growth was driven primarily by a recovery in activity from a severe pandemic downturn in 2020-21. During this period, pricing increases were generally unable to keep pace with cost and supply chain pressures, resulting in OFS margin challenges. We expect operator spending growth (and rigs adds) to moderate through 2023, with continued pricing gains and improved fixed-cost absorption driving sector margins higher (particularly as cost pressures ease). Barring a meaningful commodity price pullback, we expect this to drive consensus estimates higher as margin gains fall straight to the bottom line of OFS service providers. If producers (who are significantly underspending cash flow) choose to curtail spending in response to increased OFS pricing, this is likely bullish for commodity prices and the sustainability of the current up-cycle.”
Mr. Bereznicki said companies in his oilfield coverage universe beat the Street’s quarterly EBITDA projections by an average of 14 per cent, which he said reflects improved pricing, margin expansion and “some moderation” in inflationary headwinds. He also noted management commentary was “almost uniformly constructive,” leading equities to rise by almost 12 per cent during the earnings season from Oct. 28 to Nov. 11.
“While our OFS coverage universe is up an average of almost 75 per cent year-to-date, FTM [forward 12-month] consensus EV/EBITDA in the space has steadily declined over most of this same period and is now highly depressed from an historical perspective at 4 times,” he said. “Said otherwise, equity tailwinds have been driven by consensus estimate revisions rather than multiple expansion. We believe this is reflective of fundamental anxiety and investor perception the sector may be approaching peak earnings in 2023 (not to mention global decarbonization objectives). Should investors gain increased conviction in the sustainability of the current up-cycle and shift capital into the sector, we believe multiple expansion could drive another tailwind to OFS equities.”
Raising his estimates based on higher price assumptions, he increased his targets for stocks in his coverage universe. His changes were:
- CES Energy Solutions Corp. (CEU-T, “buy”) to $4.50 from $3.50. The average on the Street is $4.34.
- Ensign Energy Services Inc. (ESI-T, “hold”) to $4.50 from $3. Average: $5.69.
- Precision Drilling Corp. (PD-T, “hold”) to $130 from $110. Average: $144.47.
- Secure Energy Services Inc. (SES-T, “buy”) to $10 from $9.50. Average: $10.27.
- Trican Well Service Ltd. (TCW-T, “buy”) to $5.75 from $4.75. Average: $5.85.
- Total Energy Services Inc. (TOT-T, “buy”) to $16 from $10.50. Average: $13.88.
“We view our target price multiples as reflective of current market sentiment to the sector. We believe TOT offers the most upside potential in our coverage universe, followed by CEU and TCW,” he concluded.
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Ahead of its Nov. 22 earnings release, RBC Dominion Securities analyst Irene Nattel called Alimentation Couche-Tard Inc. (ATD-T) “a top pick with potential upside to both earnings and valuation.”
Forecasting EBITA and earnings per share for its second quarter of fiscal 2023 of $1.484-billion and 83 cents, respectively, that exceed the Street’s expectations ($1.418-billion and 78 cents), Ms. Nattel sees “significant earnings growth potential inside the box driven by initiatives to capitalize on industry trends and capture share of wallet.”
“ATD continues to ramp up store openings and deploy initiatives with a focus on optimizing promo activity, local assortment, and labour hours,” she said. “We are especially constructive on the Fresh Food, Fast program ability to drive sales, the cost and experience benefits from the rollout of Smart checkout technology at 7k stores over the next 3 years.”
“Our call around fuel margin sustainability significantly above C19 levels based on observations, both at the industry level: i) mid single-digits structural demand destruction due to new work paradigm, ii) elevated, albeit normalizing fuel prices driving credit card fees, iii) opex inflation, and specific to ATD: i) procurement initiatives, notably the JV with Musket, the benefits of which amplify in times of price volatility, ii) gross profit benefit of Circle K rebranding. Importantly, assuming an unexpected unwind of recent industry trends, shifting our outlook toward more moderate margins would conceivably also include better volumes, lower operating costs and improving demand for higher-margin premium fuels.”
Reiterating her “constructive view” on the Montreal-based company, Ns. Nattel raised her target for its shares by $1 to $80 with an “outperform” rating. The average is $69.59.
“Against the backdrop of elevated rates and growing economic uncertainty, we favour staples/staples-like names that perform across the cycle and that enjoy stock-specific optionality,” said Ms. Nattel.
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MDA Ltd.’s (MDA-T) better-than-anticipated third-quarter financial results “reflected stability,” according to RBA Dominion Securities analyst Ken Herbert, who thinks they “provided relief” to investors.
On Nov. 11, the Brampton, Ont.-based space technology company reported revenue of $172-million, up 55 per cent and topping both Mr. Herbert’s $163-million estimate and the Street’s forecast of $165-million.
“The total revenue growth was driven by the Satellite Systems (up 92 per cent, due largely to Globalstar work) and in the Robotics & Space Ops segment (up 65 per cent due to Canadarm3 increases),” he said. “Mix was a headwind for margins, with gross margins of 32.8 per cent, but adj. EBITDA margins were up over 3Q21 at 22.6 per cent. The company did not lower its 2022 guidance, and we believe most investors have now completely removed the Telesat Lightspeed program from expectations.”
Concurrently, MDA increased its full year 2022 adj. EBITDA guidance by $8-million to now $133-million, which Mr. Herbert called a “positive.”
“The company continues to guide to 2022 revenues of $640-million, which implies 4Q22 revenues of $185-million, up almost 60 per cent over 4Q21,” he said. “We are lowering our 2023 revenue estimate to now $780-million. We see growth in a number of programs (Canadarm3, Globalstar, and CSC), but we now believe the implied 4Q22 revenue run-rate is a good starting point for 2023, and we have completely removed any potential Lightspeed contribution from our estimates. There is still a chance the Lightspeed program hits its funding goals, in which case MDA could see upside to the current outlook.”
Maintaining an “outperform” rating, he trimmed his target to $12 from $13, exceeding the $10.25 average.
“We believe MDA continues to provide attractive exposure to space markets, with a largely de-risked near-term outlook. We expect top-line growth in 2023, with flat margins, will be a positive catalyst with upside potential,” he said.
“We believe the stronger than expected 3Q22 results were a positive sign for company and support positive sentiment on the stock. We continue to have confidence in the future fundamentals, as they remain strong in our view. However, the timing risk associated with the CSC and Telesat programs are likely to be an overhang on the stock. We expect the company to provide conservative full year 2023 guidance with the next earnings report.”
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Scotia Capital’s Phil Hardie sees Guardian Capital Group Ltd. (GCG.A-T) as an “attractive small cap value play.”
“Guardian remains our top small-cap value pick, and we believe its valuation discount is too hard to ignore,” he said.
“Guardian benefits from a solid balance sheet and despite near-term industry headwinds, it continues to invest in strategic initiatives that we believe will position it for accelerated growth in the future. These include investments in the development of its retail platform in addition to developing ‘next generation’ offerings”
The analyst said the Toronto-based financial services company “demonstrated better-than-expected resilience in the face of turbulent markets through the third quarter.” Operating earnings exceeded his expectations, “benefiting from a better-than-anticipated top line driven by higher-than-forecast AUM [assets under management.”
“We estimate that shares of Guardian trade at $1.14 per share above the estimated NAV of its corporate investment portfolio of $25.11 per share,” he said. “Consequently, this implies that the market is ascribing a value of $1.14 per share for the company’s investment & wealth management platforms, which implies a value of approximately 0.4 times 2024 estimated operating EBITDA (ex-BMO dividend). We believe over the next 12 months, the value of these platforms should be reflected at roughly $14.95 per share, representing 5.5 times 2024 operating EBITDA (ex-BMO dividend). From a NAV perspective, Guardian’s NAV discount currently sits at 56 per cent, roughly 2.6 times standard deviation wider than its historical five-year average of 40.5 per cent.
Maintaining a “sector perform” rating for its shares, Mr. Hardie raised his target to $42 from $40. The current average is $41.
“We believe the combination of Guardian’s significant capital position through its corporate portfolio and discounted valuation results in a high level of embedded optionality,” he said. “Various scenarios such as the sale of Guardian’s holdings in BMO and the redeployment of capital in the form of significant share buybacks, acquisition of other institutional platforms, streamlining operations to become a pure-play institutional asset manager, or financial restructuring, together with a steep NAV discount could significantly increase Guardian’s share price. Over time, generating more meaningful earnings from its underlying operations will likely serve as the catalyst to structurally reduce its NAV discount. Strategic focus on diversifying its AUM and capabilities outside of Canadian equities, with a priority on increasing presence in U.S. markets along with Global equities, is likely to accelerate earnings growth over the medium term. Opportunities related to the build-out of its Canadian Retail platform and continued expansion of its Wealth Management capabilities likely represent additional sources of longer-term growth and overlooked optionality in the stock.”
Elsewhere, CIBC’s Nik Priebe bumped his target to $40 from $38 with an “outperformer” rating.
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Following a “disappointing” third quarter, ATB Capital Markets analyst Frederico Gomes made significant reductions to his forecast for Auxly Cannabis Group Inc. (XLY-T) upon resuming coverage, citing “recent market share erosion (especially in vapes), a lower market size forecast, and a slower gross margin ramp-up due to XLY’s price adjustments and foray into the value segment in flower (with the recently-launched Parcel brand).”
“Management is striving for adjusted EBITDA profitability by the end of 2022, but our estimates imply that will occur in 2024,” said Mr. Gomes.
Before the bell on Tuesday, the Toronto-based company reported third-quarter net revenue of $19.8-million, down 27.5 per cent quarter-over-quarter and below the $28.7-million expectation on the Street. That led to an adjusted EBITDA loss of $5.8-million, higher than the consensus forecast of a loss of $4.1-million.
Mr. Gomes attributed the miss to “market share losses in flower (slow sell-through of low-THC inventory) and vapes (intense price competition), reduced orders from Ontario and B.C. (due to data security and labor issues, respectively), and a one-week closure of Auxly Charlottetown (due to hurricane Fiona).”
“Management guided to revenue improvements in Q4/22, supported by higher-potency SKUs, increased production from Leamington, and new automation for packaging and pre-rolls,” he added. “However, we are adopting a more cautious outlook given our lower market size forecast (here), XLY’s recent market share erosion (and the need for pricing adjustments to regain share), and a leveraged balance sheet ($173.7-million total debt, with a $49.1-million credit facility maturing on September 23, 2023).”
Reinstating a “sector perform” recommendation (from “restricted” previously), Mr. Gomes cut his target for Auxly shares to 7 cents from 25 cents. The average is 24 cents.
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In other analyst actions:
* National Bank Financial’s Cameron Doerksen downgraded Taiga Motors Corp. (TAIG-T) to “sector perform” from “outperform” with a $5.50 target, down from $8. Elsewhere, Canaccord Genuity’s Derek Dley cut his target to $7 from $8 with a “buy” rating. The average target is $6.25.
* BMO’s Peter Sklar raised his ABC Technologies Holdings Inc. (ABCT-T) target to $5 from $4.50 with a “market perform” rating. The average is $5.40.
“On November 11, ABC reported adjusted Q1/23 EBITDA of $23.9 million, above our estimate of $18.1 million,” said Mr. Sklar. “This was also a significant improvement in sequential results and exceeded Q4/22 EBITDA of $15.2 million. The stronger result reflected customer production schedules which were relatively more stable as the semi-conductor shortage and other supply chain issues improved. However, we point out that auto parts stocks generally underperform the market during periods of Fed tightening as this is clearly an interest-sensitive sector in terms of consumer demand for vehicles.”
* RBC Dominion Securities’ Jimmy Shan cut his Automotive Properties REIT (APR.UN-T) target by $1 to $11.75, keeping a “sector perform” rating, while BMO’s Joanne Chen trimmed her target to $12.50 from $13.50 with a “market perform” rating. The average is $13.30.
“Automotive Properties REIT reported an in-line quarter,” said Mr. Shan. “The news of the quarter was an opportunistic asset sale to end user at a 6.1-per-cent cap rate, $440 PSF. This supports valuation, especially given the property is in Kingston, although we suspect end users put more weight on the replacement cost calculus in their decision. With APR’s all-in debt cost in the mid to high 5 per cent, we think for new deals to make sense, acquisition cap rates should be meaningfully better than 6.1 per cent. APR trades at a fair valuation.”
* Evercore ISI’s Josh Schummer raised his Bellus Health Inc. (BLU-N, BLU-T) target to US$24 from US$20, exceeding the US$18.88 average, with an “outperform” rating.
* Cowen’s Cai Von Rumohr raised his Bombardier Inc. (BBD.B-T) target to $61.24 from $41.15. with an “outperform” rating. The average is $57.43.
* Scotia Capital’s Kevin Krishnaratne cut his Dye & Durham Ltd. (DND-T) target to $23 from $31 with a “sector outperform” rating. The average is $23.90.
“We have lowered our forecasts and target to better align expectations for Dye & Durham’s real estate business (68 per cent of revenues ex-TM Group), which continues to see pressure on a rapid deterioration in transaction volumes,” he said.
“We continue to rate shares of DND Sector Outperform. The stock now trades at 6.7 times calendar 2023 EBITDA, and has potential for upside on future M&A, which could help further diversify the business away from Canadian Real Estate (43 per cent of revenue).”
* CIBC’s Mark Jarvi lowered his Emera Inc. (EMA-T) target to $54, below the $58.32 average, from $55 with a “neutral” rating.
* RBC’s Drew McReynolds trimmed his target for Enthusiast Gaming Holdings Inc. (EGLX-T) to $3.50 from $4, below the $5.73 average, with an “outperform” rating, while Canaccord’s Robert Young cut his target to $4.50 from $7 with a “buy” rating.
“Enthusiast reported mixed results with revenue up 17 per cent year-over-year but light of our estimates and consensus given macro and CPM pressure on the programmatic ad business,” said Mr. Young. “That said, the company continued to drive gross margin expansion as the mix of revenue shifted toward higher-margin segments. Gross profit, up 64 per cent year-over-year, was in line with our estimate despite the top-line miss, which combined with OpEx control, drove EBITDA in line with our model. Enthusiast continues to see a strong seasonal Q4 uptick but with EBITDA less likely to break positive, which we expect pushes positive EBITDA out to Q2/23 or H2/23. Management remains committed to sustained profitability starting in 2023 nonetheless. At these levels, we believe Enthusiast shares remain attractive despite the pullback in digital media names. We are reiterating our BUY rating but with a reduced target ... based on 3 times EV/2023 estimated Sales (from 4 times ) given sector multiple compression, macro pressure on ad spend and likelihood of profitability pushout albeit offset by a stronger balance sheet post actions undertaken in Q3.”
* Raymond James’ Jeremy McCrea raised his PrairieSky Royalty Ltd. (PSK-T) target to $30 from $28 with an “outperform” rating. The average is $24.89.
“We believe PrairieSky is one of the strongest business platforms in the basin, between its unique royalty assets, top profitability, and expected debt-free status next year,” said Mr. McCrea. “Although investors might believe they know the business fundamentals quite well, it appears we’re entering a new era for the company. 1) Over the past decade, PSK’s mineral title royalty land never quite had the competitive advantage that it does today (vs. crown land sliding scale royalty rates); and 2) the advent of multi-lateral drilling designs and growing adoption throughout the basin is extending many historical oil pool reservoirs (throughout PSK’s 18.4 million acres of mineral title land). Overall, we believe we are on the cusp of a substantial increase in well licensing across PSK’s land base, much greater than what we’ve seen in the past decade. We’ve started seeing this with 3Q results and we suspect as investors speak with management (as we’ve recently done), they will realize that there is much more near-term inventory upside than we believe is being priced in today. This should ultimately lead to higher revisions to production, something we have yet to see with consensus estimates.”
* Scotia Capital’s Mario Saric cut his SmartCentres REIT (SRU.UN-T) target to $31.50 from $33.25 with a “sector perform” rating. The average is $30.19.
* ATB Capital Markets’ Patrick O’Rourke increased his target for Topaz Energy Corp. (TPZ-T) to $32 from $30 with an “outperform” rating. The average is $30.45.
David Leeder