Inside the Market’s roundup of some of today’s key analyst actions
IA Capital Markets analyst Naji Baydoun thinks Bird Construction Inc. (BDT-T) is navigating a difficult macro environment “well” and appears poised for a “strong” 2023.
He raised his recommendation for the Mississauga-based company to “buy” from “hold” following Monday’s announcement of a 10-per-cent increase in its monthly dividend (to 43 cents from 39 cents). That increase came with the approval of an annual business plan “which anticipates significant growth in earnings per share and adjusted EBITDA.”
“Although we do not forecast any other major or consistent dividend increases at this time, management noted that it expects its payout ratio to be below 40 per cent of adjusted earnings in 2023,” said Mr. Baydoun. “This conservative payout ratio (1) provides ample excess FCF to reinvest in organic growth and/or M&A, and(2) could lead to further dividend increase over time (ultimately depending on capital allocation priorities and growth opportunities).”
With Bird’s management expecting top-line growth to be driven by both existing backlog of secured work and new contract awards “supported by a healthy pipeline of opportunities,” the analyst said Bird has “dramatically changed its portfolio makeup in the past few years, leading to a lower-risk and more stable business.
“The Company also expects higher margins in 2023 as it replaces older contracts with new projects,” said Mr. Baydoun. “We note that despite recent margin pressures, BDT now seems to be in a better position to drive more sustainable top-line and bottom-line improvements. The Company’s better-than-expected Q3/22 results helped TTM [trailing 12-month] margins stabilize, and we are raising our estimates to reflect increased confidence in the overall outlook. We expect organic growth initiatives to drive top-line increase in 2023 above market expectations, supported by upcoming conversions of projects from pending backlog into backlog. Furthermore, BDT’s shares are currently trading below their own historical forward EV/EBITDA and at an 1.0 times higher-than-average discount to peers; we expect some (if not all) of this higher-than-average gap to normalize as the Company executes on its growth strategy and delivers strong results in 2023.”
He maintained a target of $10 for Bird shares. The current average on the Street is $9.50.
“BDT offers investors (1) mid-single-digit revenue, Adj. EBITDA, and FCF/share growth (4-6 per cent per year, CAGR 2021-26), (2) exposure to the Canadian construction sector with potential upside from additional infrastructure investments and tuck-in M&A, (3) an attractive dividend (6-per-cent yield, 20-30-per-cent FCF payout), and (4) a discounted valuation compared with peers,” he concluded.
Canaccord Genuity analyst Derek Dley sees a “high likelihood” that Freshii Inc.’s (FRII-T) $74.4-million acquisition by privately held Foodtastic Inc. will close in the first quarter of 2023.
That prompted him to lower his recommendation for the Toronto-based healthy fast-food restaurant chain to “hold” from “buy” previously.
“In our view, the transaction is a positive one for Freshii shareholders given the fair multiple offered and a healthy premium to the company’s recent trading price range,” said Mr. Dley. “Further, in Foodtastic Inc., which is a seasoned industry player with $1.0-billion in system sales and other well-known brands under its portfolio, the company has a strategic buyer that will likely be able to help execute in its current growth phase and navigate the currently challenged consumer spending environment.”
Shares of Freshii soared 133.7 per cent on Monday following the premarket announcement of the deal for $2.30 per share in an all cash transaction.
“While we expect same-store sales will remain challenged in the near term as Freshii navigates a challenging consumer spending environment, we believe investor’s focus will now firmly be on the acquisition offer by Foodtastic and the related proceedings,” the analyst said.
Mr. Dley moved his target to $2.30 from $2 to match the offer. The average is $1.88.
Iamgold Corp. (IMG-T) received an “early Christmas present” from Sumitomo Metal Mining Co. Ltd., its partner in the Côté Gold Joint Venture, according to Canaccord Genuity analyst Carey Macrury.
After SMM agreed to contribute approximately $340-million in 2023 to Iamgold’s funding for the project in exchange for an additional 10-per-cent interest, Mr. MacRury raised his recommendation to “hold” from “sell,” citing the reduced capital requirement “combined with the previously announced sale of Rosebel to Zijin Mining for $360 million in cash.”
“We estimate that the transaction is 11-per-cent accretive to our NAV7% which values IAMGOLD’s reduced interest in Côté at $1.11 billion vs. $1.0 billion previously,” he said. “We also reduce our discount rate on the project to 6 per cent, from 7 per cent, to reflect the lower funding risk and our consolidated NAV has increased to $4.16 per share from $3.76 per share previously (up 11 per cent).
“We still see a small funding shortfall in 2024, largely due to the company’s gold prepay arrangement coming due but we suspect that IAMGOLD should be able to roll the prepay arrangement forward which should get it onside. We now forecast ND/EBITDA peaking at 3.3 times in 2024 from 4.8 times in 2023 previously.”
Mr. MacRury raised his target for Iamgold shares to $3 from $1.50. The average is $2.67.
Elsewhere, BMO’s Jackie Przybylowski bumped her target to $2 from $1.75 with a “market perform” rating.
“Despite the progress towards financing we continue to see significant risks to project construction and execution as well as rampup. However, reflecting the easing of financing risks and the high value paid by SMM we have raised our one-year target,” she said.
After the box office results from the opening weekend of Avatar: The Way of Water were “good but not good enough,” Scotia Capital analyst Maher Yaghi reduced his fourth-quarter financial projections for Cineplex Inc. (CGX-T) for a second time in less than week.
“With a three-day haul of US$134-million, Avatar was the main draw in a weekend that brought in US$152.5-million in North American box office revenues,” he said. “Expectations heading in the weekend were for a US$150-US$160 million debut for Avatar. We discussed the importance of a strong showing for Avatar when it came to Cineplex’s fourth quarter results last week. While the first weekend for Avatar was not as strong as initially expected, we argue that this film should not be compared to other movies given its length affecting supply of screens as well as the idea that moviegoers prefer to watch these type of movies on Imax/3D and hence we could see a long tail without a significant drop in the coming weeks.”
“Last two weeks of December are very important. As we indicated in our note last week, this December did not start off strong tracking 55-60 per cent, as of last week, vs. 2019 levels. This weekend’s release of Avatar has improved things with the month now tracking at 77 per cent vs 2019 month to date. The last 2 two weeks of December normally account for 60-70 per cent of the month’s revenues and hence we still have a good amount of volatility when it comes to having a clear view on how the month will finish.”
Mr. Yaghi’s new estimates point to attendance in the fourth quarter of around 63 per cent of the same period in 2019 with box office revenues averaging 73 per cent of that level.
“Our updated revenue estimate for Q4 of $360 million compares with consensus of $396 million while our EBITDA estimates now stand at $85 million compared to consensus of $93 million. Under our new assumptions we estimate leverage in Q4 to be around 3.70 times compared to the company’s covenant test of 3.75 times. We believe the very tight level of maneuverability around the covenant will likely continue to pressure the stock in the short term. However, we point out that the company has been able to receive covenant test reprieve from its lenders as long as the long-term outlook remained positive,” he said.
The analyst also reduced his target for Cineplex shares to $13, below the $13.54 average, from $14.25 with a “sector outperform” rating.
National Bank Financial analyst Gabriel Dechaine reduced his target prices for a group of Canadian bank stocks in his coverage universe on Tuesday.
His changes include:
- Bank of Nova Scotia (BNS-T, “sector perform”) to $75 from $82. The average is $77.87.
- Canadian Imperial Bank of Commerce (CM-T, “sector perform”) to $61 from $67. Average: $62.96.
- Laurentian Bank of Canada (LB-T, “sector perform”) to $42 from $44. Average: $40.77.
- Royal Bank of Canada (RY-T, “outperform”) to $145 from $147. Average: $141.65.
- Toronto-Dominion Bank (TD-T, “sector perform”) to $100 from $103. Average: $101.56.
Thor Explorations Ltd. (THX-X) appears poised to benefit from its first-mover advantage in Nigeria, according to Echelon Capital Markets analyst Ryan Walker, who sees “significant margin expansion on the horizon.”
“Thor’s flagship Segilola mine represents Nigeria’s first commercial gold mine and THX is reportedly the only active gold explorer in the country,” he said. “Importantly, the Nigerian Government actively encourages mining sector investment aiming to diversify the economy and reduce dependence on the oil and gas sector. That support includes awarding the mining industry Pioneer Status Incentive, which includes substantial fiscal incentives, including an income tax holiday for up to five year.”
Initiating coverage of the Vancouver-based company with a “speculative buy” recommendation, Mr. Walker said Segilola has “consistently outperformed nameplate daily mill throughput,” allowing it to “take advantage of prevailing gold prices ... to blend in additional lower-grade material.”
“Since declaring commercial production on January 1, 2022, THX’s Segilola open-pit gold mine has produced 71,651 ounces of gold at AISC [all-in sustaining costs] of $909 per ounce sold, which places it amongst the industry leaders in terms of costs,” the analyst said. “And, the low cost comes despite a high waste/ore stripping ratio, which averaged 15.1/1.0 year-to-date — demonstrating the importance of the high-grade nature of the Company’s open-pit reserves (4.02g/t Au).”
Seeing Thor having navigated “well” through “significant restrictions and logistical and supply chain challenges associated with the global COVID-19 pandemic, demonstrating management’s strength and acumen,” he set a target of 65 cents per share, matching the average on the Street.
“We highlight that THX currently trades at steep discounts to peers in terms of P/CFPS and P/NAV — generally trading below the multiples of even those companies exhibiting negative CFPS CAGR (2023-25), while at the same time delivering better AISC metrics,” said Mr. Walker. “We contend that such discounts are ill-deserved given THX’s performance to date — timely mine build during COVID-19, uninterrupted low-cost production meeting or exceeding guidance (helping to offset headline Nigeria risk), and strong cash generation (indeed we see the potential for THX to almost cashflow the current market capitalization by 2025) that could ultimately internally fund potential supplemental underground and satellite-sourced production, subject to exploration success at Segilola and longer term potentially via the development of the Douta gold project in Senegal. We expect the abovementioned discounts to narrow as Thor’s story becomes more widely known and the Company continues to consistently perform and demonstrates exploration success at both Segilola (to extend the mine life there) and Douta.”
In other analyst actions:
* Jefferies’ Akash Tewari upgraded Vancouver-based Zymeworks Inc. (ZYME-Q) to “buy” from “hold” with a US$11 target, rising from US$7.70, while JP Morgan’s Brian Cheng raised his target to US$8 from US$7 with a “neutral” rating. The average is US$12.67.
* Credit Suisse’s Karen Short started coverage of Dollarama Inc. (DOL-T) with a “neutral” rating and $85 target and Alimentation Couche-Tard Inc. (ATD-T) with a “neutral” rating and $65 target. The averages are $89.86 and $69.92, respectively.
* JP Morgan’s Brian Ossenbeck cut his Canadian National Railway Co. (CNR-T) target to $165 from $174 with a “neutral” rating. The average is $160.79.
* KBW’s Rob Lee raised his CI Financial Corp. (CIX-T) target to $18 from $17 with an “outperform” rating. The average is $18.50.
* RBC’s Michael Siperco lowered his target for Osisko Mining Inc. (OSK-T) to $5.50 from $6.50, keeping an “outperform” rating. The average is $5.21.
* National Bank’s Adam Shine cut his Telus Corp. (T-T) target to $34 from $35 with an “outperform” rating. The average is $33.13.
* Following the $419-million sale of non-core assets, TD Securities’ Aaron Bilkoski raised his Whitecap Resources Inc. (WCP-T) target to $17 from $16.50 with a “buy” rating, while Stifel’s Cody Kwong cut his target to $13.50 from $14 with a “buy” rating. The average is $14.77.
“We believe this recent non-core asset sale should provide a catalyst to the stock, as shareholders appear inline to enjoy dividend increases 4-6 months earlier than previously expected,” said Mr. Kwong. “The next meaningful dividend increase, targeted at 73 cents per share (annualized), could be expected as soon as 2Q23 with the achievement of its $1.3 billion debt bogey coming faster than forecasted with this sale of non-core assets now announced. With an implied yield that appears to be headed to mpre than 7.5 per cent, WCP is becoming differentiated, not only with the size of its return, but also its sustainability in delivering it.”