Tuesday’s analyst upgrades and downgrades

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

Metro Inc. (MRU-T) is “delivering growth in a volatile operating environment,” according to National Bank Financial’s Vishal Shreedhar, who expects a “continued solid performance” when the retailer reports its second-quarter results on April 19.

The analyst is forecasting earnings per share of 95 cents, up 13 per cent year-over-year (from 84 cents) and a penny above the consensus estimate on the Street. He attributes the gains to “share repurchases, resilient discount format performance, continued strength at Jean Coutu Group (aided by strong F/E), and benefits from lower COVID-19 costs (approximately $8-million last year) and supply chain modernization.”

“We believe that drug store will be the key growth driver through F2023,” said Mr. Shreedhar. “In Q2/F23 we anticipate continued heightened cosmetics trends, driven by heightened demand for experiential out-of-home activities. Furthermore, our analysis suggests ongoing heightened positive influenza tests on a year-over-year basis, which we believe will support the OTC category.”

“Last quarter, MRU indicated market share gains driven by the discount grocery segment. In addition, management indicated it saw flat tonnage year-over-year despite negative industry tonnage. We expect continued outperformance in the discount segment; we note that Empire recently reported double-digit growth in its discount banners in its Q3/F23 results. Unsurprisingly, MRU is increasingly focused on growing its discount banners (management commented on the planned opening of 2 Super C stores in Q2/F23 and an additional 2 in F2023, as well as 2 Food Basics stores in Ontario during F2023).”

Mr. Shreedhar expects consumer themes to remain “broadly similar” from the first quarter across the industry, seeing “incremental pressure on consumer spend (elevated promotions, strength in discount offerings, tradedown to cheaper products) as well as building margin pressure (difficulty in fully passing on inflation).”

With that view, he made modest reductions to his fiscal 2023 and 2024 revenue and earnings estimates. His EPS projections slid to $4.30 and $4.60, respectively, from $4.32 and $4.61.

Keeping a “sector perform” rating, Mr. Shreedhar raised his target by $1 to a Street-high of $81 based on an advancement in his valuation period. The average is currently $78.20.

“We believe that Metro is a solid company which has delivered superior long-term performance supported by strong execution and strong capital allocation; however, these favourable attributes are reflected in the valuation, in our view,” he said.

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DA Davidson analyst Brandon Rolle predicts off-road vehicle retail sales in March “likely did not accelerate in-line with normal seasonality.”

That led him to downgrade Valcourt, Que.-based BRP Inc. (DOO-T) to a “neutral” recommendation from “buy” previously.

“From conversations with our dealer contacts, we estimate March ORV retails ales were relatively in-line to slightly weaker than what dealers experienced in February,” said Mr. Rolle. “The trajectory of March retail sales left many dealers concerned given that retail usually accelerates during March and dealers have ample inventory. Although weather in the Northern/Midwest markets weighed on retail activity, dealers cited higher interest rates and weak underlying demand (foot traffic, incoming calls, sales leads, etc.) as the main drivers of weaker than expected March retail. Multi-line dealers also noted BRP’s market share gains were starting to slow as PII’s (rated NEUTRAL) promotional aggressiveness as attracting customers looking for a deal.”

With a retail slowdown, the analyst now sees dealer inventory approaching 2019 levels.

“Although it is well understood PII was at the end of their ORV dealer restocking phase entering 2023, it was interesting to hear from our BRP ORV dealer contacts that they were in a similar position entering April,” he said. “On average, BRP dealers we spoke with indicated their inventory levels were at 85-95 per cent of 2019 inventory levels, with premium ORV models being the most glaring need. Our contacts cited increased shipments from BRP throughout 2023 coupled with a pronounced retail slowdown over the past two months as reasoning for the quicker than expected dealer inventory replenishment. Without dealer restocking, BRP will be reliant on new retail success to drive ORV shipments, which could be challenged given our recent checks.”

Cutting his fiscal 2024 earnings estimates, Mr. Rolle reduced his target for BRP shares to US$111 from US$125. The average is $136.67.

“Although BRP has one of the best management teams in our coverage list, our checks lead us to believe ORV market share dynamics may be changing, which could limit upside to FY24 EPS guidance,” he concluded.

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“Buoyant” prices are likely to provide a near-term tailwind for North American gold miners, according to Citi analyst Alexander Hacking.

“Citi’s commodity team is bullish with a short-term trading target for gold of $2,300 per ounce,” he said. “Gold miners have significantly underperformed the underlying in recent months mostly due to cost inflation (up $100-200 per ounce since 2020) – but the sector pivot back to M&A may not be helping. Costs appear to be peaking, but labor pressures persist, particularly in Australia and North America.”

“Gold has found itself on solid ground so far in 2023 with prices averaging ~$1,895/oz year-to-date as the U.S. Dollar’s strength tapered and inflation abated slightly as oil came off its peaks. Citi sees see four potential macro drivers for the market here: (1) STIR traders repricing to a significantly lower terminal rate and putting 2H’23 insurance cuts back on the table, prompting a rapid rally across the rates curve; (2) concerns about potential systemic risk as potentially deflationary or increasing likelihood of recession, leading to investor demand for the ‘lower vol’ safe haven; (3) light positioning for gold ETFs and options heading into the March 22 FOMC; and (4) physical gold having no counterparty credit risk.”

Despite that stance, Mr. Hacking warned that both Newmont Corp. (NEM-N, NGT-T) and Barrick Gold Corp. (GOLD-N, ABX-T) are likely to report “relatively weak” first-quarter results, seeing 2023 production growth weighted toward the second half of the year. He’s projected earnings per share of 31 US cents for Newmont, below the 43-US-cent consensus, and 17 US cents for Barrick, matching the Street.

“Costs should move higher again before tracking lower as production improves through the year,” he said.

The analyst expects “a relatively stronger” quarter from Agnico Eagle Mines Ltd. (AEM-N, AEM-T), seeing production tracking marginally above his prior estimates. His EPS estimate of 48 US cents is 8 US cents ahead of the consensus.

He said Agnico remains his top pick in the sector, reiterating a “buy” rating and US$65 target for its shares. The average on the Street is US$61.77.

“Agnico is arguably the highest quality name in the space given its assets and management. Production is predominately in Canada with strong reserve life and expansion potential,” he said.

Mr. Hacking also kept a “buy” recommendation for Newmont, calling it “the ‘go to’ gold name for U.S. generalists.” However, he said he’s skeptical about the value proposition for its proposed acquisition of Newcrest Mining Ltd.

“Newmont is in the Newcrest data room and seems likely to improve its prior offer. We remain skeptical on the strategic rationale with plenty of work still to do on legacy GG assets in Canada – but understand the desire to add more Tier 1 assets to the portfolio,” he said.

He cut his target for Newmont shares to US$60 from US$70. The average is US$56.60.

Mr. Hacking maintained a “neutral” rating and US$20 target for Barrick, calling “disciplined and discounted, although without a clear re-rating catalyst.” The average is US$21.73.

Elsewhere, RBC Dominion Securities analysts expect “more mixed” results across the precious metals sector with “higher gold prices more than offset by challenging operating results for producers.”

“Despite a deceleration of input cost pressures, 2H22 inflation plus low 1Q volumes point to high costs this quarter which could represent a high water mark,” the firm said. “Given the recency of annual guidance and year-end financials, we anticipate fewer surprises, although note that near-term risks outweigh opportunities. Our outlook for the sector has improved ytd, following more clear shifts to monetary policy supporting gold prices; however, valuation for the gold equity sector reflects the assumption of near-record gold prices being sustained.”

“In our view, upside opportunities are more tempered, where we highlight greater potential strength from Agnico Eagle (EPS above cons), Gold Fields (production less skewed in 1Q), and B2Gold (production less skewed, favourable FCF). We highlight greater risks with results from AngloGold (weaker 1Q not reflected within cons, 2024 guidance uncertainty), Barrick (EPS slightly below cons, skewed 1Q, PV ramp-up uncertainties), and Wheaton Precious Metals (skewed 1Q, concentrate sales risks, EPS below cons). Other financials of note include Newmont (guided particularly weak 1Q, but reflected within cons), Kinross (EPS above cons, but higher cash consumption forecast), and Triple Flag (heightened noise likely from MMX acquisition).”

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Following Monday’s announcement of its US$4.3-billion acquisition of oil assets in the southwest United States, National Bank Financial analyst Travis Wood called Ovintiv Inc. (OVV-N, OVV-T) a “Permian powerhouse.”

TSX-listed shares of the Denver-based company, formerly Encana, jumped 11.1 per cent following the premarket announcement of an agreement to buy the assets from private equity firm EnCap Investments. It also revealed a 20-per-cent increase to its quarterly dividend.

“This announcement is consistent with our view that inventory-driven M&A is required to backfill inventory quality and depth across many of North America’s E&P companies,” said Mr. Wood. “The acquisition is accretive on most metrics while padding the company’s drilling inventory (over 1,000 net locations) across its high-quality Permian asset base, alleviating any concerns about the depth of inventory in the near- to medium-term. Furthermore, Ovintiv opportunistically horse-traded assets in the process, divesting its Bakken assets for $825 million to help fund the acquisition.

“Ovintiv has made significant strides in strengthening its B/S in recent years through a cost-focused approach, coupled with optimizing its portfolio through non-core asset divestitures (Duvernay, Eagle Ford, Bakken). As a result, the company remains well-positioned to deliver significant shareholder returns across our forecast period through a clearly defined capital allocation framework, evidenced by a 20-per-cent increase to its base quarterly dividend (more within).”

Maintaining an “outperform” rating for Ovintiv, he trimmed his target to US$61 from US$66 based on revisions to his debt-adjusted per share estimates. The average is US$59.24.

Others making changes include:

* RBC’s Greg Pardy to US$55 from US$57 with a “sector perform” rating.

“In our minds, Ovintiv’s $4.3 billion Permian deal is strategically sound and addresses its need to replenish drilling inventory, but is mixed on a financial basis,” said Mr. Pardy. “Ovintiv will adhere to its capital return game plan and announced a 20 per cent ($0.20 per share annualized) increase to its base dividend.”

* Evercore ISI’s Stephen Richardson to US$42 from US$60 with an “in-line” rating.

* Truist Securities’ Neal Dingmann to US$56 from US$54 with a “buy” rating.

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Citing “uncertain” timing for its next growth catalysts and its valuation “amidst an increasingly uncertain revenue growth outlook for the coming two years,” BTIG analyst Jonathan DeCourcey downgraded Florida-based cannabis retailer Jushi Holdings Inc. (JUSH-CN) to “neutral” from “buy.”

“At current levels, Jushi trades significantly above the peer group on EV/EBITDA while growth this year will be challenged due to lost sales for the company’s Illinois/Missouri border stores in light of Missouri’s better than expected rec opening,” he said. “For 2024, Virginia rec contributions are no longer expected following the failure of the Virginia state assembly to finalize rec regulations in time for the state’s anticipated Jan ‘24 opening. Now the soonest a rec opening in Virginia can occur will be 2H/24 but even that timing looks optimistic given the Governor’s opposition to progress. Medical market expansion in the state which started in 2H/22 and will continue this year is a positive and will drive growth on both the top and bottom lines, however those contributions will be significantly less than rec would provide.

“We have long pegged Jushi’s status as being the best positioned operator in the state (both in terms of geographic location within the state’s regional model and established asset base) and even if that status is unlikely to change, the near term hit to growth is meaningful to our thesis. Meanwhile, we continue to track rec legislation in Pennsylvania, Jushi’s other looming expansion state, and while we are encouraged by recent signs of progress the outlook for passage this year and an opening in ‘24 remains uncertain. Any timing clarity on a rec opening in Virginia or Pennsylvania and/or a greater understanding of the long term impact from Missouri’s opening as well as any broader industry reform progress could permit us to again be more constructive on Jushi’s stock. Importantly, even as we downgrade our rating we note that following the company’s refinancing in late ‘22 and in light of cost-cutting measures put in place by management, Jushi is poised to withstand the slower growth outlook for the coming years.”

Mr. DeCourcey did not specify a target for Jushi shares. The current average on the Street is $2.22.

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G Mining Ventures Corp. (GMIN-X) is “well positioned to grow, with a top-tier management/technical team,” according to analysts at RBC Dominion Securities.

The Brossard, Que,-based company was the lone addition to the firm’s “Canadian Small Cap Conviction List” for the second quarter of 2023. The list now consists of 17 of its “highest-conviction names” with market capitalizations of less than $2-billion.

“GMIN’s TZ project in Brazil is well advanced and, to date, on budget and on time for first production in 2H24,” said analyst Michael Siperco. “We model a US$460-million open pit project with a +10-year mine life producing 1.8moz of gold (roughly 175kozpa, almost 200kozpa for the first five years) at milled grade of 1.3 grams per ton. Procurement for TZ is over 80 per cent complete (including 100 per cent of major equipment), and we see the project as fully financed with strong financial partners.

“GMIN is differentiated from developer peers through its relationship with GMS, a private engineering/consulting firm with a strong track record of execution on large scale projects for Newmont, IAMGOLD, Lundin Gold and others. The connection is the Gignac family, which controls GMS, members of which include GMIN Chair Louis Gignac and CEO Louis-Pierre Gignac. Moreover, we see producer re-rate potential and leverage to higher metal prices. At spot metal prices (approximately US$2,000 per ounce), we estimate an NPV5% of US$783-million for TZ, and a NAV5% for GMIN of $1.1-billion ($2.47 per share), representing 130-per-cent potential upside (90-per-cent implied to our $2.00 price target based on the RBC price deck, US$1,600/oz Au LT). At spot, GMIN trades inline with developer peers at 0.45 times NAV, but a 30-per-cent discount to growth producers, and a 50-per-cent discount to intermediate producers, with production expected within 18 months, and management targeting eventual production of 500kozpa through further acquisitions.”

Mr. Siperco has an “outperform” rating and $2 target for G Mining shares. The average is $1.89.

Stocks removed from the list following the first quarter were: Magnet Forensics Inc. (MAGT-T); Minto Apartment REIT (MI.UN-T); Osisko Mining Inc. (OSK-T); and Skeena Resources Ltd. (SKE-T).

The remainder of the list is: Cargojet Inc. (CJT-T); Cascades Inc. (CAS-T); Copperleaf Technologies Inc. (CPLF-T); Doman Building Materials Group Ltd. (DBM-T); Exchange Income Corp. (EIF-T); Freehold Royalties Ltd. (FRU-T); Enghouse Systems Ltd. (ENGH-T); InterRent REIT (IIP.UN-T); Jamieson Wellness Inc. (JWEL-T); Major Drilling Group International Inc. (MDI-T); Opsens Inc. (OPS-T); Park Lawn Corp. (PLC-T); Pason Systems Inc. (PSI-T); Tamarack Valley Energy Ltd. (TVE-T); Tidewater Midstream & Infrastructure Ltd. (TWM-T); and VerticalScope Holdings Inc. (FORA-T).

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For the first time since its initial public offering, DRI Healthcare Trust (DHT.UN-T) has “in place a foundation primed for growth,” according to Raymond James analyst Rahul Sarugaser

“We see DRI’s work to complete the replacement of its mature/expiring cash flows as a significant achievement and a material derisking event,” he said. “We believe the market asymmetry identified here presents a solid near-term entry point.”

Seeing the Toronto-based DRI “primed for growth,” Mr. Sarugaser initiated coverage with an “outperform” recommendation on Tuesday.

“We identify a wide market asymmetry between DRI’s stock price and its current NAV (more than $10 per share),” he said. “Further, as the Trust executes the $300-million in incremental transactions it has guided to during 2023-2025 — producing a robust calculable series of future cash receipts — we expect its valuation should correct toward our target.

“During the last 10 years, there has been a rapid expansion in the number of biotech companies created and launched onto the public markets (2013-2022: more than 500 IPOs; 2003-2012: approximately100 IPOs), which has played a key part in driving the escalation of novel drug approvals by the U.S. FDA during the last half-decade or so. During the same period, global R&D spend has grown substantially (more than 7-per-cent CAGR 2014-2021), and is expected to continue its upward trajectory, with $4-trillion in R&D spend forecasted across the biopharma ecosystem during the next decade. The growing capital needs of the biopharma ecosystem, the growing number of recently-approved therapies, and today’s challenging equity capital market backdrop for biotech companies creates an ideal environment for non-dilutive royalty financing, in our view.”

He set a target of $13.50. The average is $15.34.

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After “mixed” fourth-quarter results and 2023 guidance, ATB Capital Markets’ Frederico Gomes sees Auxly Cannabis Group Inc.’s (XLY-T) improved margin outlook is counterbalanced by slower sales growth and its leveraged balance sheet.

On Friday, the Toronto-based company reported net revenue of $24.7-million, below the analyst’s $25.8-million estimate. However, an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) loss of $0.8-million was better than anticipated (a loss of $4.8-million).

“We are updating our estimates to reflect XLY’s mixed 2023 guidance for adj. gross margins of 35-40 per cent (ahead of previous ATB estimate of 30 per cent) and net sales growth of 15 per cent (which is below previous ATBe of 29 per cent and implies no significant market share gains during the year),” said Mr. Gomes. “We think operations are becoming more efficient (the adj. EBITDA loss of $0.8-million came in above ATBe loss of $4.8-million, driven by better-than-expected gross margins of 30.1 per cent and lower SG&A), but the Company’s balance sheet remains leveraged. While the margin outlook has improved—we now expect XLY to reach positive adj. EBITDA in Q2/23 (from 2024 before)— the guidance suggests 2023 net sales of $108-million, a low revenue base compared to $173.2-million in debt accompanied by $5.7-million in quarterly interest expense.”

The analyst lowered his 2023 sales estimate to align with management guidance while raising his margin assumptions to “reflect efficiency improvements in Leamington, pre-roll automation investments, and an optimized product portfolio (with the discontinuation of unprofitable SKUs).”

However, seeing “growth being delayed into future years,” Mr. Gomes trimmed his target for Auxly shares to 5 cents from 7 cents with a “sector perform” rating. The average is 9 cents.

“We remain cautious on the stock due to concerns around the leveraged balance sheet (our model assumes the Company will need to raise an additional $15-million through 2023 and 2024 to execute its growth strategy), which enhances dilution and liquidity risks, in our view,” said Mr. Gomes.

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In other analyst actions:

* Raymond James’ Bryan Fast initiated coverage of Bolton, Ont.-based Titanium Transportation Group Inc. (TTNM-T) with an “outperform” rating and $5 target. The average is $5.90.

“Titanium has grown from a logistics broker to one of Canada’s largest transportation companies,” said Mr. Fast. “The successful path forward is based on a continuation of its strong track record of M&A, its organic growth opportunities primarily through the asset light logistics vertical and leveraging its investment in technology. Should Titanium achieve its goal of becoming a $1bln transportation and logistics provider, we expect a material re-rating and considerable upside from an already attractive valuation. Titanium has proven their ability to source, execute on, and improve prospects, growing its way to a fleet of approximately 800 tractors and 3,000 trailers, placing it amongst the leading Canadian trucking companies, and one of the publicly investable vehicles with exposure to the industry. Further, we see the company’s organic expansion of the asset light logistics (truck brokerage) business as an important driver of growth, and with scale comes improved efficiencies.”

* Credit Suisse’s Andrew Kuske raised his Boralex Inc. (BLX-T) target to $45 from $43, keeping a “neutral” rating. The average is $47.

“On balance, we do like BLX’s ability to gradually grow the business and execute with a manageable degree of risks,” he said. “Given the company’s size, individual project wins can translate into a significant valuation impact, in our view. The team’s positioning, duration and credibility combined with an overall favourable backdrop for many renewable developers should collectively be supportive of value creation potential. With our NAV-driven methodology, we await either a better entry point or greater clarity on a variety of value-surfacing opportunities from the growth pipeline.”

* Scotia’s Konark Gupta raised his CAE Inc. (CAE-T) target by $1 to $38 with a “sector outperform” rating. The average is $36.25.

* CIBC World Markets’ Bryce Adams increased his target for Capstone Copper Corp. (CS-T) to $7.25 from $6.25 with an “outperfomer” rating. The average is $7.50.

* TD Securities’ Sam Damiani lowered his Firm Capital Mortgage Investment Corp. (FC-T) target to $13.50 from $14 with a “buy” rating. The average is $12.50.

* Scotia’s Phil Hardie raised his IGM Financial Inc. (IGM-T) target to $49 to $47 with a “sector perform” rating. The average is $45.88.

“IGM announced a pair of transactions that we view positively and believe create long-term value and is strategically aligned but risk being received with a bit of mixed investor reaction given what is likely to be viewed as a relatively high acquisition multiple,” said Mr. Hardie. “The transactions include 1) a 20.5-per-cent stake in Rockefeller Capital Management, a leading U.S. wealth manager focused on the high- and ultra-high-net-worth client segments, and 2) the sale of its IPC division to Canada Life, another subsidiary of the Power Group companies.

“The IPC sale is likely to be seen as an unambiguous positive for IGM given that it monetizes what was likely an overlooked and undervalued asset by investors. We view the Rockefeller transaction as a relatively low risk approach to entering the U.S. wealth management market, which we believe advances IGM’s strategy of expanding its presence in the high-net-worth client segment and adds an attractive new growth lever. That said, we believe IGM is paying a valuation premium that likely reflects Rockefeller’s high growth, and investors have not historically fully reflected the value of strategic investments into its stock price.”

* Canaccord Genuity’s Doug Taylor reduced his Lifespeak Inc. (LSPK-T) target to $1.50 from $2.50 with a “speculative buy” rating. The average is $1.35.

“LifeSpeak’s Q4 results featured stronger-than-expected EBITDA as the company continues to manage its cost base effectively amid a more challenging top-line growth outlook,” he said. “The trend of modest top and bottom-line expansion is expected to continue in the near-term; We have adjusted our expectations accordingly. Alongside the results, there were several moves made to give the company more breathing room from its substantial balance sheet obligations. This includes: 1) A new $15-million convertible loan injection from Beedie Capital; 2) A substantial reduction in the earnout owed on its Wellbeats acquisition; 3) An updated agreement with its lender to reduce principal payments required in 2023 to just $1.2-million. Balance sheet overhang has led to a depressed valuation; LSPK trades at 6.6 times our revised 2023 EV/EBITDA with a substantial amount of the Enterprise Value represented by debt (60 per cent). The torque in the equity to successfully navigate to a healthier leverage profile is substantial but carries risks which advise our SPECULATIVE BUY rating.”

* Scotia Capital’s Maher Yaghi raised his target for Quebecor Inc. (QBR.B-T) to $35.75 from $33.50 with a “sector perform” rating. The average is $36.23.

‘We are updating our Rogers and Quebecor models, including our KPIs, to account for the acquired assets and concomitant financing post closing,” said Mr. Yaghu. “The updated guidance provided by Rogers on Friday was very much in line with the merger model that we published in December and hence, beyond a few tweaks, our Rogers merger assumptions remain consistent with our prior views. For Quebecor, we assumed that for now the merchandising strategy remains the same. However, and as we discussed in recent reports on bundling, we believe the wireless execution will be dependent on the company’s success in bundling. We don’t see the conditions attached to the ISED approval as adding extra weight on the companies beyond what we already knew, however, we believe the regulatory environment in Canada is becoming riskier, and we are cautious regarding the outcome of the upcoming review by the CRTC of broadband access and FTTP services.”