Inside the Market’s roundup of some of today’s key analyst actions
Stifel analyst Martin Landry sees Gildan Activewear Inc.’s (GIL-N, GIL-T) “strong” environmental, social and governance initiatives as a “competitive advantage,” emphasizing its targets are “more aggressive and with shorter time-frames” than its peers.
“Gildan launched its Next Generation ESG Strategy 18 months ago, which represents the company’s third set of targets since the beginning of the company’s ESG journey 20 years ago,” he said. “Starting in 2023, Gildan’s ESG targets will be taking into account when assessing the annual short-term incentive plan for all senior executives, sending a strong message to Gildan’s stakeholders. We believe that Gildan does not get the credit it deserves for being an ESG leader. With its vertical integration and strong ESG practices, Gildan provides its B2B customers with peace of mind. This competitive advantage should enable Gildan to gain new business, get better pricing and ultimately drive shareholder value.”
On Aug. 16, the Montreal-based clothing manufacturer released its 19th ESG report, a 120-page document outlining its achievements and initiatives. That includes a target of reducing waste sent to landfills to zero by 2027, sourcing 100 per cent of its cotton from growers with sustainable practices by 2025 and attaining ISO 45001 certification in all its facilities by 2028.
“Gildan started its ESG journey more than 20 years ago when it built its first Biotop wastewater treatment system,” said Mr. Landry. “In the following years, management continued to invest in infrastructures to reduce the company’s carbon emission footprint and in 2022, ESG became one of three pillars of the company’s strategy.”
“Gildan’s B2B customers, such as mass retailers and national brands also have high ESG commitments and goals to attain. The seek business partners which will help them meet their own ESG objectives. Strong ESG practices can be at times the deciding factor for Gildan’s clients to award a new retail or wholesale program. B2B customers are also concerned about their reputational risk, especially given that apparel is a labor-intensive industry which operates in developing countries, prone to violations of workers’ rights.”
Alongside its ESG practices, the analyst sees two additional advantages, noting: “Gildan’s vertical integration facilitates ESG audits as Gildan is involved from start to finish as opposed to competitors who may have several outsourcing partners, complicating the audit process. Gildan’s other advantage is the location of its facilities, in Central America, sourcing U.S. grown cotton and meeting the nearshoring needs of clients.”
Also touting its “strong” return on invested capital, “healthy” balance sheet and the expectation for double-digit earnings per share compound annual growth, Mr. Landry raised his target for Gildan shares to US$37 from US$35, keeping a “buy” recommendation. The average target on the Street is US$36.92, according to Refinitiv data.
“Valuation provides a good margin of safety,” he said. “Gildan’s valuation is 25 per cent lower than its 10-year historical average and near a 10-year low. This depressed valuation provides investors with a margin of safety under a scenario in which consensus estimates are too high. Gildan’s end markets are cyclical and sales could decline by 10-20 per cent if economic conditions worsen. However, we do not model such a scenario at this point.
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CIBC World Markets analyst Dennis Fong thinks investors’ risk aversion toward Canadian large-cap energy stocks has “moderated” and “still provide value for investors given the pace of deleveraging and capital allocation plans which will eventually shift all free cash flow towards shareholder returns.”
“As concerns around an economic recession moderated, we saw increased interest in names with perceived higher torque to the oil price,” he said. “We saw investors move away to some degree from high-quality names with strong balance sheets. Year to date, MEG Energy has significantly outperformed the remaining peer group as we believe investors are pricing in the potential positive impacts of the Trans Mountain Expansion Project (TMEP). The large-cap group is trading at an EV-based 2024E FCF yield of approximately 12 per cent on strip pricing which has fallen from the highs seen in 2022 but still represents relative value vs. other yield-focused industries. We believe the companies investors are most focused on include CNQ, CVE and SU.”
In a research report released Tuesday, Mr. Fong emphasized differentials have “widened modestly after the second quarter and crack spreads remained relatively strong.”
“We believe the market is in a cautiously optimistic mindset,” he added. “There is an understanding that while macroeconomic events could drive volatility, the oil price should be relatively rangebound as OPEC+ has ample supply capacity and SPR replenishment could spur additional demand if the oil price falls significantly. We are entering a period of refinery turnarounds driving wider WCS-WTI basis. The recent strength in crude oil prices has helped pick up share prices in the space. We estimate the group is discounting US$68 WTI, or approximately US$10 below strip pricing of US$78 WTI over the balance of 2023, and US$3 below longer-term futures (2024 - 2026) of US$72 WTI.”
Mr. Fong made a pair of target changes:
* Canadian Natural Resources Ltd. (CNQ-T, “outperformer”) to $93 from $90. The average on the Street is $91.25.
“We expect the company could reach its $10 billion net debt target in early 2024 (current strip), triggering an increase of free cash flow allocation to shareholder returns to 100 per cent (from 50 per cent currently),” he said. “Following the completion of turnarounds at both Horizon and Scotford (non-operated), SCO production reached ~513 MBbl/d in July. During the Horizon turnaround, two furnaces were brought online as a part of the strategic capital spending, which increases SCO capacity by 5 MBbl/d. Thermal in-situ production is expected to be 280 MBbl/d in Q3/23 as optimization of production at Primrose/Wolf Lake and the ramp-up of Kirby sustaining well pads continue before year end. Full-year 2023 production guidance was unchanged, but management guided towards the lower end of the 1,330 - 1,374 MBoe/d range. Capital spending guidance increased by 4 per cent to $5.4-billion with the increase of $130 million in Oil Sands Mining (increased scope and third-party service costs relating to sustaining activities) and $70 million in North American E&P and thermal operations (increased non-operated and workover activity and inflationary pressures).”
* Imperial Oil Ltd. (IMO-T, “neutral”) to $76 from $75. The average is $79.18.
“The company started construction of the Strathcona Renewable Diesel project in the quarter and intends to complete the recently renewed NCIB by year end,” he said. “Public data shows that approximately 2.3 million shares were purchased in July, or 8 per cent of the current NCIB program. This is about half the pace of last year’s buyback program; however, we saw the pace accelerate last August and September (with the program having been completed in October). The company anticipates full-year impacts of 3 MBbl/d and 9 MBbl/d from upcoming Syncrude (hydrotreater) and Sarnia turnarounds, respectively, in H2/23. Imperial exited the quarter with ~$2.4 million in cash, which we see persisting until year end (on current strip) and believe can open the door for a potential SIB in H1/24 and a dividend increase in Q1/24.”
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Raymond James analyst Steve Hansen sees Decisive Dividend Corp. (DE-X) “well-positioned to deliver outsized growth,” citing its “unique competitive position, advanced M&A pipeline, and key secular tailwind.”
“While still early innings, we believe Decisive is in the midst of a long-term strategic growth plan that will benefit from robust acquisitive & organic growth over the next 5+ years,” he said. “We also see the opportunity for significant revenue and cost synergies, particularly as Decisive builds clear clusters of expertise over time.”
In a research report released Tuesday titled Buy, Build & Prosper: Accumulating Niche Enterprises to Power Sustainable Divvy, Mr. Hansen initiated coverage of the Kelowna, B.C.-based acquisition-oriented company with an “outperform” rating.
“Decisive is developing a solid track record for its ability to grow the businesses it acquires ... The company has posted almost 30-per-cnet consolidated organic growth across its platform over the past two years (post COVID),” he said. “While the source of growth varies by subsidiary, key strategies have included: 1) strategic investment into new production capacity; 2) R&D investment into new product development; 3) cross-selling across common customers/channels; and 4) installing new professional management (C-Suite, sales).
“While DE’s current subsidiaries are broadly diversified across multiple end-markets, we expect the company to develop core platforms of expertise over time that should allow for improved synergy extraction (revenue & cost). To this end, we already point to an evolving platform in the hearth sector (Blaze King & ACR) and industrial wear parts (Unicast/Micon/Procore).”
Mr. Hansen thinks Decisive’s management appears “laser focused” on creating shareholder value through “disciplined accretive growth.”
“In other words, they eschew growth-for-the-sake-of-growth and instead focus on KPIs such as earnings/share, EBITDA/share, and FCF/share—all measures that help measure/protect shareholder interests, in our view. Strong competitive positions, high returns on invested capital, and low capital intensity are all complementary factors that also underpin this strategy,” he added.
The analyst set a target of $10.50 per share, representing a 35-per-cent total return from its Monday closing price. The average on the Street is $10.63.
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While viewing its second-quarter results as “largely neutral,” ATB Capital Markets analyst Tim Monachello thinks Questor Technology Inc.’s (QST-X) pending replacement of longstanding president and CEO Audrey Mascarenhas could “signal a much more meaningful shift in the long-term trajectory of the company.”
On Aug. 23, the Calgary-based environmental technology company announced the departure of Ms. Mascarenhas, who also resigned from the Board of Director and owns roughly 17 per cent of outstanding shares.
“After relatively stagnant earnings for roughly three years, QST’s Board of Directors announced it would replace its CEO,” Mr. Monachello said. “We understand the Board is in advanced talks with various external candidates, each with extensive leadership backgrounds in the energy sector, and could have a replacement announced as early as October. We believe the Board is ultimately looking to refocus the company on its core North American rental fleet markets where fleet utilization has fallen from 50-60 per cent in 2018/2019 to the 15-20-per-cent range currently (ATB estimate), drive better uptake of its waste-heat-to-power technology, and increase accountability throughout the organization.
“In our view, upside for investors requires a tangible and actionable long-term strategy that is rooted in deliverable emissions and cost savings for its customers, an adherence to that strategy, and execution throughout the organization to meet long-term targets. Still, we also believe QST’s relatively lack luster performance has been partly attributable to structural challenges as E&Ps have yet to widely accept high-efficiency incinerators as a primary tool in reducing emissions.”
Mr. Monachello thinks Questor has “struggled to regain lost ground” since it hit its “high-water mark” in 2019, when it generated $30-million in revenue and approximately $19-million in adjusted EBITDA.
“Nevertheless, this ambition remains to be actualized, and we believe upside for investors is limited until there is evidence of a significant and sustainable improvement in growth rates and profitability,” he said.
After narrow reductions to his financial forecast to reflect a “slightly weaker” outlook for the second half, Mr. Monachello trimmed his target for Questor shares by 5 cents to $1.10, maintaining a “sector perform” recommendation. The average target on the Street is $1.07.
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Stifel analyst Stephen Soock sees Orla Mining Ltd.’s (OLA-T) Camino Rojo mine in Zacatecas, Mexico as “a very simple, well run operation at steady state with excellent exploration upside.”
“The open pit mining is going very well with short haul cycle times,” he said after a recent site visit. “Crushing is on track to sustain above nameplate capacity for the foreseeable future. Leaching has presented no surprises and the Merrill-Crowe plant is running smoothly. Focus is on increasing secondary crusher availability, leach pad oxygen injection, reagent optimization and improving dore bar quality under their business improvement program. Oxide definition just beyond the resource pit boundary is having success with exploration drilling at the Guanamero oxide target continuing to show promise. Resource drilling to bring the sulphides to an Indicated underground resource for 1H 2024 is ongoing, with the Sulphide Expansion target continuing to emerge as high value rock. Orla is also an active social partner with the communities.”
Calling Orla a “production growth story,” Mr. Soock maintained his “buy” recommendation and target of $7.50 for the Vancouver-based company’s shares. The average is currently $7.29.
“We believe the company executed the Camino Rojo oxide project construction very well and will continue to build mines, building on its established track record,” he said. “he company plans to use the cash generated by Camino Rojo to fund construction of the Cerro Quema oxide project and the South Railroad oxide project. This will give Orla a diversified production asset base minting more than 250koz/yr. We see this followed by construction of the polymetallic Camino Rojo Sulphides scoped as an underground scenario targeting the highest-grade portions of the deposit. We think this asset alone can produce more than 250koz AuEq/yr for almost two decades. We see the high-margin, low-capex oxide mines providing a non-dilutive cash source to fund organic production growth.”
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Following Monday’s release of a “solid” second-quarter financial report, Echelon Partners analyst Rob Goff thinks CloudMD Software & Services Inc. (DOC-X) has “taken the prudent steps necessary to realign its business around core competitive advantages and an eye toward profitability and free cash flow positive operations.”
Shares of the Vancouver-based company jumped 11.1 per cent following its premarket release. Revenue of $23.2-million fell short of Mr. Goff’s forecast of $25.3-million, but an EBITDA loss of $0.7-million was lower than expected (a loss of $1.3-million).
“The large delta between the reported top-line results and forecasts stemmed in part from the $3.3-million in revenues that were either discontinued operations or held-for-sale assets (VisionPros); thus, the reported results reflect CloudMD’s streamlined core operations going forward – this includes CloudMD’s Health and Wellness Services (HWS) segment (formerly Enterprise Health Solutions) and the Company’s Health and Productivity Solutions (HPS) segment, which houses the new remote patient monitoring (RPM) vertical,” he said. “For context, although we believed the Company would eventually look to divest VisionPros, our forecasts still included the US eye care asset.
“Nonetheless, CloudMD’s results were highlighted by quarter-over-quarter and year-over-year improvements in gross/EBITDA margin ... Over the past year, CloudMD has identified $20-million in cost savings, including another $3-million in annualized savings within Q223. The Company reaffirmed its target to turn EBITDA positive (and notably, free cash flow (FCF) positive) in Q423, as it looks for low double-digit revenue growth on its HWS business in 2024 and another $3-4-million in average revenues per quarter in 2024 from its U.S. RPM contract announced last week – that is above and beyond the referenced low double-digit growth.”
Mr. Goff added he’s “encouraged to see another quarter of outperformance where it matters – on the profitability front.”
“We’ve been supportive of the Company’s efforts in streamlining assets toward core operations and it appears the heavy lifting is now complete, while CloudMD’s loud entry into the RPM space with its U.S. hospital system contract sets the stage for a strong top-line organic growth outlook to pair with its improved profitability profile,” he said. “Heading into 2024, the Company expects additional margin enhancements as its RPM deployment is mostly technology-based with anticipated 15-20-per-cent EBITDA margins. The Company is looking to onboard upwards of 2,000 patients (via its U.S. hospital partner’s care providers) over the next four to six months in order to achieve reasonable scale toward realizing its target of $3-4-million in revenues per quarter; CloudMD plans on keeping the market updated with key performance indicators (KPIs) around its patient onboarding over the next few quarters. We hold the potential for additional albeit likely much smaller wins.”
Maintaining a “speculative buy” rating for CloudMD shares, he trimmed his target to 33 cents from 40 cents, citing the impact of his forecast revisions to “accommodate for CloudMD’s streamlined operations, along with taking a more conservative approach to our previously forecasted HWS growth trajectory for 2024.” The average on the Street is $1.15.
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In other analyst actions:
* RBC Dominion Securities’ Tom Callaghan initiated coverage of Flagship Communities REIT (MHC.U-T) with an “outperform” rating and US$21 target. The average target on the Street is US$21.29.
“As the only pure-play portfolio of U.S. based manufactured housing communities listed on the TSX, Flagship is a unique offering for Canadian investors,” he said. “Supported by favourable industry fundamentals, we believe the REIT is poised to continue to deliver above-average organic growth. Concurrently, the resiliency of the U.S. manufactured housing sector, and the REIT’s debt profile position it favourably against potential economic headwinds.”
* CIBC World Markets’ John Zamparo reduced his target for Aurora Cannabis Inc. (ACB-T) to 85 cents, below the 97-cent average, from $1 with a “neutral” rating.
“Though there’s still much more progress needed, Aurora has made credible movement towards positive FCF,” said Mr. Zamparo. “We anticipate another $20-million in annualized cost cuts should flow through the P&L, and while revenue growth isn’t said to be needed to achieve the positive FCF target in calendar 2024, we believe it’s possible given the company’s ability to take share and grow in the right markets internationally. It has taken some time, but ACB’s focus on EU GMP facilities looks to be paying off in certain markets, creating barriers to entry. The stock looks more attractive to us than it has in the past, but we suspect the company needs to further advance towards its profitability goals to gain the confidence of more investors in a difficult time for the sector, which could be prolonged and has no obvious catalyst in sight.”
* In response to a “soft” second quarter, Raymond James’ Steven Li cut his Emerge Commerce Ltd. (ECOM-X) target to 15 cents from 20 cents with an “outperform” rating.
* Cormark Securities’ Gavin Fairweather hiked his Lightspeed Commerce Ltd. (LSPD-N, LSPD-T) target to $37 from $31 with a “buy” rating. The average is US$21.08.
* Credit Suisse’s Andrew Kuske cut his Tidewater Midstream and Infrastructure Ltd. (TWM-T) target to $1.20 from $1.30 with an “outperform” rating. The average is $1.28.
“Tidewater Midstream and Infrastructure Ltd. (TWM) is continuing an asset review process as per past disclosures that looks to be a potentially favourable catalyst before the end of 2023,” he said. “Needless to write, TWM and the related Tidewater Renewables Ltd. (LCFS) affiliate struggled for market performance and possibly broader acceptance. From our perspective, the asset base is individually interesting and value oriented; however, challenges exist in a smaller cap stock - especially with some of the company specific issues. On balance, the strategic review came at the time of a past management shift and, more importantly, the verge of greater basin volumetric growth and directional clarity. Naturally, interest rates, debt levels and some capex issues along with a few other factors were (and are) headwinds. Yet, timing and some value fundamentals look to favour TWM exposure, in our view.
“The Tidewater Group looks to be well positioned in the Western Canadian basin - especially with large capital projects coming to an end. Successful project commissioning should validate underlying value and provide re-rate potential.”
* Echelon Capital’s Rob Goff lowered his Volatus Aerospace Corp. (VOL-X) target to 75 cents from 90 cents with a “speculative buy” rating.
“We look for the shares to be positively revalued with demonstrated positive EBITDA and FCF along with the Company securing additional financial flexibility. We see scenarios with large contract wins from its pipeline representing significant positive catalysts beyond our baseline forecasts,” he said.
David Leeder