Inside the Market’s roundup of some of today’s key analyst actions
While the first quarter of its fiscal 2024 was “slow,” Raymond James analyst Stephen Boland raised his recommendation for Canaccord Genuity Group Inc. (CF-T) to “strong buy” from “outperform” on Tuesday, seeing an “excellent asymmetric risk / reward opportunity with limited downside risk and high upside potential should the capital markets improve.”
On Aug 3, the Toronto-based firm reported adjusted earnings per share of 7 cents, missing the 17-cent estimate of both Mr. Boland and the Street. The miss came as Capital Markets revenue disappointed, falling 11.2 per cent year-over-year as M&A activity became “increasingly challenged” during the quarter.
“This was another weak quarter from CF, possibly the weakest we’ve seen since the current down cycle began in early 2022 (1Q23 revenues were lower, but skewed by warrant revaluations),” he said.”There were few positives in the numbers and while the early data suggested this, we suspect the big drop in M&A activity q/q was below expectations (advisory revenue down 61 per cent vs 4Q23). On top of this, there is still nothing concrete to suggest the underwriting business is coming back any time soon. And in spite of all this, the stock still finished up 1.98 per cent on Friday post-release. While we acknowledge the danger in reading too much into short-term market movements, we believe the stock reaction suggests we may have reached the point of maximum pessimism for CF and this may have put a floor on the stock. With what we see as downside protection, we now believe CF investors are effectively getting a free call option on the resurgence in new issue activity.”
While he cut his earnings expectations for fiscal 2024 and 2025, the analyst raised his target for Canaccord shares to $11 from $9.50. The average on the Street is $10.19, according to Refinitiv data.
“We understand many investors will be hesitant to buy CF before there is a visible improvement in capital markets activity. This is an obvious concern for many. However, we believe that ‘waiting’ could lead to (1) a significant loss of upside given the torque of CF’s stock or (2) mistaking a temporary resurgence in activity for a more prolonged recovery,” he said.
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Stifel analyst Ian Gillies thinks Doman Building Materials Group Ltd.’s (DBM-T) “improved margin profile creates equity torque,” leading him to raise his recommendation for its shares to “buy” from “hold” following better-than-anticipated second-quarter results.
“On the 2Q23 conference call, Doman’s management indicated that a gross margin range of 14-16 per cent is appropriate moving forward, higher than our previous expectation of 13-15 per cent,” he said. “This makes a meaningful difference to our estimates with 2023 EBITDA increasing 22.2 per cent to $208 and 2024 increasing 19.0 per cent to $201-million. Moreover, leverage on the balance sheet creates significant torque to the equity value.”
On Thursday, Doman reported revenue of $711-million and adjusted EBIYDA of $66-million, exceeding Mr. Gillies’s projections of $675-million and $48-million. Adjusted earnings per share of 34 cents also blew past his expectation of 18 cents.
“Recent housing market data has demonstrated the resiliency of the housing markets as the decline is not as large as the market previously expected,” he said. “Fannie Mae is now calling for housing starts in 2023E of 1.4 million, down 9.3 per cent year-over-year. For 2024, Fannie Mae is expecting housing starts to be 1.3 million (down 7.4 per cent year-over-year). Both of the 2023 and 2024 forecasts are much improved from the December 2022 outlook of 1.1 million and 1.2 million, respectively.”
Raising his full-year revenue and earnings projections, Mr. Gillies increased his target for Doman shares by $2 to $9.75. The average is $8.75.
“Doman’s margin profile has had a step change in 2023 which is expected to carry on into future periods. This has meaningfully increased the company’s EBITDA generation potential. In conjunction, the balance sheet is much healthier giving the company more optionality for M&A. Lastly, the company’s ROE and ROCE appear to be structurally improved due to acquisition of Hixson in 2021 and improved working capital management,” he concluded.
Others making changes include:
* Raymond James’ Daryl Swetlishoff to $8.75 from $8 with an “outperform” rating.
“In the wake of better-than-expected U.S. & Canadian housing demand and continued upbeat R&R end-user takeaways supporting improved sales volumes across segments, we highlight Outperform- rated DBM as an attractive low volatile vehicle to play our constructive building materials’ thesis,” said Mr. Swetlishoff. “[Thursday] after market, DBM delivered strong 2Q23 results with EBITDA of $66-million (up 27 per cent year-over-year) well ahead of both the Street and RJL estimates ($49.5-million), with the upside primarily driven by much better-than-expected gross margins coming at 17 per cent. With the modest 45-per-cent payout ratio backstopped by strict working capital management supporting lower net debt (down $59.4-million quarter-over-quarter), we note this bodes well for the healthy 7.6-per-cent dividend yield with DBM looking to execute on additional accretive M&A as valuations return to more attractive levels. Successive EBITDA and margin beats have prompted us to increase our target .... further supported by a ‘lean-and-mean’ business strategy with the application of lower net working capital. With 20-per-cent upside to our new target, despite DBM rallying 10 per cent intraday on the impressive print (vs. the TSX up 1 per cent), we encourage investors add to positions as the company continues to deleverage its balance sheet while guiding to an improved margin range ahead.”
* National Bank’s Zachary Evershed to $8.50 from $7.50 with an “outperform” rating.
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Seeing significant upside to its revitalization efforts south of the border, National Bank Financial analyst Vishal Shreedhar initiated coverage of Lassonde Industries Inc. (LAS.A-T) with an “outperform” recommendation on Tuesday, feeling its enticing valuation “compensates” for heightened risk associated with a difficult macroeconomic backdrop.
“We consider Lassonde to be a company with meaningful turnaround potential, predominantly within the U.S. operations,” he said in a note titled Juiced up for a rebound. “We estimate Lassonde’s U.S. operations generate slightly negative EBIT margin (about negative 0.4 per cent, 2022) versus a historical range of 6-7 per cent (2012-2017). If the U.S. business returns to historical EBIT margins, we estimate more than 20-per-cent upside to our 2026 EPS. In 2022, the U.S. business represented 55 per cent of revenue; EBIT generation was negative. Lassonde expects its turnaround improvements to manifest over a 2–3-year timeline, with gradual benefits in 2023, and more meaningful benefits in 2024 and 2025. We model a more conservative 4- year time horizon and forecast 2026 U.S. EBIT margin of 3.2 per cent, translating to 2026 EPS of $15.78.
“There are reasons for optimism – the company has begun to see early benefits from the execution of its initiatives, including a more efficiently produced product offering and lower transportation costs partly due to route optimization.”
Despite that encouraging view, Mr. Shreedhar called Lassonde “a show-me stock,” believing the Rougemont, Que.-based company will requite several quarters of “sustained strong execution to inspire investor confidence.” He thinks acquisitions and/or capacity expansion in adjacent markets could prove to be “a relevant factor for future growth given limited organic growth opportunities in its base business.” However, he thinks a focus on its turnaround efforts in the United States should be a top priority, calling it “the key value driver for Lassonde over the next few years.”
“A lackluster 2022 ROIC [return on invested capital] of 5.4 per cent, at the bottom of our coverage universe, further dampens investor enthusiasm, though we model improvement through our forecast horizon (6.9 per cent by 2026),” he said. ”In addition, juice sales volumes are not helpful - we expect the industry to show flattish volume growth through our forecast horizon.
“In our view, valuation compensates investors for risk associated with the uncertain backdrop. Specifically, Lassonde currently trades at 6.3 times our NTM [next 12-month] EBITDA versus the five-year average of 7.7 times. In addition, we calculate an implied WACC [weighted average cost of capital] of 12.0 per cent, which is more favourable versus other staples in our coverage universe averaging 10.2 per cent. If we assume that Lassonde can successfully turnaround its operations, the implied WACC improves further to 14.2 per cent, which we deem to be very attractive. Our upside/downside analysis also suggests opportunity.”
He set a target of $146 per share. The average target on the Street is $138.
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In response to a recent valuation “pull-back,” Raymond James analyst Brad Sturges upgraded Dream Residential REIT (DRR.U-T) to “outperform” from “market perform,” believing ongoing renovation activity is “augmenting its organic growth prospects.”
On Thursday, the Toronto-based REIT, which focuses on the Sunbelt and Midwest regions of the United States, reported funds from operations of 18 US cents, matching the Street’s expectation, as average monthly rents rose 2.5 per cent from the previous quarter.
“We are upgrading our rating for DRR to Outperform from Market Perform, to reflect: 1) its P/AFFO multiple contraction over the past few months; 2) defensive rental demand characteristics for DRR’s core Class B U.S. MFR portfolio in the affordable mid-market rental segment; 3) DRR’s value-add plans that can augment its near-term organic growth prospects; and 4) DRR’s strong balance sheet metrics,” said Mr. Sturges. ”While DRR is trading at its average historical 3 times P/AFFO multiple turn discount to its closest peer, BSR REIT, DRR’s P/AFFO multiple valuation has re-traced back to its recent trough levels, which we believe represents a good entry point.”
Believing its “low financial leverage metrics and ample liquidity provides balance sheet capacity to execute on possible U.S. MFR property acquisition opportunities,” he trimmed his target to US$9.50 from US$10. The average on the Street is US$10.97.
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Following a “solid” first-quarter performance and another increase to its full-year guidance, iA Capital Markets analyst Naji Baydoun thinks TransAlta Corp. (TA-T)’s “strong liquidity and strategic focus” continue to support notable growth.
On Friday, the Calgary-based company reported EBITDA of $387-million, exceeding both Mr. Baydoun’s $352-million estimate and the consensus forecast on the Street of $334-million. Free cash flow per share of $1.05 also blew past expectations (62 cents and 55 cents, respectively), driven by higher realized power prices in Alberta and strong energy trading performance.
“TA added 344MW of capacity to its development pipeline in the quarter, and continues to advance its in-construction phase projects, with minor and manageable commissioning delays and capex budget increases,” he said. “The Company has 418MW of advancedstage projects that could progress towards FID in 2023 (below the 500MW target for the year but in line with the goal of adding $75-100-million of incremental annual EBITDA). We note that the recently announced pause on new renewable project approvals in Alberta is not expected to impact TA’s near-term growth plans in the province, and could allow the Company to capitalize on higher power prices in 2023-24. Management expects to provide an update on the Company’s growth plans at an Investor Day event in Q4/23 following the expected closing of the RNW buyout transaction.
“Although we could likely see delays in TA achieving its growth target of adding 2GW of new clean power capacity to its portfolio (as well as capital cost project pressures), we continue to like the Company’s (1) focus on disciplined growth (i.e., not chasing growth for the sake of growth if projects don’t meet riskadjusted return hurdles), and (2) strong FCF generation profile that supports selffunded growth and provides capital allocation optionality.”
Mr. Baydoun said TransAlta’s “diversified merchant portfolio predominately in hydro and gas assets” led it to capture a high realized power price in the quarter. With a “strong” performance thus far in 2023 as well a revised Alberta power price outlook for the remainder of the year, it raised its financial guidance for a second time.
“TA remains well positioned to continue generating significant FCF in H2/23 providing capital allocation flexibility, which includes an opportunistic NCIB to enhance long-term shareholder value,” he said. “TA completed approximately $35-million in share buybacks during the quarter and returned $71-million year-to-date via the repurchase of 6 million shares (more than 2 per cent of total o/s). Overall, we continue to see TA as well-positioned to capitalize on elevated power prices to generate higher near-term FCF and execute on its strategic priorities.”
Reiterating a “strong buy” recommendation, he raised his target to $17.50 from $17. The average on the Street is $16.50.
Elsewhere, others making target changes for TransAlta include:
* ATB Capital Markets’ Nate Heywood to $19 from $18 with an “outperform” rating.
“The recent alignment of TA’s strategy with the majority owned (60.1 per cebt) RNW subsidiary, combined with a strong balance sheet and liquidity position, has provided an opportunity to strategically acquire RNW,” said Mr. Heywood. “The combined corporate strategy will continue to emphasize a sustainable approach to providing power and a focus on its clean electricity growth plan, while continuing to offer attractive exposure to the merchant market in Alberta and peaking capacity. The growth pipeline consists of more than 4.3 GW and management has previously pointed to a target investment of $3.6-billion in 2 GW of renewable capacity and plans to be entirely off coal-fired generation by 2025. We expect renewable developments to be focused on regions with favourable energy transition-related tailwinds and capacity retirements across existing operating networks (Canada, the US, and Australia). With a 2023 estimated EV/EBITDA multiple of 4.2 times, we note that TransAlta is trading at a discount to its peer group average of approximately 10 per cent. We expect the multiple could re-rate higher with an increasing proportion of revenue from contracted renewable generation.”
* National Bank’s Patrick Kenny to $15 from $14 with an “outperform” rating.
* CIBC’s Mark Jarvi to $18.50 from $17.50 with an “outperformer” rating.
Meanwhile, Mr. Jarvi also raised his TransAlta Renewables Inc. (RNW-T) target to $13.50 from $13 with a “neutral” rating. The average is $12.88.
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While Desjardins Securities analyst Chris MacCulloch made “modest” reductions to his estimates for Tourmaline Oil Corp. (TOU-T) following last week’s second-quarter earnings release and now sees “thinning” returns to his target price for its shares, he still sees “upside in the story,” calling the Calgary-based company “a real gem.”
“Following the strong performance of recent months, valuation is beginning to stretch for TOU; whether measured from a strip EV/DACF [enterprise value to debt-adjusted cash flow] multiple (6.5 times 2024) or FCF yield (7.1-per-cent 2024) perspective, it screens among the most expensive in the Desjardins E&P coverage universe,” he said.
“We believe TOU clearly warrants a premium valuation given the depth of its inventory, strong growth visibility, pristine balance sheet, shareholder-friendly capital return strategy and highly regarded management team, among other things. However, equity markets are often a ‘what have you done for me lately?’ kind of business, and investors have every right to be looking around the corner at what’s next, particularly within the context of a lofty multiple.”
However, Mr. MacCulloch thinks Tourmaline continues “leaving breadcrumbs regarding potential upside to the market, which could help backfill valuation in the absence of further M&A activity.”
“Recall that the company has been openly discussing new pool/zone discoveries in recent months, with two new wildcat successes reported last month, increasing the total to 17 over the last three years,” he added. “On a possibly related note, TOU also highlighted that it is currently evaluating a potential new South Montney project after acquiring land and infrastructure in the area. While no details were provided, management noted on the conference call that future development prospects are largely unaccounted for in the current five-year plan, which is expected to receive a refresh when formal 2024 guidance is released later this fall. Watch this space.”
The analyst emphasized the company’s management continues to hint at potential upward revisions to its five-year plan with the upcoming release of its 2024 guidance due to recent exploration success. He also expect it to “remain active on the M&A front.”
Maintaining a “buy” recommendation for Tourmaline shares, Mr. MacCulloch trimmed his target by $1 to $77. The average is $80.38.
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National Bank Financial analyst Jaeme Gloyn thinks Brookfield Business Partners L.P.’s (BBU-N, BBU.UN-T) “diversified portfolio of companies across sectors/geographies continues to deliver solid results, setting it on “the valuation re-rate path.”
“In addition, we hold a favourable view of BBU’s recent acquisition activity (CDK, Neilsen, La Trobe, Scientific Games’ Lottery Business, Aldo, DexKo and Modulaire), and the ongoing build into the technology sector,” he said.
“Moreover, the monetization of Westinghouse increases our confidence in management’s ability to monetize other assets next and delever the balance sheet. Overall, we anticipate BBU’s successful execution/integration will drive the shares higher.”
On Friday, Brookfield reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of US$606-million, down 14 per cent year-over-year and narrowly below both Mr. Gloyn’s US$628-million estimate and the consensus forecast of US$612-million. Earnings from operations per unit of 85 US cents also fell short of estimates (US$1.10 and US$1.05, respectively).
“While higher interest costs negatively impacted EFO results this quarter, we expect these impacts to fade in the near term as interest rates plateau,” the analyst said. “In addition, we’re encouraged to learn the company refinanced nearly $5 billion in debt at four businesses in recent weeks with half executed at rates cheaper than prior funding costs. The other half experienced a modest increase in funding costs. Overall, a very positive signal BBU can refinance existing businesses at attractive costs - a lingering investor concern that has weighed on the shares.”
Reaffirming an “outperform” rating, Mr. Gloyn trimmed his target to US$33 from US$35 due to lower EBITDA from its Industrial Services segment. The average is US$26.50.
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In other analyst actions:
* CIBC’s Krista Friesen raised her Badger Infrastructure Solutions Ltd. (BDGI-T) target to $35 from $33, keeping a “neutral” rating, while Stifel’s Ian Gillies bumped his Street-high target to $48.50 from $47.50 with a “buy” rating. The average on the Street is $38.61.
“BDGI’s 2Q23 was characterized by a 10.2-per-cent consensus EBITDA beat with EBITDA margins exceeding consensus by 220 basis points,” said Mr. Gillies. “Management indicated on the conference call that it is targeting EBITDA margins of 24-25 per cent in 2024 (compared to FactSet consensus of 20.8 per cent). Moreover, margins have been a key point of contention for the stock, and we now believe a recovery is well underway. In our view, the stock stands to benefit from increasing consensus estimates and multiple expansion in the near-term. Over the medium-term, the company’s end market exposure to U.S. infrastructure spending should drive strong EPS growth (2024: up 40 per cent).”
* Desjardins Securities’ Kyle Stanley lowered his Canadian Apartment Properties Real Estate Investment Trust (CAR.UN-T) target to $58 from $59 with a “buy” rating. Other changes include: RBC’s Jimmy Shan to $61 from $60 with an “outperform” rating and Raymond James’ Brad Sturges to $59.50 from $61 with an “outperform” rating. The average is $56.82.
“Top-line growth drivers remain intact as CAR achieved record leasing spreads in 2Q; however, higher-than-expected opex drove a modest reduction to our NOI and FFOPU outlook,” Mr. Stanley said. “CAR continues to unearth value in non-core asset dispositions, which (1) enable it to advance its portfolio modernization strategy (newbuild acquisitions, asset-light development); and (2) reduce costly variable-rate debt.”
* CIBC’s Kevin Chiang cut his target for Chorus Aviation Inc. (CHR-T) to $4, below the $4.07 average, from $4.50 with an “outperformer” rating, . Other changes include: BMO’s Fadi Chamoun lowered to $4.75 from $5.35 with an “outperform” rating and RBC’s Walter Spracklin to $3.75 from $4 with an “outperform” rating.
“Q2/23 results were generally in line with our expectations, and management reaffirmed its guidance for F2023. The stock came under pressure, however, as CHR announced another delay in the launch of Fund III, which is viewed as an important growth catalyst for the company. While the transition to an asset light model and underlying growth may be tracking somewhat behind expectations, we continue to believe that this strategic direction makes sense for CHR and should prove positive for growth and valuation,” said Mr. Chamoun.
* CIBC’s Paul Holden increased his Definity Financial Corp. (DFY-T) target by $1 to $40.50 with an “outperformer” rating. The average is $42.14.
* CIBC’s Dean Wilkinson lowered his Dream Office REIT (D.UN-T) target to $14, below the $14.47 average, from $17.50 with a “neutral” rating. Other changes include: Desjardins Securities’ Lorne Kalmar to $14.50 from $17.50 with a “hold” rating and RBC’s Pammi Bir to $15 from $17 with a “sector perform” rating.
“Notwithstanding in line Q2 results, we curbed our estimates and price target on D on a challenged outlook for office fundamentals and higher rates. We’re encouraged by D’s improving organic growth and recent progress on developments. As well, post-Q2 refinancing activity addresses its largest near-term debt maturity. However, we believe the recovery in occupancy will take longer and cost more with rising availability on offer for tenants,” said Mr. Bir.
* National Bank’s Patrick Kenny cut his Enbridge Inc. (ENB-T) target to $55 from $56 with a “sector perform” rating, while RBC’s Robert Kwan dropped his target to $60 from $65 with an “outperform” rating. The average is $58.
“We see an opportunity for Enbridge to attract increased investor interest due to its capital allocation framework that features leverage that is currently at the low-end of its 4.5-5.0 times debt/EBITDA target range and free cash flow generation,” said Mr. Kwan. “While we acknowledge uncertainty with respect to Mainline financial performance under the new tolling agreement as well as the volume outlook in 2024 following the start-up of the Trans Mountain expansion, rebasing of EBITDA is already included in our 2024 forecast.”
* BMO’s John Gibson raised his Ensign Energy Services Inc. (ESI-T) target to $4.50 from $3 with an “outperform” rating. Other changes include: RBC’s Keith Mackey to $3.75 from $3 with an “outperform” rating and Stifel’s Cole Pereira to $3.25 from $2.50 with a “hold” rating. The average is $4.54.
“ESI’s Q2/23 results were strong in context of recent U.S. rig count declines and forest fire/weather impacts in Canada. We expect a debt refinancing should be announced in the next few months, while ESI’s free cash flow profile remains strong. We see leverage moving sub-2 times by year-end 2024 (less than 3 times currently), and expect further debt repayment should act as a positive catalyst for the story,” said Mr. Gibson.
* National Bank’s Jaeme Gloyn raised his Street-high target for Fairfax Financial Holdings Ltd. (FFH-T) to $1,700 from $1,600 with an “outperform” rating. The average is $1,451.76.
“We believe the combination of 1) 4-per-cent quarter-over-quarter increase in BVPS [book value per share]; 2) strong combined ratio of 94 per cent; 3) huge operating income beat; and 4) run-rate interest and dividend income that we estimate now approaches $1.9 billion will continue to drive the shares materially higher in the coming months,” said Mr. Gloyn.
“Although one of the best performing Financials stocks so far in 2023, we believe FFH remains the best value idea in our coverage universe.”
* CIBC’s Paul Holden reduced his iA Financial Corp. (IAG-T) target to $95 from $96 with a “neutral” rating. The average is $100.
* CIBC’s John Zamparo cut his Street-low target for Jamieson Wellness Inc. (JWEL-T) to $32 from $37 with a “neutral” rating. The average is $41.60.
* CIBC’s Krista Friesen raised her Magna International Inc. (MGA-N, MG-T) target to US$73 from US$72 with an “outperformer” rating, while RBC’s Tom Narayan moved his target to US$75 from US$74 with a “sector perform” rating. The average is US$68.06.
“Magna once again posted a strong Q2/23 beat, but its guidance raise might have underwhelmed the market. That said, ex-M&A, H2/23 consensus numbers would be going up much more. We await further details on Sept 7 on the financial outlook including the Veoneer acquisition,” said Mr. Narayan.
* Desjardins Securities’ Lorne Kalmar trimmed his Primaris Real Estate Investment Trust (PMZ.UN-T) target to $17, matching the average, from $17.50 with a “buy” rating, while Raymond James’ Brad Sturges bumped his target to $16.75 from $16.50 with an “outperform” rating.
“2Q was another solid showing as PMZ continues to navigate the broader macro uncertainty,” said Mr. Kalmar. “SPNOI guidance was increased while 2023 committed occupancy guidance of 92.5 per cent by year-end was maintained, notwithstanding the year-to-date 50 basis points decline in the metric. Despite continued execution by management and the long runway of internal and external growth, PMZ continues to trade at levels that we believe overly discount the impact of the current macro headwinds and PMZ’s growth prospects.”
* TD Cowen’s Jason Seidl raised his TFI International Inc. (TFII-N, TFII-T) to US$163 from US$158 with an “outperform” rating. The average is US$145.50.
* CIBC’s Dean Wilkinson cut his True North Commercial REIT (TNT.UN-T) target to $3 from $3.50 with a “neutral” rating. The average is $2.90.
David Leeder