Inside the Market’s roundup of some of today’s key analyst actions
While its second-quarter results came in “light,” BMO Nesbitt Burns analyst Thanos Moschopoulos emphasized Dye & Durham Ltd. (DND-T) remains “very profitable .. despite the current cyclical downturn” and predicts it “should benefit from strong operating leverage once volumes inevitably recover.”
Shares of the Toronto-based software company fell 2.9 per cent on Monday after it reported revenue of $106.7-million, down 3 per cent year-over-year, and earnings before interest, taxes, depreciation and amortization (EBITDA) of $57.6-million, falling 8 per cent. Both missed the consensus forecast on the Street ($115.1-million and $63.9-million).
Mr. Moschopoulos attributed the miss to the impact of softer property transaction volumes, including a “sharp” decline in Canadian real estate from the previous quarter,
“Revenue related to real estate transactions, ex TM Group, represented 61 per cent of revenue in the quarter,” he said. “Canadian real estate was the bulk of this at 37 per cent of revenue, or roughly $34-million, which appears to be perhaps down 3 per cent year-over-year and down 23 per cent quarter-over-quarter (although these numbers might be slightly off due to rounding). According to CREA data, Canadian residential property sales were down 38 per cent year-over-year and down 23 per cent quarter-over-quarter (though we note that DND’s geographic mix differs from the overall market). We think DND’s non-real estate revenue grew perhaps high-single digits quarter-over-quarter.”
Despite reducing his estimates to reflect his “tempered expectations with respect to the macro backdrop,” the analyst predicts expect Dye & Durham will remain active on tuck-in M&A.
“DND acquired Korbitec, a Canadian vendor of legal document automation software, for $25-million during the quarter, and Insight Legal, a U.K. vendor of practice management software, subsequent to quarter end,” he said. “It continues to have roughly $270-million of dry powder for M&A (not incl. the proceeds it will receive from the pending sale of TM Group). We expect DND will continue to execute on tuck-ins, likely within its existing core geographies.”
Believing such activity will be “additive to our forecasts,” Mr. Moschopoulos raised his target for Dye & Durham shares to $25 from $20, reiterating an “outperform” recommendation. The average on the Street is $23.
Elsewhere, others making changes include:
* Scotia’s Kevin Krishnaratne to $26.50 from $23 with a “sector outperform” rating.
“We see the recent pullback as providing an opportunity for investors seeking exposure to a strong FCF-generating firm leveraged to multiple end markets (real estate transactions, property search, corporate due diligence, payments),” he said.
* Raymond James’ Stephen Boland to $26 from $21 with an “outperform” rating.
“Going forward, management will focus on disciplined cost control while continuing to target an inflation plus pricing strategy. On capital allocation, DND has $270-million of available liquidity plus cash expected from the sale of TM Group. While priority will continue to focus on scaling the business, buybacks remain an option if the stock continues to trade around current levels,” said Mr. Boland.
* CIBC’s Scott Fletcher to $25 from $27.50 with an “outperformer” rating.
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Precious metals analysts at National Bank Financial expect few surprises during the approaching fourth-quarter 2022 earnings season.
“The bulk of our coverage universe has provided Q4 operating results, which we have factored into our models, and thus we are generally seeing consensus well aligned with our estimates on Adj EPS,” they said. For concentrate producers, provisional pricing adjustments are expected to be a net positive for 4Q22 earnings with nearly all metal prices ending higher at quarter end.
“At the time of writing, we have conviction in Dundee, Equinox, First Majestic, and Wesdome missing Bloomberg consensus Adj EPS estimates, while we expect Aya and K92 Mining to beat.”
In a research report released Tuesday, the firm updated its metals price and foreign exchange rate assumptions, using closing prices from Feb. 8 to align their 2023 and 2024 projections. That includes a gold price of US$1,875 per ounce, up from US$1,825.
“Our revised metal price deck proved slightly positive for the cash flow generation outlook and price estimate revisions of our coverage universe given the increased commodity prices,” it said. “Our LT gold and silver prices remain unchanged at US$1,600/oz and US$20.00/ oz, respectively. Our long-term pricing comes into effect as of 2027 (unchanged). We also factored in the revised price deck of our Base Metals team.”
With those changes, the firm made target price changes to several stocks in their coverage universe.
Companies with target price changes of more than 10 per cent were:
- Aris Mining Corp. (ARIS-T, “outperform”) up 28.6 per cent to $6.75 from $5.25. The average on the Street is $9.02.
- First Majestic Silver Corp. (FR-T, “sector perform”) down 4.1 per cent to $11 from $14.50. Average: $12.95.
- SSR Mining Inc. (SSRM-T, “sector perform”) down 11.5 per cent to $23 from $26. Average: $28.53
- Wesdome Gold Mines Ltd. (WDO-T, “outperform”) down 10.5 per cent to $8.50 from $9.50. Average: $9.99.
- Marathon Gold Corp. (MOZ-T, “outperform”) down 10.0 per cent to $1.35 from $1.50. Average: $1.97.
Heading into earnings season, the firm’s top picks are:
Seniors
- Endeavour Mining Corp. (EDV-T, ”outperform” and $48 target)
- Kinross Gold Corp. (K-T, ”outperform” and $8.50 target)
Intermediates/Juniors
- Alamos Gold Corp. (AGI-T, ”outperform” and $18 target)
- Aya Gold & Silver Inc. (AYA-T, ”outperform” and 12.50 target)
- K92 Mining Inc. (KNT-T, ”outperform” and $12 target);
Royalty Companies
- Osisko Gold Royalties Ltd. (OR-T, ”outperform” and $23 target).
““We continue to remain constructive on the spot gold price in 2023, but we believe we are still potentially facing a very near-term volatile period in the spot gold price,” the analysts said. “In our opinion, over the coming months we could see the spot gold price swing wildly (+/- one or more percent) around key U.S. economic data points with the U.S. Fed still expected to raise rates in the coming months and inflation remaining well above the target level. Generally, we believe that in this gold price scenario, the best gold companies to invest in continue to be those with near-term production growth that is well funded, and companies with a strong balance sheet and a good catalyst calendar ... We believe that 2023 could prove a good year to be overweight gold equities.”
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BMO Nesbitt Burns’ Tim Casey thinks Thomson Reuters Corp.’s (TRI-T) “attractive” fundamentals support its valuation.
“We believe Thomson Reuters remains a compelling equity with very strong fundamentals, attractive free cash flow conversion and limited downside risk,” he said in a note released Tuesday. “We expect mid-single-digit revenue growth supported by margin accretion and a step-up in FCF, supplemented by tuck-in acquisitions. The company has outlined initial plans to monetize LSEG shares. It has increased the dividend 10% for the last two years. We believe that TRI warrants a premium multiple given its attractive fundamentals, growth opportunities and significant return of capital to shareholders.”
Mr. Casey also called its business model “attractive,” touting limited downside risk “due to stability in the Big 3 segment”, given 80-per-cent recurring revenues and 91-per-cent client retention.
“The company holds leadership positions across its product lines and has a wide moat to protect its market share and support growth,” he said.
“Through the success of the change program, TRI has leaner operations and a simpler product portfolio focused on leveraging technology to improve the customer experience. Since 2020, office and call center locations were reduced by 63 per cent and the company plans to increase the revenue available in cloud solutions to 90 per cent (from 50 per cent) by year-end 2023. Thomson is looking to expand its business internationally (LATAM/Asia) and through product enhancements (ESG). TRI continues to search for acquisitions that complement the Big 3 given more attractive valuations. Management has a strong track record of successfully acquiring and integrating companies”
Maintaining an “outperform” rating, Mr. Casey raised his target for Thomson Reuters shares to $182 from $161. The average is US$121.63.
“We believe that TRI warrants a premium multiple of 22 times 2024 estimated EBITDA given its strong fundamentals, stable business model, growth opportunities and significant return of capital to shareholders,” he concluded.
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With revenue from Altus Group Ltd.’s (AIF-T) Analytics business set to surpass its Consulting segment for the first time in 2023, Eight Capital analyst Christian Sgro expects “execution on growth and margin expansion will be rewarded with potential valuation upside.”
“We think that a stabilizing macro, refreshed leadership, and enhanced operational alignment make shares attractive for the long-term,” he added.
In a research report released Tuesday, Mr. Sgro initiated coverage of the Toronto-based commercial real estate data firm with a “buy” recommendation.
“Based on our research, Altus’ Argus Enterprise (‘AE’) platform is the de facto standard software application for the CRE industry, with significant large-logo penetration,” he said. “Revenues are not transaction-based but are rather nearly 90 per cent recurring, with recent bookings’ strength driving visibility. We provide context on a dynamic outlook for the CRE industry, which we think will stabilize through the year with limited impact on Altus’ expansion targets.
“Data driven intelligence next leg of growth. Altus recently completed $400-million-plus in Analytics acquisitions, enriching the end-to-end utility and predictive capabilities of the platform. We see meaningful upsell opportunities as Altus becomes more deeply embedded across functions, migrates customers onto the cloud, and evolves its go-to-market with value-based Offer selling. We are optimistic about the company’s $400-million Analytics revenue target for 2023 and continued double-digit organic growth.”
Also calling Altus a “market leader” in performing tax appeal services, he set a target of $70 per share, emphasizing its “defensive attributes and capital allocation.” The average target on the Street is $64.38.
“The company generates approximately 20-per-cent adj. EBITDA margins, has a 1-per-cent dividend yield, and recently reported a fully funded leverage ratio of 2.29 times. We see the potential for tuck-ins of adjacent Analytics technologies or attractively priced tax assets given challenging cyclical dynamics. We calculate $350-milllion-plus in dry powder but we believe the integration of recent M&A and operational alignment will be the top priorities in the short term,” said Mr. Sgro
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Canaccord Genuity expects the next several quarters “will be challenging” for Adentra Inc. (ADEN-T), viewing the Street’s forecast for 2023 “as being aggressive.”
Accordingly, after outperforming the S&P/TSX composite index year-to-date (up 21 per cent versus 7 per cent), he lowered his recommendation for the Langley, B.C.-based company to “hold” from “buy.”
“Long lead times and strong demand in the first half of last year led to excess inventory by year’s end as demand softened,” said Mr. Lynk. “Orderly destocking rarely occurs in a market as fragmented as architectural building products. Therefore, we believe gross margins have near-term downside and could temporarily fall below management’s target range of more than 20 per cent.
“It’s clear, near-term demand is softening. At ADENTRA’s Analyst Day, management noted an 8-per-cent near-term revenue headwind due to adverse market conditions. Separately, Masco Corp. (MAS-N, not rated), one of the few building products companies to report Q4/2022 results, saw revenue slip 8 per cent year-over-year in its Architectural Products segment and guided to a 5-per-cent to 10-per-cent revenue contraction in 2023.”
Projecting “decremental” margins, Mr. Lynk sees downside to the 2023 consensus estimates for the company formerly known as Hardwoods Distribution Inc.
“Our 2023 EBITDA estimate is the Street low at $185 million on an 8.0-per-cent margin assumption. The consensus sits at $202 million, implying an 8.9-per-cent margin,” he said. “Q3/2022 was the first meaningful quarter-over-quarter decline in revenue and EBIT since Q4/2019, allowing us to gain some insight into ADENTRA’s decremental margin profile, which was 32 per cent. Our 2023 estimates imply an improvement in the decremental margin to 28%, but the consensus is even more optimistic at 26 per cent. To put these numbers into perspective, ADENTRA’s decremental margin averaged 62 per cent over the five most recent quarters that witnessed q/q revenue declines. Masco’s decremental margin in Q4/2022 was 42 per cent. We think decremental margins can improve to more than 30 per cent in 2023 as there is some flex in ADENTRA’s overhead. For example, we expect management will move to reduce discretionary spending while incentive bonuses will naturally decline in a shrinking market. However, we don’t expect larger reductions to overhead as this would involve closing distribution facilities, which would stunt ADENTRA’s growth in the long term.”
He maintained his $34 target for Adentra shares. The average is $48.50.
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Following Monday’s release of better-than-anticipated preliminary fourth-quarter results and full-year 2022 financial results, Scotia Capital analyst Michael Doumet thinks Ritchie Bros Auctioneers Inc. (RBA-N, RBA-T) is “continuing to execute and deliver value.”
For its fourth quarter, the Vancouver-based company expects sales, adjusted EBITDA and net income of US$444-million, US$120-million (at the midpoint), and US$43.5-million (at the midpoint), respectively. They also top the Street’s forecast (US$416-million, US$109-million, and US$56-million.
“Higher EBITDA was driven by a combination (we assume) of higher service growth and better cost leverage,” said the analyst.
Mr. Doumet said he’s bullish on the combined entity stemming from the company’s proposed acquisition of IAA Inc., noting “management’s experience and understanding of what the insurance carriers want and our view on their ability to execute on synergies provides significant runway for value creation.”
“Combined, RBA and IAA will generate 2022 EBITDA of more than $980-million,” he added. “Adding cost synergies (to be fully realized by the end of 2025E), pro forma EBITDA amounts to $1.1-billion. We expect the equipment and salvage cycle (i.e., loosening supply chains, higher volumes, offset by lower prices) to drive incremental EBITDA of $50-million to $150 million through 2024. Moreover, we expect revenue synergies to add EBITDA of more than $150-million in 2-3 years. Our highest-conviction revenue synergies (in terms of quantum and speed) are those from the “Grow Domestic IAA Sales” and “Grow RBA GTV” categories (combined for $115-million to $315-million), whereby we believe the combined company can leverage the yards much more effectively; RBA’s sales coverage should enable it to accelerate its satellite yard strategy using IAA yards; the increased yard space in Florida/Texas should enable it to enhance its Cat-response value proposition for carriers. The vote is scheduled for March 14 (for RBA shareholders of record as of January 25). We believe the probability of the deal closing is high.”
Mr. Doumet raised his target for Ritchie Bros shares to US$71 from US$67, which is the current average. He kept a “sector outperform” rating.
“We raised our 2023/24 estimates. We believe the mergeco can generate EBITDA of $1.2 billion to $1.4 billion in 2025 (and maintain strong profit growth beyond). Our target is based on our 2024E; achieving $1.3 billion in 2025E EBITDA could drive more than 40-per-cent potential upside in the share price,” he said.
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Calling its flagship Reliance Gold Project a “multi-million-ounce high-grade deposit in the making,” Atrium Research analyst Ben Pirie initiated coverage of Endurance Gold Corp. (EDG-X) with a “buy” rating on Tuesday.
“We are highly encouraged by the Company’s ability to interpret, discover, and grow this orogenic (Fosterville-style) gold deposit systematically and economically,” he said.
“EDG’s portfolio of assets and investments combine to form a junior explorer that can quickly and systematically develop its flagship project while advancing its other assets in a cost-efficient manner. The Company has excellent access to capital while also having the option to sell off or spin out its non-core assets. 2023 could be a transformational year for the Company as it continues to uncover what is showing strong signs of becoming a multi-million-ounce gold discovery at Reliance.”
Currently the lone analyst covering the Vancouver-based company, Mr. Pirie set a target of 50 cents per share.
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In other analyst actions:
* Following Monday’s announcement that it has agreed to be acquired by B2Gold Corp. (BTO-T) in a $1.1-billion deal, TD Securities’ Arun Lamba moved Sabina Gold & Silver Corp. (SBB-T) to “tender” from “buy” with a $1.87 target, down from $2.75 and below the $3.05 average.
“We view the transaction as a favourable outcome for shareholders as it represents a fair premium (approximately 45 per cent to the 20-day VWAP [volume-weighted average price]), at a reasonable multiple without having to deal with potential upcoming financing, construction, and execution risks, and it does so in shares of B2Gold (we have a positive view on BTO),” he said.
“In our view, based on a lack of balance-sheet capacity (or northern construction experience) from many mid-tier miners, we do not believe that a superior bid will arise. Moreover, we do not believe that a large-cap miner would be inclined to bid, given that most, in our coverage universe, are busy with recent transactions or Back River’s near-term production profile would not move the needle.”
* BMO’s Peter Sklar raised his ABC Technologies Holdings Inc. (ABCT-T) target to $6.50 from $6, reiterating a “market perform” recommendation. The average is $6.10.
“ABC reported adjusted Q2/23 EBITDA of $41.7-million, in excess our estimate of $29.3-million,” said Mr. Sklar. “The improvement in earnings was primarily from the higher commercial settlements in the North America segment while the Rest of the world segment continues to be plagued by the European energy crises. We believe the elevated level of commercial settlements are one time and will not benefit future earnings to the same extent.”
* TD Securities’ Graham Ryding raised his EQB Inc. (EQB-T) target to $83 from $80 with a “buy” rating. The average is $81.13.
“We are encouraged with the strong results in 2022 to-date (ahead of guidance) and constructive outlook for earnings and BVPS growth in 2023 (including Concentra),” said Mr. Ryding. “Management is executing well on NIM expansion in a rising rate environment. Loan growth is strong, but it is expected to moderate in line with guidance. Credit trends continue to be solid, though we do expect some deterioration. The digital EQ Bank is a valuable and differentiating asset, in our view.”
* CIBC’s Anita Soni trimmed her Kinross Gold Corp. (KGC-N, K-T) target to US$5.80 from US$6 with a “neutral” rating. The average is US$5.50.
* Echelon Capital’s Amr Ezzat increased his MDF Commerce Inc. (MDF-T) target by $1 to $6.50 with a “buy” rating, while Acumen Capital’s Nick Corcoran bumped his target to $4 from $3.20 with a “hold” rating. The average is $4.78.
“While MDF shares are 78.2 per cent higher since the sale of InterTrade, the stock continues to trade at impaired valuation levels at 1.4 times run-rate sales versus 1.1 times pre-disposition, giving little credit to the removal of the debt overhang,” Mr. Ezzat said.
* CIBC’s John Zamparo raised his Premium Brands Holdings Corp. (PBH-T) target to $99 from $87, keeping a “neutral” recommendation. The average is $114.10.
“We increase our Q4 and 2023 EBITDA estimates due to positive results from U.S. peers (CAG and PFGC) and a more favourable commodities environment; however, we remain cautious on PBH because of a lack of historical margin expansion and ongoing operational challenges,” he said. “Moreover, we see risk to 2023 consensus EBITDA; we now project $570-million, 3 per cent below consensus and 5 per cent below guidance. An improved appetite for consumer stocks leads us to increase our blended EV/EBITDA multiple by one turn (to 12 times).”
* Scotia’s Michael Doumet raised his Savaria Corp. (SIS-T) target to $20 from $17.50 with a “sector outperform” rating, while Stifel’s Justin Keywood bumped his target to $25 from $24 with a “buy” rating. The average is $21.07.
“We believe the 2023 guidance should be viewed as better than expected given it demonstrates SIS’s ability (and confidence) to produce strong growth rates and recoup pricing/expand margins despite the softening macro,” said Mr. Doumet.
David Leeder