Inside the Market’s roundup of some of today’s key analyst actions
Following the release of “solid” fourth-quarter 2022 financial results, appointment of a new CEO and seeing early contributions from recently acquired Certarus Ltd. trending ahead of forecast, iA Capital Markets analyst Matthew Weekes raised his recommendation for Superior Plus Corp. (SPB-T) to “buy” from “hold” on Tuesday.
“SPB offers investors (a) a low-beta propane distribution business, with the leading position in Canada and the fourth-largest market share in the U.S.; (b) the acquisition of Certarus at an attractive forward multiple, diversifying SPB’s business, providing a parallel platform for organic growth, and reducing overall seasonality; (c) an improved balance sheet outlook with pro forma Debt/EBITDA expected to be within SPB’s target range post acquiring Certarus; (d) solid cash flow with an 11-per-cent 2023 estimated AFFO [adjusted funds from operations] yield; and (e) a sustainable dividend yield of nearly 7 per cent (60-65-per-cent AFFO payout ratio),” he said. “Based on these factors, we are upgrading our rating to Buy despite our more conservative estimates.
“While SPB’s propane business is sensitive to weather and we expect unseasonably warm Q1 weather to weigh on 2023 results, we believe the outlook on a pro forma, normalized basis is solid.”
On Friday, shares of the Toronto-based company rose 1.5 per cent after it reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $183-million, a record for the fourth quarter and ahead of both Mr. Weekes’s $162-million forecast and the consensus estimate on the Street of $171-million. Adjusted operating cash flow of 66 cents per share also topped the analyst’s estimate (57 cents).
He attributed the beat, in large part, to the benefits from acquisitions, particularly the $1.05-billion deal for Certarus, a Calgary-based compressed natural gas, renewable natural gas and hydrogen distributor, which he said is “trending well.”
“Certarus achieved record monthly Adj. EBITDA in both December 2022 and January 2023,” said Mr. Weekes. “Pro forma Certarus adjusted EBITDA of $140-150-million compares to 2022 estimated adjusted EBITDA of $124-million disclosed at the announcement of the acquisition and implies a purchase multiple of 7.5 times or lower.”
Superior also announced the appointment of Allan MacDonald as President and CEO effective in April. He was most recently VP and COO at Canadian Tire Corp. Ltd.
“The Chair of SPB’s Board conveyed confidence in Allan’s ability to strengthen SPB by focusing on internal growth, operational improvements, and accretive tuck-ins,” the analyst said.
While he trimmed his forecast after the company’s 2023 guidance fell below his expectations, including a “cautious outlook” on first-quarter weather, Mr. Weekes maintained a $12 target for Superior Plus shares. The average on the Street is $12.73, according to Refinitiv data.
Elsewhere, ATB Capital Markets’ Nate Heywood cut his target to $12 from $12.50 with a “sector perform” rating.
“Looking to 2023 we continue to expect the U.S. propane division to benefit from recent M&A and the associated synergy realization; however, warmer weather in Q1/23 to date, seasonally the strongest quarter, remains a modest headwind for 2023,” said Mr. Heywood. “Management is currently guiding to 2023 Adjusted EBITDA of $585-million-$635-million, including a full year contribution from Certarus. We have estimated 2023 EBITDA of $557-million, to include a contribution from Certarus after the acquisition’s close (estimated mid-Q2/23). Overall, our thesis for SPB remains unchanged following the recent transformative Certarus announcement as we expect M&A to slow near-term for SPB to focus on balance sheet maintenance, modest organic growth opportunities, and synergy.”
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While its fourth-quarter results fell short of expectations, ATB Capital Markets analyst Chris Murray expects a “continued recovery and a more normalized margin profile” for Air Canada (AC-T) in 2023, pointing to “a constructive pricing environment, increasing capacity and expectations for moderating cost pressures.”
The airline’s shares plummeted 8.4 per cent on Friday after it reported quarterly EBITA and adjusted fully diluted earnings per share of $389-million and a loss of 61 cents, respectively. Both fell short of Mr. Murray’s projections ($476-million and a 31-cent loss) and the consensus forecast ($481-million and a 29-cent loss) despite better-than-anticipated revenue.
“EBITDA of $389-million came in below expectations due to cost pressures in the quarter, primarily attributable to increased traffic and inflationary (mainly labour) pressures, which were exacerbated by severe weather in late Q4,” said Mr. Murray. “We expect costs to stabilize in 2023, given the restart is now behind the Company with inflation moderating. Our estimates anticipate a 4.5-per-cent decline in Adjusted CASM [cost per available seat mile] in 2023 vs. 2022, consistent with guidance.”
The analyst called the company’s outlook “constructive,” pointing to “positive trends it is seeing in advanced booking activity and is supportive of the Company’s plan to continue to add capacity in 2023.”
“Management expects capacity (ASMs) to reach 90 per cent of 2019 levels in 2023 (84 per cent in Q1/23) before increasing to 100 per cent of pre-pandemic levels in 2024,” he said. “Management reaffirmed that the recovery continues to be led by leisure travel, with business travel remaining slower to return, though management expects a gradual recovery to continue. Management remained positive on Aeroplan, which it views as a contributor to the strength in yield trends. We expect the sharp recovery witnessed in Q2/22 and Q3/22 to continue into 2023, with operational challenges associated with the system-wide restart now behind the Company, which should contribute to more normalized levels of profitability in 2023.”
Despite that optimism, Mr. Murray trimmed his 2023 and 2024 earnings expectations, leading him to cut his target for Air Canada shares by $1 to $31, keeping an “outperform” recommendation. The average on the Street is $27.33.
Elsewhere, others making target adjustments include:
* RBC’s Walter Spracklin to $20 from $21 with a “sector perform” rating.
“From a strategic perspective, we believe AC is doing all the right things in terms of positioning the company for the post-pandemic future,” said Mr. Spracklin. “We agree with the company’s re-fleeting strategy, its cost realignment efforts and emphasis on (re)newed products such as loyalty. That said, we are more cautious on the aspects outside the company’s control (infrastructure challenges, recessionary impact on demand and pricing, business travel rebound, cost inflation, increased small player competition, etc.). Accordingly, our estimates are and remain below guidance and consensus.”
* BMO Nesbitt Burns’ Fadi Chamoun to $29 from $30 with an “outperform” rating.
“Significant inflationary cost pressures are negatively impacting Air Canada’s CASM (ex-fuel) normalization curve. On the positive side, demand environment is also stronger than expected and supporting higher volumes and RASM (unit revenue). AC is projecting to return capacity to 90 per cent of pre-pandemic levels in F2023 and 100 per cent by F2024 (previously 95 per cent), which should help it remain on track to match pre-pandemic EBITDA by F2024, with F2023 representing a significant step up versus F2022,” he said.
* CIBC’s Kevin Chiang to $31 from $32 with an “outperformer” rating.
* TD Securities’ Tim James to $26 from $28 with a “buy” rating.
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Desjardins Securities analyst Gary Ho said he likes Dominion Lending Centres Inc.’s (DLCG-T) “story” over the long term and “would become more bullish on a housing turnaround.”
However, he downgraded his recommendation for the Vancouver-based company to “hold” from “buy” after reducing his financial forecast ahead of the March 28 release of its fourth-quarter results.
“Several model changes/items to focus on: (1) Following recent CREA data, we cut our 4Q funded mortgage volume estimate to $13.6-billion (was $14.8-billion) — relevant data for 4Q suggests residential sales declined 36 per cent (driven by softer activity and January home prices 15 per cent below the February 2022 peak),” he said. “We estimate tough funded mortgage volume comps in 1H23 and have further reduced our 2023 estimate by 8 per cent. This is offset by continued reflagging efforts and successfully attracting brokers to the DLC network. (2) EBITDA margin compression — we lowered our 4Q margin to 44 per cent from 57 per cent (factoring in lower revenue, higher advertising, marketing and event/conference expenses) while also trimming our 2023 margin by 270bps. (3) 3Q results missed, attributable to the Finastra-to-Newton transition which left a void in earnings. We continue to monitor the unplugging from Finastra as Newton represents DLC’s biggest near-term earnings growth driver. That said, we tempered our Newton earnings given lower funded mortgage volumes and moderating volumes submitted through Newton.”
Lowering his revenue and adjusted EBITA projections through fiscal 2024, Mr. Ho also cut his target for Dominion shares to $4 from $4.50, which is the current average on the Street.
“Our investment thesis is predicated on: (1) reduced housing activity and lower home prices will lead to tough comps, at least in 1H23, slightly offset by reflagging; (2) EBITDA margin pressure from a lower top line; and (3) we continue to monitor the Finastra-to-Newton transition. However, we recognize a potential privatization scenario could provide share price upside,” he concluded.
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In a research report titled Ready to rumble, Desjardins Securities analyst Benoit Poirier said the fourth-quarter report from Uni-Select Inc. (UNS-T) reinforced his bullish stance.
“We were impressed once again with UNS’s results, which confirmed the potential for value creation under the new management team,” he said. “We are encouraged by management’s operational excellence and the company’s improved leverage ratio, which opens the door for strategic acquisitions. We believe the best is yet to come as we see many opportunities to grow revenue and improve margins.”
The Boucherville, Que.-based automotive parts and paint distributor rose 3.1 per cent on Friday following the premarket release of better-than-anticipated results. Revenue rose 6 per cent year-over-year to US$425-million, topping both Mr. Poirier’s US$411-million forecast and the consensus estimate of US$415-million. Adjusted EBITDA of US$39-million was also ahead of projections (US$36-million and US$37-million, respectively).
“UNS’s key priorities for 2023 are still to improve profitability by focusing on organic growth, to continue operational improvement and to leverage synergies from recent acquisitions (eg Maslack),” the analyst said. “Although management expects to face headwinds from persistent currency translation impacts, it continues to believe that positive momentum will enable it to achieve higher adjusted EBITDA and adjusted EPS compared with 2022 (no change in the outlook vs 3Q). UNS’s solid financial position also enables it to actively seek acquisition opportunities to further drive growth. During our marketing in November, UNS reiterated its confidence in sustaining strong FCF generation and deploying capital toward M&A. Management has identified a series of opportunities for value creation across each segment: (1) CAG — leverage relationship with independent jobbers to unlock value; (2) GFS — clearing the skeletons out of the closet; and (3) FM — growth through volume and streamlined operations.
“Aside from M&A opportunities, value creation could arise from margin improvement, driven by several initiatives such as an increased mix of private label. For 2023, we forecast an adjusted EBITDA margin of 10.7 per cent, which we view as conservative given inflation will likely continue to be a tailwind. Our forecast for 2023 is far from the average of 17.2 per cent for U.S. peers (AZO at 22.9 per cent and ORLY at 26.0 per cent), even taking into account the differences in UNS’s business model. We calculate that each 1-per-cent improvement in EBITDA margin translates into approximately $7 per share of value creation. Assuming management brings the EBITDA margin to 15 per cent long-term — which we believe is achievable — we derive a value of $82 per share, significantly above UNS’s current share price, excluding any upside from M&A.”
Seeing its end markets “setting up nicely for 2023 and beyond” and touting its “solid” balance sheet, Mr. Poirier increased his target for Uni-Select shares to $54 from $50, reiterating a “buy” rating. The average is $50.75.
Elsewhere, RBC Dominion Securities’ Sabahat Khan hiked his target to $47 from $41 with a “sector perform” rating.
“Overall, we believe Uni-Select’s Q4 results reflect the continued execution by current management on improving the operations of the business, which we expect will continue heading into 2023,” said Mr. Khan.
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Scotia Capital analyst Michael Doumet expects Dexterra Group Inc.’s (DXT-T) growth to continue to be slowed by margin pressure, leading him to lower his recommendation for its shares to “sector perform” from “sector outperform.”
“In the last 12-18 months, DXT’s margins have come under pressure as price increases have lagged inflationary pressure,” he said. “The margin pressure was the most pronounced in MS [Modular Solutions]; it was less so in WAFES and IFM [Workforce Accomodations and Facilities Management], but margins lagged targeted levels as material and labour inflation were not fully recouped. We believe this has been largely reflected in the share price.
“We liked how DXT transitioned its business to become capital-light and growth-heavy. We think it will eventually get back to that. However, in the next several quarters, we expect margin pressure to persist. When combined with higher debt costs, we expect the inflection in FCF (after its dividend) to occur in 2024 (not 2023). As a result, that may slowdown its ability to execute on M&A – an aspect of the story we like. We pushed out our 2023 EBITDA (i.e. $100 million) to 2024 due to lower near-term margin expectations.”
In a research note titled Could Take a While Longer to Get Going, Mr. Doumet said those margin pressures have slowed the benefits of the 2020 merger between Dexterra and Horizon North Logistics Inc.
“The objective was to generate $1 billion in sales and $100 million in EBITDA,” he said. “Immediately, the mergeco reduced its cost base and rightsized its capex requirements, shifting the model to operate as a capital-light services business. It raised its dividend on the basis of its enhanced earnings profile and utilized its improved B/S to acquire TRICOM and Dana Hospitality (deals we liked). The company had positioned itself to generate healthy levels of excess capital in which to recycle into M&A. Then (as with most other businesses) inflationary pressures surged, impacting costs from materials (i.e. food, janitorial supplies, building supplies) all the way to subcontractors. CPI price escalators have kicked in; in certain instances, contracts were renegotiated. While this has all happened already (i.e. reflected in the share price), we think the margin recovery may take longer still. As a result, our 2023 EBITDA (i.e. $100 million) is pushed back to our 2024E. In 2023, a lowered EBITDA expectation and higher interest cost will lead to reduced FCF (and reduced M&A optionality). Areas where we are incrementally concerned going into 4Q and 2023 include WAFES, where we think the Kitimat lodge may take until 2Q23 or 3Q23 for occupancy to rise to levels whereby healthy EBITDA generation is achieved, MS, where elevated subcontractor costs could pressure margins a while longer, and IFM, where persistent inflation and rolling contract renewals may lead to a more gradual increase in EBITDA margins.”
With his forecast reduction, Mr. Doumet trimmed his target for Dexterra shares to $6.50 from $7. The average is $8.14.
“With DXT trading at 5.7 times EV/EBITDA on our 2023 estimates, it’s hard to argue there isn’t value in the shares,” he said. “The IFM business should be valued anywhere from 7 times to 10 times EV/EBITDA. The WAFES business, now that it is less capital intensive, should be value more than 5 times. FCF yield is roughly 12 per cent (using our 2023). However, we believe EBITDA and FCF margins may need to improve to drive multiple expansion. Further, with the announcement of a CEO transition, we prefer to wait on the sidelines until there is more visibility on strategy and execution ahead.”
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In other analyst actions:
* National Bank’s Mike Parkin cut his Agnico Eagle Mines Ltd. (AEM-T) target to $76 from $88 with an “outperform” rating. The average on the Street is $89.75.
“We updated our model for the weaker than expected three-year outlook, which significantly weighed on the share price Friday,” said Mr. Parkin. “The update proved overall negative to our near- to medium-term cash flows, however, we continue to regard Agnico Eagle positively for the strategic position it has built and is building out further in the Abitibi region of Ontario and Quebec. We believe the stock may trade at a modest discount to its recent historic levels in the very near term as it works to demonstrate the risks highlighted in the Q4 earnings release are manageable and under control, but with Friday’s underperformance in addition to a year-to-date underperformance we see the shares trading at more than a 6-per-cent discount to the LTM [last 12-month] average EV/ EBITDA multiple on a FY1 basis. Thus, with guidance potentially conservative, we believe the current price offers a good entry point for long-term investors.”
* After coming off research restriction, Scotia Capital’s Himanshu Gupta raised his target for Dream Industrial REIT (DIR.UN-T) to $17.50 from $15, reiterating a “sector outperform” rating. The average is $16.88.
* RBC’s Pammi Bir raised his target for Choice Properties REIT (CHP.UN-T) to $16 from $15.50, keeping a “sector perform” rating. The average is $15.69.
“After another round of in-line results, our stable view on CHP is unchanged,” he said. “Operationally, we expect its defensive, necessity-based retail portfolio to withstand broader economic turbulence. Coupled with solid anticipated growth from its industrial portfolio, management’s SP NOI and earnings guidance are well within reach, in our view. As well, we’re encouraged by the continued growth of its industrial and mixeduse residential development pipelines, which provide a window into valuecreation opportunities in the years ahead.”
* Mr. Bir reduced his Dream Office REIT (D.UN-T) target to $18, below the $18.81 average, from $19.50 with a “sector perform” rating. Others making changes include: TD Securities’ Sam Damiani to $19.50 from $18 with a “buy” rating, Desjardins Securities’ Lorne Kalmar to $17.50 from $17 with a “hold” rating and National Bank’s Matt Kornack to $18.50 from $18 with a “sector perform” rating.
“While we like D’s focus on downtown Toronto, we expect continued near-term softness in the market owing to a slower RTO, a potential economic downturn and significant new supply,” said Mr. Kalmar. “We have increased our target ... on a higher NAVPU estimate. In view of the clouded outlook, its year-to-date performance (up 14 per cent), the near-term earnings erosion (2023 FFOPU decline of 5 per cent) and its relative valuation, we believe D’s units are fairly valued at current levels.”
* RBC’s Geoffrey Kwan hiked his EQB Inc. (EQB-T) target to $85 from $72 with an “outperform” rating, while BMO’s Étienne Ricard raised his target to $93 from $88 also with an “outperform” rating. The average is $84.63.
“Despite a slowing housing market, EQB delivered strong Q4/22 results underpinned by higher-than-forecast originations, adjusted pre-tax, pre-PCL earnings and adjusted EPS,” Mr. Kwan said. “Bigger picture, EQB continues to execute well on its growth strategy and we think the Concentra acquisition provides EQB with increased scale and diversification.”
* RBC’s Mark Dwelle increased his Fairfax Financial Holdings Ltd. (FFH.U-T, FFH-T) target to US$775 from US$700 with an “outperform” rating, while BMO’s Tom MacKinnon bumped his target to $1,150 (Canadian) from US$1,050 with an “outperform” rating. The average is $1,115.47 (Canadian).
“A solid all around quarter with underwriting margins, premium growth and investment income all stronger than expected,” Mr. Dwelle said. “In ‘22 Fairfax delivered over $1 billion of underwriting profits and nearly $1 billion in interest and dividend income. We see upsides to both of those for ‘23 given the high level of cat losses last year and continued rising yields. These factors along with continued affiliate contributions and already visible asset monetizations support another year of likely rising book value and earnings growth. We continue to see FFH shares as attractive and remain at Outperform.”
* CIBC’s Anita Soni cut her Iamgold Corp. (IAG-N, IMG-T) target to US$3 from US$3.30. The average is US$2.90.
* CIBC’s Dean Wilkinson raised his target for Killam Apartment REIT (KMP.UN-T) to $21.50, exceeding the $20.93 average, from $20 with an “outperformer” rating, while Desjardins Securities’ Kyle Stanley bumped his target to $21.50 from $21 with a “buy” rating.
* National Bank’s Mike Parkin lowered his Kinross Gold Corp. (K-T) target to $8 from $8.50 with an “outperform” rating. The average is $7.83.
“We updated our model for Kinross for the strong Q4 earnings release and the three-year outlook,” said Mr. Parkin. “We opted to remain elevated to guidance on the 2025 capex guidance as we see the potential to increase spending in that year to advance a number of projects that could add good value to the company. Those projects include the potential restart of the Kettle River & Curlew mine complex, the extension of the La Coipa mine life, and the addition of an underground mine at Round Mountain. .... By our estimates, Kinross continues to screen as one of the best names to own in our coverage universe in a gold bull market thanks to the high NAV sensitivity to a change in the gold price, with our updated model exhibiting a 3.5:1 sensitivity. We continue to believe Kinross is deserving of a P/NAV re-rating relative to the senior peer average now that it has the bulk of its mining asset value tied to the Americas, but Kinross will need to demonstrate operational execution relative to 2023 guidance to kickstart this re-rating.”
* Berenberg’s Adrien Tamagno cut his Nutrien Ltd. (NTR-N, NTR-T) target to US$92 from US$99 with a “buy” rating. Others making changes include: RBC’s Andrew Wong to US$110 from US$115 with an “outperform” rating, HSBC’s Santhosh Seshadri to US$81 from US$83 with a “hold” rating and Citi’s P.J. Juvekar to US$89 from US$86 with a “buy” rating. The average is US$97.90.
* National Bank’s Lola Aganga raised hertarget for Sigma Lithium Corp. (SGML-X) to $68 from $60, keeping an “outperform” rating. The average is $59.89.
David Leeder