Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Adam Shine sees Thomson Reuters Corp.’s (TRI-T, TRI-N) execution as “strong,” its outlook “solid” and expects shareholder returns to “persist.”
However, given its stock is less than 3 per cent from his target price and “ahead of fair value,” he lowered his rating for the Toronto-based news and information company to “sector perform” from “outperform” on Tuesday.
“The stock has added approximately 7 per cent from the $154.46 at which it stood when we published our Q4 review on Feb. 9,” said Mr. Shine in a research note. “As we base our target on our 2024 estimated NAV [net asset value], we look to our 2023 metric for the context of current fair value. Our 2023 estimated NAV points to $151.36 and would jump to $158 if we use current FX at 1.357 instead of the 1.30 rate used in our valuation. We apply an EBITDA of 20 times to TRI’s Big 3 segments and 14 times to Global Print and Reuters News which have very different growth profiles. If we used 20 times across the five segments and adjusted for the current value of TRI’s stake in LSEG, our 2023 estimate NAV would point to $155 at 1.30 FX or $162 at 1.357 FX. The stock trades over fair value and we see no reason yet to raise our target.”
The analyst emphasized the recommendation is based solely on Thomson Reuters’ current valuation and shouldn’t be viewed as a criticism of the state of its business.
“Management continues to execute its vision of TRI 3.0, with only relatively minor changes on Feb. 9 to its 2023 outlook first given on Feb. 23, 2021 and then moved to the upper end of ranges on Feb. 28, 2022,” said Mr. Shine. “Big 3/Total organic growth was unchanged at 6.5-7.0 per cent/5.5-6.0 per cent, respective total growth was reduced by 100 basis points to 5.5-6.0 per cent/4.5-5.0 per cent. Adj. EBITDA margin was moved to bottom of recent 1-pt ranges, with Big 3 to approximately 44 per cent and Total to 39 per cent. Capex intensity 7 per cent (was 6.0-6.5 per cent). FCF $1.8-billion (was $1.9-$2.0-billion). For Q1, organic revs growth is anticipated to be at low end of 5.5-6.0 per cent with margin 38 per cent. The guidance excludes FX and future M&A. Besides small Q4 divestitures, TRI closed its $500-million purchase of SurePrep on Jan. 3. Meanwhile, TRI sold 10.5 million LSEG shares to Microsoft on Jan. 31 for $1-billion. Its remaining 61.5 million shares have a market value of $5.55-billion ($5.86-billion with hedges). It can sell an extra 31 million LSEG shares released from lock-up on Jan. 30. Related sales this year won’t start until after early March (likely to occur in multiple tranches). After it completes its NCIB, TRI will initiate a return of capital of at least $2-billion, which will be combined with a share consolidation or reverse stock split (similar to what was done in 2018) and result in 17 million fewer shares.”
He maintained a target for the company’s shares of $170. The average target on the Street is $170.68.
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Desjardins Securities analyst Benoit Poirier is “disappointed” by Uni-Select Inc.’s (UNS-T) $2.6-billion deal to be acquired by U.S. auto equipment supplier LKQ Corp. (LKQ-Q), emphasizing he “strongly” believes in its current management team and “its ability to further improve margins and create shareholder value.”
“On the other hand, even if there is a possibility of a superior bid (low probability, in our view), it is difficult to argue against the valuation offered by LKQ, which is fair, in our opinion. Bottom line, we recommend that investors tender their shares,” he said.
After its shares soared 16.6 per cent on Monday following the premarket deal announcement, he moved his recommendation for the Boucherville, Que.-based company distributor of automotive refinish and industrial coatings and related products to “tender” from “buy,” calling the deal’s valuation “fair” with the discount “not as significant when looking at valuation on a pre–IFRS 16 basis.”
However, he did suggest a superior bid still possible.
“Based on 2022 numbers, the transaction implies an EV/TTM EBITDA [enterprise value to trailing 12-month earnings before interest, taxes, depreciation and amortization] multiple of 12.3 times, but after adjusting for IFRS 16, we derive a multiple of 14.2 times, a 15-per-cent premium to the peer average of 12.3x times. Looking at FY2 or 2024 on a pre– IFRS 16 basis, we derive a multiple of 11.8 times, a discount of only 8 per cent vs the peer average of 12.8 times. While this is still a slight discount vs U.S. peers, we see the valuation as fair.
“Who could be interested in making a larger offer? ORLY and AZO [O’Reilly Automotive Inc. and Autozone Inc.] are the most likely but given the unanimous support of UNS’s board and significant shareholders, any competing offer would have to appear quickly. At this point, we still do not know who initiated the process and if there are any breakup fees (details to be disclosed in the circular). Bottom line, besides LKQ, only ORLY or AZO could have been interested, in our view.”
Seeing few potential risks to the deal, he cut his target to $48 from $54. The average target is $50.08.
“We do not foresee significant antitrust issues that could derail the transaction given LKQ’s intention to divest of the UK business,” he saud. “We have a similar view in relation to CAG and FM [Canadian Automotive Group and FinishMaster]. In terms of shareholder activism, the largest hedge fund invested in the name by a significant margin is EdgePoint (14 per cent of shares outstanding), which has already signalled its support and has voted in favour of the transaction.”
Elsewhere, Canaccord Genuity’s Luke Hannan downgraded Uni-Select to “hold” from “buy” with a $48 target, down from $51 in a research report titled Closing the book on a textbook turnaround story.
“Though the investors we’ve spoken to have a high degree of conviction in management’s ability to create long-term shareholder value and would be happy long-term holders, they (and we) also recognize the next leg of margin expansion will be more difficult to execute than the previous leg due to (1) pricing tailwinds from inflation that will likely dissipate over the medium-term and (2) the “low-hanging fruit”, so to speak, having already been picked by management,” said Mr. Hannan. “In light of this, an 11 times 2023 estimated EBITDA takeout multiple (vs. UNS’ historical 9 times NTM [next 12-month] average) doesn’t seem unfair to us.”
Those making target adjustments include:
* RBC’s Sabahat Khan to $48 from $47 with a “sector perform” rating.
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National Bank Financial analyst Vishal Shreedhar expects a “resilient” demand for pet merchandise to drive Pet Valu Holdings Ltd.’s (PET-T) fourth-quarter financial results.
He’s projecting earnings per share of 45 cents for the Markham, Ont.-based retailer, up 4 cents (or 9 per cent) from the same period a year ago and above the consensus forecast on the Street of 42 cents. He says gains reflect “strong” same-store sales growth (10.8 per cent versus 16.7 per cent a year ago), new store openings over the past 12 months and contributions from subsidiary Chico.
“Demand expected to remain strong: Management revised its outlook higher last quarter, highlighting strength across most categories and no meaningful trade-down,” said Mr. Shreedhar. “Our review of peer commentary indicates that consumer spending on pets remains resilient despite the weakening economic backdrop, reflecting increasing pet humanization trends, amongst other factors. We note that PET has proprietary brands priced at a 5-20-per-cent discount which it can leverage should economic conditions further deteriorate.
“Our review of StatsCan data suggests that pet industry retail sales (data up to November 2022) were about 13.3 per cent higher year-over-year or about 3.6 per cent higher year-over-year if excluding inflation. Recall that management expressed confidence heading into Q4 despite the weakening macroeconomic backdrop. Our current forecasts are generally at the high-end or ahead of management’s 2022 guidance, including: sssg of 15.5-16.5 per cent (NBF is 17.4 per cent), revenue of $938-$947-million (NBF is $945-million), EBITDA of $212-$214-million (NBF is $215-million), and EPS of $1.56-$1.58 (NBF was $1.61).”
When the company reports its results before the bell on March 7, the analyst expects investor focus will be centred on the outlook for the next fiscal year, calling it “key.”
“Expectations for 2023 will be an important driver, though management’s track record suggests that it may offer a conservative outlook,” he said. “Our 2023 forecasts reflect sssg of 6.9 per cent, revenue of $1.029-billion (consensus: $1.031-billion), EBITDA of $237-million (consensus: $230-million) and EPS of $1.75 (consensus: $1.68).”
After modest increases to his 2022 and 2023 revenue and earnings estimates, Mr. Shreedhar raised his target for Pet Valu shares to $47 from $44, maintaining a “sector perform” recommendation. The average on the Street is $45.67.
“We hold a favourable view of Pet Valu’s business model, its outlook and the industry, supported by secular pet humanization trends and resilient pet ownership rates,” he said. “That said, in the interim, we find better value elsewhere.”
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Ahead of Thursday’s release of its fourth-quarter 2022 results, RBC Dominion Securities analyst Irene Nattel lowered her near-term forecast for Park Lawn Corp. (PLC-T) while maintaining a more positive view of the longer term.
“At this time, we are moderating earnings growth forecasts to reflect: i) lower overall death rate in Q4 reflecting easing of COVID-related contracts, ii) normalizing group sales sequentially in Q4, iii) tough comp on call volumes notably for Q1/23, exacerbated this year by tight consumer spending, iv) operating cost increases reflecting growth of the business, inflationary pressures and IT support and training related to FaCTS rollout, partly offset by i) pricing, and ii) cost management. EBITDA margin pressure down 290 basis points year-over-year in Q4E to 22.4 per cent reflects high fixed cost business.”
Ms. Nattel is now expecting quarterly EBITDA of $19.4-million, down 2.7 per cent year-over-year but narrowly above the Street’s forecast of $18.7-million.
“While normalizing death rates continue to muddle nearterm visibility, COVID distortions should ease as we move through 2023,” she said.
“M&A continues apace and remains the primary engine of long-term value creation. Latest acquisition announced early February and expected to close in April, broadens presence in Kansas City Metropolitan Area with three stand-alone funeral homes and one stand-alone cemetery. EBITDA contribution anticipated to be US$2.2-million or 3 per cent of TTM [trailing 12 months] once fully integrated. Our F23 M&A assumption $60-$65-million is conservatively below stated target range $75-$125-million per year, rising to $90-million in F24.”
Believing a “return to more favourable growth and more substantive M&A [is] key to re-rating,” Ms. Nattel trimmed her target for Park Lawn shares to $41 from $44, remaining above the $34.50 average, with an “outperform” rating.
“Based on our analysis, PLC investment opportunity appears quite attractive at current levels, given: i) relatively low risk long-term growth profile supported by low elasticity of demand as death rates remain relatively stable over time, and attractive margin, ii) strong growth outlook driven by extensive M&A opportunities at attractive multiples in this highly fragmented industry, iii) rising returns over time consistent with PLC’s marginal ROIC that should trend higher with improving profitability of the business, and attractive transaction multiples, and iv) high FCF business model,” she concluded. “Our model indicates PLC should be able to fund most potential deals from internally generated cash flow, caveat being cadence/size of M&A.”
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Scotia Capital analyst Ovais Habib resumed coverage of Rupert Resources Ltd. (RUP-T) with an “sector outperform” recommendation, emphasizing the potential from its flagship Ikkari project in Finland.
“We believe Rupert’s management team’s fiscally disciplined approach to advancing the Ikkari discovery, further discoveries, resource growth and project de-risking are a proven recipe for success,” he said. “The Ikkari project (including Pahtavaara) has 4.2 million ounces (Moz) Au [gold] of indicated and inferred resources in situ, at an average grade of 1.9 grams per ton (g/t) Au. The 22-year life of mine is expected to produce an average of 200,000 ounces annually at a LOM [life-of-mine] cash cost of $667 per ounce (we model $732/oz) and All-in Sustaining Cost (AISC) of $759/oz (we model $784/oz).”
Mr. Habib sees the Toronto-based company as “an attractive acquisition target,” pointing to its “low-cost production profile in a favourable mining jurisdiction, with further potential mineralization.”
Ikkari is within 1km to the west of the Helmi discovery, a 70/30 JV between B2Gold and Aurion Resources, while Agnico holds 15 percent of Rupert’s shareholding,” he said. “We believe that the long-life Ikkari project could be an attractive takeover target for producers looking to get exposure to a high-quality asset and gain presence in a stable jurisdiction: Finland.”
With Rupeert “well funded for further exploration efforts until a prefeasibility study is released (expected in 2024),” he set a target of $7.50 per share. The average is $8.15.
“Our Sector Outperform rating is based on our belief that the Ikkari deposit is of high enough quality to warrant standalone development,” he concluded. “In addition, we think the surrounding exploration licences are under-explored and will yield satellite discoveries, at a minimum, and potentially other significant ore bodies. In our opinion, the combination of Ikkari and further potential mineralization make Rupert a likely acquisition target in a favourable jurisdiction.”
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Citing “significant exploration success that points to increased tonnage at their Corvette property located in the James Bay region of Quebec,” Stifel analyst Cole McGill reaffirmed a bullish view on Patriot Battery Metals Inc. (PMET-X), leading him to almost double his target price for its shares.
“Drilling has expanded the main CV5 cluster 400 metres to the east, and included the best0yet hole drilled at the property, with a hit of 2.12-per-cent Li2O over 156.9 metres,” he said. “At CV13, positive drilling results highlighted the district-scale potential of Corvette as a whole.”
“Patriot recently reported successful metallurgical test results on core samples from the CV5 lithium cluster that used Heavy Liquid Separation (HLS) to produce a commercial-grade concentrate of Li2O. We see these results as a positive de-risking event that builds confidence in a new project base case of using a Dense Media Separation (DMS) circuit for eventual processing. DMS is technically simpler and less costly than other methods such as flotation.”
With this “success,” Mr. McGill said he has “greater visibility into a future development scenario at CV5″ and upgraded his valuation model, leading him to hike his target for the Vancouver-based company to $16 from $8.25 previously. The average is $16.21.
“We are retaining our Speculative Buy rating on the stock in consideration of the above-noted catalysts and the potential for a mine of considerably larger scale than our base case (and correspondingly higher valuation) should the resource grow,” he said. “We also highlight that our model assumes a long-term price for 6.0-per-cent lithium spodumene concentrate (SC6.0%) of $1,750 per ton, materially below spot, leading to considerably higher upside should current pricing prove persistent.”
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In other analyst actions:
* Cowen and Co. initiated coverage of Vancouver-based AbCellera Biologics Inc. (ABCL-Q) with an “outperform” rating.
* Jefferies’ Owen Bennett reduced his targets for a series of cannabis stocks. They include: Aurora Cannabis Inc. (ACB-T, “hold”) to $1.31 from $1.89, Canopy Growth Corp. (WEED-T, “hold”) to $3.65 from $4.95, Hexo Corp. (HEXO-T, “hold”) to $2.57 from $2.80 and Organigram Holdings Inc. (OGI-T, “buy”) to $1.80 from $2. The averages are $1.78, $3.29, $11.55 and $2.03, respectively.
* National Bank’s Don DeMarco cut his B2Gold Corp. (BTO-T) target to $6.50 from $6.75, below the $7.02 average, with an “outperform” rating.
* National Bank’s Michael Parkin trimmed his target for Eldorado Gold Corp. (ELD-T) to $13.50 from $14 with a “sector perform” rating. The average is $14.97.
* CIBC’s Bryce Adams cut his target for First Quantum Minerals Ltd. (FM-T) to $26 from $28 with a “neutral” recommendation. The average is $29.42.
* CIBC’s Cosmos Chiu lowered his Franco-Nevada Corp. (FNV-T) target to $230 from $240, keeping an “outperformer” rating. The average is $209.97.
“After First Quantum announced it was suspending Cobre Panama operations due to a ban on concentrate loading, we have updated our FM & FNV models to account for a two-month suspension,” they said. “We see some potential that protests by Panamanian employees, contractors and suppliers apply increasing pressure on the government to resume concentrate loading sooner, however, our current view is that the suspension will last for two months, and that the Government of Panama continues to hold negotiating leverage until a revised tax and royalty regime is agreed to.”
* RBC’s Irene Nattel raised her George Weston Ltd. (WN-T) target to $215 from $204 with an “outperform” rating. The average is $192.14.
“Our constructive outlook on WN is predicated on our favourable outlook for more than 52-per-cent -owned Loblaw (TSX: L) augmented by share buyback funded through participation in L NCIB, and balance sheet optionality of accelerated buyback with greater than $400-million net cash at GWL Corporate as at Q3,” she said.
* After announcing the RSA U.K. Pension Trustees entered into an agreement with Pension Insurance Corporation plc for bulk purchase annuities, RBC’s Geoffrey Kwan cut his target for Intact Financial Corp. (IFC-T) to $228 from $231 with an “outperform” rating. The average is $221.15.
“[Monday’s transaction makes a lot of sense to us, as Intact is taking advantage of the significant increase in interest rates to more costeffectively remove its RSA U.K. pension liability,” he said. “We can’t help but wonder whether this transaction may also be the first step of making the nonCanadian RSA business (particularly the non-Specialty Lines RSA business outside Canada) “cleaner” by not having the pension liability overhang and therefore allowing IFC to be in a position to monetize (e.g., asset swap, sale) that segment if the right opportunity comes along. Furthermore, although debt-to-capital increases just under 200bps, we don’t think this deal impacts IFC’s M&A appetite. We continue to think IFC should remain a core holding, reflecting positive company/industry fundamentals, a strong track record of growth and profitability, potential catalyst(s), defensive attributes, and a reasonable valuation, but we recognize that IFC’s shares may not perform as well in a market recovery scenario.”
* CIBC’s Bryce Adams raised his Lundin Gold Inc. (LUG-T) target to $20 from $18.50 with an “outperformer” rating, while Canaccord Genuity’s Michael Fairbairn bumped his target to $18 from $17 with a “buy” rating. The average is $17.64.
“Pre-market [Monday] morning, LUG announced the results of a reserve and resource update for its Fruta del Norte Mine (“FDN”) located in Ecuador,” said Mr. Fairbairn. “The update showcased effective reserve replacement by LUG at the mine, with total reserves having increased net of depletion since mining began in 2019. Recall that this is the first full updated R&R estimate for the deposit since April 2016, though the company provided a previous reserve update in 2021 (with non-material changes vs. the 2016 update).”
“In this update, we believe LUG has demonstrated the benefit of its ongoing conversion drilling programs, which managed to not only replace but also modestly increase reserves at FDN. The deposit retains a sizable reserve base after three years of mining and offers compelling opportunities to extend FDN’s reserve-base mine life via future conversion of the 1.7Moz of Inferred resources near the deposit’s lower-grade South Domain. Following this R&R update, we now forecast an additional 900koz of total production from FDN over an identical 13-year mine life (until 2036), lifting our estimate for average annual gold production to 413koz from 346koz over this period. Looking beyond the near-term impact, we continue to see attractive potential in the broader FDN land package for additional discoveries and/or a mine-life extension at FDN.”
* BMO’s Randy Ollenberger raised his MEG Energy Corp. (MEG-T) target to $26 from $25, above the $23.92 average, with an “outperform” rating, while TD Securities’ Menno Hulshof hiked his target to $23 from $20 with a “hold” rating.
“MEG reported Q4/22 results that were ahead of expectations,” said Mr. Ollenberger. “The company generated $295-million of free cash flow in the fourth quarter and returned $96-million to shareholders while also reducing net debt by US$167-million to roughly US$1.0-billion. We believe that MEG offers investors significant leverage to improving heavy oil prices as well as an additional equity re-rating as the company reduces its financial leverage and expands its share buyback program.”
* TD Securities’ Graham Ryding cut his Sprott Inc. (SII-T) target to $53 from $57 with a “hold” rating. The average is $50.33.
David Leeder