Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Dan Payne believes the fourth-quarter 2022 results for major U.S. oilfield services providers have “continued to reflect an expanding value proposition, where moderating rate of change & growth is yielding to an optimized and inclining return environment, in support of long-term fundamental value.”
In a research report released Tuesday, he said that trend falls in line with his view of Canadian peers ahead of their quarterly releases.
“The cadence of activity growth should similarly moderate, but a rebased top line with disproportionate return potential resulting from the group’s operating leverage is not currently priced in to sector valuations, which remain at a material discount to historical,” Mr. Payne said. “Domestic OFS participants should positively participate through this phase of the cycle on the basis of quality, with business orientation selectively compounding that narrative in support of free cash flow growth, option value and value upside off a low base of valuation over the cycle’s duration, and given our thesis and observations, the relative value-adjusted opportunity remains relatively well-balanced on a risk/reward basis across the group.”
Concurrent with his quarterly preview, Mr. Payne assumed coverage of Enerflex Ltd. (EFX-T) and moved the firm’s recommendation to “sector perform” from “outperform,” despite seeing “opportunities abound.”
“The change in rating to Sector Perform is principally based on valuation (with EFX share appreciation of up 44 per cent in Q4/22 and 16 per cent year-to-date), leaving a return to target of approximately 9 per cent,” he said. “The value opportunity of execution remains ahead for the company, where asset integration, validation of returns and ultimate de-leveraging, should serve to support option-value to longterm shareholder returns.”
Ahead of the release of its results on March 1, which will reflect its first reporting period since the close of its Exterran business combination, he’s projected top-line revenue and adjusted EBITDA of $500-million and $85-million, respectively, which are increases of 27 per cent and 62 per cent quarter-over-quarter but below the consensus estimates of $631-million and $99-million.
“Looking through to the outlook and the potential embedded within the consolidated enterprise, EFX offers a stout global presence at scale, set to capitalize on the transformational nature of its pro-forma business mix and associated margin profile (while high-grading through synergies),” said Mr. Payne. “Principally, we continue to expect the high-emphasis within its Energy Infrastructure business unit to drive a significant pivot for its return profile (55-65-per-cent gross margin), which in association with its Service unit, provides visibility to high proportional recurring and resilient returns relative to historical (i.e. 20-per-cent blended margin vs. historical 15-20 per cent). Resulting from that improved return outlook, and paired with the strength of its more cyclical Engineered Systems business (solid $1.5-billion backlog, approximately one year conversion rate), and very manageable capex requirements ($200-million or 50-per-cent payout), the company has established a repeatable & ample free cash proposition from which to execute key strategic priorities in; a) de-leveraging the pro-forma business less than 2.5 times D/EBITDA (likely through 2023e), b) bolster shareholder returns (augmenting its current 1-per-cent cash yield, or buy-back as the case may be), and c) continued reinvestment (opportunistic and return-focused).”
He maintained a $10.75 target for Enerflex shares. The average on the Street is currently $12.58.
Mr. Payne also assumed coverage of Pason Systems Inc. (PSI-T), maintaining a “sector perform” rating and $20 target. The average is $20.25.
“Fourth quarter results are expected to be reported on March 2nd (after market), and in association with its high correlation to the cadence of industry activity (i.e. high relative entrenchment), results are expected to be largely flat sequentially, with top line revenue expectations of $94-million (up 2 per cent quarter-over-quartrer) and associated EBITDA of $47-million (up 2 per cent quarter-over-quarter),” he said.
“That said, the primary take-away to value for PSI remains the significance of its margins (still trending around historical peak at 51 per cent, vs. 50 per cent prior Q & 39 per cent same period last), which as a result of its low maintenance capital requirements supports material free cash flow conversion, with a 7-per-cent 2023 estimated FCF yield (20-per-cent maintenance) implied through our estimates. That should continue to underpin a strong and sustainable dividend (recently expanded by 50 per cent to a 3-per-cent cash yield), and in association with its pristine capitalization, support option-value within the business and ultimately implications towards potential contraction of its yield in support of shareholder value.”
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While he predicts the lingering “drama” surrounding Rogers Communications Inc.’s (RCI.B-T) acquisition of Shaw Communications Inc. (SJR.B-T) will overshadow fourth-quarter earnings season for Canadian telecommunications companies, Desjardins Securities analyst Jerome Dubreuil thinks investors should not lose sight of shifting fundamentals in the sector.
“Overall, we expect another quarter of strong wireless loading, but we will be paying particular attention to margins as we believe inflation may be increasingly reflected in the companies’ costs, wireline competition is relatively high as telcos work to load customers on newly deployed fibre, and domestic wireless ARPU [average revenue per user] remains under pressure,” he said.
David Berman: Move over, BCE and Rogers. Investors have a new telecom favourite
“We expect the migration to DOCSIS 4.0 to be a subject of growing importance on cablecos’ (RCI, QBR) earnings calls, in light of the update Charter provided in the US in mid-December. While we believe Canadian cablecos’ network performance remains significantly above consumers’ needs, this subject may create uncertainty with regard to the cablecos’ medium-term capex requirements.”
Mr. Dubreuil said the fourth quarter is “an annual reminder that [Telus Corp., T-T] grows faster organically than other members of the Big 3.” He’s expecting the Vancouver-based company’s adjusted EBITDA to grow 8.4 per cent year-over-year organically, versus a 6.2-per-cent gain for Rogers and 3.3 per cent for BCE Inc. (BCE-T).
“However, we expect BCE to increase its dividend by 5 per cent, which should be well-received amid the current high inflation environment,” he added.
The analyst said his opinion on BCE’s stock is improving relative to its peers. He maintained a “hold” rating and $66 target, exceeding the $65.78 average.
“Among Canadian telecoms, BCE led the industry on share price performance in 2021 but the same cannot be said for 2022—it finished in the middle of the pack, down nearly 10 per cent on the year due to the higher interest rate environment (we estimate that BCE has higher exposure to interest rates than its peers),” he said. “We tweaked our estimates, as we anticipate a solid subscriber quarter and in-line financials for the largest company under our coverage. We are warming to the name given it has underperformed RCI by 20 per cent in the last three months and given its defensive attributes; however, we remain on the sidelines as we expect it will guide to lower 2023 EBITDA growth vs peers.”
Mr. Dubreuil made one change, raising his target for Quebecor Inc. (QBR.B-T) to $36 from $35 with a “buy” rating, expressing “greater confidence in its ability to drive accretion from its expected acquisition of Freedom.” The average is $34.50.
On the Rogers-Shaw merger, he said: “After the Federal Court of Appeal’s decision to dismiss the Competition Bureau’s challenge, we view ISED Minister François-Philippe Champagne’s decision as the final major milestone. We are not certain if Mr Champagne will render his decision before the CRTC reaches a verdict on TekSavvy’s application. On that aspect of the review, we believe it is difficult to conclude that the wholesale rates QBR will pay to RCI represent undue preference given they are just one part of a much more complex agreement. However, we do not know how the CRTC sees this issue, especially given the recent change at its helm. The uncertain timing on the closing of the merger makes it more challenging to position ahead of the quarter. Our RCI 2023 EBITDA forecast is lower than the Street’s; at the same time, we believe the stock could perform well if (but mostly when) the merger is approved. We calculate that a growing portion of RCI/SJR synergies are now priced into RCI’s stock.”
His other targets and ratings are:
- Cogeco Communications Inc. (CCA-T) at $96 with a “buy” rating. Average: $86.35.
- Rogers at $73 with a “buy” rating. Average: $71.32.
- Shaw at $40.50 with a “hold” rating. Average: $40.50.
- Telus at $33 with a “buy” rating. Average: $32.56.
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Following last week’s release of near-mine exploration drilling results from its Fruta Del Norte project in Ecuador, Haywood Securities analyst Kerry Smith thinks a premium valuation for Lundin Gold Inc. (LUG-T) is “justified” and recommends investors accumulate shares.
That led him to raise his rating for the Vancouver-based company to “buy” from “hold” previously.
Mr. Smith thinks the results, which Lundin called “promising,” display “decent intercepts over good widths” thus far.
“The program started in Q3/22, targeting extensions to the current resource, along with deeper drilling to extend the resource envelope to depth,” he said in a note. “To-date the Company has drilled 8,600 metres across 16 holes, from surface and underground, and in 2023, the Company is planning to drill 15,500 metres at a cost of US$9.4 million.”
“This is a good start to this exploration initiative, and we expect this near-mine exploration will add mineable ounces over time.”
The analyst did warn that Lundin’s valuation isn’t cheap at 9.6 times enterprise value to consensus 2023 cash flow per share, versus 8.6 times.
“These results, while encouraging, will not move the stock,” he said. “The near-mine exploration program will add resource ounces over time, as the deposit is still open to depth and along strike to the north and south, but this program will need at least another year of drilling to add resources we believe. The regional program is very early stage and looking for epithermal deposits in jungle terrain is slow and expensive, although one hole can quickly change the potential regionally.”
Mr. Smith raised his target to $16.50 from $14. The current average on the Street is $16.38.
“The Fruta del Norte project ranks as one of the largest and highest-grade gold projects in the world,” he concluded. “Results continue to exceed our expectations, and for 2023 the Company is expecting production in the upper end of guidance of 425,000 to 475,000 ounces of gold.”
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Scotia Capital analyst Michael Doumet expects heavy equipment dealers to see their momentum continue into 2023.
“Having been beneficiaries of tight supply conditions, healthy pricing, and a strong backdrop, equipment dealers beat consensus estimates approximately 85 percent of the time since 2021,” he said. “From a share price standpoint, the beats have become progressively less impactful – as is typical late-cycle, as investors increasingly view beats as ‘backward looking’. That being said, the negative sentiment of late-last year has reversed. Prospects of a soft landing and China’s reopening have provided a boost to commodities and has led to strong share price outperfomance for FTT – or more accurately, a reversal of its recent underperformance. Generally, we see an increased likelihood that the equipment dealers will continue to build from their 2022 earnings base.”
“In 2023, we expect a downshift in EPS growth as dealers work through near-record backlogs, deliver more equipment, and cope with margin normalization. Despite late-cycle concerns, we remain bullish on the group as we expect strong backlogs to provide a bridge beyond the near-term macro softness and as trends in infra, non-res, mining, and O&G support continued EPS growth in the mid-term. We think TIH has the best prospects for a 4Q22 beat; our top pick is FTT.”
Prior to the start of earnings season, Mr. Doumet raised his target prices for stocks in his coverage universe.
For Finning International Inc. (FTT-T), his “top pick” in the group, he increased his target to $44 from $37. The average on the Street is $41.88.
“In the span of six quarters, FTT’s LTM EPS [last 12-month earnings per share prospects have gone from ‘maybe more than $2.00?’ to ‘how much more than $3.00?,’” he said. “We view its EPS growth as sustainable and deserving of a multiple re-rate. CAT’s P/E [price-to-earnings] multiple has expanded to a mid-cycle P/E multiple – whereas FTT trades at 20 per cent discount. TIH trades at 20 times P/E, relatively in line with the Canadian Rails – and we view it as a defensive name with M&A optionality.
“For FTT, we forecast 4Q22 EBITDA/EPS of $274 million/$0.81, roughly in line with consensus of $277 million/$0.81. The quarter-over-quarter decline is driven primarily from a normalization of product support volumes in Chile, higher LTIP, and softer seasonality. Compared with last year, our EBITDA/EPS forecast is up 14 per cent/23 per cent, reflecting demand growth and operational improvements.”
His other changes were:
- Toromont Industries Ltd. (TIH-T, “sector outperform”) to $121 from $106. Average: $118.
- Wajax Corp. (WJX-T, “sector outperform”) to $27 from $25. Average: $25.50
“TIH beat the Street ten consecutive times,” Mr. Doumet said. “Despite this track record, consensus still appears conservative: for 4Q, we think consensus is too low on revenues (strong deliveries, product support momentum, etc.) and margins (strong rental margins, operating leverage, etc.). FTT’s 3Q was arguably its best quarter ever. 2022 is its best year for product support (with strong price contributions); we expect mid-single digits growth in 2023. We remain optimistic on its prospects for further market share gains and cost efficiencies, but we expect offsetting LTIP costs ($20-million) in 4Q (we are looking for in-line EPS). WJX’s year-to-date results have been less consistent, but it benefits from the same underlying strength as the other two and combines an attractive growth via-M&A story. We are looking for a strong 4Q and a modest beat for WJX.”
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After a “strong 2022 year-to-date performance driven by robust growth in multiple geographies and margin expansion,” iA Capital Markets analyst Matthew Weekes reaffirmed his “constructive” outlook on Ag Growth International Inc. (AFN-T) ahead of its Investor Day event on Thursday.
“AFN has delivered exceptional growth year-to-date in 2022, driven by robust sales growth across multiple geographies, including the U.S., Brazil, India, and Australia, along with recovering sales in Canada; and margin expansion driven by a focus on operational efficiency, disciplined pricing, volume growth and operating leverage, and a favourable sales mix,” he said. “All in all, AFN is on pace to generate 20-per-cent revenue growth and 30-per-cent Adj. EBITDA growth in 2022, with limited incremental M&A and despite losses of $10-million year-to-date in the Digital division. Headwinds in the Digital business have led the Company to recently announce restructuring initiatives and anticipated impairment charges in Q4. The Digital segment accounts for 3 per cent of AFN’s total revenues. The market has likely discounted AGI Digital to a large degree and as such, it could provide upside if it is able to improve its profitability. We expect that the Company will touch on how it intends to refocus AGI Digital at Investor Day.”
Mr. Weekes predicts the tone of Investor Day to be “generally positive” with the the introduction of strategic priorities under new chief executive office Paul Householder. He said investors should “expect consistent focus on operational excellence, balance sheet discipline, and profitable organic growth.”
“AFN’s order backlogs have continued to expand through 2022, albeit at a slowing pace off of already-strong levels,” said Mr. Weekes. “AFN expects its strong backlog to provide a foundation for continued positive momentum heading into Q4/22 and 2023, and is confident in further margin expansion as well. Our 2023/2024 estimates are on the low end of consensus but still project solid organic growth. Over the long term, we remain bullish on fundamentals underpinning growth in agri-food equipment and infrastructure.”
Maintaining a “speculative buy” recommendation for the Winnipeg-based company’s shares, he raised his target to $54 from $50 following a valuation update. The average target is $57.36.
“Our Speculative Buy rating is underpinned by AFN’s (a) diversified ag-equipment business serving both Farm and Commercial customers, with exposure to both fast-growing and mature agricultural markets; (b) track record of strong growth in per share metrics; (c) constructive near-term outlook with projected mid-single-digit adjusted EBITDA CAGR [compound annual growth rate] from 2022E-2024E, driven by organic growth and a focus on margins while reducing leverage; and (d) positive secular trends underpinning equipment in agri-food equipment and infrastructure; tempered by (e) litigation risk,” Mr. Weekes said.
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Raymond James’ Mining Research team expects to see an improvement when base metals producers report fourth-quarter results, while seeing a “mixed bag” for precious metals companies.
“We expect producer margins to improve in 4Q from 3Q levels, particularly amongst base metals producers supported by higher average pricing for copper and nickel with some offset from lower zinc prices quarter-over-quarter,” the firm said. “We expect positive provisional pricing adjustments to further boost base metal margins. We expect more of a mixed outcome for precious metals producers with little help from the gold price (average gold price relatively flat q/q) but some companies should benefit from 4Q being the strongest production quarter for the year (eg: BTG). Silver producers are expected to benefit from higher pricing with silver up 11 per cent q/q.”
In a research report released Tuesday, the firm raised their commodity price forecasts for 2023 and 2024 with copper seeing the most “significant” change. Increasing its short- and long-term projections for the metal, it pointed to “improving demand outlook related to the China re-opening and ongoing challenges on the supply side.”
“We have also increased our long term copper price from US3.50/lb to US$3.75/lb as we believe decreasing global copper grades, increasing taxes/royalties and inflationary pressure has increased the incentive price for new investments,” the analyst said. “We have also increased our price forecasts for nickel and zinc in 2023/24, and increased our long term price for nickel from US$9.00/lb to US$10.00/lb to reflect a strong demand outlook supported by EV growth and challenges on the supply side. We have also made small changes in our 2023 iron ore price forecasts to reflect current market conditions.
“In precious metals, we have increased our 2023 gold price estimate on weakening of the US dollar and expectations of slowing interest rate increases and have adjusted our silver price forecasts with our gold:silver price ratio now at about 80 times for 2023 (from 85 times previously) and maintain that ratio for the long term.”
Making a series of target price adjustments in response to the price deck changes, the firm made one rating change, upgrading Silvercorp Metals Inc. (SVM_T) to “outperform” from “market perform” with a $6.15 target, up from $5 and above the $5.54 average.
“In the base metals producers, target prices have generally been adjusted upward reflecting higher long term copper and nickel forecasts,” the firm said. “We continue to favor IVN and TECK amongst the base metals producers given both have near term copper growth, long mine lives and potential catalysts at the other assets. In the bulks, we favor CIA for its near term growth and potential catalysts and remain constructive on uranium and recommend CCO,NXE and DML.
“In precious metals, we prefer AEM amongst the senior gold producers for its lower political risk profile and steady to growing production profile with a full-year of the Kirkland Lake assets and expected consolidation of Canadian Malartic. Among intermediate producers we favor EDV for its low cost and attractive valuation, KNT for its growth potential and exploration opportunities, and SIL given its cash flow (just commenced production) and exposure to silver. We prefer TFPM and WPM in the royalty space and MAU amongst the juniors for its exploration potential.”
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In other analyst actions:
* Bernstein’s Bob Brackett raised his target for Barrick Gold Corp. (ABX-T) to $28 from $24 with a “market perform” rating. The average on the Street is $29.43.
* BMO’s Jackie Przybylowski cut her Teck Resources Ltd. (TECK.B-T) target to $45 from $48 with a “market perform” rating. The average is $58.45.
* After making “material” reductions to his fourth-quarter projections for VerticalScope Holdings Inc. (FORA-T), National Bank Financial’s Adam Shine cut his target for its shares to $11 from $15 with an “outperform” rating. The average target is $13.79.
“It would appear that we didn’t go far enough in our forecast adjustments last fall,” he said. “As such, we further reduced growth rates for digital advertising and ecommerce, so our total revs outlook looks like negative 2.1 per cent 2023, up 4.9 per cent 2024 and up 6.7 per cent 2025 compared to up 0.3 per cent, up 14.3 per cent and up 8.3 per cent. Importantly, there was no M&A in Q4/22, and we removed acquisitions from our model post-2022 until we see renewed activity. Management had last been talking about an Adj. EBITDA margin in the mid-30s. We’re at 38.3 per cent in 2022, but now drop to 33.0 per cent amid revs pressure in 2023E before rising to 35.0 per cent in 2024 and 37.0 per cent in 2025. We had been over 40 per cent post-2022. We’ve yet to hear of any job cuts at the company where employee churn may have moved incrementally higher, but we do expect some realignment of staffing amid a shift to organic initiatives to stimulate growth. We await more information on the progress of the pending app, Marketplaces, and other product development efforts.”
David Leeder