Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Chris MacCulloch expects the impact of the wildfires in Western Canada will dominate focus during the coming second-quarter earnings season for Canadian energy companies.
“Wildfires, wildfires, wildfires — get ready to hear a lot about wildfires!,” he said. “Pardon our cynicism, but for many producers, the wildfires that raged across Alberta and northeast B.C. throughout 2Q23 provided a welcome opportunity to reset expectations. We also highlight an active turnaround season for oil sands producers and refiners. To that end, with a few notable exceptions, particularly among heavy oil producers benefiting from tightening WTI–WCS differentials, we expect the trend of cash flow moderation to continue, with most companies expected to post modest reductions in quarterly CFPS prints vs 1Q23. We also do not expect major changes in capital returns as producers continue approaching net debt targets.”
In a research report released Tuesday, the analyst maintained his “constructive” outlook on oil price, however he acknowledged his prior 2024 forecast of US$90 per barrel for WTI was “too aggressive,” pointing to a “a global economic slowdown and a sluggish recovery in Chinese demand exiting zero-COVID.”
Accordingly, he lowered his 2024 estimate by US$5 to US$85 per barrel. He also trimmed his NYMEX forecast for next year to US$4 per thousand cubic feet from US$4.50, wanting “better visibility on production declines approaching the critical winter heating season.”
“Looking ahead to the reporting season, we expect the trend of cash flow moderation to continue, with most companies expected to post modest reductions in quarterly CFPS prints vs 1Q23, particularly among the small-cap natural gas producers, which are expected to bear the brunt of softer commodity prices and wildfire-related disruptions,” said Mr. MacCulloch. “On the other hand, there were some notable standouts that received a tailwind from narrowing WTI–WCS differentials, namely ATH, HWX, MEG and TVE. Meanwhile, CPG and VET are expected to lead light and medium oil-weighted mid-cap producers with strong cash prints on the back of stellar well results and an active hedge book, respectively.
“However, the strongest quarterly improvement in CFPS is expected to come from CVE, which is beginning to benefit from a recovery in downstream operations now that the Toledo and Superior refineries have both started coming back online. Refinery margins are expected to remain depressed in 2Q23 with the full absorption of operating costs and the required inventory build-up to support operations at Toledo and Superior while utilization rates are expected to land close to the 50-per-cent level. Nevertheless, we expect most investors to look beyond the 2Q23 financial results and remain focused on 2H23 when the company should finally reap the full benefit of its integrated business model with stronger margin capture, even with our expectation for a modest softening of refiner crack spreads.”
Seeing a limited potential return to his revised target prices, Mr. MacCulloch downgraded a pair of stocks on Tuesday:
* Peyto Exploration & Development Corp. (PEY-T) to “hold” from “buy” with a $13 target, down from $15. The average on the Street is $15.18, according to Refinitiv data.
“For reference, we have trimmed our 2024 production forecast to 107,500 boe/d (from 115,000 boe/d), which would imply limited organic growth of 4 per cent from 1Q23 levels (from 12 per cent),” he said. “Meanwhile, elevated debt levels remain an overhang for the company, with a 2024 strip D/CF of 0.8 times, the highest among natural gas–weighted producers within the Desjardins E&P coverage universe, which contributes to investor fears of a potential dividend cut in the absence of a more pronounced recovery in natural gas prices. As a result, the stock has struggled to gain market traction this year, despite offering a best-in-class dividend yield of 11.5 per cent. For context, our revised $13.00 target implies an EV/DACF (2024E) multiple of 3.0 times, which is below the stock’s historical consensus multiple of 4.1 times; note that our target multiple would expand to 3.3 times based on current strip prices.”
* Vermilion Energy Inc. (VET-T) to “hold” from “buy” with a $22 target, down from $27.50. The average is $25.46.
“While the company has managed to trim debt levels closer to the peer group average on the back of non-core asset dispositions and organic FCF generation, we expect balance sheet repair to continue hindering any near-term acceleration of capital returns,” he said. “For reference, based on current strip prices and previously outlined corporate net debt targets, we expect VET to continue returning only 25 per cent of FCF to shareholders through the balance of 2023, which significantly lags mid-cap peers. Meanwhile, a string of operational disappointments, including the unplanned disruption of the Wandoo offshore Australia oil asset for more than six months, have negatively impacted cash flow in recent quarters and damaged investor sentiment for the story. Additionally, the market is still awaiting clarity on the future of European solidarity contributions (ie windfall taxes) and we remain cautious that they will remain an overhang on future development plans and corporate cash flow.”
The analyst also made a series of target adjustments.
For large-cap stocks, his changes are:
- Canadian Natural Resources Ltd. (CNQ-T, “buy”) to $95 from $97. Average: $90.35.
- Cenovus Energy Inc. (CVE-T, “buy”) to $31 from $32. Average: $29.72.
- Imperial Oil Ltd. (IMO-T, “hold”) to $76 from $79. Average: $78.47.
- Suncor Energy Inc. (SU-T, “buy”) to $50 from $55. Average: $50.33.
For dividend-paying stocks, his changes are:
- Crescent Point Energy Corp. (CPG-T, “buy”) to $14 from $14.75. Average: $13.61.
- Enerplus Corp. (ERF-T, “buy”) to $21 from $23.50. Average: $23.13.
- Headwater Exploration Inc. (HWX-T, “buy”) to $9.25 from $9. Average: $8.75.
- Tamarack Valley Energy Inc. (TVE-T, “buy”) to $5.50 from $6.25. Average: $6.02.
- Whitecap Resources Inc. (WCP-T, “buy”) to $12.75 from $14.50. Average: $13.48.
His other changes are:
- Athabasca Oil Corp. (ATH-T, “buy”) to $4.50 from $4. Average: $4.
- Freehold Royalties Ltd. (FRU-T, “buy”) to $19 from $20.50. Average: $20.28.
- MEG Energy Corp. (MEG-T, “hold”) to $26.50 from $25.50. Average: $26.
- Nuvista Energy Ltd. (NVA-T, “buy”) to $14.50 from $16.50. Average: $15.52.
- Spartan Delta Corp. (SDE-T, “buy”) to $6.50 from $7.50. Average: $9.30.
- Topaz Energy Corp. (TPZ-T, “buy”) to $27 from $28. Average: $27.25.
“We continue to favour oil-weighted producers in the near term and highlight that small- and midcap producers provide the most torque to our expectation for a robust oil price recovery,” he concluded. “That said, we believe investors should retain exposure to natural gas–weighted producers given our more constructive outlook on NYMEX and AECO prices moving into 2024. Our top picks are CVE (integrated oil), ARX (large-cap natural gas), CPG (mid-cap oil), AAV (small-cap natural gas), FRU (royalty) and ATH (oil sands).”
While the sale of a 40-per-cent stake in its Columbia Gas and Columbia Gulf assets to New York-based Global Infrastructure Partners (GIP) allowed TC Energy Corp.’s (TRP-T) to reach its divestiture target, National Bank Financial analyst Patrick Kenny thinks the price tag of $5.2-billion “falls short” and led him to reduce his expectation for future transactions.
“Although the deal achieves the company’s targeted $5.0-billion-plus asset sale program to be completed by the end of 2023, we note the 10.5 times price tag comes in slightly below our previously modelled 11.0 times assumption (10-12 times range), while the newly created JV reintroduces corporate complexity, which in turn reduces the quality of our consolidated AFFO/sh [adjusted funds from operations per share] forecast,” he said. “As such, although 2024 estimated D/EBITDA moves down to 5.2 times (was 5.7 times), we highlight on a proportionately consolidated basis, our 2024 estimated leverage ratio would only decline to 5.5 times, remaining well above the company’s near-term target of 5.0 times and longer-term 4.75 times.”
Mr. Kenny expects TC Energy will likely now “take a pause” on selling further assets until next year, noting: The Coastal GasLink project [is] now over 90 per cent complete (was 87 per cent in May) and on track for mechanical completion in Q4/23 for $14.5-billion, combined with S&P affirming its BBB+ credit rating (albeit maintaining Negative Outlook).”
“Overall, we continue to assume an incremental $5.0-billion of asset sales, but have trimmed our expected average transaction multiple from 11.0 times at 10.5 times, while also pushing back our expected closing date from Q4/23 to Q4/24,” he said.
Maintaining a “sector perform” recommendation for the company’s shares, Mr. Kenny trimmed his target by $1 to $53 due to the “slightly lower price tag.” The average on the Street is $58.91.
Elsewhere, CIBC World Markets’ Robert Catellier downgraded TC Energy to “neutral” from “outperformer,” calling the move “a big step forward” but warning “more work [needs] to be done.”
“The sale of a 40-per-cent equity interest in Columbia Gas and Columbia Gulf causes us to revise our asset sales valuation lower to 10.5 times from 11.0 times previously,” he said. “The implications are a reduction to our price target from $62 to $60, in turn causing us to downgrade our rating to Neutral from Outperformer. We see risks of leverage and execution of the CGL project as being roughly offset by potential upside to our price target. Successful execution of future asset sales could serve as a positive catalyst for the shares.”
Mr. Catellier’s target slid to $60 from $62.
Others making target changes include:
* Scotia Capital’s Robert Hope to $64 from $66 with a “sector outperform” rating.
“We see a number of puts and takes with the transaction, but overall we think the shares could regain some underperformance,” he said. “First and foremost, the transaction is very sizable and achieves management’s target of closing $5b+ of asset sales in 2023. This could increase competitive tension on the remaining asset sale processes and removes any downside scenarios where the company is a forced seller of assets. On the other hand, the 10.5 times EV/EBITDA multiple was lower than the market was expecting for a marquee asset such as Columbia. We update our model to reflect the specifics of the asset sale (we previously assumed whole asset sales for simplicity) and some other minor updates. The net result is our EPS estimates come down slightly. Our target price comes down $2 to $64 to reflect the lower-than-expected value of Columbia and our new estimates. TC Energy is trading at a 11 times forward EV/EBITDA multiple, which is toward the lower end of its four-year trading range, and we do not believe the market is reflecting the long-term value of its asset base.”
* BMO’s Ben Pham to $60 from $64 with an “outperform” rating.
“While the implied valuation was disappointing (10.5 times vs. our 12 times expectation) and could cause investors to re-evaluate sector valuations for our Canadian pipes coverage, the implied total return to our new target of $60 (vs. $64) is still attractive (esp. with the 7 per cent plus yield) and the $5B plus asset divestiture target for 2023 has effectively been largely de-risked (providing flexibility on the next round of asset sales),” said Mr. Pham.
* JP Morgan’s Robert Kad to $61 from $62 with a “neutral” rating.
CIBC World Markets’ diversified financials analyst Nik Priebe made a series of target price adjustments to stocks in his coverage universe on Tuesday.
“Overall, we don’t foresee the Q2 reporting cycle being quite as noisy as the preceding quarter (e.g., CIX, GSY, AD.UN) and are expecting mostly straightforward results, with the potential exception of ECN Capital,” he said.
He raised his targets for these stocks:
* CI Financial Corp. (CIX-T, “neutral”) to $18 from $13.50. The average on the Street is $19.50.
Analyst :”When CI reports Q2 results, we will be looking for an update on capital allocation priorities. According to SEDI filings, the company resumed share repurchases at an accelerated rate in May (i.e., following the announcement of the investment in the U.S. wealth platform). This follows two consecutive quarters of no buybacks as the company had elected to prioritize the allocation of excess free cash flow towards debt repayment. We had previously highlighted this activity here. We will also be looking for an update on the relative performance of longterm fund flows versus the industry (i.e., excluding contributions from the high-interest savings fund and other cash-like products). CI has been outperforming the industry on a longterm fund flows basis lately. Our investment performance tracker has detected a modest sequential improvement in both short- and long-term investment performance in Q2, which should help the company sustain its Morningstar ratings and fund flows performance.”
* Fairfax Financial Holdings Ltd. (FFH-T, “outperformer”) to $1,300 from $1,200. Average: $1,371.74.
Analyst: “When Fairfax reports Q2 results, we expect the company to announce a modest step-up in run-rate dividend and interest income related to the recent acquisition of a real estate construction loan portfolio from Pacific Western Bank. The net pickup on the annualized runrate is expected to be approximately US$120 million (versus a previous run-rate of US$1.5 billion). Separately, on May 10, Brit completed the sale of Ambridge. We are modeling a US$255 million pre-tax gain, which is consistent with management guidance and should not be a source of an earnings surprise. Public equity and bond markets were mixed in the quarter, but Fairfax’s share price was up 13 per cent (in USD) which should drive a gain for the total return swaps on Fairfax subordinate voting shares. In our view, a key catalyst for shares of FFH in 2023 could be a benign CAT season (particularly considering the exceptionally strong pricing environment for CAT-exposed property lines).”
* Goeasy Ltd. (GSY-T, “outperformer”) to $150 from $130. Average: $164.10.
Analyst: “We are not anticipating any major surprises with Q2 results. Revised commercial forecasts (incorporating the impact of a lower rate cap) were announced in May, and the company provided quarterly guidance on loan growth and credit performance nearly halfway through the quarter. The second quarter tends to be a period of elevated demand from a seasonality perspective, but this should be reflected in quarterly loan growth guidance of $175 million to $200 million. This guidance range appears reasonably conservative considering: 1) average quarterly loan growth over the past year was $209 million and 2) Q2 is a period of seasonally higher demand. The aggregate volume of consumer insolvencies in Canada continues to grind higher, but we would consider this data to be a better barometer than thermometer.”
* Onex Corp. (ONEX-T, “outperformer”) to $100 from $88. Average: $90.
Analyst: “Onex was active building balance sheet liquidity in the quarter with the secondary sales of Celestica (CLS-NYSE) and Ryan Specialty Holdings (RYAN-NYSE) shares. We hope to obtain better clarity on the intended “use of proceeds” when Q2 results are reported (e.g., share repurchases, capital recycling or other). After a brief approximately five-month pause, SEDI filings indicate that Onex resumed share repurchases in Q2. We recently upgraded shares of Onex to an Outperformer rating and see several levers available to address the NAV discount. After the leadership transition in May, Bobby Le Blanc signaled a clear intent to explore options and take action to address the market perception of Onex and accelerate value-creation plans for shareholders. We hope to hear more about this as the year progresses. With respect to NAV growth in Q2, public equity market multiples expanded with the S&P 500 increasing 8.3 per cent in the period and the S&P equal weight index advancing 3.5 per cent. This should have positive implications for the private marks (at least directionally).”
* Power Corp. of Canada (POW-T, “neutral”) to $39 from $37. Average: $40.38.
Analyst: “We consider shares of POW to be a NAV growth story as opposed to an ‘earnings-driven’ stock. As always, we are less concerned with the prospect of an earnings miss or beat, and more focused on corporate development updates, the performance of Power’s non-core portfolio holdings and changes to the corporate balance sheet and liquidity position.”
* TMX Group Ltd. (X-T, “neutral”) to $34 from $30. Average: $31.63.
Analyst: “From a technical perspective, TMX shares have recently broken out of their three-year trading range and the company has delivered six consecutive earnings beats (all with a positive share price reaction on the announcement date). We have no reason to speculate on the likelihood of a beat in Q2, but acknowledge that another positive earnings surprise (of a reasonable magnitude) could help sustain the momentum.”
Conversely, Mr. Priebe cut his targets for these stocks:
* ECN Capital Corp. (ECN-T, “neutral”) to $3 from $3.50. Average: $3.38.
“ECN shares have underperformed sharply over the past year,” he said. “The sale of Kessler Group in August 2022 was a negative catalyst and earnings expectations have compressed dramatically. In March, the company initiated a formal review of strategic alternatives, which is expected to reach a conclusion “before Q2 results in August.” In our view, the range of potential outcomes could include, but is not limited to: 1) an outright sale of the business; 2) the sale of a single operating subsidiary; 3) a counterparty making an equity investment and committing to become a large, multi-year, cornerstone funding partner; and 4) doing nothing at all. In this note, we feature a write-up discussing these potential outcomes and assessing their relative likelihood. We remain at a Neutral rating and are a bit cautious as we approach the conclusion of the review which has potential for an uncertain market reaction. However, any volatility (if it occurs) could create a good opportunity for investors to refresh themselves on the ECN story and reformulate an investment thesis in the context of whatever emerges.”
* Fiera Capital Corp. (FSZ-T, “neutral”) to $7 from $7.25. Average: $7.94.”
Analyst: “On a year-to-date basis, Fiera Capital’s share price has declined 22 per cent, more than any other name we follow in the Canadian financials space. We believe this has been largely driven by a few disappointing quarters (for various reasons) and a persistent pattern of net redemptions. The stock now offers a 13-per-cent dividend yield, but LTM free cash flow of $68 million (as of Q1/23) is lower than the annualized dividend obligation of $88 million. In order to see a recovery in the stock, we think it would require a combination of: 1) improving free cash flow, which was impacted in the LTM period by some one-time, non-recurring items; 2) a sustained recovery or stabilization of net flows; and 3) continued momentum in equity markets which would positively impact the beta-sensitive component of earnings and drive down the payout ratio. Long-term mutual funds remain in net redemptions in the retail channel however, which makes a recovery in net sales challenging. We would also like to obtain better confidence that the potential leakage from the PineStone relationship is limited and unlikely to result in an ongoing earnings drag.”
In response to recent share price appreciation, RBC Dominion Securities’ Geoffrey Kwan lowered his recommendation for TMX Group Ltd. (X-T) to “sector perform” from “outperform” on Tuesday.
“With the recent increase in the share price, the TMX’s shares now trade at approximately 20 times our NTM EPS [next 12-month earnings per share] forecast, which is slightly above its historical average. With an implied total return more in line with the average of our coverage universe and a more balanced risk-reward profile, we downgrade TMX,” he said.
“Why we were Outperform. Previously, we believed the shares offered an attractive mix of strong defensive attributes (which helped during the negative equity markets in 2022); a P/E multiple that was at the low end of its historical range; and the Company executing well on its growth strategy.”
Mr. Kwan maintained a $34 target, exceeding the $31.63 average.
“The industry backdrop remains mixed as Canadian derivatives trading volumes are improving, U.S. derivative trading volumes remain robust and Trayport continues to deliver strong revenue growth and the TMX has done a good job limiting expense growth,” he added. “However, listings activity remains weak and equity trading volumes continue to decline and haven’t yet shown signs of stabilizing (industry equity trading volumes are now slightly below pre-pandemic levels). With the recent share price increase, we view the shares as fairly valued and the risk-reward profile as more balanced. The TMX’s shares trade at ~20x our NTM EPS forecast, which is slightly above its historical average.”
Concurrently, in a report previewing quarterly earnings season for diversified financials, Mr. Kwan increased his target for EQB Inc. (EQB-T) to $91 from $88 with an “outperform” recommendation. The average on the Street is $87.38.
“Our Top 3 best ideas are: (1) Element Fleet; (2) Brookfield Asset Management; and (3) Brookfield Corp. Element Fleet is our #1 high-conviction best idea as it continues to deliver strong EPS and FCF growth, which should get a further boost from normalizing OEM production. EFN also has strong defensive attributes and remains attractively valued ... We like BAM for its growth potential and view BN as an attractive contrarian investment idea,” he said.
National Bank Financial analyst Cameron Doerksen expects a “challenging” end market will likely to continue to weigh on investor sentiment toward Cargojet Inc. (CJT-T).
Ahead of the release of its second-quarter financial results on Aug. 14, he thinks the Mississauga-based company remains “well positioned for longer-term growth,” however he believes “the dynamics in the broader air cargo industry remain challenging in the short term, which we view as a headwind for the share price to move higher.”
“FedEx recently reported its fiscal Q4 results (ended May) where its FedEx Express division saw total package volumes down 6.8 per cent year-over-year and total package revenues down 9.6 per cent year-over-year,” said Mr. Doerksen. “We also note that in its most recent Air Freight State of the Industry, DHL Global Forwarding highlighted a 5-per-cent year-over-year decline in global volume demand in June.
“According to IATA data, global demand for air freight was down 5.2 per cent year-over-year in May while capacity was up 14.5 per cent suggesting that the industry is broadly in an overcapacity position, noting that the increase in capacity is largely due to more belly capacity from passenger aircraft coming online, especially on international routes. Further contributing to the oversupply is the number of passenger-to-freighter conversions as of late, which is significantly higher than pre-pandemic.”
The analyst lowered his revenue and EBITDA expectations for the second quarter as well as full-year 2023 and 2024, trimming his growth assumptions for both years. He’s now projecting adjusted earnings per share for the quarter of $1.03, down from $1.10 but above the 96-cent consensus on the Street, with his full-year projections sliding to $4.81 and $5.44, respectively, from $5.09 and $5.87.
Maintaining a “sector perform” rating for Cargojet shares, he cut his target to $117 from $127. The average on the Street is $148.58.
“We remain positive on Cargojet’s longer-term growth prospects as we do expect a resumption in secular growth in e-commerce volumes once the market re-sets from the unsustainable growth seen during the pandemic years,” said Mr. Doerksen. “We also expect Cargojet will continue to add contracted ACMI aircraft withDHL, which supports revenue growth in 2024 and beyond. Short-term demand trends for the air cargo industry are more challenging, but we expect Cargojet to protect margins through cost controls and through the consolidation of flights within its domestic network.
“Valuation is also reasonable, with the stock currently trading at 7.4 times forward EV/EBITDA on our forecast, which is below the historical forward average for the stock at 11.4 times (which was skewed higher by lofty valuations during the pandemic period). However, current valuation is consistent with the air freight peer group average at 7.3 times forward EV/EBITDA, below UPS at 10.9 times, but more in line with FedEx at 7.7 times and well ahead of Air Transport Services Group (which has some similarities to CJT) at 4.4 times.”
In other analyst actions:
“Following a busy Q1 for Shopify, with restructuring and fulfillment exit, we look for a less eventful Q2,” he said. “Alternative data points suggest merchant adds may have slowed during 2Q, but we believe positive engagement trends (stronger web traffic, increased time spent on SHOP app by end consumers) point to continued share gains in the U.S. despite a weaker spending environment. Robust web traffic signals may show further signs of pushing adoption and/or conversions to Shopify Plus. We remain Neutral/High Risk-rated given overall softness in the e-commerce landscape and as SHOP already trades near the high-end of its peer group valuation range. We assume a 4-year revenue CAGR [compound annual growth rate] to FY27 of approximately 22 per cent (still above consensus) and a FY27 non-GAAP operating margin of 18 per cent, which, with our updated regression variables, increases our TP.”
* RBC’s Sabahat Khan raised his Finning International Inc. (FTT-T) target to $51, exceeding the $45.22 average, from $44 with an “outperform” rating.
“We maintain our positive view on Finning heading into Q2 reporting and are revising our 2023/2024 forecasts higher,” he said. “Relative to our prior forecasts, the upward forecast revision reflects stronger top-line and margins through 2023 and 2024. Our prior view reflected lower YoY top-line and earnings next year given the uncertain macro backdrop. We are now revising forecasts higher on the view that the current momentum can continue over the 2-3 years given strong demand across the company’s regions. At our recent Canadian AIT conference, Finning’s President and CEO, Kevin Parkes, highlighted the supportive operating backdrop and the healthy outlook for mining equipment in Chile. As of Q1/23, Finning’s backlog stood at a record $2.7-billion, and the company was already selling ‘workshop space’ into 2024. Earlier this year, Finning also eliminated 400 non-revenue-generating positions (of which 50 per cent were contractors), which improves its cost structure.
“We expect investor focus at Q2 reporting to be on: 1) broader demand outlook across the company’s regions and any early commentary on 2024; 2) operating backdrop in Chile and whether mining customers are ready to/ starting to ‘green light’ larger projects; 3) trends in the data centre market and the runway ahead; and, 4) any changes to capital allocation priorities given the strong recent share price performance.”
* Canaccord Genuity’s Tania Armstrong-Whitworth trimmed his target for Jamieson Wellness Inc. (JWEL-T) to $41.25 from $42 with a “buy” rating. The average is $43.41.
* Canaccord Genuity’s Yuri Lynk increased his Mattr Infratech (MATR-T) target to $24 from $20 with a “buy” rating. The average is $21.33.
“With its 45-per-cent year-to-date surge, Mattr shares have dramatically narrowed the significant valuation gap with peers we highlighted in our October 11, 2022 initiating coverage report,” he said. “We attribute the stock price move to the continuing inflection in the EBITDA of the core business, including a 50-per-cent year-over-year increase in Q1/2023. We also believe investors have largely priced-in the planned PPS monetization, which was supposed to have been announced mid-year. Based on our discussions with investors, a PPS sale price between $200 million and $250 million is widely expected, and we see low odds of the actual price falling dramatically outside this range.
“In anticipation of the sale we are benchmarking Mattr’s go-forward businesses to peers and see room for its valuation to continue to play catch-up. The growth rate and margin profile of the Composite Technologies and Connection Technologies segments compare favourably to peers that generally command much higher valuation multiples. We are therefore increasing our target valuation multiple to 9 times (from 6 times) applied to our 2024E EBITDA for the “go forward business”, plus our Q4/2023 net cash forecast including $250 million in potential PPS proceeds.”
“LTL [Less-than-truckload] stocks continue to trade at elevated levels as investors assess a potential downsizing of YELL,” he said. “We believe TFII could see outsized U.S. LTL volume tailwinds in a YELL restructuring given its similar low weight/shipment freight profile and available network capacity. However, not being a pure play LTL, valuation upside is likely more modest relative to peers.”
* Credit Suisse’s Andrew Kuske increased his West Fraser Timber Co. Ltd. (WFG-N/WFG-T, “outperform”) to US$106.50 from US$92.50 with an “outperform” rating, while he cut his Mercer International Inc. (MERC-Q, “neutral”) target to US$9.50 from US$10. The averages are US$108.83 and US$9.80, respectively.
“At the core, a spectrum of business models and volatility profiles exist in the Forest Products sector along with various types of end market exposure,” said Mr. Kuske. “There is a lot of focus on the U.S. housing market as a major portion of the sub-sector’s dynamics. With the “rate debate” (i.e. the timing of Central Bank reductions) ongoing, steep changes to the curve’s shortend played a key part in housing market uncertainty and reduced home prices. A negative pricing reset combined with prospective rate declines are supporting selected positives in housing markets. Some of those positives are evident with solid wood markets with a series of interesting near-term price increases in lumber and oriented strand board. These positives can be contrasted by an array of challenges facing pulp markets in a notoriously cyclical and often with rather accentuated moves. In that context, we revised forecasts and targets, but maintained ratings.”
“Our limited coverage in this sector provides options that includes: (a) Acadian Timber (ADN) offers relative defensive appeal along with underlying optionality on carbon value – that could be significant in the future; (b) Mercer International (MERC) faces margin headwinds in the pulp business and the target is trimmed to US$9.50 (from US$10); and, (c) West Fraser Timber Co. Ltd. (WFG) is Outperform rated and the target price increased to US$106.50 from US$92.50 with a stronger pricing market looking beneficial into H2 2023.”
* RBC’s Drew McReynolds trimmed his Street-high target for VerticalScope Holdings Inc. (FORA-T) by $1 to $11 with an “outperform” rating. The average is $6.54.
“While VerticalScope earnings are not immune to macro headwinds, we continue to view current levels as largely ‘trough-on-trough’ with the stock trading at an EV/EBITDA multiple of 6.6 times on FTM [forward 12-month] EBITDA of $21-million versus what we believe on a normalized basis (i.e., in the absence of cyclical headwinds) would be a 10.0-12.0 times multiple and FTM EBITDA of $40-million,” he said. “Although some patience will be required pending improved macro visibility and investor sentiment, such a trough-on-trough set-up has historically been an attractive accumulation opportunity for longer-term-oriented investors looking for high-quality names within the media sector.”