Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Vishal Shreedhar is expecting to see “significant” earnings growth from MTY Food Group Inc. (MTY-T) when it reports second-quarter results next month as the contributions from its recent acquisItions of BBQ Holdings Inc. and Wetzel’s Pretzels begin to surface.
However, he warned of a “more challenging” restaurant environment moving forward, pointing to a “good” backdrop in Canada but much more “mixed” conditions south of the border.
Mr. Shreedhar is projected adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $65-million, up 36.4 per cent year-over-year (from $47.6-million) and in line with the Street’s projection of $65-million. He attributes $16-million in EBITDA to the two new holdings. His forecasts for system sales of $1.434-billion and revenue of $299-million are also significant jumps from a year ago ($1.054-billion and $163-million, respectively).
“We model solid trends in Canada and the U.S. supported by: (i) acquisitions, (ii) organic growth initiatives across the business (broad-based digital/technology enhancements, new marketing approaches, new menu/store concepts, etc.), (iii) adequate consumer health in Canada (during the quarter), and (iv) inflation,” said Mr. Shreedhar.
“U.S. and Canada real restaurant growth continues to outpace real food store growth; this gap has narrowed since Q1/F21. We understand that traffic trends are positive in Canada, but tepid in the U.S. In April/May 2023, U.S. food inflation at home fell below restaurant menuinflation for the first time since we started tracking the data in February 2022.”
The analyst expects investors to be focused on the company’s store footprint, “seeking stability in the network.” He’s modelling neutral net store openings for the quarter.
“Our analysis of peer commentary from various North American restaurants indicates the following themes: (a) A more cautious consumer spending environment, as evidenced from continued trade-down. This is also resulting in a pressured delivery business (which is typically more expensive); (b) Persistent inflationary pressures on costs, albeit moderating sequentially; (c) Easing labour environment, resulting in higher store hours, (d) Lower check and mixed traffic, (e) Continued supply chain issues primarily impacting store development, and (f) A continued shift to away-from-home meal consumption (albeit moderating in our view),” he said.
With that backdrop, he lowered his 2023 and 2024 revenue and earnings projections. His full-year EPS estimates slid to $3.09 and $3.74, respectively, from $3.16 and $3.92.
That led him to trim his target for MTY shares to $69 from $74 with an “outperform” recommendation. The average on the Street is $70.36.
“Despite near-term headwinds, we remain constructive on MTY given good valuation, operational improvements and supportive capital allocation outcomes such as share repurchases and/or acquisitions (although we expect this to be limited in the near term),” said Mr. Shreedhar. “That said, we also acknowledge heightened risk related to inflation, supply chain, labour and general macroeconomic conditions.”
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Eight Capital analysts Adhir Kadve and Christian Sgro believe Enerprise Software companies have yet to benefit from the “arms race” in the technology sector to adapt to the use of Generative artificial intelligence, however they “see early evidence of momentum building.”
“In our view, the adoption and implementation of Generative AI solutions will be a secular growth theme within Enterprise Software and one which will dominate the technology narrative for the foreseeable future,” they said. “As technology companies harness the technology to bolster their offerings and accelerate growth, profitability and value creation, there will be a re-rate opportunity for well-positioned companies from 18-month valuation lows.”
In a research report released Tuesday titled Generative AI: Outlook and Opportunity, the analysts predicted generative AI could “outpace” previous technology cycles and will prove a “significant tailwind” for enterprise software companies with offerings in development or the market.
“We see a select group of companies within our coverage that will benefit from Generative AI, given significant increases in expected spending to adopt the technology, including Canadian bellwethers; OpenText, and Kinaxis,” they said. “Within that list, we see Docebo, WELL Health, and Coveo as outsized beneficiaries, given products in market and early evidence of product market fit.”
In all, the analysts recommended 13 companies for investors to gain exposure to the trend. They are:
* Open Text Corp. (OTEX-N, OTEX-T) with a “buy” rating and US$50 target. The average target on the Street is US$48.30.
Analysts: “Open Text has a broad suite of AI offerings including key products Magellan and Vertica (which was acquired via the Micro Focus acquisition). Recall that Open Text is a leader in Enterprise Information Management and as such the company leverages the significant data and information stored within an organization to unlock potential insights within that data by leveraging Large Language Models. The company recently showcased a Titanium X integration leveraging Google’s T5 open source model as well as OpenAI’s GPT.”
* Kinaxis Inc. (KXS-T) with a “buy” rating and $230 target. Average: $222.46.
Analysts: “Kinaxis’ long history in Machine Learning forms the backbone for the company’s responsive supply chain planning solution, improving forecasting and planning capabilities. Models are trained to respond to exogenous changes in supply signals and recommend corrective measures. The company’s Planning.AI solution detects and fuses heuristics, optimization, and machine learning to provide accurate agile recommendations. At the company’s recent Kinexions conference, Kinaxis teased the potential for upcoming Generative AI capabilities, including a chat interface, code creation, or auto-generated executive briefings.”
* Altus Group Ltd. (AIF-T) with a “buy” rating and $65 target. Average: $62.67.
Analysts: “Altus’ machine learning algorithms bring together disparate and unstructured inputs across the world of Commercial Real Estate (CRE) to provide property intelligence. Currently, there are no universal identifiers for real estate, such as a CUSIP for equities. Altus identifies properties, associates attributes within proprietary models that are actively maintained, and drives predictive insights for clients. Across advisory, tax, and valuation services, Altus generates immense exhaust data that we believe gives Altus a significant edge in maintaining its moat and driving value for customers. We see recent acquisitions and a full platform rebuild (including a push to a full Cloud offering) as driving the next leg of Altus’ analytics-fueled growth.”
* Docebo Inc. (DCBO-T) with a “buy” rating and $75 target. Average: $69.50.
Analysts: “: Docebo has built out native AI-functionality across the platform and has a Generative AI solution in-market. We believe Docebo has built its market leadership in corporate LMS by being innovative, and we think that AI has accelerated this journey by enabling a higher-touch and personalized learning experience at scale. Over the last several years, Docebo has built out its own language models that power its productized Generative AI tool as well as other content creation, tagging, and interactive content.”
* Well Health Technologies Corp. (WELL-T) with a “buy” rating and $10 target. Average: $8.20.
Analysts: “WELL’s unique positioning as a leading clinic network in North America creates an opportunity to aggregate, test, and integrate AI solutions to drive efficiency. The company’s AI Voice offering is a first example of a productized solution that automatically transcribes SOAP notes for practitioners (link to demo here). We see the potential for a product roadmap that ultimately provides a robust AI-assistant to doctors, enabled by WELL’s widely installed EMR and network.”
* Coveo Solutions Inc. (CVO-T) with a “buy” rating and $12 target. Average: $11.
Analysts: “In our view, Coveo Solutions offers investors a pure-play on the AI growth theme. Over the past 12 years, Coveo has leveraged AI to develop its Relevance Cloud platform. The platform is able to ingest, retrieve, and index massive amounts of data from several internal and external sources, such as Adobe PDFs, YouTube Videos, RSS feeds, and SharePoint, to name a few, while also incorporating clickstream data and behavioral patterns. This data is then fed into the company’s internally developed AI and ML models. The model will then be able to, in real-time, find context and surmise what users are searching for or what content or information they require to complete a given task.”
* Converge Technology Solutions Corp. (CTS-T) with a “buy” rating and $7 target. Average: $5.73.
Analysts: “Converge is a leading IT Service Provider for the mid-market, offering advisory, re-sell, and managed services solutions. The company’s advanced analytics practice has been a growth area for the company, with deep technical skills across data visualization, data integration, and other areas. Converge has a large team of data scientists and a diversified set of partner vendors, offering expertise and recommendations that add substantial value to mid-market clients.”
* D2L Inc. (DTOL-T) with a “buy” rating and $11 target. Average: $10.79.
Analysts: “For the last 10+ years, D2L has offered AIbased capabilities in products natively and through solutions partners. Current native AI capabilities adapt learning paths based on the learner’s performance, and predict the likelihood of learner success. AI-based solutions partners are integrated to detect plagiarism, provide audio-video captioning, translations, etc. New capabilities in development are leveraging Generative AI to improve instructor and learner efficiency and outcomes. For example, auto-generating quizzes for learner evaluation.”
* Propel Holdings Inc. (PRL-T) with a “buy” rating and $15 target. Average: $13.13.
Analysts: “Artificial Intelligence permeates throughout Propel’s business. The company uses AI to improve its underwriting posture and the performance of its operations. On the former, its AI underwriting model has been in use for the past decade and is able to evaluate a borrower’s ability to repay their loans, using variables beyond a traditional credit score. This results in insights that can identify a creditworthy borrower who otherwise would be deemed uncreditworthy. Furthermore, AI is also used in customer acquisition, where Propel draws insights on customers they believe will better convert based on their marketing efforts. Within their operations, Propel is leveraging AI to improve their customer service. They leverage the use of Speech Recognition technology to understand the levels of customer service that their representatives are providing and thus constantly improve training methods.”
* MediaValet Inc. (MVP-T) with a “buy” rating and $2.50 target. Average: $1.93.
Analysts: “MediaValet has been working with Microsoft’s AI engines for ~5 years, developing their own Cognitive Metadata Framework for Digital Asset Management (DAM). This includes integrating to run assets through AI engines/tools, pull back AI-generated metadata, ingest the metadata and associate it with the asset, and then make it searchable. MediaValet offers a full spectrum of AI capabilities for customers, including Optical Character Recognition (converting typed, handwritten, or printed text into machine-encoded text), FACE recognition (launching now), among others.”
* Wishpond Technologies Ltd. (WISH-X) with a “buy” rating and $1.30 target. Average: $1.70.
Analysts: “Wishpond enables high-value and costeffective SMB marketing, which makes the platform well-suited to incremental AI and automation tools. The company already has an AI Website Builder solution on the market and provided a demo at their recent investor day. Leveraging OpenAI’s platform, the tool generates a completely customized landing page for SMBs within minutes. The company’s public future development roadmap includes tools that will drive efficiency, such as an AI powered email responder and marketing newsletters.”
* Sabio Holdings Inc. (SBIO-X) with a “buy” rating and $3.50 target. Average: $3.06.
Analysts: “Operating a Connected TV ad ecosystem, Sabio has incorporated AI capabilities primarily into the insights engine it offers customers like brands and agencies. Leveraging ML, Sabio sifts through user data for interest and behavioral patterns, categorizes these audiences into targetable segments, and then delivers highly personalized ads. Also in play today are predictive analytics, which read historic trends to forecast and optimize ad performance.”
The analysts also recommended Quisitive Technology Solutions Inc. (QUIS-X). They are currently under research restriction on the Toronto-based firm.
“As a reseller of Microsoft services and solutions, Quisitive is able to help clients identify and implement AI solutions. Quisitive has commented on opportunities to wrap AI into its own IP (including healthcare solutions) as well as improve the data digitization journey for customers. Quisitive is seeing customers and C-Suite executives explore AI solutions to build value in both revenue generation and cost optimization (labor, supply chains, and operation efficiencies). Within Quisitive’s payments offering, PayiQ, the company expects AI to enable insights and the commercialization of payments data.,” they said.
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Raymond James analyst Steve Hansen thinks calibration “represents a powerful (& widely underappreciated) new theme” in the North American collision repair sector, and it is one that “disproportionately benefiting nimble multi-store-operators (like Boyd Group Services Inc.) that strategically leverage their network to in-source this high-value workflow.”
“Vehicles rolling off today’s OEM production lines are vastly more complex than their siblings only a few years younger, an evolution driven by the rapid adoption of complex ADAS (Advanced Driver Assistance Systems) and related safety/technology packages into most new platforms,” he said. “However, for all their benefits, these same systems are highly vulnerable to collision events, and thus require precise tuning (‘calibration’) following a repair to ensure proper functioning.”
After a recent client event with an executive from Mitchell International Inc., a California-based developer of auto software, Mr. Hansen sees the potential for the U.S. calibration industry to increase four-fold by the end of 2025.
Based on that growth, Mr. Hansen thinks calibration and “corresponding tailwinds” will benefit Winnipeg-based Boyd (BYD-T) over the next three or more years.
“We see calibration providing a multi-year same-store-sales growth (SSSG) tailwind estimated at approximately 1.5 per cent pet year (with upside potential),” he said. “Together with sustained labour/complexity/inflation tailwinds impacting the traditional repair business, we expect Boyd’s consolidated SSSG will remain elevated through both 2024/2025 (7-8 per cent). We also see calibration adding up to 50 basis points in gross margin through 2025 as the company: 1) in-sources previously outsourced calibration flow; and 2) continues to scale its in-house calibration services.”
Citing “increased confidence in our macro and company-specific outlook associated with this emerging calibration theme,” Mr. Hansen raised his target for Boyd shares to $285 from $275, reiterating a “strong buy” recommendation. The average on the Street is $263.85.
“While our 2023/24 estimates remain largely unchanged, the aforementioned dynamics provide us with incremental conviction in Boyd’s ability to: 1) deliver above-average SSSG throughout our forecast horizon; 2) recapture normalized margins over time (with potential upside); and 3) re-accelerate its M&A flywheel,” he said.
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In a separate note, Mr. Hansen made further downward revisions to his financial estimates for Methanex Corp. (MEOH-Q, MX-T) based on “sharply lower global methanol prices and a corresponding widening in the expected discount rate.”
“Global methanol prices have corrected sharply lower over the past several months, drawing pressure from a confluence of negative forces that include: 1) a weaker-than-expected Chinese economy; 2) sluggish MTO margins; 3) sliding domestic coal prices (leaning on cost curve); and 4) plentiful supply originating from the Middle East (Iran),” he said. “For context, global spot prices have slipped 20 per cent quarter-to-date, 25 per cent year-to-date, and 50 per cent vs. their ‘fly-up highs’ observed in Oct-2021, with all three regions recently posting new multi-year lows. Not surprisingly, Methanex’s posted contract prices have adjusted lower in tandem, although we still expect further declines ahead given the vast spot-contract spreads that have emerged.”
“As suggested, spot-contract spreads have blown out (again) in recent months following the swift drop in spot markets, a pattern we expect to drive Methanex’s reported discount rate higher in its 2Q23/3Q23 prints. To illustrate this point ... the dramatic surge in the NA spot-contract spread, currently perched at 56 per cent ($241/mt), one of the highest levels on record. We have increased our discount rate assumptions accordingly.”
Lowering his 2023 and 2024 earnings per share estimates to US$1.87 and US$3.99, respectively, from US$3.35 and US$5.80, Mr. Hansen trimmed his target for Methanex shares to US$50 from US$58 with a “market perform” rating. The average is US$52.64.
“While we continue to admire the company’s robust FCF capabilities, compelling growth outlook (G3), and pledge to return excess cash to shareholders, we reiterate our MP3 rating based upon our lingering concerns over stagnant demand intersecting with ample supply — a pattern likely to carry through much of 3Q23. We will continue to monitor accordingly,” he said.
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Raymond James analyst Rahul Sarugaser raised his valuation for Victoria-based Eupraxia Pharmaceuticals Inc. (EPRX-T) following the release of the results of its Phase 2b clinical trial for its EP-104IAR treatment for pain associated with knee osteoarthritis, seeing “franchise potential.”
“We believe EP-104IAR’s strong safety profile will lead to a bilateral knee + repeat-dosing label, combined with extended duration of pain relief toward 24 weeks (well beyond Zilretta’s),” he said.
Emphasizing “a repeat-administration label would set EP-104IAR apart as the only drug on market for treatment of OA with such a label,” Mr. Sarugaser hiked his target for Eupraxia shares to $17 from $11, keeping a “strong buy” recommendation. The average is $18.33.
Elsewhere, Canaccord Genuity’s Tania Armstrong-Whitworth raised her target to $13 from $5.75 with a “speculative buy” rating, seeing a reduced risk.
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In other analyst actions:
* Jefferies’ Owen Bennett cut his Canopy Growth Corp. (WEED-T) target to 61 cents from $3.65 with a “hold” rating. The average is $1.78.
* TD Securities’ Craig Hutchison raised his Denison Mines Corp. (DML-T) target to $2.50 from $2.25 with a “speculative buy” rating, while Raymond James’ Brian MacArthur lowered his target to $2.40 from $2.50 with an “outperform” rating. The average is $2.54.
* Following the payout of the $9.50 per share special dividend attached to the sale of Montney assets to Crescent Point, Stifel’s Cody Kwong cut his target for Spartan Delta Corp. (SDE-T) to $6.25 from $18 with a “buy” rating, while ATB Capital Markets’ Patrick O’Rourke lowered his target to $6 from $16.50 with an “outperform” recommendation. The average is $9.44.
David Leeder