Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Cameron Doerksen sees demand for trans-Atlantic flights remaining “strong” for the key summer season this year, however he expects “some pricing pressure” to weigh on Canadian airlines due to increased capacity.
“The trans-Atlantic (Canada to Europe) has historically been an important market for Canada’s air carriers and is one of the largest drivers of profitability in the peak summer period,” he said in a research note. “In the first full post-pandemic summer for air travel, last summer saw exceptionally strong demand and pricing for Canada’s airlines on routes to Europe and one of the key questions for 2024 is whether that strength can be sustained.”
“Our analysis of the trans-Atlantic market for summer 2024 shows total planned industry seat capacity between Canada and destinations in Europe up 13.6 per cent year-over-year and up 11.3 per cent against 2019. Air Canada’s trans-Atlantic summer seat capacity is scheduled to be up 5.3 per cent year-over-year and 4.1 per cent ahead of 2019. Transat’s seat capacity is projected to be up 13.1 per cent year-over-year and 0.1 per cent higher than 2019.”
Mr. Doerksen said a January survey of select trans-Atlantic routes showed fares for the peak summer period were “generally mixed but overall, not significantly different year-over-year,” however a late-February survey showed “a more meaningful decline” in prices year-over-year.
“However, we would highlight that our fare survey only covers routes to Northern Europe, but on its Q4 earnings call, Air Canada noted that travel to Southern European destinations is seeing considerable strength with forward bookings running ahead of last year, so the company’s trans-Atlantic yields this summer will likely not be as negatively impacted as what our fare survey suggests,” he said. “We expect Transat may also be seeing similar strength on Southern European destinations (Transat will provide an update on its Atlantic demand and yields with its fiscal Q1 results to be released on March 14th). Additionally, while fares from our most recent survey show a more meaningful year-over-year decline in pricing than what was seen in our initial check, we note that prices have still generally increased from January to now (albeit not to the same magnitude as was seen last year).”
He maintained an “outperform” rating and $31 target for shares of Air Canada (AC-T). The average target on the Street is $29.09.
“The trans-Atlantic market accounted for 36 per cent of Air Canada’s total passenger revenue in Q2 and Q3 last year (up from 30 per cent in the same quarters of 2019) and will likely still be one of the most important contributors to profits this summer,” the analyst said. “While we believe that prices in the summer will come under some pressure due to higher industry capacity and AC will also face very tough year-over-year comparisons on routes to Europe, if transAtlantic market conditions should weaken, the airline has the flexibility to shift capacity to other international markets.”
Mr. Doerksen kept an “underperform” recommendation and $3.25 target, below the $4.20 average, for Transat AT Inc. (TRZ-T).
“Last summer the trans-Atlantic represented 70 per cent of Transat’s total revenue in its fiscal Q3 and Q4 (May-October) and remains by far the most important driver of yearly profits for the company,” he said. “Transat is adding materially more capacity to Europe this summer, which should drive higher revenue, but our current forecast also assumes some modest yield deterioration. We remain cautious on Transat shares as we await the company’s refinancing plan that we suspect could lead to dilution for existing equity holders.”
=====
While Thinkific Labs Inc. (THNC-T) topped the Street’s expectations for its fourth-quarter 2023 financial results and release a “slightly improved” outlook for the current quarter, ATB Capital Markets analyst Martin Toner downgraded its shares to “sector perform” from “outperform,” citing a low return to his target price.
After the bell on Monday, the Vancouver-based company, which provides a platform for entrepreneurs and businesses to create and run online courses, reported consolidated revenue of $15.6-million, up 13 per cent year-over-year and ahead of the consensus estimate of $15.2-million. Adjusted EBITDA of $0.6-million was also better than anticipated ($0.3-million).
Thinkific’s revenue guidance for the first quarter of 2024 came in at $15.8-$16-million, implying growth of 12.0-13.5 per cent and in line with projections.
“The Company posted a second consecutive top-line and bottom-line beat of its previously issued guidance, driven by strength in Plus, Payments, and Commerce,” said Mr. Toner. “The Company has seen better-than-expected adoption in value-add features such as its tax solution and bundling features, helping to drive topline growth while paid customer growth slowly resumes. The beat in adjusted EBITDA was again driven by declining operating expenses, which were down nearly 20 per cent year-over-year and flat quarter-over-quarter, showing the Company’s cost discipline. The Company posted its fifth consecutive quarter of paid customer growth, and while the 400 added customers in Q4 represent the largest quarterly gain since reacceleration, it represents a soft level in comparison to the COVID years. Management highlighted its confidence in topline growth stabilization, and believes that as the Company continues to refine its goto-market strategy and increase investments into topline growth, topline growth will reaccelerate in 2024 and heading into 2025.”
Raising his target for Thinkific shares to $4.50 from $4, Mr. Toner says he will now “look for evidence that efforts to convert the top-of-funnel pipeline are translating into paying customer growth, which would significantly improve the long-term growth outlook.” The average on the Street is $4.78.
“We believe the current share price reflects Thinkific’s lack of liquidity, a deterioration in growth and a general lack of demand for less profitable growth assets,” he said. “We believe there is a countercyclical element to the business, since during periods where the employment outlook is poor, people will seek out selfemployment and use Thinkific’s platform, which we incorporate into our discount rate. The market for Creator platforms is crowded and nascent. There are a number of credible competitors as well as capital entering the market. For these two reasons, Thinkific has one of the highest weighted average costs of capital (WACC) in our coverage universe.”
Conversely, Canaccord Genuity’s Robert Young upgraded Thinkific to “buy” from “speculative buy” with a target of $5, rising from $4.25, citing “growing confidence in leading indicators of future growth.”
“Thinkific reported Q4 results with a continued rebound in sequential ARR [annual recurring revenue] and paid customer adds, key leading indicators of future growth, in our view, alongside Q1 guidance ahead of our model but in line with consensus. Notably, the company reported positive EBITDA for a second consecutive quarter, staying true to its commitment to profitable growth,” said Mr. Young.
Other analysts making target changes include:
* BMO’s Thanos Moschopoulos to $4 from $3 with a “market perform” rating.
“We’re encouraged by THNC’s success in ramping its Commerce (payments) revenue and by the sustained strength in the Plus business. We also view the stock’s valuation as undemanding. However, we’d like to see better growth in THNC’s SaaS revenue prior to taking a more constructive view,” he said.
* TD Securities’ Daniel Chan to $4 from $2.50 with a “hold” rating.
* National Bank’s Richard Tse to $4.50 from $4 with an “outperform” rating.
=====
While acknowledging Canadian Natural Resources Ltd. (CNQ-T) has outperformed its North American large cap oil-focused E&Ps and Integrated peers over both the short and long term, Stifel’s Michael Dunn emphasized its “near-best-in-class regular dividend yield on best-in-class reserve life and a strong balance sheet.”
“CNQ’s regular dividend yield is well above average, even though it has by far the longest proved developed reserve life, and we’d argue a better than average balance sheet considering its low decline rate and relatively low sustaining capital requirement,” he said.
“We continue to consider the company the gold standard amongst the largest North American domiciled oil producers, based on a very long track record of value creation, and an enviable go-forward outlook.”
In a research report released Tuesday, Mr. Dunn updated his financial projections for the Calgary-based company in response to its fourth-quarter 2023 results, resulting in a 0.7-per-cent reduction to his adjusted funds from operations estimate on “reduced mined production estimates partially offset by increased conventional liquids production forecasts.”
However, he increased his target for its shares to $110 from $100 with a “buy” recommendation. The average is $99.04.
“The list of major global oil and gas companies with long-term track records of value creation rivaling CNQ is scarce to zero,” he said. “Its FCF generation is driven by its low-cost structure, long-life assets, and low decline rate, while its Management and Board have a long track record of execution on operational, strategic, and M&A initiatives. It seems clear that elements within CNQ that have contributed to its long-term success over the years (i.e., management and corporate governance structures, corporate culture, succession planning success, lean operations, strategic astuteness) are difficult, if not impossible, for the rest of industry to replicate. The company has raised its dividend for 24 consecutive years, and recently shifted to targeting the return of 100 per cent of its FCF to shareholders.”
=====
Even with a “peer-leading” share price jump of 22 per cent thus far in 2024, Scotia Capital analyst Cameron Bean sees “considerable upside” in Advantage Energy Ltd. (AAV-T) stock.
“In our view, the company is well positioned to deliver best in class per share growth over the next several years based on the company’s top quality Montney asset base, low operating cost structure, clean balance sheet, and active share repurchase program,” he said.
After the bell on Monday, the Calgary-based company released fourth-quarter 2023 results that Mr. Bean deemed to be “solid” following pre-reporting production and capex in early February.
“Adjusted Funds Flow and Free Cash Flow came in 5 per cent ahead of consensus on higher-than-expected NGL price realizations,” he said. “The company also delivered on its commitment to reduce capex, trimming the 2024 budget by 15 per cent, while maintaining production guidance at the original level. Year-end 2023 PDP reserves were up 8 per cent, with outsized oil and NGL growth on reasonable FD&A costs.”
Reiterating his “sector outperform” recommendation for Advantage shares, Mr. Bean bumped his Street-high target to $17 from $16. The average is $12.34.
Elsewhere, RBC’s Michael Harvey raised his target to $11 from $10, keeping a “sector perform” recommendation.
“FY23 results were solid and in line with street estimates with capex revised downward (on low gas prices); both corporate volumes and capex cut were pre-released,” said Mr. Harvey. “Additionally, the company provided a reserves update which was highlighted by 2P reserves up 4 per cent year-over-year and PDP up 8 per cent, punctuated by FD&A costs which remain below $9/boe [barrel of oil equivalent]. Managing low gas prices remains top of mind with select hedges added and capex trimmed; we now see the company generating roughly $60-million in FCF (3-per-cent FCF yield) during 2024 at strip pricing.”
=====
Citing reduced balance sheet risk and a better potential upside to its shares’ current level, Beacon Securities analyst Ahmad Shaath upgraded Geodrill Inc. (GEO-T) to “buy” from “hold” despite weaker-than-anticipated fourth-quarter 2023 financial results.
“The main catalyst that will help GEO shares recapture better valuation remains meaningful contract wins with big clients,” he said. “With the audited results, and the risk of more meaningful A/R collection issues out of the way, we should expect GEO’s valuation to at least stop deteriorating over the coming months. Shares currently trade at EV/EBITDA (next 12 months) of just 1.9 times, which is the low end of the historical range.”
On Monday before the bell, the West Africa-focused driller reported revenue of $30.1-million and adjusted EBITDA of $3.4-million, missing Mr. Shaath’s estimates of $32.4-million and $2-million, respectively. He attributed the miss to “less-than-forecast amounts recognized under the expected lifetime credit losses line.”
“The company ended the quarter with a net cash position of $3.6-million, up modestly from $3.5-million at the end of Q3/FY23,” the analyst said. “The audited annual results showed net A/R aged more than 90 days stayed relatively stable at $9.8-million (vs. $9.3-million at the end Q3/FY23). Overall, the company still has a gross amount of A/R aged more than 90 days of $15.2-million (47 per cent of it’s A/R balance). To that end, management is seeing promising signs on the collections front as it continues to drill for many of these clients on a 7-day grace period. All these clients have longstanding relationships with GEO and in turn the company aims to help them produce the drill results they require to help unlock value at their properties, with a view to collect most of their outstanding balance over time.”
Expecting Geodrill’s top line to show growth after shifted its focus to Tier-1 senior mining clients “in order to minimize collection issues in the future,” Mr. Shaath maintained his forecast and raised his target for its shares to $2.25 from $1.90. The average on the Street is $3.08.
“The revised TP is mainly benefiting from rolling forward our EBITDA that now excludes meaningful A/R credit losses,” he said.
=====
Coming off a research restriction following Rogers Sugar Inc.’s (RSI-T) $117.9-million bought deal public offering, National Bank Financial analyst Zachary Evershed sees its valuation as “seemingly full as the company embarks on a capex cycle with a payoff in 2026.”
“As clearly telegraphed by management, the net proceeds of the offering will be used to fund a portion of the Eastern Canada expansion project undertaken by the company’s wholly owned operating subsidiary Lantic,” he said. “The equity funding tops up the loans from Investissement Québec to Lantic for up to $65-million and the ~$175-million available under the company’s credit facility as at FQ1, leaving a comfortable cushion above the expected $200-million total investment for the project (initially $160-million as of Q3/22). The investments will see Lantic’s Montreal facility’s capacity rise by 20 per cent (100k metric tons, 10-per-cent consolidated) once the project is complete, and improve logistical infrastructure in Montreal by adding a new bulk rail loading station, and in the Greater Toronto Area by increasing storage capacity to serve the Eastern Canada market. Management intends to use the over-allotment proceeds for working capital purposes.”
Awaiting “a better entry point,” Mr. Evershed reiterate a “sector perform” recommendation and $6 target for Rogers Sugar shares, noting “this financing event was by no means unanticipated.” The average on the Street is $6.06.
Elsewhere, Desjardins Securities’ Frederic Tremblay resumed coverage with a “hold” rating and $6.25 target.
“Including its access to debt, the company looks well-funded to advance this important project, which is expected to come online in 1H FY26,” said Mr. Tremblay.
“We reiterate our Hold rating as we see higher total potential returns elsewhere in our coverage.”
=====
Desjardins Securities analyst Frederic Tremblay sees Frontier Lithium Inc.’s (FL-X) announcement of a definitive agreement with Mitsubishi Corporation to establish a joint venture partnership for its PAK lithium project and planned lithium chemicals conversion facility as a “significant milestone,” touting the near-term nature of the financing and “quality” of the strategic partner.
“Mitsubishi will acquire an initial 7.5-per-cent interest in the PAK lithium project for $25-million, which will meaningfully enhance Frontier’s financial position (FL’s cash position was $15.5-million at the end of December 2023) and is expected to be sufficient to cover expenses related to the definitive feasibility study (DFS),” he said.
“In addition to the DFS and the potential for Mitsubishi to increase its JV interest to 25 per cent, we view infrastructure development as a key success factor. We continue to wait for updates on this front and would welcome government support. Management expects the DFS (Phases 1 and 2) to be completed by mid-2025 and envisions first production of spodumene concentrate in 2027.”
Awaiting further clarity on other project milestones, Mr. Tremblay maintained a “buy” rating and $2.50 target for the Sudbury, Ont.-based company’s shares after minor increases to his EBITDA and cash flow projections for 2024. The average is $3.28.
=====
In other analyst actions:
* Ahead of the March 20 release of its results, BMO’s Tamy Chen hiked her Alimentation Couche-Tard Inc. (ATD-T) target to $91 from $81 with an “outperform” rating. The average is currently $88.71.
“The stock’s rally has us worried about expectations heading into FQ3/24,” she said. “Industry sample data suggest same-store U.S. fuel volumes may have deteriorated so far in 2024, and we wonder if the Street’s U.S. fuel margin assumption beyond FQ3/24 is somewhat optimistic. Remain Outperform as we still like the medium-term story, but there may be near-term volatility. Stock ranks lower in our pecking order.”
* Stifel’s Cody Kwong bumped his Bonterra Energy Corp. (BNE-T) target to $8.25 from $8 with a “buy” rating. The average is $8.44.
“Last year it was BNE rolling out its surprise Montney position in Valhalla, and, for an encore, the company has just rolled out a new core position in the Charlie Lake play, where it has aggregated 116 net sections of land,” he said. “Through two years of stealthy land sale activity preceding its recently closed $24.1-million acquisition, BNE is now stretching its legs outside its legacy Cardium position, and adding some sizzle in a couple of western Canada’s hottest plays. We expect a foray into the high-profile Charlie Lake play will significantly increase the relevance of this illiquid stock that trades at a deep discount to its small-cap peers. With heightened catalysts, enhanced growth prospects, and a significant upgrade in quality/depth of drilling inventory, we are increasing our target.”
“Those remembering BNE headed into the COVID-19 downturn as an over-levered company with major commitments to its banking syndicate, ugly hedging book, and declining asset base should now take a second look at where the company is today, in our opinion. Its net debt has been reduced substantially, volumes are back on the rise, and it now has the flexibility to look at acquisition opportunities, new play concepts, and contemplate the reintroduction of a dividend policy. Many of its peers went through this positive catalyst stream last year, which now leaves BNE as a company we believe will be a differentiated outperformer over the next 12 months.”
* Stifel’s Ian Gillies increased his Doman Building Materials Group Ltd. (DBM-T) target to $11 from $9.25 with a “buy” rating. The average is $9.71.
“Doman has executed a bolt-on transaction of Southeast Forest Products, which will strategically improve their operations in the U.S. through the expansion of existing geographies in the South and Midwest. We estimate the transaction to be 9.0-per-cent accretive to our 2025 estimated EPS. Doman has done a good job post pandemic of structurally improving EBITDA margins (23-25E 8.0 per cent, 17-19: 5.6 per cent) and ROE (23-25E 12.5 per cent, 17-19: 7.8 per cent), which should result in a higher trading multiple. We are increasing our target price ... due to higher estimates and modestly increased target multiples that better align with historical averages.”
* RBC’s Irene Nattel cut her Park Lawn Corp. (PLC-T) target by $1 to $24, below the $25.25 average, with an “outperform” rating.
“Adjusting forecasts to reflect sale of underperforming assets, M&A expectations, and fine-tuning operating assumptions, including a more gradual recovery in the death rate through 2024,” she said. “The net result is mid-teens EBITDA reduction across our forecast horizon; three-year EBITDA/EPS CAGR [compound annual growth rate] to 2026 10 per cent, in our view highly achievable, which should underpin a floor on valuation and contribute to an improvement in investor sentiment. With stabilizing organic performance, key caveat is the cadence and magnitude of forward M&A; our F24– 26 forecasts average midpoint of range but back-end loaded.”
* Canaccord Genuity’s Mike Mueller increased his Topaz Energy Corp. (TPZ-T) target to $28.50 from $27.50 with a “buy” rating. The average is $26.58.
“TPZ is one of the most attractive ways for investors to play WCSB development and benefit from the implicit growth outlined by its key payors while collecting a healthy 6.3-per-cent dividend,” he said.
David Leeder