Inside the Market’s roundup of some of today’s key analyst actions
Stifel analyst Martin Landry saw the first-quarter financial results from Premium Brands Holdings Corp. (PBH-T) as a “good start” to 2024, calling its ability to increase its EBITDA on a year-over-year basis for 15 consecutive quarters “an impressive feat given the slow economic growth in Canada.”
Before the bell on Monday, the Vancouver-based company reported revenue of $1.462-billion, up 2 per cent year-over-year and ahead with both Mr. Landry’s $1.451-billion estimate and the consensus of $1.456-billion. The beat was driven by a “strong” performance from its the Specialty Foods segment in the U.S., which grew organic volumes at a 9.7-per-cent pace and offsetting softness within the Distribution segment. However, higher interest, depreciation and amortization expenses led to a 16-per-cent drop in earnings per share of 54 cents, matching the Street’s expectation and 6 cents higher than Mr. Landry’s forecast.
“Following a difficult Q4/23 performance in Canada, with revenues down 7.5 per cent year-over-year, PBH increased promotional activity,” he said. “This appears to have paid off in Q1/24 with revenues in Canada increasing 1.6 per cent year-over-year. The Specialty Foods segment grew organic volumes by 1.1 per cent year-over-year, a significant improvement vs. the 4.4-per-cent year-over-year decline reported in Q4/23.”
Mr. Landry thinks “significant” price inflation passed along to customers at quick service restaurant (QSR) chains stemming from weaker demand in recent quarters has created opportunities for Premium Brands.
“While this appears to be a headwind for PBH in the short-term given its exposure to the channel, over time, management sees an opportunity for PBH to further help QSR chains reduce menu inflation with lower-cost alternatives and product innovation,” he said. “Management mentioned that interest for PBH’s services is increasing as a result of the aforementioned.”
Touting a “healthy” acquisition pipeline,” he added: “PBH’s acquisition pace has been muted in the last 24 months as management was focused on expanding capacity internally. Now, with a more constructive operating environment and valuation multiples declining, management appears more willing to act on acquisitions. The purpose of M&A would be to add capacity in the U.S. in areas where the company is short on capacity.”
Maintaining a “buy” recommendation for the company’s shares, Mr. Landry raised his target to $106 from $104. The average target on the Street is $112.10.
“Management mentioned that 10-per-cent EBITDA margins could be realized in 2025, two years earlier than the company’s 5-year plan suggests,” he added. “While Q1/24 EPS declined 16 per cent year-over-year on higher D&A and interest expenses, these headwinds should start to abate in the coming quarters and EPS growth should return in Q3/24. On the back of these results, we increase our 2024 EBITDA estimates while leaving our 2024 EPS mostly unchanged.”
Other analysts making target adjustments include:
* Desjardins Securities’ Chris Li to $106 from $105 with a “buy” rating.
“1Q results were solid with better-than-expected EBITDA margin expansion from SF (up 90 basis points vs our estimate of up 50 basis points) and PFD (up 40bps vs our estimate of down 120bps),” said Mr. Li. “In SF, strong growth in the US continued, with sequential improvement in Canada. Despite recent weakness from a key customer, 2024 guidance was affirmed. All capacity to meet 2024 guidance is in place and the focus is on execution. Near-term, we expect the shares to be range-bound pending better macro and leverage visibility. We maintain our positive long-term view.”
* National Bank’s Vishal Shreedhar to $112 from $110 with a “sector perform” rating.
* RBC’s Sabahat Khan to $101 from $99 with a “sector perform” rating.
* CIBC’s John Zamparo to $103 from $97 with a “neutral” rating.
* TD Cowen’s Derek Lessard to $125 from $130 with a “buy” rating.
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Citing a lack of near-term per unit growth and catalysts, Scotia Capital analyst Mario Saric downgraded RioCan REIT (REI.UN-T) to “sector perform” from “sector outperform” previously.
“The challenge has been and still is the relatively short-term vs. long-term outlook for REI, in our view,” he said. “Long-term, we think REI’s portfolio (and disclosure) is vastly superior to the past, which the team deserves credit for, including creating RioCan Living (via development, as opposed to acquisition ... for us). Occupancy and lease spreads are pretty much as good as they’ve been . On the other hand, despite that, our flat 2023-2025 estimated AFFOPU CAGR [adjusted funds from operations per unit compound annual growth rate] (ex. residential gains) = a PEG ratio that is n/a or 3.7 using just 2025 or 3.6 including gains (vs. Retail 3.3 average), on elevated near-term debt maturities that is simply hard to overcome at current market rates (AFFOPU CAGR would be 3 per cent ex. refi).”
In justifying his rating change, Mr. Saric emphasized what he sees as “limited” recurring AFFOPU growth through 2025 due tos higher interest expenses.
“We’re at or above consensus FFOPU through 2025 (incl. gains),” he noted. “That said, REI no longer stands out on ‘mean reversion’ due to our lower AFFOPU estimates, something we’ve cited several times in the past. .... REI AFFO yield spread to 10-year now looks more reasonable in the context of less forecast growth and above-historical-avg. leverage (by 0.5 times); the implied cap spread is tighter than avg. (reasonable given ownership of new Apartments). Having sold multiple high-cap rate (low growth) assets in the past 5 years, REI acquisitions > dispositions recently, contrary to market preference for “FFOPU-accretive and debt-lowering dispos” ala FCR. We think that changes in 2025 with much higher residential gains anticipated (i.e., accretive debt paydown; our 2025 estimate = $82-million vs. 2024 of $30-$34-million); we could see 2024 guidance fall if some of it gets pushed into 2025. The high-end Toronto residential rental market (i.e. REI new construct) is showing some signs of flattening (REI resi occupancy fell 120bp quarter-over-quarter to 96.2 per cent; but likely mostly due to acquisition).
Also seeing “limited unit price catalysts over the summer,” he cut his target to $20.50, down from $22.50 and below the $20.70 average.
In a separate report, Mr. Saric downgraded Dream Residential REIT (DRR.U-T, DRR.UN-T) to “sector perform” from “sector outperform” with an US$10 target, above the US$9.09 average.
“On the back of solid in line Q1/24 results, our target price of $10.00 and our NAVPU of $12.50 are intact,” he said. “We think DRR should appeal to deep-value investors given that DRR is now trading at 50 per cent discount to Scotia NAV and 53-per-cent discount to IFRS NAV. However, some patience is required on the name as the broad REIT sector is also trading at a 20-per-cent discount to NAV, and there continues to be uncertainty with respect to macro environment and bond yields. We are moving our rating to SP (from SO previously).
“DRR’s distribution yield is 6.7 per cent with a low 2024 AFFO payout ratio of 64 per cent. Investors with a 12 to 18 months time horizon, could get paid while they wait for the market to resolve the current valuation discount. Our FFOPU estimates are largely unchanged and in line with management guidance. DRR had a strong end to 2023 as total NOI reached the high end of the guidance range and FFOPU expectations were met. We believe it is crucial to build a solid track record for a relatively new entity, and DRR has done a good job so far.”
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After the latest reduction to its guidance, Desjardins Securities analyst Benoit Poirier does not see a reason to buy shares of Transat A.T. Inc. (TRZ-T) at this point, preferring to “remain on the sidelines while awaiting additional deleveraging as well as execution of the strategic plan.”
“As a result of ongoing GTF engine issues and unfavourable market dynamics leading to downward pressure on yields (particularly in Europe and sun destinations), TRZ is revising its adjusted EBITDA margin forecast to approximately 5 per cent for FY24, below the lower end of its previous guidance of 7.5‒9.0 per cent (we had forecast 6.4 per cent),” he said. “Following discussions with management, we are keeping our capacity growth forecast mostly unchanged but are revising downward our pricing forecast to negative 5.0 per cent from a gain of 0.7 per cent for the remainder of the year.”
Ahead of the June 6 release of its second-quarter results, Mr. Poirier expects the Montreal-based company to “slightly” reduce its capital expenditure forecast for the year, however he does not project it to achieve positive free cash flow generation in the current fiscal year.
“As a result, we are reducing our [FCF] forecast to negative $18-million from $42-million for FY24 and to $54-million from $102-million for FY25,” he said. “We expect TRZ’s leverage ratio to decline to 7.4 times in FY25, higher than our initial forecast of 5.8 times. Management continues to actively look at financing options with different sources.”
Reiterating a “hold” recommendation for Transat shares, Mr. Poirier trimmed his target to $3 from $4. The average on the Street is $2.84.
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With GDI Integrated Facility Services Inc. (GDI-T) “endeavouring to bounce back from trough earnings,” National Bank Financial analyst Zachary Evershed continues to see limited near-term catalysts, seeking to see improvement efforts to “take hold” at its Business Services business in the United States, margin stability for that segment in Canada and “working capital efficiency gains to help delever the balance sheet, restoring greater optionality.”
On May 9, the Lasalle, Que.-based commercial facility services provider reported first-quarter revenue of $644-milllion, up 9 per cent year-over-year and exceeding both Mr. Evershed’s $627-million estimate and the consensus forecast of $610-million. However, adjusted EBITDA of $28-milllion missed expectations ($35-million and $33-milllion, respectively) on weaker-than-anticipated margins. Earnings per share of 2 cents was also lower than expectation (15 cents and 14 cents).
“BSUSA [Business Services USA] delivered 10-per-cent top line growth despite the loss of much of a major customer’s business in the month of March (8 per cent of the segment’s top line), indicating the segment’s sales force has already backfilled much of the lost revenue, and we therefore raise our organic growth forecasts in Q2-Q4/24,” he said. “We note that the reduction of the size of the relationship with the major customer should be helpful for margin expansion as the profitability of the contract was notably lower than the segment’s average. Our Atalian contribution estimates move upwards as we align them to reflect first quarter performance.
“Management confirmed the cost overruns at TS [Technical Services] accounted for a $5-million hit to Adj. EBITDA in the first quarter. As the troublesome contracts are not expected to have an impact on Q2 or going forward, and as management remains bullish on the segment’s margins maintaining their typical seasonal progression upwards throughout the year, we move our profitability assumptions up slightly in Technical Services.”
While his BSC margin assumptions have “taken another leg downward,” his positive revisions in TS and BSUSA are “partially offset by a lower steady state Business Services Canada profitability assumption.”
“We remain uneasy on the sustainability of higher margins over the long-term as management has confirmed that there are no structural changes to the segment driving the profitability lift, but rather that it depends on the widened spread between GDI’s costs ($/hour) and revenues ($/sqft) which benefits from lower occupancy,” said Mr. Evershed. “We do not foresee a sudden upward movement in occupancy compressing the segment’s margins immediately, but we are cognizant of the widespread push from employers for ever more time in the office (eg: recent announcement that federal public servants’ in-office days will rise from 2 to 3 in September).”
Maintaining his “sector perform” recommendation, he raised his target for GDI shares by $1 to $41.50. The average on the Street is $42.75.
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Desjardins Securities analyst John Sclodnick recommends investors buy Karora Resources Inc. (KRR-T), seeing it now trading on the takeout offer from Australia’s Westgold Resources Ltd. “and it remains below that price.”
“While there is certainly a low-risk, near-term trade into the close of that transaction in late July, we would be buying into the medium-term potential re-rate as we expect the mergeco to trade at a premium to intermediate peers and to see a demand boost from index inclusion,” he said.
Reiterating his “tender” recommendation for the Toronto-based company’s shares, he trimmed his target to $5.65 from $5.92 following the release of first-quarter results that featured in-line earnings and better-than-anticipated all-in sustaining costs. The average target on the Street is $6.50.
“We continue to base our target price on the Westgold takeover offer of 2.524 of a WGX share, 61 cents per share of cash and management’s estimated spinco value of 15 cents per share (although we believe it is worth almost double that), which gets to our target of $5.65. The intraday share price of $5.38 implies a 5.0-per-cent return into the deal close, which is expected in late July. With the resulting mergeco fully exposed to the gold price and benefiting from a weak Australian dollar, we expect the new company to be a go-to for investors looking for relatively low-risk gold exposure in a vehicle with strong gold price sensitivity. Based on company trading multiples and recent M&A activity, we have noted strong investor preference for lower-risk jurisdictions, and Western Australia is our favourite mining jurisdiction globally — which is also where all of the mergeco’s operations will be based.”
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BMO Nesbitt Burns analyst Jeremy McCrea reinstated coverage of two Canadian energy companies on Tuesday:
* Lycos Energy Inc. (LCX-X) with an “outperform” rating and $5 target. The average on the Street is $6.16.
“The most important attribute for an E&P company is its ability to ‘create value’ long term — especially on a full-cycle basis,” he said. “Although Lycos is a relatively new entity, it is at the forefront in developing new drilling concepts that have the potential to materially change well economics and go-forward profitability in shallow heavier oil basins. With a seasoned management team and another round of encouraging well results, we think it’s only a matter of time before the high profitable growth catches the attention of the institutional investor community.”
* Vermilion Energy Inc. (VET-T) with an “outperform” rating and $21 target. The average is $21.02.
“Our thesis on VET focuses on its profitability with a high degree of inventory in conventional formations as compared to resource style plays,” he said. “That said, the share price has seen plenty of volatility due to uncertainties such as oil and European gas prices, windfall taxes, and unplanned production outages. Despite these challenges, VET remains focused on executing its strategy, including promising Montney BC wells (w/ new completion designs), and potentially transformative natural gas wells in Germany (results coming soon). Overall, VET continues to execute on factors that it can control.”
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In other analyst actions:
* Scotia’s Mario Saric raised his Canadian Apartment REIT (CAR.UN-T) target to $54 from $53.75 with a “sector outperform” rating. The average is $56.09.
“We maintain our SO rating and most key estimates on a slight Q1 FFOPU beat (2 per cent) = 8-per-cent year-over-year growth, the highest growth in 4 years and a big step up on an LTM [last 12-month] basis,” he said. “Looking forward, we expect accelerated growth starting in Q2/24, but CAR is also the only Apartment REIT where our 2025 year-over-year growth > 2024 estimates. In addition to the expected earnings growth acceleration, we remain constructive on CAR given the downside protection it offers (cheap major-market rent with large MTM rent gap) should the economy correct, a reasonable PEG ratio (2.5 vs. 3.4 sector average), and a management team willing to aggressively recycle capital to drive NAVPU growth. Near-term catalysts include the potential sale of its MHC portfolio and other non-core assets and a narrowing in the growth gap. CAR was willing to buy at an avg. $48 in Q1, and we think so too should investors (esp. below that). We’re buyers up to PEG Ratio of 2.7-2.8 (i.e., $50-$52/un).”
* RBC’s Walter Spracklin lowered his target for Cargojet Inc. (CJT-T) to $182 from $184 with an “outperform” rating. The average is $149.58.
* Scotia’s Jonathan Goldman raised his CES Energy Solutions Corp. (CEU-T) target to $8.50, above the $8.17 average, from $5.85 with a “sector outperform” rating.
“Given the recent track record, you can’t just write off the sizable Q1 beat as an anomaly anymore,” said Mr. Goldman. “Revenue was another quarterly record and margins of 17.3 per cent were the highest since 1Q15. U.S. DF share hit a record 22.6 per cent (and management called out similar trends in PC) supported by secular trends towards higher drilling intensity and share gains, including the introduction/adoption of new products. Separately, we think the SLB acquisition of CHX could provide near-term opportunities to gain share (and talent) as the latter is focused on integration. Management noted Q1 margins were a lofty expectation heading into a seasonally weaker q, but that it would have to consider increasing the guidance range of 14 per cent to 15 per cent. Naturally, we expect higher volumes and better mix to sustain margins above the historical range. The company also continues to become more efficient on working capital: w/c investment as a percentage of LTM run-rate revenue was 27.1 per cent, again below the historical range of 30 per cent to 35 per cent. All this is translating into higher FCF generation/conversion.”
* TD Cowen’s David Kwan raised his Constellation Software Inc. (CSU-T) target to $4,150 from $4,050 with a “hold” rating. The average is $4,0141.25.
* Canaccord Genuity’s Yuri Zoreda trimmed her Doman Building Materials Group Ltd. (DBM-T) target to $9 from $10 with a “buy” rating, while CIBC’s Hamir Patel also lowered his target to $9 from $10 with an “outperformer” rating. The average is $9.88.
“Results came in shy of our expectations on a soft top line impacted by the slowing North American housing market,” said Ms. Zoreda. “However, we like the company’s positioning in the North American building products distribution space given the secular demand drivers we see in the long term, the company’s structurally higher and more stable gross margins on management’s focus on value-added products (particularly pressure treated wood), and its attractive 7.5-per-cent dividend yield. We see good valuation upside with the stock down 9 per cent year-to-date against the 17-per-cent increase in the S&P500 building products index and trading at 10.2 times 2024 EPS vs. peers at 12.5 times.”
* Wells Fargo’s Neil Kalton increased his target for Emera Inc. (EMA-T) to $53 from $49 with an “equal weight” recommendation. The average is $53.40.
* Scotia’s Phil Hardie cut his Guardian Capital Group Ltd. (GCG-T) target to $55 from $58 with a “sector outperform” rating. The average is $54.
“Operating earnings fell short of our estimates primarily due to higher-than-anticipated opex and a lower-than-expected management fee,” said Mr. Hardie. “That said, given the steep valuation discount, with the stock trading below the value of its corporate investment portfolio, we see a relatively limited near-term read-through for the stock price.
“We continue to view the sizeable $1.2-billion ($47.77 per share) of corporate investment portfolio as providing a high degree of optionality for value-creation that ranges from M&A strategies to share buybacks. We believe this could potentially double the stock price over the next few years. With the stock trading at $3.1 per share below its corporate portfolio, this implies the market attaches no value to its investment & wealth management platform which we valued at almost $6.60 per share. As a result, we view Guardian as our top small-cap value idea.”
* Eight Capital’s Puneet Singh lowered his Lithium Americas Corp. (LAC-N, LAC-T) target to US$10 from US$13.50 with a “buy” rating. The average is US$9.48.
* CIBC’s Dean Wilkinson, currently the lone analyst covering Northview Residential REIT (NRR.UN-T), raised his target to $16.50 from $15.50 with a “neutral” rating.
* CIBC’s Bryce Adams cut his Orezone Gold Corp. (ORE-T) target to $1.25 from $1.50, below the $1.62 average, with an “outperformer” rating.
* National Bank’s Zachary Evershed moved his Park Lawn Corp. (PLC-T) target to $22 from $21 with an “outperform” rating. The average is $23.99.
“Pandemic-driven record highs are firmly in the rearview mirror, but mortality rate volatility post-pandemic is now stabilizing,” he said. “Management reiterated expectations for volumes this year to come in flat to slightly down. Focusing on what is controllable, PLC will continue to evaluate pricing on a monthly and rooftop-by-rooftop basis, pushing pricing in line with inflation to maximize market share while managing costs. On the bottom line, the incorporation of FaCTs to managers’ operating processes, restructuring of the sales force’s compensation, and continued integration of recent acquisitions lend confidence to a steadily increasing EBITDA margin through FY24.”
“As PLC’s valuation is again flirting with levels that we believe could attract the interest of a strategic or financial buyer, we see limited downside and remain comfortable with our Outperform rating.”
* CIBC’s Todd Coupland increased his target for Quarterhill Inc. (QTRH-T) to $2.60 from $2.50 with an “outperformer” rating. The average is $2.31.
* CIBC’s Bryce Adams bumped his Sierra Metals Inc. (SMT-T) target to $1.10 from $1 with a “neutral” rating. The average is $1.10.
* National Bank’s Don DeMarco raised his Torex Gold Resources Inc. (TXG-T) target to $27 from $25.50 with a “sector perform” recommendation. The average is $26.56.
* Mr. DeMarco also increased his target for Wesdome Gold Mines Ltd. (WDO-T) to $15 from $14.25, above the $12.23 average, with an “outperform” rating.
David Leeder