Inside the Market’s roundup of some of today’s key analyst actions
Ahead of first-quarter earnings season for Canadian diversified financial companies, National Bank Financial analyst Jaeme Gloyn reaffirmed his “favourable” view on Property and Casualty (P&C) insurance providers.
“We believe the sector remains well positioned for the near term given persistent hard market conditions, still lower inflationary pressures in Canada vs. the U.S., and two favourable book value per share drivers inQ1-23 - IFRS 17 and favourable capital markets,” he said. “Our pecking order shifts slightly as FFH moves to the top, followed by DFY, TSU and IFC. While we remain long-term positive on one of our 2023 Top Picks, Trisura, we believe share price upside will be constrained near term as management proves out the stability and consistency of strong core operating performance. Thus, our top value idea FFH moves to the top while we believe DFY’s near-term catalysts (e.g., CBCA conversion and M&A) drive a more compelling relative valuation vs. IFC (DFY trades at 1.8x P/B compared to IFC’s 2.6x).”
Mr. Gloyn raised his target for Fairfax Financial Holdings Ltd. (FFH-T), which he sees as the “top value idea” in his coverage universe, to $1,350 from $1,300, keeping an “outperform” rating. The average is $1,211.31.
His other target adjustments for P&C firms are: Definity Financial Corp. (DFY-T, “outperform”) to $51 from $48 and Intact Financial Corp. (IFC-T, “outperform”) to $242 from $240. The averages are $43.50 and $220.64.
Conversely, Mr. Gloyn is taking a “more tepid view” on mortgage providers.
“We maintain our view that caution and patience remain the appropriate strategy heading into Q1-23 results due to downside risks that could constrain sector valuations and share price performance near term,” he said. “Regulatory and policy uncertainty persists, higher interest rates continue to impact home sales activity and consumer spending, and valuations on mortgage finance stocks are trading at levels we deem ‘fair’. On the flip side, the employment backdrop remains resilient while housing markets in the GTA show early signs of heating up. Our pecking order remains EQB, FN, TF, with HCG rated Tender.”
He raised his target for EQB Inc. (EQB-T) to $77 from $75 with an “outperform” rating. The average is $83.28.
Overall, the analyst said Element Fleet Management Corp. (EFN-T) remains his “top pick” with an “outperform” rating and $28 target (both unchanged). The average on the Street is $83.65.
“We like the setup into Q1-23 for several reasons,” he said. “We believe management sufficiently addressed any perceived funding concerns last week, but Q1-23 results and outlook commentary will cement this view; we expect new CEO Laura Dottori-Attanasio will take a more prominent role and reenergize confidence in the near- to long-term outlook; we expect management will upgrade 2023 guidance; and lastly, we see upside to our in-line with consensus forecasts primarily given an unexpectedly strong used vehicle price market but also because of ongoing organic growth momentum. We view the current 9-10-per-cent FCF yield as extremely attractive for investors looking to add or establish a position.”
Despite lowering his target for Goeasy Ltd. (GSY-T) to $170 from $180, above the $161.80 average, with an “outperform” rating, Mr. Gloyn recommends investors “put it on your radar.”
“While the potential for recession headwinds to drive increased charge-off rates remains a key risk, we believe the current trading multiple offers an attractive risk-reward as the market has overreacted to the Budget 2023 decision to lower the rate cap. GSY currently trades at 6.6 times P/E on our 2023 and 5.5x on our 2024 estimates (downwardly revised), roughly in line with record lows of 6.0 times (excluding the COVID bottom),” he said. Q1-23 results will be strong, and we expect management will update its three-year commercial forecast with stronger guidance than the market is pricing in today.”
Mr. Gloyn’s other target changes were: TMX Group Ltd. (X-T, “sector perform”) to $152 from $148, Brookfield Business Partners LP (BBU-N/BBU-UN-T, “outperform”) to US$35 from US$36 and Fiera Capital Corp. (FSZ-T, “sector perform”) to $8.50 from $9.50. The averages are $150.71, US$27.86 and $9.16.
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While investors rewarded Monday’s release of Cargojet Inc.’s (CJT-T) first-quarter results with a 3.9-per-cent share price gain, equity analysts took a more pessimistic view of the report, which fell short of their expectations and was accompanied by a more conservative near-term outlook.
The Mississauga-based company reported revenue of $231.9-million, down 0.7 per cent year-over-year and below the consensus forecast $237.3-million. Adjusted fully diluted earnings per share dropped 37.8 per cent to 97 cents, also under the Street’s projection of $1.15.
“Q1/23 results came in below ATB estimates, mainly due to softer-than-expected volumes on the domestic network,” said ATB Capital Markets analyst Chris Murray. “Management noted that volume trends weakened more than anticipated in late Q1, with the Company’s revised outlook calling for volumes to be more in line with 2022 levels. We have moderated our growth expectations for 2023 within the Company’s domestic network to account for prevailing conditions. Our revised numbers now call for growth to remain neutral in the segment (previously 5-per-cent growth).”
While emphasizing that “moderating growth outlook,” Mr. Murray did maintain his “constructive long-term view” on Cargojet Inc. , seeing “valuations remain compelling for a high-quality GARP [growth at a reasonable price] name.”
However, he dropped his target for Cargojet shares to $130 from $190 with an “outperform” rating. The average is $154.50.
“Management guided to flat growth across the domestic network in 2023, with ACMI [Aircraft, Crew, Maintenance and Insurance] expected to remain a source of growth given the anticipated full-year impact of its expanded partnership with DHL,” said Mr. Murray. “The Company is taking measures to better align capacity with the demand environment, including minimizing contract labour and overtime, and training costs, and adjusting block hours, which it expects to support margins in a lower-demand environment.
“Despite confirming an LOI for the sale of the third B777, we see the Company as well positioned to benefit from e-commerce-led demand trends and attractive supply/demand dynamics around international air cargo services while maintaining the flexibility (through control of the conversion slots) to add or defer growth capex depending on economic conditions over the next 12-18 months. We continue to view valuations as attractive, particularly given the secular tailwinds and the strength of the Company’s domestic franchise.”
Others reducing their targets include:
* Scotia Capital’s Konark Gupta to $146 from $172 with a “sector outperform” rating.
“CJT delivered an in-line Q1 after a Q4 miss in March, helped by the core segments and early fruits of cost optimization efforts,” said Mr. Gupta. “Management remained committed to the previously communicated deferral/reduction of growth capex (by $320-$400-million), disclosing its intention to sell another B777. As a result, the company now plans to operate only four B777s (instead of eight), earmarked for DHL. In addition, CJT announced domestic fleet changes, replacing some B757s with B767s to reduce direct costs and leverage dry/wet lease opportunities. Overall, we are encouraged that the company is making solid efforts to protect margins and FCF in the short term, while maintaining flexibility (e.g., not cancelling conversion slots) to capitalize on long-term secular trends. Our estimates have come down as we have incorporated management’s updated views as well as our incremental caution, driving our target down ... However, we maintain our Sector Outperform rating as risk/reward looks quite attractive, beyond the very near term, with the stock trading well below its historical (pre-pandemic) range at only 7.9 times 2024 EV/EBITDA.”
* National Bank Financial’s Cameron Doerksen to $127 from $140 with a “sector perform” rating.
“We remain positive on Cargojet’s longer-term growth prospects but do not see an obvious catalyst for Cargojet shares to move materially higher in the near term,” he said.
* Acumen Capital’s Nick Corcoran to $175 from $180 with a “buy” rating.
“CJT remains well positioned to navigate the uncertainty from a slowing economy. We will look for evidence of the cost controls in subsequent quarters,” said Mr. Corcoran.
* TD Securities’ Tim James to $175 from $180 with a “buy” rating.
“We believe that Cargojet deserves a premium valuation relative to comparables, due to the stability of its long-term contracts, historical growth, prudent financial leverage, strong margins, and competitive position within an industry that is expected to continue benefiting from the advantages of air freight relative to other modes of transportation,” said Mr. James.
* RBC’s Walter Spracklin to $202 from $231 with an “outperform” rating.
“CJT reported an inline Q1, which considering the weaker results among North American parcel couriers, we consider as a positive read,” said Mr. Spracklin. “Going forward, we believe mgmt positioned its outlook in the right way: current trends are a reflection of the pent-up shift in consumer purchasing services (from goods) and return to physical stores. Longer term, the expectation is that this will reverse and eCommerce growth will resume. We agree with this view and forecast CJT will resume its high-growth trajectory following a 2023 pause. Shares are fundamentally mispriced in our view. Reiterate CJT as a top idea.”
* BMO’s Fadi Chamoun to $115 from $119 with a “market perform” rating.
“We characterize Q1/23 as largely in line with expectations, but with underlying demand trends slightly weaker than expected going into the rest of the year, particularly in the Domestic Network. Management continues to focus on cost reduction, fleet rightsizing, and cash flow preservation while maintaining long-term flexibility to underwrite growth once demand recovers,” said Mr. Chamoun.
* CIBC’s Kevin Chiang to $180 from $193 with an “outperformer” rating.
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Canaccord Genuity analyst Luke Hannan has “modest” expectations for Canadian Tire Corp. Ltd.’s (CTC.A-T) retail performance ahead of its first-quarter earnings release on May 11 due to “tougher” comps and the impact of a warm winter.
He’s now projecting consolidated revenue of $3.751-billion, down 2 per cent year-over-year but above the consensus estimate of $3.712-billion. His earnings per share forecast of $1.44 is 12 cents above the Street’s expectation, however it’s a significant drop from $3.05 during the same period a year ago.
“Higher levels of seasonal inventory are expected to weigh on both CTR retail sales and revenue for H1/23, with a $150 million revenue headwind that will be felt more in Q1/23 than Q2/23, though we’ll be curious to hear from management whether the magnitude or the timing of this headwind has changed due to the recent fire at the A.J. Billes Distribution Centre,” said Mr. Hannan. “Further, modestly higher promotional intensity across all three of Canadian Tire’s retail banners, strong comps, and a softer discretionary spending environment suggest year-over-year comparable sales will be relatively modest.
“Accordingly, we forecast year-over-year comparable sales declines for Q1/23 of 8 per cent at CTR and 3 per cent at SportChek, while expecting year-over-year comparable sales growth of 1 per cent at Mark’s. We’re taking a (likely overly) conservative stance regarding our comparable sales growth assumption for CTR to reflect not only how strong the prior comparable periods have been (our estimate for the quarter implies a still-healthy Q1/23 three-year stack for CTR year-over-year comparable sales growth of 16 per cent), but also uncertainty associated with the recent distribution centre fire.”
Also predicting a “slowdown in credit card spending growth in 2022 has persisted into the early innings of 2023,” Mr. Hannan lowered his full-year 2023 and 2024 revenue and earnings forecast, leading him to trim his target for Canadian Tire shares by $1 to $202 with a “buy” rating. The average target is $199.80.
“Our target represents a combination of our updated sum-of-the-parts valuation, which separately values Canadian Tire’s Retail and CTFS divisions and the company’s ownership of CT REIT,” he said. “As the company begins to cycle, easier comps and visibility into earnings growth improves, we expect the valuation gap vs. historical averages will begin to close.”
Elsewhere, Scotia Capital’s George Doumet raised his target to $200 from $196 with a “sector outperform” rating.
“We are below consensus for Q1 as CTC will be comping exceptional results from last year, while navigating a challenging retail environment (and absorbing the financial impact of a recent fire at one of its DCs),” said Mr. Doumet. “Specifically for the quarter, we expect (i) higher spring/summer inventory levels at dealers, softened consumer demand, and a milder winter to affect top-line performance and (ii) increased promotional intensity, continued investments related to Better Connected Strategy and costs associated with the fire (which we do not model but estimate could be $30-million-plus) to impact margins, partly offset by slowly easing freight and commodity costs.
“We will be looking for clues on consumer demand/operational performance for the rest of the year (Street expectations calling for higher year-over-year EPS growth as the year moves on). Despite our view that (2H) estimates are vulnerable, CTC shares are trading at a 20-per-cent discount to its historical average (2008/09 levels), and are pricing in that potential risk. Maintain SO – and look for an upcoming re-rate on improved earnings visibility.”
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Gildan Activewear Inc.’s (GIL-N, GIL-T) current valuation does not accurately reflect its “recently improved profitability and resulting strong return on invested capital of 22 per cent,” according to Stifel analyst Martin Landry.
“Gildan’s valuation is 30 per cent lower than its 10-year average and near a 10-year low,” he said. “This depressed valuation provides investors with a margin of safety under a scenario in which consensus estimates are too high. Gildan’s end markets are cyclical, and sales could decline by 10-20 per cent if economic conditions worsen significantly. However, we do not model such a scenario at this point.”
In a research report released Tuesday, he initiated coverage of the Montreal-based clothing manufacturer with a “buy” recommendation, touting its “strong ROIC and healthy balance sheet” as well as the expectation for annual double-digit earnings per share growth.
“Gildan has improved its profitability in recent years with its ‘Back-to-Basics’ initiative, reducing SG&A expenses by more than $100 million,” said Mr. Landry. “The company’s operating profit margin has risen to 20 per cent, the highest levels in more than 10 years. This translated into a strong ROIC of 22 per cent, 870 basis points above peer average. We expect these strong returns on invested capital to continue. Gildan’s financial leverage stands at 1.1 times, at the low end of the company’s range of 1-2 times, offering flexibility to weather changing economic conditions or return capital to shareholders in the form of share buybacks.”
“Gildan has near-term capacity expansion plans to support an additional $1 billion in sales. The company upgraded its equipment in the Dominican Republic and Central America to support $500 million in incremental sales in 2023. In addition, the phase one expansion in Bangladesh is expected to support $500 million in incremental sales in 2024. This incremental capacity combined with share buybacks of 5 per cent annually support our long-term scenario in which we believe Gildan can growth its EPS at a 10-14-per-cent CAGR [compound annual growth rate] over the next four years.”
Mr. Landry did warn of several “weaknesses” with Gildan, including “high volatility” in earnings, execution risk from expanding beyond core markets and the recent consolidation at the distributor level in the United States.
However, he sees its valuation “contraction” providing an “appealing entry point” for investors, setting a target of US$38 per share. The current average is US$37.10.
“Gildan’s shares are trading at 9 times our 2024 EPS estimates, 5.5 times lower than the company’s 10 year average,” said Mr. Landry. “The decline in Gildan’s valuation multiple reflects investors perception that earnings estimates are too high and will have to be adjusted downwards as economic activity slows. Nonetheless, we believe the current valuation doesn’t fully capture Gildan’s business quality and structural improvements in profitability and return metrics over the last five years, which warrants a higher valuation, in our view.”
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Touting its “diversified portfolio and a track record of growth that has shaped the company into a well-established intermediate royaltyco,” Stifel analyst Ingrid Rico initiated coverage of Triple Flag Precious Metals Corp. (TFPM-T) with a “buy” recommendation on Tuesday.
“Triple Flag has shown robust growth on attributable gold equivalent ounce (GEO) production with year-over-year increases and displaying a 5-year GEO CAGR [compound annual growth rate] through 2022 of 21 per cent,” she said.
“Triple Flag is a true contender in the precious metals royalty/streaming space, and it currently ranks #4 by market cap and 2023e attributable GEO production. We see TFPM strongly positioned as an intermediate royalty/streamingco bolstering a larger near-term scale than its immediate peers, diversification, and a balance sheet that offers good financial liquidity to remain active on accretive royalty and streaming deals.”
Ms. Rico set a target of $27. The average on the Street is $23.45.
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Pointing to an “uncertain” outcome from its strategic review, Echelon Capital Markets analyst David Chrystal lowered his recommendation for Firm Capital Apartment REIT (FCA.U-X) to “speculative buy” from “buy” after its fourth-quarter 2022 financial results fell short of his expectations.
In November, the Toronto-based REIT announced the initiation of a strategic review process to “identify, evaluate and pursue a range of strategic alternatives with the goal of maximizing unitholder value.” That included the listing for sale of all of its wholly owned real estate investments. It has since sold a property in Austin, Texas for net proceeds of $8.8-million of cash on closing and is in the process of selling its New Jersey and Florida properties.
“As FCA executes its disposition strategy, we expect significant cash proceeds to be realized,” said Mr. Chrystal. “In the near-term, we expect proceeds to be allocated to debt reduction. Use of net proceeds from future asset sales is somewhat less certain, given potential outcomes of the strategic review. While disposition of the Trust’s entire asset base, followed by return of excess capital would support a unit price closer to NAV, we note that several alternatives remain on the table including redeploying capital into new investments.”
Along with concerns about the use of the proceeds from its disposition strategy, the analyst also emphasized the “underperformance from the Trust’s joint ventures and preferred investments.” On April 24, Firm Capital reported adjusted fourth-quarter funds from operations of 2 cents, down 70 per cent year-over-year and below Mr. Chrystal’s 5-cent estimate.
“We are adjusting our NAV estimate to reflect slightly lower run-rate NOI [net operating income] from the wholly-owned portfolio,” he said. “Our NAV estimate dips to $7.50/unit (from $7.80 previously).”
That led him to cut his target for the REIT’s units to $6.50, matching the average, from $7.
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In other analyst actions:
* Raymond James’ Brad Sturges dropped his target for units of Allied Properties REIT (AP.UN-T) to $29 from $36.50 with an “outperform” rating. The average is $30.95.
“We view the successful execution of Allied’s planned Toronto UDC portfolio sale to be a possible positive event for the REIT’s unit price, so long as Allied realizes or exceeds the REIT’s recorded IFRS book value of its Toronto UDC portfolio totaling $1.3-billion (or $9.40 per unit) at March 31, which in turn would allow Allied to successfully de-lever its balance sheet towards its targeted levels,” said Mr. Sturges.
* In response to the April 24 announcement that it has been awarded $300-million in new work through master service agreements, Canaccord Genuity’s Yuri Lynk raised his target for Bird Construction Inc. (BDT-T) to $12, above the $11.56 average, from $11 with a “buy” rating.
“These awards represent $300 million in incremental recurring work to be performed over the next three to seven years, further enhancing Bird’s revenue visibility,” he said. “Management notes it is capitalizing on numerous secular demand drivers for Bird’s construction services, which include the energy transition, renewed investment in mines (EV metals, potash, oil sands), and the infrastructure build-out. This strong demand, combined with several competitors having left the industry, is allowing Bird to negotiate lower-risk contracts and generate higher margins. Bird trades at 8 times 2023 estimated EPS despite its attractive growth profile, strong balance sheet, and 5.0-per-cent dividend yield.”
* CIBC’s Mark Jarvi increased his Capital Power Corp. (CPX-T) target to $51 from $50 with a “neutral” rating, while BMO’s Ben Pham bumped his target to $51 from $50 with a “sector perform” rating. The average is $51.54.
“First quarter results highlight the sustained benefit of strong Alberta power prices (3-per-cent EBITDA beat) and continued success in extending contract length for its natural gas power facilities (Goreway contract extended 6 years),” said Mr. Pham. “At the same time, management remains positive on new growth opportunities, such as in renewables and Ontario gas/ storage (RFPs). As such, we remain comfortable holding shares for yield (5.1 per cent growing at 6 per cent per annum through 2025, with next dividend increase expected with Q2/23 results), and maintain our Market Perform rating and raise target.”
* Canaccord Genuity’s Matt Bottomley reduced his Curaleaf Holdings Inc. (CURA-CN) target to $9, below the $10.37 average, from $10.50 with a “buy” rating, while Eight Capital’s Ty Collin lowered his target to $10 from $16 with a “buy” rating.
“Although the Q4 print was generally in line with our expectations and management’s previously issued outlook on the top line, the quarter saw a moderate reduction in its adj. EBITDA margin profile on the back of pricing headwinds, unfavourable geographical mix and its conversion to US GAAP,” said Mr. Bottomley.
* TD Securities’ Graham Ryding raised his target for First National Financial Corp. (FN-T) to $39 from $38 with a “hold” rating. The average is $39.33.
“First National remains a solid income-generating investment, and we value the lowcredit-risk ‘originate-to-sell’ model,” said Mr. Ryding. “Negative operating leverage was an overhang in 2022, but expense management was evident this quarter. The near-term outlook for originations and earnings appears muted, but is expected to improve.”
* TD Securities’ Tim James increased his GFL Enviromental Inc. (GFL-T) target to $58, above the $48.68 average, from $52 with a “buy” rating.
“GFL’s better-than-expected results reflect stronger-than-forecast core pricing in Solid Waste, a continuation of extremely high growth in the Environmental Services segment, a greater-than-expected contribution from recent M&A, overall execution on cost-saving initiatives, and the prudent conservatism management has been taking in setting investor expectations,” said Mr. James. “We believe that $1.6-billion in pending asset sales, FCF progress, and management commentary suggest that 2023 will be the most significant year of deleveraging since the IPO, and will reward investors who have accepted the higher leverage over the past two years to allow for the execution of accretive and long-term value-producing M&A. We believe that GFL has the resources to execute accretive tuckin acquisitions, while moving leverage lower at a rate that is sufficient to narrow the valuation gap with other comparable waste-management companies.”
* National Bank Financial’s Don DeMarco lowered his target for Pan American Silver Corp. (PAAS-T) to $32 from $34.50 with an “outperform” rating. The average is $30.02.
* Ahead of its May 8 earnings release, RBC’s Sabahat Khan cut his target for Sleep Country Canada Holdings Inc. (ZZZ-T) to $26 from $27 with a “sector perform” rating. The average is $29.67.
“We expect investor focus at Q1 reporting to be on: 1) the overall demand environment given the uncertain macro backdrop; 2) consumer uptake of mattresses across higher/lower price points; 3) commentary on the recent acquisition of Casper’s Canadian assets (see below for more information); 4) progress updates on the company’s various ongoing partnerships/initiatives (e.g., the Walmart Sleep Country Express offering); and, 5) any updates on capital allocation priorities amidst the evolving macro backdrop,” said Mr. Khan.
* Desjardins Securities’ Jerome Dubreuil reduced his Think Research Corp. (THNK-X) target to 65 cents from 70 cents with a “hold” rating. The average is 85 cents.
“[Monday’s] negative share price reaction [of 18.6 per cent] does not reflect our view of the quarter, which we see as broadly in line with expectations,” he said. “We maintain our Hold rating due to recent dilution and as we want to see more stable results before recommending the stock. However, we note that the improvement in the financing situation, the decent quarter and recent momentum in data connectivity make us more constructive on the name.”
* CIBC’s Nik Priebe increased his TMX Group Ltd. (X-T) target to $150 from $140 with a “neutral” rating. The average is $150.71.
* TD Securities’ Aaron Bilkoski raised his Topaz Energy Corp. (TPZ-T]) target to $23, below the $27.10 average, from $22 with a “buy” rating.
* Raymond James’ Bryan Fast increased his target for Wajax Corp. (WJX-T) to $28 from $27 with an “outperform” rating. The average is $28.25.
“After lagging the peer group last year, Wajax has been one of the best performing stocks in our coverage year to date, up 23 per cent compared to the machinery comps up 5 per cent and the TSX up 7 per cent,” he said. “The company has made progress on key strategic initiatives in recent quarters. Efforts in increasing relative weighting to engineered repair services (ERS) and industrial parts, is bearing fruit as earnings hit multi-year highs. Wajax’ more direct relationship with Hitachi is in the early stages, but initial signals are encouraging. The Japanese OEM is aiming to be a top-three manufacturer of construction machinery by 2028, a lofty target given they sit at the lower end of the top ten currently. With Wajax holding the exclusive distribution rights for Hitachi in Canada, the company is well positioned should they achieve those goals.
“We look for more meaningful M&A ahead, as the company notes a large pipeline of targets in the range of $5-100-million in revenue potential. Although debt levels edged higher in the quarter to fund inventory, the balance sheet remains in good shape providing flexibility to fund the strategy.”
David Leeder