Inside the Market’s roundup of some of today’s key analyst actions
Following Friday’s release of better-than-anticipated third-quarter financial results, Credit Suisse analyst Joo Ho Kim raised his forecast for Canadian Western Bank (CWB-T), pointing to improved net interest margins.
Shares of the Edmonton-based bank surged 11.5 per cent after it reported core cash earnings per share of 88 cents, blowing past both Mr. Kim’s 83-cent estimate and the consensus projection on the Street of 82 cents. A “strong” net interest income performance drove a “better” revenue performance, while lower provisions for credit losses also contributed to the beat.
“In light of the industry-wide slowdown in loan growth (including domestic commercial loans), improved net interest margin performance was a key positive featured in CWB’s Q3 results (especially given the bank’s relative over-indexing to NII),” said Mr. Kim. “While we assume a modest increase in our Q4 NIMs (especially vs. quarter-over-quarter growth of 11 basis points this quarter), our NIMs in our fiscal 2024 estimate also go up meaningfully as a result of a better outlook for more stable funding in particular.
“Other positives from Q3 included better-than-expected credit performance and continued strength in the near-term guidance (within 18-23 basis points in the PCLs ratio for next quarter; our estimates assume 20 basis points in Q4 and 24 basis points in F2024), as well as strong efficiency ratio guidance of approximately 52 per cent for the current year (was 54 per cent year-to-date, and therefore implies a solid step-down in Q4).”
The analyst raised his 2023 EPS projection by 3 per cent to $3.56 (from $3.45 previously), pointing to “the impact of the beat and better NIMs.” His 2024 estimate rose by 2 per cent “to reflect higher NIMs as well.”
Maintaining a “neutral” recommendation for CWB shares, Mr. Kim raised his target to $31 from $26. The average target on the Street is $31.08, according to Refinitiv data.
“Given the strong move up in the shares on the earnings day and our return to target, we continue to rate the shares Neutral,” he concluded.
Other analysts making target adjustments include:
* Scotia’s Meny Grauman to $32 from $27 with a “sector perform” rating.
“WB’s Q3 result was a clear turning point for the shares, and the market certainly agreed as the stock rallied by over 11 per cent on earnings day,” said Mr. Grauman. “The driver of that performance was net interest margins, which expanded by 11 basis points quarter-over-quarter after nearly two years of steady downward pressure. We had expected another sequential decline given 50 bps in additional BoC rate hikes, but tighter monetary policy only had a nominal impact on margins this past quarter. Although an improving margin was the highlight of the quarter, other positives included strong expense management, and a solid build in the bank’s CET1 ratio without the help of the ATM. After a tough few quarters the pieces appear to be falling into place for this name, except for loan growth which slowed in Q3 and continued to lag CWB’s larger peers. While we materially boost our price target for this name based off of these results, we leave our recommendation at SP given the huge move in the shares on earnings day.”
* Desjardins Securities’ Doug Young to $34 from $29 with a “buy” rating.
“Adjusted pre-tax, pre-provision (PTPP) earnings were 10 per cent above our estimate (up 4 per cent year-over-year), driven mostly by unexpected NIM expansion (up 11 basis points quarter-over-quarter),” said Mr. Young. “While one quarter does not set a trend, the company’s strong delivery in NIM, expenses, credit and capital gives us confidence in our Buy rating.”
“We find the current valuation compelling. The company is attractively positioned to deliver further NIM expansion, cost controls, and disciplined credit and capital management.”
* National Bank’s Gabriel Dechaine to $33 from $28 with an “outperform” rating.
“11 basis points of NIM expansion was a positive shift, following several quarters of disappointing results,” said Mr. Dechaine. “Wider loan spreads and higher re-investment rates on maturing securities were the main drivers. Management indicated that these factors offset higher deposit costs, though we saw positive developments there, as well. Of note, branch-raised deposits rose 3 per cent quarter-over-quarter, including a 3-per-cent increase in branch notice & demand deposits. CWB’s cheapest source of funding had been declining for four consecutive quarters. The bank expects additional NIM expansion during Q4/23, though not at the same level as what was delivered this quarter. We are maintaining conservative NIM forecasts (i.e., 1-2bps/quarter), given the unpredictable factors affecting spreads.”
* Raymond James’ Stephen Boland to $34 from $30 with an “outperform” rating.
“Since the Bank of Canada began hiking interest rates in early 2022, CWB’s NIM has been pressured by rising funding costs,” said Mr. Boland. “CWB’s relative reliance on higher-cost funding sources (e.g. broker deposits) left the bank more vulnerable to changes in market rates compared to its larger peers. With the pace of policy rate increases slowing in recent months, asset yields across CWB’s portfolio have begun to reprice at a quicker pace than the bank’s deposits, leading to a material improvement in the NIM this quarter. NIM has also benefited from more focused lending across the company’s General Commercial book. All told, management expects these dynamics will lead to further NIM expansion in 4Q23, albeit at a slower pace than what we saw in 3Q23. Assuming market rates remain stable, we believe CWB’s NIM could improve steadily all the way through to the latter part of next year.”
* CIBC World Markets’ Paul Holden to $31 from $26 with a “neutral” rating.
“We have increased our F2023 and F2024 EPS estimates following a positive surprise on NIM. We are, however, cautious on loan growth and credit moving forward. Our new forecast is for modest expansion to continue, offset by slowing loan growth and increasing PCLs,” said Mr. Holden.
* TD Securities’ Marcel McLean to $33 from $32 with a “buy” rating.
“CWB’s NIM experienced pressure in the rising rate environment as funding costs increased faster than asset pricing,” said Mr. McLean. “As interest rates stabilize, the impact of the asset/ liability pricing gap reverses driving margin expansion (as evidenced this quarter). Additionally, the bank generally delivers solid loan and deposit growth and low credit losses over the medium term. The bank is trading at a 20-per-cent discount to the group, and we continue to rate the stock BUY.”
* Barclays’ Joseph Ng to $31 from $29 with an “overweight” rating.
* Cormark Securities’ Lemar Persaud to $33 from $28 with a “buy” rating.
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SNC-Lavalin Group Inc. (SNC-T), Stantec Inc. (STN-T) and WSP Global Inc. (WSP-T) “stand to benefit from a global infrastructure renaissance, the energy transition, and the re-shoring of manufacturing in North America,” according to Scotia Capital analyst Michael Doumet.
In a research report released Tuesday titled Defensives on the Cusp of an Upturn, he assumed coverage of all three firms, believing “the best is still in front of them” despite “strong” organic growth across the sector through the last year.
“Expanding trading multiples are likely the primary hurdle for investors; however, we believe strong projected (multi-year) organic growth profiles, capital-light features, and proven M&A capabilities will grow profits (i.e., double-digit EBITDA-per-share CAGRs [compound annual growth rates]) such that multiple expansion is unnecessary (but may occur) to create ample returns,” he said. “SNC is the exception – we see a mix of strong profit growth and multiple expansion (lower NTM FCF [next 12-month free cash flow] is an offset).”
Emphasizing “simple is better,” he added: “We think the Canadian engineercos are positioned to provide investors with GDP-plus top-line organic growth, above-average earnings visibility (given record backlogs), consistent margin performance (given the cost-plus nature of work), and a decade-long runway of M&A. For 20-plus years, the engineercos actively consolidated smaller players, expanding their platforms and capabilities. The industry still remains fragmented, and the benefits of being larger may be becoming increasingly important as companies look to take on “mega” projects and attract/retain talent. The “winning” M&A strategy for the engineercos has been to avoid construction businesses and focus on OECD/North American exposure. When it comes to M&A track records, we think WSP did it best by using its access to capital to optimize accretion and accelerate growth. MWH Constructors bogged down STN’s efforts for a while, but its divestiture in 2018 was rewarded with a positive re-rate; since then, it has been increasingly active with M&A. SNC is more focused on optimizing its portfolio; in the NTM, we believe it too will be generating improving FCF and begin to redeploy into M&A.”
Mr. Doumet said his picks in the sector are SNC and WSP, giving both “sector outperform” recommendation. His target for SNC shares is $51, while his WSP target is $216. The averages on the Street is $47.18 and $202.54, respectively.
He gave Stantec a “sector perform” recommendation and $99 target, which exceeds the $96.70 average.
“The engineercos are easy to like: they are defensive names with rising organic growth profiles and a proven ability to recycle capital accretively via M&A,” he concluded. “Industry tailwinds and improving organic growth outlooks have driven multiple expansion, such that we believe share price upside will be driven less so by multiple expansion (except for SNC) and more so by (1) upside surprises, (2) accretive M&A, and (3) roll forwards. With STN and WSP trading essentially in line, we prefer WSP given its higher likelihood of upside surprises. STN has the most exposure to the U.S. (which we like), but we believe it has tougher comps into 2024. For SNC, we think the large negative surprises related to lump-sum turnkey (LSTK) projects are behind it. Once it sheds lower-margin businesses (and potentially its stake in the 407 Highway), it should ‘look and feel’ like STN/WSP. Unable to pursue M&A for a while, we think SNC’s Engineering Services has developed an organic ‘growth muscle’ (effective employee hiring/retention and backlog build), driving strong organic growth; its Nuclear segment also appears poised for a decade-long period of solid growth.”
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Desjardins Securities analyst Chris Li expects the first-quarter 2024 financial results from Alimentation Couche-Tard Inc. (ATD-T) to “show the resiliency of the c-store/fuel business.”
“We believe ATD is well-positioned to achieve attractive organic EPS growth of 10 per cent or more in the longer term due to a strong pipeline of initiatives (more details at investor day on October 11) with upside from a favourable M&A backdrop supported by ATD’s solid balance sheet,” he said in a research note previewing Wednesday’s quarterly release.
“We believe the current valuation is supported by investors’ preference for a mix of defensive/growth attributes with earnings upside from higher fuel margins and M&A.”
Mr. Li is projecting adjusted earnings per share of 78 US cents, matching the consensus forecast on the Street but down 7 US cents year-over-year.
“We expect the results to show the resiliency of the c-store/fuel business, solid execution, and organic growth and margin-enhancement initiatives,” he said. “There is further upside from a favourable M&A backdrop supported by ATD’s solid FCF and balance sheet (2.1 times pro forma net debt/EBITDA).”
After raising his revenue and earnings expectations through 2025, Mr. Li increased his target for Couche-Tard shares by $5 to $79 with a “buy” rating (unchanged). The average target is $80.11.
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National Bank Financial analyst Patrick Kenny thinks AltaGas Ltd.’s (ALA-T) $650-milllion acquisition of natural-gas assets from Tidewater Midstream and Infrastructure Ltd. (TWM-T) fortifies its Midstream platform, “strategically locking in supply for LPG exports.”
On Thursday, it announced an agreement for Tidewater’s Pipestone Gas Plant & Expansion Project as well as the Dimsdale Gas Storage Facility in a deal that includes $325-million in cash portion and $325-million in shares (approximately 12.5 million priced at $26.07 each).
“Expected to close in Q4, the Pipestone assets fit squarely into ALA’s Midstream strategy, adding approximately 15,000 barrels per day of highly contracted liquids handling capacity pro forma Pipestone II, translating into 6,500 bpd of propane/butane supply to be directed towards the company’s global exports platform by H2/25,” said Mr. Kenny. “Longer term, propane/butane supplies could move up to 11,500 bpd through processing additions beyond Pipestone II, representing10 per cent of its current global exports. Recall, ALA’s export terminals have capacity to export up to 150,000 bpd, while the proposed REEF expansion would take total export capacity above 200,000 bpd, with an FID expected in H1/24.”
Touting run-rate accretion and seeing its balance sheet “in check,” the analyst added: “With the deal contingent on Pipestone II reaching a positive FID, the all-in investment represents 5-per-cent accretion to our H2/25+ estimates, with run-rate D/EBITDA continuing to track the company’s long-term target of 4.5 times. Of note, the transaction also improves the company’s Midstream cash flow quality profile by increasing its contracted business mix by 6 per cent.”
Citing long-term accretion to his estimates, Mr. Kenny raised his target for AltaGas shares by $1 to $33, keeping an “outperform” recommendation. The average is currently $31.60.
“Combined with cash flow quality accretion (i.e., increased take-or-pay and fee-for-service) and a $35 sum-of-the-parts valuation based on current market comparables, we reiterate our Outperform rating alongside a 29.1-per-cent total return opportunity,” he said.
For Tidewater, the analyst came off research restriction with a target of $1.25, up from $1.10 but below the $1.38 average, with a “sectot perform” rating.
“Net of lease obligations also being offloaded, the total price tag represents an attractive transaction multiple of approximately 13 times 2023 estimated EBITDA,” said Mr. Kenny. “The deal is expected to close in Q4/23, with the ALA shares freely tradeable thereafter.”
“Of note, closing is subject to a positive FID on the 100 mmcf/d Pipestone Phase 2 Project, with a new JV agreement with ALA to finalize commercial underpinning before sanctioning. The JV agreement also permits both parties to collaborate on Pipestone II even if the transaction does not proceed.”
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While acknowledging Arizona Sonoran Copper Co. Inc. (ASCU-T) is a young company, Paradigm Capital analyst Jeff Woolley sees it “exceptionally well timed to benefit from the recent addition of copper to the U.S. critical minerals list” with its flagship Cactus project “among the most advanced” in the country.
“Cactus is a scalable brownfield copper project situated in the middle of the Arizona Copper Belt,” he said, initiating coverage with a “buy” rating.
“Since closing the acquisition of the historic Cactus project in 2020, Arizona Sonoran’s exploration program has more than doubled the delineated resources at the project, now to over 4.7 billion pounds of soluble copper and more than 6.5 billion pounds of total copper. “Arizona Sonoran is advancing work on a Pre-feasibility Study (PFS) expected to be completed in Q1/24 and targeting up to 50 Ktpa [kilotonnes per annum] of cathode copper production over a 30-year mine life.”
Mr. Woolley said the company “positive” Preliminary Economic Assessment (PEA) for the phased development plan at Cactus, which increased production expectations with a “low” upfront capital cost, “outlines a compelling base-case development scenario.”
“However, Arizona Sonoran’s success with its exploration drilling campaigns in 2020–2022 have materially increased the resources at Cactus and justify rescoping the project,” he said. “The major change driving this has been a maiden resource announced for the Parks/Salyer deposit located 1.3 miles to the southwest of the Cactus open pit.”
“Our mine model essentially flips the 2021 PEA development plan on its head. We continue to expect initial production to come from processing a portion of the surface stockpile to generate early cash flow; however, we next look for development and mining of the Parks/Salyer underground deposit to commence in conjunction with development of the Cactus East underground. The large earthworks and stripping activity required to mine the lower-grade Cactus West open-pit deposit would then be deferred until late in the mine life.”
Expecting to Arizona Sonoran to “benefit as the U.S. accelerates its transition to green energy,” Mr. Woolley set a target of $3.75. The average target on the Street is $3.43.
“Arizona Sonoran and the Cactus project present a compelling risk/reward opportunity for investors seeking exposure to future copper production, in our opinion,” he said. “Cactus is located in a safe jurisdiction, it is a brownfield project and entirely situated on private land which materially reduces permitting risks, and as a proposed heap leach and SX/EW operation producing finished copper metal at site it also has multiple ESG benefits compared to traditional copper concentrate and smelter operations.”
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Despite recent production problems, Eight Capital analyst Ralph Profiti sees Cameco Corp. (CCO-T) “well-positioned for improved financial performance,” citing “rising uranium prices, exposure to market-related contract terms (albeit limited), improved cost structure as Cigar Lake and McArthur River reach licensed production rates, and the benefits of vertical integration in the Uranium and Fuel Services businesses through the pending acquisition of a 49-per-cent stake in the Westinghouse Electric JV.
On Sunday afternoon, the Saskatoon-based company said “challenges” at its Cigar Lake mine and Key Lake mill are likely to “impact” its 2023 production forecast. It lowered is Cigar Lake production forecast to 16.3 million pounds of uranium concentrate from 18 million previously and its McArthur River/Key Lake expectation to 14 million pounds from 15 million pounds.
“Equipment reliability, availability of skilled & experienced personnel, and supply chain challenges are cited as causes for the shortfall, which suggests to us that production challenges are likely transitory, and not geotechnical, which would cause us greater concern,” said Mr. Profiti. “Cigar Lake mining activities were initiated from a new zone in the orebody (West pod) in Q2/23 with equipment reliability issues emerging to further negatively impact productivity. Cigar Lake is scheduled to enter its planned annual maintenance shutdown in Sept-2023. Key Lake milling has been impacted by the length of time the facility was on care & maintenance, implementation of operational changes, availability of technically skilled personnel, and supply chain challenges related to the availability of materials and reagents. The McArthur River mine is expected to continue production as planned with unprocessed ore at the Key Lake mill to be stored as inventory.
“The production downgrade highlights the growing risk to secure and reliable uranium supply that continues to shift risk from uranium producers to utilities and puts upward pressure on prices that more than offsets Cameco’s reduction in output.”
The analyst emphasized increased supply risks globally may “put a charge on a strengthening contract cycle,” benefitting Cameco.
“Year-to-date longterm utility contracting of 121 million pounds is on-track to exceed each of the last 10 years, which has averaged 77 million pounds per year (peak: 125 million pounds in 2022),” he said. “UxC recently reported its term uranium price indicator rose $2 per pounds month-over-month to $58 per pound, which brings year-to-date long-term prices up 14 per cent and 43 per cent since the beginning of the Russia-Ukraine conflict and compares to spot prices of $60.75 per pound (up 6.6 per cent month-over-month; up 26.6 per cent year-to-date). UxC states the term market remains ‘moderately active’ and ‘Several other utilities are expected to enter the market between now and October seeking mid- and longer-term delivery, as we approach the fall season and the next round of industry meetings’ so we expect positive underlying market momentum into the World Nuclear Symposium 2023 meetings being held this week (Sept 6-8th) in London, U.K.”
Pointing to “contracting momentum” and revisions to his uranium supply-demand model, Mr. Profiti raised his target for Cameco shares to $60 from $52 with a “buy” rating. The average is $52.06.
“‘Peak uranium’ valuation & investor positioning suggest Cameco is likely to trade at the high-end of historical ranges, in our view,” he said.
“Increased interest from traditional resource investors, energy investors, clean energy investors, infrastructure investors and generalists, reinforces our view that peak-uranium P/NAV multiples of 1.6- 1.8 times for Cameco are reflective of uranium ‘bull markets’.”
Elsewhere, RBC’s Andrew Wong increased his target to $56 from $49.50 with an “outperform” rating.
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IA Capital Markets analyst Neehal Upadhyaya sees Alithya Group Inc. (ALYA-T) “on the cusp of a breakout,” initiating coverage of the Montreal-based IT services provider with a “buy” recommendation on Tuesday.
“ALYA has been growing at a robust pace, supplementing its organic growth with a flurry of acquisitions, enabling greater scale and accelerating its path to double-digit EBITDA margins,” he said. “Over the past three years, the Company has grown at a CAGR [compound annual growth rate] of 23 per cent, with organic growth accounting for 5-27 per cent per quarter between Q4/F21 and Q4/F23 before dipping below 0 per cent last quarter. We are forecasting the Company to grow by approximately 2 per cent in F2024 and 6 per cent in F2025. However, despite the softer F2024 revenue forecast, we are expecting considerable improvement to ALYA’s margin profile with Adj. EBITDA margins moving to 8 per cent in F2024 and 9 per cent in F2025, representing an 80-per-cent increase since F2022. Our forecasts have plenty of upside as our top line is fairly conservative as global software and IT services – segments that comprise most of the Company’s revenues – are slated to grow 8 per cent and 11 per cent, respectively. Additionally, our estimates do not include future M&A, which should provide further growth, but more importantly, also help increase the Company’s margin profile.”
Seeing Alithya “finally at scale,” Mr. Upadhyaya now sees it focusing on cost management.
“ALYA has been one of the quickest-growing IT service providers in Canada and is now the second largest in the country,” he said in a report titled A Company Transformed, Gunning for a Re-Rating. “For years ALYA focused on achieving scale by using M&A as its main tool. This has resulted in less operational downtime thus helping to reduce overhead costs, while simultaneously providing a growing and stable sales pipeline through its cross-selling initiatives from the customers it acquired and getting more sales leads from its main channel partners, Microsoft (MSFT-Q, Not Rated) and Oracle (ORCL-Q, Not Rated), as the Company now boasts a global presence with a comprehensive service solution suite. With scale achieved, management is turning its focus on improving its margin profile through different internal initiatives like smart-shoring, whereby it hires more employees in low labour-cost regions and converts more of its subcontractors into employees.”
Also believing “operating in a stable industry provides a safety net to the top line,” Mr. Upadhyaya set a target of $3.50 per share. The average on the Street is $3.38.
“While the stock has traded in a holding pattern of sorts, as M&A results have not been reflected in the Company’s financials as quickly as investors would have liked, we believe ALYA has finally achieved scale and is on the cusp of a margin breakout that will lead to a re-rating of its stock price,” he said. “With an experienced management team and several tangible cost reduction initiatives underway, we believe greater profitability, and in turn, greater FCF will allow Alithya to not only weather the poor macro storm in the near future but position it to take advantage of lower valuations in order to continue growing at an aggressive pace.”
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In other analyst actions:
* Bernstein’s Aneesha Sherman upgraded Lululemon Athletica Inc. (LULU-Q) to “market perform” from “underperform” with a US$366 target, jumping from US$328. The average target on the Street is US$430.50.
* CIBC World Markets’ Mohamed Sidibe initiated coverage of Frontier Lithium Inc. (FL-X) with an “outperformer” rating and $4 target, exceeding the average by 3 cents.
“Frontier is a lithium developer focused on building and vertically integrating its PAK project to produce high-quality lithium hydroxide,” he said. “The asset is located in the Red Lake mining division in Northwestern Ontario and is one of the highest-grade lithium deposits in North America. While Frontier’s share price appreciated significantly from 2019 to early 2022, it has been on a downward trend, trading in a narrow band over the last year and a half. We attribute the weakness in the share price to lithium price softness and to an overhang related to questions around site infrastructure and road access. At 0.29 times P/NAV, Frontier trades at a significant discount to overall peers at 0.80 times and to other developers at the feasibility stage at 0.36 times, based on our price deck of US$22,500/t LCE.”
“As Frontier continues to de-risk its project and with potential upcoming catalysts—such as infrastructure development updates, permitting updates and the release of a feasibility study (FS)—we expect FL to re-rate higher towards its developer peers.”
* Mr. Sidibe also initiated coverage of Rock Tech Lithium Inc. (RCK-X) with an “outperformer” rating and $3.15 target. The average is $4.91.
“Rock Tech is a cleantech company aiming to produce lithium chemicals for electric vehicle (EV) batteries through its Guben lithium hydroxide converter in Germany and Georgia Lake mining project in Canada,” he said. “With the converter strategically located in the world’s second-largest EV market, we expect RCK to benefit from governments’ and companies’ decarbonization efforts. Notably, the company has already landed its first offtake agreement—with Mercedes Benz in October 2022 — to supply 10ktpa of battery-grade lithium monohydrate hydroxide (LHM), or approximately 42 per cent of RCK’s converter capacity, from 2026 onward”
* ATB Capital Markets’ Patrick O’Rourke raised his Athabasca Oil Corp. (ATH-T) target to $5 from $4.50, maintaining an “outperform” rating. The average is $4.29.
“Following the recent release of Alberta oil and gas public production data for the month of July, we are now reviewing individual company and asset level analysis for the month,” he said. “In particular, ATH’s cornerstone asset, Leismer, stood out to us as the only thermal oil sands asset reporting a new single-month production record in July, doing so on the back of notable production strength from the recently expanded Pad L8.”
* Upon assuming coverage, Scotia’s Himanshu Gupta raised the firm’s target for NorthWest Healthcare Properties REIT (NWH.UN-T) to $9.50 from $8, keeping a “sector perform” rating. The average on the Street are $8.29.
“We think market is largely pricing in a distribution cut, and we see limited downside from here,” said Mr. Gupta. “In our view, NWH could rally in a scenario when rate cut cycle begins.”
David Leeder