Inside the Market’s roundup of some of today’s key analyst actions
Equity analysts on the Street applauded Lightspeed POS Inc.’s (LSPD-T) second significant U.S. acquisition of the month on Wednesday, raising their target prices for the Montreal software company.
After the bell on Tuesday, Lightspeed announced it would pay US$430-million in cash and stock for Upserve Inc., a Rhode Island-based company that provides internet-based restaurant management software to 7,000 restaurants in the United States, generating US$40-million in revenue annually.
“Upserve’s customer base of complex restaurants in the U.S. is a fitting acquisition for Lightspeed from a product fit and geographic expansion perspective,” said CIBC World Markets analyst Todd Coupland in a research note.
“In particular, Upserve’s robust analytics platform is a highly significant module for high-end restaurants due to the transparency it provides into inventory and workforce management. This will help differentiate Lightspeed’s platform as one of the most competitive hospitality platforms in the market. Additionally, the high level of Payments integration among Upserve’s customer base will enable Lightspeed to further drive payments adoption and increase ARPU [average revenue per user] once the businesses combine. Both companies share similar go-to market strategies that include a centralized sales force and installation team, which should make for a smooth integration.”
Mr. Coupland said the acquisition is “strategically on point within the complex retail and restaurant industry, and also financially attractive.”
Expecting its share price to jump on the news, he increased his target for Lightspeed shares to $80 from $67, keeping an “outperformer” rating. The average target on the Street is $65.97, according to Refinitiv data.
“Our thesis is based on: 1) the SMB [small and medium-sized business] market for POS innovation is large with a low cloud adoption rate, 2) Lightspeed’s platform advantages render it a top choice, and 3) market adoption has been pulled forward by COVID-19,” said Mr. Coupland.
Other analysts raising their targets included:
* Raymond James’ Steven Li to $80 from $61 with an “outperform” rating.
“Back-to-back acquisitions (ShopKeep and Upserve) catapult LSPD into a strong market position in U.S. restaurant,” Mr. Li said. “We like the significantly higher ARPU from Upserve and the opportunity to crosssell as well as the Payments upside pick-up.”
* Scotia Capital’s Paul Steep to $70 from $56 with an “outperform” rating.
“Our view remains that Lightspeed is a strong organic revenue growth name with potential to benefit from a number of organic vectors (e.g., conversion of on-premise POS market to cloud, introduction of Lightspeed Payments into new markets), with the potential to continue actively consolidating the POS market,” said Mr. Steep.
* BMO’s Thanos Moschopoulos to $80 from US$62 with an “outperform” rating.
“With these two acquisitions, LSPD has increased its overall revenue base by over 50 per cent, removed two sizeable competitors from the mix, augmented the capabilities of its platform, and substantially increased its scale in the U.S. restaurant market,” he said. “We believe these acquisitions have significantly strengthened LSPD’s competitive position.”
* JP Morgan’s Tien-Tsin Huang to $74 from $57 with a “neutral” rating.
* RBC Dominion Securities’ Paul Treiber to $67 from $56 with a “sector perform” rating.`
* National Bank’s Richard Tse to $70 from $60 with an “outperform” rating.
* Eight Capital’s Suthan Sukumar to $84 from $70 with a “buy” rating.
* TD Securities’ Daniel Chan to $82 from $65 with a “buy” rating.
Before the bell, BMO announced adjusted earnings per share of $2.41, exceeding the forecasts of both Mr. Mihelic ($1.85) and the Street ($1.91) due largely to lower-than-anticipated provisions for credit losses. PCLs declined 59 per cent from the third quarter to $432-million, easily beating Mr. Mihelic’s $736-million projection.
“PCLs positively surprised and we believe credit is turning the corner,” he said.
“We believe total provisions for credit losses (PCLs) have peaked and will fall in 2021.”
Mr. Mihelic now sees the bank having resolved credit and capital concerns, adding it’s “time to split hairs on revenue growth.”
“With an uneven economic recovery ahead of us, we are unsure if BMO’s commercial loan focus will help or hurt BMO’s revenue growth relative to consumer loan oriented peers,” he said.
Keeping a “sector perform” rating for BMO shares, he hiked his target to $110 from $86. The average target is $100.96.
“We increased our forward target P/E [price-to-earnings] multiple to 10.5 times from 9.5 times,” he said. “We believe a higher valuation multiple is warranted for all the Canadian banks as the economy switches into recovery phase. We also roll forward our valuation to 2022 adjusted EPS estimates. Our EPS estimates increase to $9.24 (was $8.89) in 2021 and $10.49 (was $10.09) in 2022. Changes to our estimates mainly reflect Q4/20 actual results, lower assumed PCLs and modestly higher NIMs over our forecast period.”
Other analysts raising their targets include:
* Credit Suisse’s Mike Rizvanovic to $94 from $90 with a “neutral” rating.
“An improving credit outlook was the biggest takeaway from Q4, in our view, as the bank’s loan loss ratio fell back below the 40 basis points level, with management not expecting to see much movement from there in the upcoming year,” said Mr. Rizvanovic. “Supporting that view was a sizable sequential falloff in deferred loan balances across all lending categories, including residential mortgages. As such, we’ve flattened our PCL expectations in F2021, although we expect F2022 losses to remain slightly elevated in the 35 bps range as the pace of consumer and business insolvencies gradually return to more normal levels as government support programs are withdrawn.”
* Scotia Capital’s Meny Grauman to $106 from $104 with a “sector perform” rating.
* CIBC’s Paul Holden to $116 from $108 with an “outperformer” rating.
“FQ4 results and management’s outlook for F2021 confirm our positive thesis,” said Mr. Holden. “Credit risk is under control, a return to loan growth is not that far off, the bank has started to think about capital deployment and consensus estimates are too low. BMO is trading at 9.0 times our revised 2022 estimates, suggesting there is still attractive upside in the stock.”
* National Bank Financial’s Gabriel Dechaine to $93 from $87 with a “sector perform” rating.
* Canaccord Genuity’s Scott Chan to $103.50 from $94.50 with a “buy” rating.
* Desjardins Securities’ Doug Young to $100 from $93 with a “hold” rating.
* TD Securities’ Mario Mendonca to $110 from $105 with a “buy” rating.
“We believe BNS has turned the corner on credit. A higher valuation seems warranted, but to attain past premium valuation multiples, we need proof that its International segment will revert to the strong revenue growth trajectory of the past; PCLs must also improve,” said RBC Dominion Securities analyst Darko Mihelic.
Keeping a “sector perform” rating, he raised his target to $71 from $61, exceeding the current consensus of $68.55.
“We stop short of reestablishing BNS’s premium valuation multiple, as we are not yet convinced that its International segment can materially outperform Canadian bank peers’ International segments,” Mr. Mihelic added.
Others raising their targets included:
* Desjardins Securities analyst Doug Young increased his target to $70 from $67 with a “buy” rating, saying he’s “encouraged” by the outlook for the bank’s international operations.
* CIBC’s Paul Holden to $72 from $70 with a “neutral” rating.
“BNS posted positive results on credit, capital and expenses. While we increase our EPS estimates for lower PCLs, we maintain a conservative view on PTPP growth in International Banking,” he said.
* Canaccord Genuity’s Scott Chan to $66.50 from $63.50 with a “hold” rating.
* Credit Suisse’s Mike Rizvanovic to $66 from $63 with a “neutral” rating.
“Our biggest takeaway from Q4 was centered on BNS’s International segment, which we view as the most prominent potential catalyst in driving a positive re-rating of the bank’s shares,” he said. “Management provided updated earnings guidance for the segment, suggesting that a $500-million quarterly run-rate could be achieved by the end of F2021 as PCLs moderate and fee-based revenue recovers. We view that as a bit too optimistic in light of the continued underperformance in loan growth that we’ve seen in each of the Pacific Alliance countries vs. industry peers in recent months, particularly in commercial lending. As such, we have modeled a more prolonged recovery for the segment through our forecast period.”
Citing increased confidence in an eventual recovery, National Bank Financial analyst Cameron Doerksen upgraded Air Canada (AC-T) to “outperform” from a “sector perform” recommendation, seeing the airline “well positioned” despite the expectation for a “tough” 2021.
“With the roll-out of multiple seemingly effective vaccines on the horizon, we are increasingly confident that demand for air travel will begin to recover more meaningfully at some point in 2021 and that a full-fledged rebound could be underway in 2022,” he said. “We are therefore upgrading Air Canada shares ... as we expect sentiment around the stock will continue to improve over the next twelve months.”
“We continue to expect Air Canada to generate a material EBITDA loss in 2021 and do not see free cash flow turning positive until Q2/22. Indeed, even as vaccines are deployed we expect the Canadian government to be cautious in re-opening borders and dispensing with other travel restrictions. However, with ample liquidity ($8.7-billion) to manage through the remainder of the crisis and our modeling that shows leverage will still be manageable (3.3 times at year-end 2022), we believe Air Canada will be well positioned to capitalize on an upturn in travel.”
Noting Air Canada has underperformed the broader sector this year, sitting down 49 per cent versus a 25-per-cent drop in the U.S. airline index, Mr. Doerksen hiked his target for its share to $32 from $21. The average target on the Street is $25.09.
“We attribute this in part to the fact that Canada has had among the most restrictive conditions for air travel globally and because, unlike in other countries, the Canadian government has so far not provided any specific financial aid to the airline sector,” he said. “Presumably, as vaccines are rolled out in 2021, the need for quarantines and other restrictive measures will ease.”
“We have not adjusted our estimates for Air Canada and continue to see 2021 as a challenging year financially, but to reflect what we expect will be improving sentiment towards the sector, we increase our valuation to 7.5 times EV/EBITDA based on our 2022 estimates, up from 6.0 times previously. We note that our 2022 EBITDA estimate for Air Canada is still 37 per cent below the 2019 level and does not represent what we believe will be ‘normalized’ earnings.”
IBI Group Inc.’s (IBG-T) acquisition of Cole Engineering Group is a “strategic fit that should be accretive for shareholders,” according to Desjardins Securities analyst Benoit Poirier, who expects management to “remain on the lookout for further M&A opportunities.
On Monday, the Toronto-based professional services company announced the deal for one one of the largest independent civil engineering firms in Ontario. It did not disclose financial terms of the agreement, but Mr. Poirier estimates it will bring to 2 cents of earnings per share accretion in 2021 and net revenue of $23–27-million per year.
“From a strategic standpoint, Cole’s water master planning practice will complement IBI’s current infrastructure expertise by contributing its background in water/wastewater demand modelling and planning,” he said. “These new capabilities should help strengthen IBI’s BlueIQ solution while opening new cross-selling opportunities. Management also indicated that Cole’s training and accreditation program for water facilities staff is aligned with its priorities to increase its exposure to operations optimization and asset management (recurring business). Finally, Cole’s expertise in urban development and land engineering will also solidify IBI’s strong urban capabilities by expanding the scope of its site development services offering.”
After raising his revenue and earnings expectations through 2022, Mr. Poirier increased his target for IBI shares to $9.75 from $9.50, keeping a “buy” rating. The average is $9.14.
“Bottom line, we are very pleased with the resumption of M&A, which should enable IBI to solidify its expertise in urban centres with Cole’s strong water expertise while opening new cross-selling opportunities for its Intelligence practice,” he said. “IBI currently trades at 6.8 times EV/FY1 EBITDA, a 6.0 times discount vs its engineering services peer group, which we view as unjustified given its stronger margin profile and growing Intelligence practice. We expect the stock to be re-rated as the SaaS business grows and management continues to strategically deploy capital toward M&A over the mid-term.”
Elsewhere, Laurentian Bank Securities’ Nauman Satti raised his target to $10 from $9.50 with a “buy” recommendation.
”With a significant focus on the water sector, a target of interest for IBI, we view the transaction as complimentary to the company’s legacy business and believe purchase price metrics are favorable and in keeping with management’s prudent strategy,” he said. “Although proforma margins tick down slightly in 2021, we believe that significant cross-selling opportunities exist with its current Infrastructure portfolio and Intelligence offering.”
PI Financial analyst Devin Schilling increased his target to $9.50 from $9.25, keeping a “buy” rating.
Premium Brands Holdings Corp. (PBH-T) landed “a prize catch” with its joint venture acquisition of Clearwater Seafoods Inc. (CLR-T), said Desjardins Securities analyst David Newman upon resuming coverage.
In early November, the Vancouver-based company announced a partnership with a group of seven Mi’kmaq First Nations to acquire the Bedford, N.S.-based seafood giant for $1-billion. It will own a 50-per-cent interest in the company.
On Tuesday, it closed its $230-million public equity offering and a $57.5-million private placement with Canada Pension Plan Investment Board. The proceeds will be used to fund the Clearwater deal.
“We believe this landmark deal should bring PBH multiple benefits: (1) Creation of an industry-leading global seafood platform. (2) Immediate double-digit EPS accretion (we estimate 14 per cent). (3) A synergistic growth platform given the highly complementary strengths of the three parties involved, which could drive synergies of $20–25-million over 3–5 years through (i) leveraging CLR’s upstream capabilities and international sales platform; (ii) PBH’s value-added processing capabilities, growing distribution platform (Ready Seafood, Allseas, etc) and strong North American account base, which could enhance margins on CLR’s products; (iii) ability to explore growth opportunities at CLR; and (iv) cost savings in time. (4) Stable cash flow generation (PBH receives $51.8-million per annum). (5) A groundbreaking First Nations partnership,” said Mr. Newman.
Maintaining a “buy” rating, he raised his target for Premium Brands shares to $124 from $118. The average on the Street is $117.88
“In addition to gaining critical mass on a number of fronts (new channels, products and customers), PBH continues to effectively execute on an active M&A pipeline including the accretive acquisition of CLR,” he said.
Elsewhere, BMO Nesbitt Burns’ Stephen MacLeod upgraded Premium Brands to “outperform” from “market perform” with a $125 target, rising from $112.
“Even before the acquisition announcement, Premium Brands’ end market diversity, solid underlying volume growth (up 9.1 per cent in Q3/20), and new customer relationships led to results exceeding expectations through the pandemic,” said Mr. MacLeod.
“When combined with estimated double-digit PF earnings accretion from the Clearwater acquisition, valuation is attractive.”
Believing its liquidity issues must be addressed, Mackie Research analyst Greg McLeish lowered Flower One Holdings Inc. (FONE-CN) to “under review” from “buy” on Wednesday.
“Flower One has historically funded its operations from debt and equity raises,” he said. “Flower One currently is actively seeking capital. However, there can be no assurance that the company will be successful in raising enough capital to meet its short or long-term obligations until such time that it reaches positive cash flow net of debt and operational obligations.”
Mr. McLeish removed his $1.25 target for its shares. The average is 99 cents.
In response to weaker-than-anticipated third-quarter financial results, Haywood Securities analyst Neal Gilmer lowered WeedMD Inc. (WMD-X) to “hold” from “buy.”
“Q3/20 results were below our estimates due to lower medical cannabis sales, somewhat offset by growth in adult-use and a return of wholesale to other LPs,” he said. “While the release of additional product formats should help brand adoption in the adult-use market, revenue growth continues to lag our expectations.”
Mr. Gilmer trimmed his target to 30 cents from 50 cents. The average is $1.20.
“Management continues to transition the Company following the Starseed acquisition announced a year ago. Revenue and market share growth have trailed our expectations,” the analyst said. “WeedMD has worked to introduce new product formats to the market and we encourage investors to monitor the success of the products as well as traction in the medical channel to return to prior levels. The balance sheet is sufficient in the near-term with a little over $30-million in cash.”
In a separate note, Mr. Gilmer raised his target for Aphria Inc. (APHA-T) to $12.25 from $8.26 with a “buy” rating. The average is $9.70.
“On Monday Aphria announced it had closed the acquisition of SweetWater, its strategic entry into the United States and one of the largest independent craft brewers in the country,” he said. “We view this as a step to accelerate entry to the U.S. market and an opportunity to create brand awareness in advance of potential future legalization. In the near-term, the Company is able to diversify revenue with an acquisition of an EBITDA accretive business.”
“We continue to view Aphria as a leader in the Canadian LP landscape, now with a further diversified revenue base. We expect the Company will continue to demonstrate its leading position, supported by revenue growth and expanding EBITDA margins in F2021. The shares have performed well in November up 82 per cent in the month that could lead to near-term volatility. We remain positive on the name on the fundamental outlook for the company while recognizing the potential choppy trading environment.”
Dore Copper Mining Corp.’s (DCMC-X) portfolio of high-grade copper-gold deposits “offer near-term production potential and significant upside from ongoing exploration efforts,” according to Paradigm Capital analyst David Davidson.
In a research note released Wednesday, he initiated coverage of the Toronto-based company with a “speculative buy” rating.
“Dore Copper has consolidated an attractive portfolio of high-grade copper gold assets in Chibougamau, Quebec, including several past-producing operations and a 2,700-tpd mill,” he said. “The hub-and-spoke project is well positioned to benefit from low jurisdictional and execution risk given the tier 1 location, proximity to existing infrastructure and access to utilities. In addition to the large resource base and near-term production potential, the project holds significant upside exploration potential and is supported by compelling copper-gold market fundamentals.”
He set a target of $1.60 per share. The average is $2.50.
“We view Dore Copper as a near-term producer, given the mines were successfully operating just over 10 years ago and were closed mainly owing to the collapse of commodity prices in 2008,” said Mr. Davidson. “Dore has access to a central mill and the associated infrastructure is a bonus. We value the company using a 12-per-cent discount rate based on a production scenario that sees first copper-gold production in 2024 and a 12-year mine life with staged production principally from four mines. While there is significant potential to add addition mill feed, there is no NI 43-101 resource currently. We calculate a company NAV [net asset value] of $2.12/share.”
In other analyst actions:
* RBC Dominion Securities analyst Irene Nattel for Dollarama Inc. (DOL-T) to $64 from $60, keeping an “outperform” rating. The average is $55.62.
* Scotia Capital analyst Michael Doumet raised his target for Intertape Polymer Group Inc. (ITP-T) to $33 from $32.50 with a “sector outperform” rating. The current average on the Street is $27.19.
* Raymond James analyst Brian MacArthur raised his target for Osisko Gold Royalties Ltd. (OR-T) to $21.50 from $20 with an “outperform” rating. The average is $22.39.
“We believe OR offers investors a high-margin business with growth, a flexible balance sheet, as well as a diversified portfolio of development/exploration companies with low jurisdictional risk,” he said.
* CIBC World Markets analyst Raphael de Douza raised his target for Ero Copper Corp. (ERO-T) to $23.50 from $21 with a “neutral” recommendation. The average is $23.22.
* Citing “value creation optionality,” Industrial Alliance Securities analyst Frédéric Blondeau raised his target for Artis REIT (AX.UN-T) to $13 from $11.50 with a “buy” rating. The average is $11.36.
* After the US$62-million acquisition of Vanguard Modular Building Systems, Raymond James analyst Frederic Bastien raised his target for Black Diamond Group Ltd. (BDI-T) to $2.75 from $2.25 with an “outperform” rating. The average is $2.46.
“We favour this deal because it ticks many boxes for BDI—namely, it doubles the size of the Modular Space Solutions (MSS) fleet in the U.S., adds critical scale in the attractive education vertical, enhances leadership depth and sales talent, and promises to be accretive to EPS to the tune of 7 cents,” he said. “We should also note that while Vanguard temporarily pushes Black Diamond’s net debt-to-adjusted EBITDA up to 3.6 times on a pro-forma basis, there is a clear path to lowering it to within management’s target range of 2.0 times to 3.0 times.
“We believe Flyht Aerospace Solutions is positioning itself to emerge from the current environment with top-line growth and improving profitability,” he said. “We view the appointment of former CEO Bill Tempany as interim CEO and the strategic shift to focusing on SaaS revenue as key developments being overlooked by investors. We acknowledge the airline industry is navigating a challenging backdrop and are not assuming an immediate hockey stick-like snapback. However, we think the stock’s decline (down 53 per cent year-to-date vs. the R2K’s rise of 10 per cent) and current valuation (5 times 2022 EPS) only reflects the well-known near-term headwinds from the macro without any appreciation for how the transition to a more SaaS-based revenue stream will impact the P&L. With sentiment apathetic at best and conservatively set estimates, we believe this creates an attractive setup for shares where the Company will only need to show incremental improvement in the near-term and should benefit from any positive travel-related headlines.”