Inside the Market’s roundup of some of today’s key analyst actions
Citing an improved outlook stemming from the rollout of the COVID-19 vaccine, Fundamental Research analyst Sid Rajeev raised his 2021 forecast for Canada’s Big 5 banks in the wake of stronger-than-expected fourth-quarter financial results.
“Earnings were higher due to lower-than-expected provisions, as well as faster loan growth in Q4,” he said. “As the rollout of vaccines is expected to take three to six months, we expect all the banks to report Provision for Credit Losses (PCL) higher than historic levels, but lower than FY2020 levels.
“We expect earnings to improve for all the banks in FY2021, on the back of stronger loan growth, and lower provisions. However, our FY2021 dividend yield forecasts dropped across the board due to significant share price appreciation since our previous report in September 2020.”
After increased his fair value projections for the banks’ stocks, Mr. Rajeev upgraded his rating for Toronto-Dominion Bank (TD-T) to “buy” from “hold” with a $78.36 target, rising from $66.47. The average on the Street is $75.57.
Mr. Rajeev also made these changes:
- Royal Bank of Canada (RY-T, “hold”) to $102.97 from $89.93. Average: $111.89.
- Bank of Nova Scotia (BNS-T, “buy”) to $71.70 from $66.04. Average: $70.27.
- Bank of Montreal (BMO-T, “buy”) to $108.66 from $94.07. Average: $102.60.
- Canadian Imperial Bank of Commerce (CM-T, “buy”) to $117.46 from $108.25. Average: $122.28.
“Based on our fair value estimates and dividend forecasts, we believe BMO has the highest expected total return. BNS and CIBC are expected to have the highest yields,” he said.
In a research note analyzing the deal, which was announced late Tuesday, Mr. McCrea raised his rating for Whitecap to “strong buy” from “outperform.”
“Back with Q3, WCP hinted that ‘maybe we start to bring strong on strong together versus many of the past deals that have been weak on weak,’” he said. “Whitecap followed through with that statement with its announced merger with TORC, creating a 100 mboe/d, oil-weighted company. More importantly, both entities have a history of return focused culture, that with additional scale, negotiating power, and cost synergies, should continue to drive top tier profitability.
“Overall, the energy business is quickly changing and size and scope matter more than ever. Whitecap is quickly showing it will be consolidator and as we’ve seen with other acquirers in the U.S. and Canada, strong with strong transactions are typically rewarded. ... We expect a number of new shareholders could begin a buying spree over the next several months.”
Mr. McCrea raised his target for Whitecap shares to $5.50 from $4.25. The current average is $4.03.
Elsewhere, Canaccord Genuity’s Anthony Petrucci raised his target for Whitecap shares to $5.50 from $3, maintaining a “buy” rating.
“Considering the considerable overlap in asset bases, we view the amalgamation of these two premier Jr/Int E&P’s as favourable, particularly given the increased size and liquidity of the combined entity,” he said.
“Combined with the recent acquisition of NAL, in short order WCP has added 40,000 barrels of oil equivalent per day of production, increasing total production by over 60 per cent. As the dust settles, we believe WCP is poised to emerge from 2020 in a position of strength, given an improved balance sheet, a reduced payout ratio, and the size and scale of a major player within the light oil space in Canada.”
BMO Nesbitt Burns’ Ray Kwan raised his target to $5.50 from $3.50 with an “outperform” rating.
“We believe the Whitecap/TORC combination allows two well-positioned companies to benefit from a larger entity, which is capable of generating significant free cash flow and improved returns,” said Mr. Kwan.
“Whitecap is clearly emerging as the premium oil weighted consolidator in Western Canada, which we view positively.”
On TORC, ATB Capital Markets analyst Patrick O’Rourke views the deal as a “positive.”
“Although we view TOG as a strong operator, with noteworthy institutional sponsorship from CPPIB and a solid track record of execution, the strength of the combined pro-forma entity and potential upside (our TOG target price as a read-through of our WCP target increases with this announcement) presents a very appealing larger oily entity for institutional investors,” he said.
Mr. O’Rourke moved TORC to “tender” from “outperform” with a $3.27 target, up from $3. The average is $2.59.
Sylogist Ltd.’s (SYZ-X) renewed focus on organic growth, M&A and improved investor relations will “lay the foundation for increasing support from investors and higher valuation multiples,” according to Acumen Capital’s Jim Byrne.
Following a meeting with Bill Wood, the Calgary-based IT service management company’s new chief executive officer, he raised his rating for its shares to “buy” from “speculative buy.”
“In our view, SYZ has a well-established base business that is highly profitable,” said Mr. Byrne. “Investors had lost interest given slowing growth, lack of M&A, and previous issues with management compensation. A new leader with a solid track record of delivering growth should go a long way in improving the streets’ view of SYZ.
“We believe there are multiple opportunities for the company to deploy available capital, which exceeds $80-million, to reinvigorate the company’s growth profile. With the shares trading at a 65-per-cent discount to the peer group, there is considerable room for upside from current levels.”
He hiked his target to $16 from $13. The average on the Street is $13.25.
“We believe the current trading levels offer an opportunity for investors looking for a software company that is priced much lower than the eye-popping multiples of its peers all while delivering an attractive yield and strong profitability,” said Mr. Byrne.
Desjardins Securities analyst Gary Ho said he’s “encouraged” by Alaris Equity Partners Income Trust’s (AD.UN-T) “positive” corporate update and “its ability to execute on investments in the current environment.”
On Tuesday, the Calgary-based firm confirmed the closing of a $46-million bought deal. It also announced a raise in its fourth-quarter revenue guidance to $31-million from $26-million, leading Mr. Ho to raise his earnings and capital deployment expectations through 2022.
Upon resuming coverage following the equity raise, Mr. Ho also raised his target for Alaris units to $18 from $16.50, keeping a “buy” rating. The average is $17.50.
“The higher valuation reflects an improved capital deployment outlook and continued performance in its existing portfolio, highlighted by earlier-than-expected distribution payments from Kimco and BCC,” he said.
“The units remain attractively valued, trading at 1.0 times P/BV with an 8.3-per-cent distribution yield.”
Elsewhere, CIBC World Markets analyst Scott Fromson upgraded Alaris to “outperformer” from “neutral” with a $19 target, rising from $15.50.
Scotia Capital’s Phil Hardie increased his target to $16 from $15 with a “sector perform” recommendation.
Echelon Capital Markets analyst Rob Goff sees Skylight Health Group Inc. (SHG-CN) as a “compelling” investment, pointing to “its ability to add shareholder value through organic and acquisition-driven growth as a U.S. health clinic consolidator.”
“We believe current healthcare needs together with provider challenges in a fragmented industry present the opportunity for significant and sustained shareholder value creation,” he said. “Returns rest squarely upon the execution of the Company’s transition to primary care and its acquisition capabilities. With a clearly defined market opportunity, our bullish stance reflects confidence in management and the Board’s ability to successfully execute.”
In a research report released Wednesday, he initiated coverage with a “speculative buy” rating.
The Mississauga-based company is a U.S. provider of multi-disciplinary services with more than 30 physical clinics across 14 states and possessing a proprietary virtual telehealth and electronic medical record platform. In late November, it announced a rebranding from CB2 Insights previously and a new corporate plan focused on “robust” expansion.
“We forecast sustained, aggressive returns about a copy/paste/accrete/repeat consolidation drive where telehealth is a core element of the Company’s integrated primary care model,” said Mr. Goff.
“The fragmented industry structure of ‘waste and want’ clearly drives the consolidation thesis where technology and scale are enablers. These preconditions then saw the COVID-19 pandemic advance virtual care at a pace where months have equated to non-pandemic years in terms of patient and physician adoption, regulatory support, and capital deployment. Marquee leaders have quickly emerged to address the market opportunity. We see Skylight pursuing a similar technology-enabled, comprehensive primary care model where it introduces technology and integrated care capabilities as a consolidator of secondary markets.”
Mr. Goff sees Skylight focusing on building a network in secondary markets with comprehensive primary care capabilities.
“Its platform approach expands its total addressable market (TAM) through comprehensive care while affording significant patient efficiencies,” he said.
“Within both the subscription and fee-for-service models, we see an attractive opportunity to build scale targeting secondary markets and smaller organizations beyond the current radar of its marquee peers. We are bullish on secondary markets and analogously smaller employers where reduced competitive intensity is a positive backdrop for both organic and inorganic growth while supporting lower-cost models (lower rents, physician salaries) while fees remain unchanged. It is a classic strategy to adopt the role of a secondary market consolidator where a potential exit would command an aggregator’s premium.”
Though its shares are up 820 per cent year-to-date, Mr. Goff continues to seem them as undervalued on a relative basis, setting a $1.35 target. The average target on the Street is $1.05.
“We note that each of SHG, WELL and DOC shares with $10-million, $80-million and $50-million, respectively, have roughly 5-10 per cent of their enterprise valuation in cash ready for acquisitions,” he said. “We believe SHG’s scale affords investors greater leverage to acquisition-driven returns given its market capitalization to pipeline ratio ($50-million in revenues).”
“Looking forward, Skylight looks to remain EBITDA positive with growth reinvested to stimulate patient adoption, clinic acquisition, and further investment in its technology platform. We look for the Company to pursue acquisitions of increasing scale as it evolves. Within its given pipeline, the Company has seen a shift to larger, higher-margin clinics with improved growth trends. With its increasing public market profile and given the move to larger acquisitions that will likely be sourced from private equity in some cases, we see Skylight introducing acquisition earnouts (extending beyond current transition payments) and using its equity as currency.”
H2O Innovation Inc.’s (HEO-X) outlook remains “robust” following Tuesday’s release of its strategic priorities for the next three years and “ambitious” financial guidance for fiscal 2023, according to Industrial Alliance Securities analyst Naji Baydoun, who continues to forecast “strong” top- and bottom-line growth through 2025.
“From a financial perspective, depending on HEO’s success at executing on tuck-in acquisitions, we estimate that $15-75-million of new investment via M&A could drive 9-23-per-cent FCF [free cash flow] per share growth compared to our current long-term financial forecasts,” he said. “We remain conservative in our financial forecasts and continue to exclude acquisitions from our estimates. However, based on HEO’s (1) current balance sheet position, and (2) FCF generating power, we believe that the Company has the financial flexibility to pursue several tuck-in acquisitions over the near term. In our view, the Company could achieve the lower half of its F2023 financial guidance range via a combination of organic growth and M&A without the need for any discrete external common equity financing at this time.”
Reiterating a “buy” rating, he increased his target for the Quebec City-based company’s shares to $2.75 from $2.25. The average is currently $2.54.
“HEO offers investors (1) high single-digit revenue growth (6-8 per cent per year, CAGR [compound annual growth rate] F2020-25), (2) high single-digit to low double-digit FCF/share growth (8-11 per cent per year, CAGR F2020-25), (3) a discounted valuation compared to peers, and (4) potential upside from additional bolt-on acquisitions and strategic M&A,” said Mr. Baydoun. “We have adjusted our financial estimates/valuation to reflect expectations for (1) accelerating growth and higher profitability, (2) a 50 basis points decrease in our DCF model’s discount rate (reflecting a lower risk profile), and (3) an increase in our DCF terminal exit multiple to 12 times EV/EBITDA (from 10 times previously, now more in line with HEO’s current FY2E relative valuation multiple).”
“HEO continues to trade at a relative valuation discount to water-linked peers, which we believe does not fully reflect the Company’s improving financial and risk profile (Exhibit 8). As HEO continues to execute on its growth strategy, we see the potential for the relative valuation gap with peers to shrink over time.”
Calling it “a growth story with more to come,” Laurentian Bank Securities analyst Nick Agostino initiated coverage of Docebo Inc. (DCBO-T) with a “buy” rating on Wednesday, seeing the Toronto-based employee-training software provider “winning plaudits in a fragmented industry.”
“Industry research from Markets and Markets estimates the global HCM [human capital management] industry at US$17.6-billion, growing to US$24.3-billion by 2025 at a 6.7-per-cent CAGR [compound annual growth rate],” he said. “Meanwhile, Technavio calculates the high-growth LMS market to grow at a 23-per-cent CAGR from US$8.5-billion to US$19.35-billion by 2024.
“Within this highly fragmented marketplace, we expect DCBO to grow sales substantially through our forecast period ending 2022 (43.7-per-cent 3-year CAGR), as the company gains market share on the back of a growing focus on talent development and e-learning by corporations. We estimate DCBO’s targeted approach offers US$4.6-million in TAM upside relative to industry forecasts as the pandemic offers unique catalysts.”
Mr. Agostino said Docebo’s focus on innovation is “separating” the company “from the pack,” noting: “With a product-centric approach, DCBO has been leveraging AI heavily from content curation to effective learning measurement. Its latest advent with its self-generating content ‘Shape’ module is a testament to the innovation process that is driving rapid expansion.”
Also touting its “unique” functionality and “rapid” subscription sales growth, he set a target of $80 per share. The average is $64.57.
“With publicly traded LMS/HCM and Canadian SaaS [software as a service] comps trading at 10 times forward EV/Sales, we believe a premium for DCBO is warranted largely to reflect its strong organic growth rate,” he said. “Key catalysts include AI-enabled developments, expansion of its OEM/VAR ecosystem and capability-enhancing M&A, with risks emanating from geographical expansion, competition from larger players and cybersecurity. DCBO has a strong management team with an average 13 years of technology/SaaS experience.”
Elsewhere, TD Securities’ Daniel Chan raised his target to $77 from $66, maintaining a “buy” rating.
Believing its shares “still have room to go,” BMO Nesbitt Burns analyst Ryan Thompson initiated coverage of GoGold Resources Inc. (GGD-T) with an “outperform” rating.
“With a dearth of silver exploration assets in the marketplace, we see the potential for GoGold’s Los Ricos project to eventually garner a scarcity premium,” he said. “Given GGD’s sizable exploration potential, self-funded through its Parral Tailings project, we anticipate numerous potential catalysts in the near term: a PEA for Los Ricos South (January), ongoing results from the aggressive 100,000-metre exploration program, and a maiden resource estimate for Los Ricos North (late Q2/2021).”
“These deliverables have potential to be value-generating events, underpinning our Outperform (Speculative) rating.”
He set a $2.30 target, which exceeds the consensus by 10 cents.
Citi analyst Shawn Collins expects a strong holiday season for global toymakers as the restrictions brought on by the COVID-19 pandemic continue to force consumers to seek out options for at-home entertainment.
“Demand for popular products is expected over the Christmas holiday in 2020, when most purchases of traditional toys and games are made,” he said. “We note that almost 2/3 of sales comes in the second half [of the year] for both HAS and MAT. We expect Hasbro will have a relatively strong Holiday season (with its broad line-up of toys & games). In addition, we expect the resumption of entertainment production activities at eOne should benefit Hasbro’s 4Q. We expect that Barbie and American Girl (doll category) should have a strong Holiday season performance for Mattel.
“The pandemic has boosted sales in some toy categories as consumers seek entertainment options at home, such as a spike in demand for games, puzzles, and digital/video games. We note that the COVID shutdown of retail stores in 2Q caused an unusually weak 1H20 for both HAS & MAT. E-commerce in the toy industry accounts for 30 per cent of sales, up from 20 per cent in ’19, driven by the COVID lockdown. This E-commerce trend appears to be here to stay.”
Though he sees the valuation for both as “reasonable,” Mr. Collins thinks Hasbro " presents a more solid buying opportunity of the two.” He set a target of US$120, which exceeds the current consensus of US$98.33.
“We rate Hasbro a Buy relative to Mattel’s Neutral rating as we believe Hasbro is further along in its transition from a Toy company to a Toy & Entertainment company than Mattel,” he said. “Specifically, Hasbro has been a) active in integrating its owned toy brands into movies & digital offerings, b) has a long and successful history of partnering with Disney on movies/toys, and c) purchased the independent studio eOne in early 2020 ($5-billion). With a strong holiday season, easy comps in the 1H21 and a more attractive valuation, we rate HAS Buy.”
“We are encouraged by the following. 1) Hasbro’s diverse toy portfolio is more diversified than industry rival Mattel. 2) Strongest management team execution in industry led by CEO Brian Goldner (since 2008) transformed Hasbro from a toy manufacturer to a brand manager (and now strongly towards entertainment). 3) Potential eOne synergies and transformation after $4.6 billion acquisition of independent studio in Dec 2019. 4) Lastly, toys are relatively recession resistant, given the reasonably low price point. U.S. industry sales declined 3 per cent year-over-year during the 2008 GFC.”
Mr. Collins said he’s taking a “wait and see approach” toward Mattel. He set a US$17.50 target, versus the US$15.88 average.
“Mattel is a leading global toy company with top brands such as Barbie, Hot Wheels, Fisher-Price, Thomas & Friends, and American Girl,” he said. “Mattel remains a Turnaround situation with new management since 2018, after a difficult period beginning in 2015 which included management turnover, sales losses, and restructuring activities. Mattel is in the midst of a plan to restore profitability and regain topline growth. We are impressed with the progress the company has made but continue to take a wait and see approach, especially in a more digital world where screens are attracting kids at younger ages. We watch margins closely at MAT, where EBIT margins are 8 per cent versus 15 per cent at HAS.”
In other analyst actions:
* Credit Suisse analyst Andrew Kuske downgraded Acadian Timber Corp. (ADN-T) to “underperform” from “neutral” with a $16 target. The average is $16.90.
“Given specific issues on the COVID vaccine roll-outs, there is arguably a more pro-cyclical environment evolving along with the continuation of very robust demand associated with the solid woods subsector part of the market,” he said. “With this dynamic, we favour more cyclical exposure and those with growing dividends. In our view, there are clearly positive elements of ‘new’ Acadian’s strategy, cost focus and exposure. Yet, we believe the stock lags other investable opportunities on dividend growth, the yield offering and on comparative valuation. As a result, we downgrade Acadian Timber.”
“Over the past several years, we believe Newmont has done a good job of restructuring its portfolio and improving its operational excellence,” he said. “It offers investors exposure to gold through a lower jurisdictional risk, global portfolio that generates solid cash flow and is supported by a strong balance sheet. In addition, it is the only S&P-listed gold stock and had a dividend framework designed to share excess free cash flow with shareholders.”
* TD Securities analyst Tim James lowered Magellan Aerospace Corp. (MAL-T) to “hold” from “buy” with a $10.50 target, up from $9.50. The average is $9.50.
* Mr. James raised his target for Heroux Devtex Inc. (HRX-T) to $18 from $16, keeping a “buy” recommendation. The average is $17.50.
* CIBC’s Robert Catellier trimmed his target for Enbridge Inc. (ENB-T) by a loonie to $47, keeping an “outperformer” rating, while National Bank Financial analyst Patrick Kenny cut his target to $54 from $55 also with an “outperform” rating. The average is $50.61.
* RBC Dominion Securities analyst Walter Spracklin raised his target for Air Canada (AC-T) to $30 from $23 with an “outperform” rating. The average is $26.66.
* National Bank Financial analyst Maxim Sytchev hiked his ATS Automation Tooling Systems Inc. (ATA-T) target to $28 from $22 with an “outperform” rating, while TD Securities’ Cherilyn Radbourne increased her target to $31 from $28 also with an “outperform” recommendation. The current average is $28.67.
* TD Securities analyst Tim James moved his target for GFL Environmental Inc. (GFL-T) to $36 from $32 with a “hold” rating. The average is $32.35.
* Scotia Capital analyst Trevor Turnbull cut his target for Lundin Gold Inc. (LUG-T) to $17 from $17.50, maintaining a “sector outperform” rating, while BMO’s Brian Quast raised his target to $20 from $19 with an “outperform” recommendation. The average is $16.73.
* Desjardins Securities analyst David Stewart raised his target for shares of Fiore Gold Ltd. (F-X) to $2.75 from $2.15 with a “buy” rating. The average is $2.59.
“Fiore released an impressive reserve and resource update for its Pan mine in Nevada,” he said. “The company successfully converted a significant portion of resources and offset two years of mining depletion since the previous reserve estimate in 2018, and this has all been done with minimal drill budgets. This is a key milestone as it should enable Pan and Gold Rock, which we expect to start up in 2023, to produce concurrently, vaulting Fiore’s production profile to 100kozpa.
“Fiore’s valuation remains compelling as the shares currently trade at 0.49 times at spot gold vs the junior producer peer group at 0.7 times based on consensus. Once Gold Rock starts up in 2H23, we forecast annual FCF of US$53-million from 2024–26 at spot gold with both Pan and Gold Rock producing concurrently, representing a yield of 55 per cent.”