Inside the Market’s roundup of some of today’s key analyst actions
Canaccord Genuity analyst Aravinda Galappatthige raised his rating for Cineplex Inc. (CGX-T) after it was awarded $1.24-billion in damages by the Ontario Superior Court of Justice over its botched deal with UK-based Cineworld Group plc.
While warning ”there may still be a long road ahead before the matter comes to a close,” he upgraded the theatre chain’s shares to “speculative buy” from “hold” on Wednesday.
“We suspect that Cineworld will appeal this decision, particularly considering the magnitude of the award,” said Mr. Galappatthige. “The company has 30 days to appeal the decision. It should be noted, however, that the appeal process would not represent an entire rehashing of facts and arguments but be limited to specific points of law. We thus do not expect this to be multi-year process.”
“The $1.24-billion translates to $19.60 per share based on the basic shares outstanding, and $13.45 per share based on the diluted share count including the convertible notes, which are now in the money. It appears to us that the award was generally based on the difference between the $34 per share acquisition price and the share price of Cineplex when Cineworld delivered the notice of termination with respect to its acquisition agreement.”
The analyst said “the question is enforceability,” noting Cineworld has “sizable” leverage in its balance sheet, projecting net debt stands of US$8.435-billion.
“Even on F2022 consensus expectations, this translates to 6.88 times net debt/forward EBITDA,” he said. “We believe that if Cineworld does not honour the court-awarded damages, Cineplex may then have to seek enforcement in the UK courts, which in turn opens up a series of new questions and uncertainties.”
After adjusting his valuation to account for the ruling, Mr. Galappatthige raised his target for Cineplex shares to $19 from $15. The average on the Street is $17.36, according to Refinitiv data.
“Considering the upside to the target price, we have upgraded the stock to SPEC BUY from Hold. We believe SPEC BUY is the appropriate rating considering the uncertainty we have with respect to the full process including enforceability. We are also considering near-term risk owing to the Omicron variant, which threatens to delay a fuller recovery in the theatre business.”
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In the wake of Algonquin Power & Utilities Corp. (AQN-N, AQN-T) revealing lower earnings growth expectations at its Investor Day on Tuesday, iA Capital Markets’s Naji Baydoun said he’s remaining on the “sidelines” with its stock, waiting for “a better entry point or further strategic developments at this time.”
He was one of several equity analysts on the Street to trim their financial projections and target price for shares of the Oakville, Ont.-based company after it introduced 2022 earnings per share guidance of 72-77 US cents, representing just 5-per-cent year-over-year growth. Its longer-term estimate was lowered to 7-9 per cent per year on average from a range of 8-10 per cent previously.
“Although we expect AQN to continue generating healthy risk-adjusted returns on invested capital, the Company’s updated capital plan (up more than 30 per cent) and long-term adjusted EPS growth expectations (relatively unchanged) would imply a shift in the return profile of its investments; this is likely impacted by the recently announced large-scale acquisition in Kentucky, which boasts a lower return profile relative to AQN’s existing regulated utility franchises,” he said. “Meanwhile, we continue to expect dividend growth to lag Adj. EPS growth in order to drive the payout ratio lower over time.”
“AQN continues to expect to finance its substantial growth from a combination of debt, equity, and hybrid instruments; in particular, we note two elements worth highlighting: (1) AQN’s current capital structure includes room for incremental low-cost hybrid financings, and (2)management expects to source funding from capital recycling initiatives starting in 2022. Although AQN has highlighted capital recycling as a potential value maximization lever in the past, management expects the Company’s current expanded scale in renewable power to support near-term execution on capital recycling initiatives.”
At the same time, Algonquin unveiled a new five-year, $12.4-billion capital program for 2022 through 2026, up $3-billion from its 2021-25 plan. It exceeded Mr. Baydoun’s projection.
“The Company’s overall capital plan remains weighted towards regulated utility investments ($8.8-billion or 71 per cent) relative to renewable power growth ($3.6-billion or 29 per cent),” he said. “Major new growth initiatives include (1) $2.8-billion for the pending acquisition in Kentucky, (2) $1.5-billion of new regulated investments, and (3) $2.1-billion of anticipated new renewables addition.
“The $12.4-billion figure is above our expectations of approximately $9.0-9.5-billion, although we note that it includes (1) $0.6-billion for a pending acquisition we previously expected to close in 2021, and (2) $1.4-billion of renewable power investments that are yet to be sourced; however, management is confident in its ability to source additional growth opportunities from its 3.8GW development pipeline (up from 3.4GW previously), and expects to convert 1.0GW of prospects into new growth over time.”
With revisions to his financial estimates, leading to adjustments to his valuation models, Mr. Baydoun cut his target for Algonquin shares to $20 from $21 with a “hold” recommendation. The average on the Street is $23.50.
“AQN offers investors a well-balanced mix of growth and income with (1) a diversified business model(regulated utilities & non-regulated power), (2) healthy medium-term growth (7-9 per cent per year Adj. EPS and FCF per share growth through 2026), (3) an attractive dividend profile (4.5-per-cent yield, 80-90-per-cent long-term Adj. EPS payout target), and (4) upside from additional growth initiatives (including M&A; not included in our estimates/valuation),” he said.
Other analysts making target adjustments include:
* Scotia Capital analyst Robert Hope to US$15.50 from US$16 with a “sector perform” rating.
“Algonquin’s investor day highlighted the company’s long backlog of utility and renewable projects,” said Mr. Hope. “However, the 2022 EPS outlook was below our and consensus expectations. We bring down our 2022 estimates materially and our 2023 estimates less so. Even with our lower estimates, the 7-9-per-cent EPS growth for Algonquin would be above the outlook for 6-7 per cent for Emera and Fortis and for Hydro One at 5 per cent. Our target price moves down $0.50 to $15.50 commensurate with our lower estimates. Our target price is based on a 20.5 times 2023E P/E multiple after adjusting for the impact of this summer’s equity unit issue, or 18.25 times based on adjusted EPS. This would be a premium to the group, which we believe reflects Algonquin’s renewable assets and strong growth.”
* Wells Fargo’s Neil Kalton to US$15.50 from US$16 with an “equal weight” rating.
“We viewed the Investor Day as a mixed bag,” he said. “While management continues to tout AQN’s position to capitalize on substantial long-term capital investment opportunities across the companies’ addressable markets (utility infrastructure + renewables), the ‘22 EPS outlook underwhelmed and the 5-yr CAGR was eased down to 7-9 per cent (off the low end of the ‘21 EPS guidance range).”
* BMO Nesbitt Burns’ Ben Pham to US$16.50 from US$17 with an “outperform” rating.
“AQN delivered a series of detailed presentations at its virtual 2021 investor day, the net of which supports our view that AQN provides the trifecta of industry leading growth, operating excellence, and ESG trends,” said Mr. Pham. “Yet, the valuation is still at a discount to peers (16.5 times 2023 estimated P/E vs. 18.5 times) and historical average (20 times-plus). Combined with a 26-per-cent potential total return including 5-per-cent yield to our revised US$16.50 target (vs. US$17), our confidence in Kentucky Power regulatory close/integration and the 7-9-per-cent EPS CAGR guidance, we are maintaining our Outperform rating.”
* TD Securities’ Sean Steuart to US$17 from US$18.50 with a “buy” rating.
* JP Morgan’s Richard Sunderland to $20 (Canadian) from $21 with a “neutral” rating.
* National Bank’s Rupert Merer to US$15.50 from US$15 with an “outperform” rating.
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Pulse Seismic Inc. (PSD-T) “provides investors with an asset-light option to invest in the western Canadian oil and gas sector, with strong (albeit somewhat unpredictable) free cash flow that the Company can return to shareholders without any debt,” according to iA Capital Markets analyst Matthew Weekes.
Assuming coverage of coverage of the stock in a research report released Wednesday, he said M&A activity has led to a “strong year” for the Calgary-based company.
“PSD is on track to deliver one of its best annual revenue figures in the past decade, as M&A activity in the Company’s customer base has led to a strong amount of Transactional revenue,” said Mr. Weekes. “We estimate that sales classified as Transactional will account for 70 per cent of PSD’s total revenue in 2021.
“Transactional sales cannot be expect to remain at these levels, but we are constructive on the underlying industry outlook. PSD’s Transactional sales are unpredictable, but on average will represent roughly 40-50 per cent of PSD’s total sales over time. As such, our 2022 estimates project a year-over-year decline in revenue. However, we remain constructive on PSD’s outlook given strong commodity prices and producer free cash flows. Additionally, increased portability for producers should translate into cash taxable earnings, which we believe will drive producers to spend more on tax-deductible seismic.”
After trimming the firm’s 2022 estimates, projecting Pulse Seismic has fully realized the revenue associated with licensing agreement sales earlier this year, Mr. Weekes cut his target for its shares to $2.60 from $2.70, which is the current average on the Street.
He kept a “speculative buy” recommendation.
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Finding it “difficult” to see a “positive outcome” given the likely dilution of its shares, CIBC World Markets analyst John Zamparo downgraded Hexo Corp. (HEXO-T) to “underperformer” from “neutral.”
“While HEXO stock has already fallen at a greater rate than peers this year, we believe further pressure is likely, owing to ongoing equity issuance,” he said. “All told, another 200 million shares (64 per cent of current shares outstanding) may need to be issued in the next six months, either via an at-the-market (ATM) offering or directly to HEXO’s convertible debt holder.
“We characterize all of [Tuesday’s] new financial targets—an implied 33-per-cent sales CAGR, $15-million in newly found synergies (with no more facility closures), and cutting nearly 35 per cent of all costs—as aggressive and unattainable. Market conditions are as challenging as ever, and, if anything, HEXO appears to be losing share. EBITDA should improve, owing to synergy capture and a full contribution of Redecan, but we expect fundamental performance will have little impact until the company has solidified its balance sheet.”
Following Tuesday’s announcement, which included further executive changes, and led to a 9.8-per-cent share price drop, Mr. Zamparo reduced his target for Hexo shares to 80 cents from $2. The average is $2.81.
“In our view, the primary risk to our investment thesis is if HEXO were to be acquired by one of its larger peers. This outcome is possible, but we also believe that any buyer would be hesitant to step in until HEXO’s balance sheet situation is improved,” he said.
Elsewhere, Canaccord Genuity’s Matt Bottomley lowered his target to $1 from $2 with a “hold” rating.
“HEXO reported FQ1/22 financial results (ended Oct/2021) that were generally in line with our top-line expectations (with revenues aided by the closing of two acquisitions in the period). However, the quarter was largely overshadowed by material asset impairments (that drove gross margin into negative territory) and a balance sheet that continues to carry a heavy debt burden,” said Mr. Bottomley.
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Fire & Flower Holdings Corp. (FAF-T) has reached a “pivotal moment” strategically, according to Echelon Capital analyst Andrew Semple, who now sees its digital segment as the majority contributor to his valuation.
“This outlook is further supported by the Company deploying capital to enhance this digital ecosystem, including the acquisitions of PotGuide, Wikileaf, and Pineapple Express (latter still pending close),” he said. “We look forward to the Company further accelerating digital ecosystem enhancement through the proceeds expected to be raised from a $30-million secured loan from Alimentation Couche-Tard (ATD.B-T), which shows ACT’s support of the Company further investing in its digital ecosystem.”
On Tuesday, the Toronto-based cannabis retail company reported third-quarter 2021 results that largely fell in line with expectations with each of its segments displaying year-over-year growth. Digital revenue topped Mr. Semple’s projections due largely to the recent PotGuide and Wikileaf.
“While the Q321 results were solid and as expected, management noted on the earnings call that FQ421 will be another tough quarter for retail,” he said. “In addition, the prevalence of discount retail continues to grow as one of Canada’s largest cannabis retailers (High Tide, HITI-X; “Speculative Buy”, price target $18.00) recently converted all stores to a discount model. Management’s caution on Q421 retail segment performance, the escalating competitive pressures in Canadian cannabis retail, and a year of stagnant retail sales growth warrants a recalibration of our retail sales/margin forecasts for Fire & Flower.”
With the results, Mr. Semple lowered his valuation to account for “much lower expected contributions from the Company’s retail cannabis segment (particularly in H122, though some improvement expected in H222 and 2023) and also updated assumptions on the Series B warrants outstanding, partially offset by an improved outlook on the Company’s Hifyre ecosystem.”
Reiterating a “speculative buy” rating for its shares, he cut his target to $11, which implies upside of 86 per cent from current levels, from $17.50. The current average is $14.20.
“Fire & Flower currently trades at 1.1 times our F2022 sales estimates. We do not believe this valuation fully reflects Fire & Flower’s steep growth trajectory and optionality inherent in its Hifyre digital platform as well as in its strategic relationship with Alimentation Couche-Tard,” he said.
Elsewhere, Stifel analyst Justin Keywood downgraded the stock to “speculative buy” from “buy” with a $12 target, up from $1.85 after its share consolidation.
“FAF navigated Q3 results well but market saturation is starting to impact gross margins and we anticipate further erosion ahead as new store openings surge in Ontario, the largest Cannabis market in Canada,” said Mr. Keywood. “We believe that there will continue to be a period of consolidation and exits in the market as the competitive reality of retail Cannabis is realized by competitors but near-term headwinds will persist as this plays out. FAF is pivoting to focus more on its technology offering, including acquiring additional assets, a strategy that we agree with but the full value of this move will take some time to surface in financial results. Overall, we still ultimately foresee greater shareholder value creation as reflected in our $12 target but also balance the near-term headwinds and industry uncertainties, leading to our SPEC buy rating.”
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Scotia Capital analyst Mark Neville thinks the opportunities brought by GFL Environmental Inc.’s (GFL-N, GFL-T) renewables business are finally becoming evident.
On Tuesday, the Vaughan, Ont.-based company announced its wholly owned subsidiary, GFL Renewables LLC, has entered into a joint venture with affiliates of OPAL Fuels LLC for the development, construction and operation of renewable natural gas facilities at 2 GFL municipal solid waste landfills. It also expects to announce arrangements for RNG facilities at 4 additional GFL landfill sites in the near future.
“Financial contribution from the first six RNG projects is expected to be material (i.e., annual FCF more than $83-million, which would be more than 12per-cent accretive to our 2022E FCF), while the capital costs and risk profile of the projects (to GFL) appear fairly low,” he said. “Moreover, the six projects are part of a potentially larger package of RNG opportunities (the company has identified 18 landfills, and potentially up to 23) that would be further additive – although not linear. While the company has talked about this opportunity in recent months, we are very encouraged to see the first agreements in place.”
Projecting the six projects could generate over US$65-millio in annual free cash flow, Mr. Neville raised his target for GFL shares to US$50 from US$46, exceeding the US$42.45 average, with a “sector outperform” rating.
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In other analyst actions:
* After its quarterly results exceeded expectations, RBC Dominion Securities analyst Sabahat Khan bumped up his Roots Corp. (ROOT-T) target to $4 from $3.50 with a “sector perform” rating, while Canaccord Genuity’s Matthew Lee raised his target to $3.75 from $3.50 with a “hold” rating. The average is $4.54.
“Looking ahead, we expect the supply chain and inflationary pressures on margins to be partially offset by promotional discipline and pricing increases,” said Mr. Khan.
* Following an increase to its capex estimate for its Magino project in Northern Ontario, Desjardins Securities analyst John Sclodnick cut his target for Argonaut Gold Inc. (AR-T) to $3.50 from $4.25 with a “buy” rating, while Scotia Capital’s Ovais Habib lowered his target to $3.50 from $4 with a “sector outperform” rating. The average is $4.64.
“While the funding gap will remain an overhang on the stock until it is plugged, the shares present very attractive value at current levels,” he said. “If the valuation does not improve, we see strong potential for Argonaut to be acquired. The M&A market for Canada-based assets is hot, and we believe that a number of larger companies are circling Argonaut and had been waiting and hoping for a stumble on development at Magino. This is potentially the opportunity they were looking for to acquire a long-life asset in Canada, with $342-million of capital sunk and a highly derisked remaining capital spend.”
* Evercore ISI analyst Josh Schimmer raised his Bellus Health Inc. (BLU-Q, BLU-T) target to US$20, exceeding the US$11.96 average, from US$12 with an “outperform” rating.
* Scotia’s Paul Steep increased his target for Constellation Software Inc. (CSU-T) to $2,500 from $2,400 with a “sector outperform” rating. The average is $2,456.51.
* TD Securities analyst David Kwan initiated coverage of Converge Technology Solutions Corp. (CTS-T) with a “hold” rating and $13 target. The average is $13.70.
* National Bank Financial initiated coverage of D2L Inc. (DTOL-T) with an “outperform” rating and $20 target. The average is $21.75.
* JP Morgan analyst Tyler Langton increased his target for Lithium Americas Corp. (LAC-T) to $53 from $49, maintaining an “overweight” rating. The average is $47.61.
* CIBC’s Anita Soni raised his target for New Gold Inc. (NGD-N, NGD-T) target to $2.20 from $2.10 with a “neutral” rating, while Canaccord Genuity’s Dalton Baretto increased his target to $2.85 from $2.50 with a “buy” rating. The average is $2.45.
* TD Securities analyst Arun Lamba raised his Solaris Resource Inc. (SLS-T) by $1 to $22 with a “speculative buy” rating. The average is $18.28.
David Leeder