Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Vishal Shreedhar expects investors to look beyond the impact of the Omicron variant on the bottom line when Metro Inc. (MRU-T) releases its second-quarter financial results on April 21.
Instead, he predicts the focus will be on “evolving” consumer behaviour amid “significant inflation and other challenges (supply chain, labour pressure).”
“Our view is that pervasive inflation is accelerating consumer preferences towards discount banners (vs. conventional) as consumers seek value amid rising food costs (we estimate that Metro generates approximately 50 per cent of grocery sales in discount banners),” he said. “While we expect elevated grocery demand to eventually normalize post-pandemic, we believe that there will be an element of heightened demand persisting, aided by ongoing work-from-home trends.”
For the quarter, Mr. Shreedhar is projecting earnings per share for the grocer to rise almost 7 per cent year-over-year to 84 cents (from 78 cents), exceeding the Street’s forecast by a penny. He sees that beat driven by improving same-store sales growth for The Jean Coutu Group, lower year-over-year COVID-related costs and “strong” share repurchases over the last 12 months.
“Metro’s improvement initiatives should support F2022+ results,” the analyst said. “Specifically, significant supply chain initiatives are anticipated to mitigate inflationary pressure. Operations in the new partially automated Toronto fresh distribution centre are expected to continue to improve. The new automated frozen DC started operations in January 2022. Lastly, the construction of a new automated, fresh and frozen facility in Terrebonne is underway (scheduled to open in Fall 2023; QC supply chain investments are a 5-year $420 million project). Recall that MRU indicated heightened capex (more than $700 million) in F2022 due, in part, to investments in supply chain.”
After raising his revenue and earnings expectations through fiscal 2023, Mr. Shreedhar increased his target for Metro shares to $74 from $72, keeping a “sector perform” rating. The average on the Street is $70.07.
“We believe that Metro is a solid company which has delivered superior long-term returns supported by strong execution and excellent capital allocation; however, these favourable attributes are reflected in the valuation, in our view,” he said.
While acknowledging downside risks are “building” for Canadian banks, Scotia Capital analyst Meny Grauman said his base case for the sector “remains constructive,” believing “reports of a recession are greatly exaggerated.”
“Underpinning our optimism for the Canadian banking sector are a host of factors including historically tight labour market, record high personal and commercial deposits, strong pent-up consumer demand, rising immigration rates, and booming global demand for domestic energy and agricultural production,” he said in a research report released Wednesday. “The bottom line is that we still like the banks despite the more complicated macro backdrop, and are not overly focused on credit and capital at this stage.”
“Although Canadian bank stocks have underperformed the broader index by 896 basis points since the end of Q1 reporting, they have continued to outperform their large U.S. peers by 618 bps, leading some to question whether Canadian banks stocks are underpricing downside risk. However, in our view this Canadian outperformance is not a signal that Canadian bank stocks need to head lower, but rather a reflection of a number of structural differences that are likely to continue to play out this upcoming earnings season including better expense control in Canada, more stable investment banking revenues, and an implicit recognition that the Canadian economy has more to benefit from rising commodity prices.”
With U.S. bank earnings season kicking off this week, Mr. Grauman thinks a “key question facing Canadian bank investors is whether news from Wall Street has the potential to shift momentum in favour of financials once again. "
“With the Street expecting significant year-over-year EPS declines (driven by tough investment banking comparables), that does not seem likely,” he said. “However, given the market’s macro fears, we do see an opening for US bank CEOs to deliver a more positive macro message than what is being expected. Perhaps more important though, will be today’s BoC policy announcement, which along with an expected 50 bps rate hike will also coincide with the release of the latest Monetary Policy Report (MPR). The MPR should lay out the bullish case for the Canadian economy, and why the housing market can absorb a significant amount of monetary tightening.”
While he remains bullish on the sector, Mr. Grauman trimmed his target multiples to reflect more historical multiples. That resulted in these changes:
- Bank of Montreal (BMO-T, “sector outperform”) to $161 from $168. The average on the Street is $166.66.
- Canadian Imperial Bank of Commerce (CM-T, “sector outperform”) to $166 from $184. Average: $174.69.
- Canadian Western Bank (CWB-T, “sector outperform”) to $44 from $48. Average: $43.21.
- Equitable Group Inc. (EQB-T, “sector outperform”) to $103 from $94. Average: $95.86.
- Laurentian Bank of Canada (LB-T, “sector perform”) to $46 from $50. Average: $47.36.
- National Bank of Canada (NA-T, “sector outperform”) to $108 from $119. Average: $109.09.
- Royal Bank of Canada (RY-T, “sector outperform”) to $150 from $163. Average: $149.55.
- Toronto Dominion Bank (TD-T, “sector perform”) to $115 from $106. Average: $108.40.
“RY remains the Street’s consensus go-to defensive name, and we like the stock, but our Top Pick remains BMO,” he said. “Meanwhile, we still also like CM, which is a clear out-of-consensus call given its recent underperformance, but we believe that investors are misjudging downside risks for this name in particular.”
With its shares having “fully recovered” to levels seen before the company announced the turbine tower failure at its Kent Hills wind facility in October of 2021, RBC Dominion Securities analyst Nelson Ng lowered TransAlta Renewables Inc. (RNW-T) to “sector perform” from “outperform,” seeing them “fully valued” currently.
“We felt that the negative market reaction was much larger than our estimated Kent Hills impact (cost to replace foundations and lost revenues) of about 50 cents per share,” he said.
“We believe investors will gradually shift their focus to the post-2025 PPA expiration economics of RNW’s gas-fired Sarnia facility. In 2022, we estimate that the Sarnia facility will contribute $80 million (or 16 per cent) of Comparable EBITDA and over 25 per cent of cash available for distribution (CAFD). Management plans to bid the facility into the Ontario IESO’s capacity procurement process this spring, with results to be announced in H2/22. If successful, the new contract would be for the 2026-30 period, providing better visibility for the Sarnia facility. Management expects to renew commercial and industrial contracts (representing about 40 per cent of the facility’s capacity) at similar economics. Overall, we estimate that Sarnia’s EBITDA post-2025 would decline by 20-40 per cent, which we believe provides management enough time to offset the decline with drop-downs and potential third-party acquisitions.”
Touting its “strong balance sheet with the flexibility to internally fund growth” and the potential for further dropdowns from parent TransAlta Corp. (TA-T), Mr. Ng maintained a $21 target. The average target on the Street is $18.46.
Seeing it “executing above expectations,” ATB Capital Markets’ Frederico Gomes raised his recommendation for Organigram Holdings Inc. (OGI-T) to “outperform” from “sector perform” on Wednesday, seeing positive tailwinds supporting “positive momentum.”
Before the bell on Tuesday, the Moncton-based cannabis producer reported second-quarter revenue of $31.8-million, in line with the $31.7-million estimate of Mr. Gomes and the Street. Adjusted EBITDA of $1.6-million topped expectations (losses of $5.9-million and $1.6-million, respectively), which he attributed to lower production costs, a sales mix tilted towards higher-margin international sales and contributions from its acquisition of Laurentian Organic Inc.
“Over the last twelve months, OGI gained 381 basis points in market share and is now the #3 LP in Canada, pointing to good operational performance, an attractive asset base, and consistent execution from management,” he said. “We expect OGI to continue driving positive sales and earnings momentum supported by three tailwinds, (1) scale benefits from cultivation expansion in Moncton, including having sufficient supply to meet international and domestic demand, (2) margin expansion from product innovation and expanded distribution of Laurentian’s premium portfolio, and (3) investments in automation and cultivation improvement. In our view, with the majority of growth CapEx expected to occur in FY2022, these tailwinds could support the Company turning FCF positive in FY2023.”
Given lower-than-anticipated recreational sales and “industry-wide sales weakness,” Mr. Gomes trimmed his revenue expectations, but his EBITDA projection rose on higher adjusted gross margins and lower operating expenses that “reflect a right-sized cost structure.”
Based on that higher profitability, he raised his target to $3.50 from $3. The average is $3.13.
“Our rating upgrade to Outperform is supported by OGI’s positive sales and earnings momentum, adj. EBITDA profitability, and the higher upside implied by our price target (from 50 per cent to 67 per cent),” he said.
“Considering OGI’s robust capital position, consistent execution, and positive momentum, we are moving to a constructive stance on the stock.”
Elsewhere, Jefferies’ Owen Bennett cut his target to $3.34 from $3.44 with a “buy” rating.
Separately, Mr. Gomes cut his Hexo Corp. (HEXO-T) target to 80 cents, below the $1.35 average, from $1.10 with a “sector perform” rating.
“On April 12, before market open, HEXO announced definitive agreements with Tilray Brands (TLRY-Q, not rated) and KAOS Capital (private, NR) in furtherance to the initial debt restructuring, commercial alliance, and equity backstop proposals announced on March 3rd,” he said. “In our view, the definitive agreements carry revised terms which are ultimately costlier for HEXO’s shareholders due to increased dilution and a material monthly advisory fee to be paid to TLRY. While we continue to view the agreements as a necessary and positive step to de-risk HEXO’s balance sheet, we are lowering our price target ... to incorporate the negative impact of the amended terms.”
In response to its recent share price performance and seeing “better relative value elsewhere” in his coverage universe, Credit Suisse analyst Andrew Kuske downgraded Hydro One Ltd. (H-T) to “underperform” from “neutral” with a target of $36, rising from $34 and above the $33.61 average on the Street.
He also made these target adjustments in a research note released Wednesday:
- Atco Ltd. (ACO.X-T, “outperform”) to $49 from $48. Average: $46.
- Algonquin Power & Utilities Corp. (AQN-N/AQN-T, “neutral”) to US$18 from US$16. Average: US$17.
- Canadian Utilities Ltd. (CU-T, “neutral”) to $41 from $39. Average: $37.97.
- Emera Inc. (EMA-T, “neutral”) to $66 from $63. Average: $63.23.
- Fortis Inc. (FTS-T, “neutral”) to $66 from $63. Average: $59.40.
“For our Utilities sub-sector coverage, we view some competing tensions in the sector as being interesting and translating into potential investment themes,” he said. “In particular, we note the tension around rising interest rate expectations that is typically a negative performance factor for the Utilities sector, however, de-risking markets along with geopolitical risks can result in a flight to safety generating upside. In this context, we highlight the significant divergence of performance with an indexed view of S&P/TSX Utilities and S&P 500 Utilities against inverted 10-year bond yields from both Canada and the US. Over 20 years of data, there is a negative correlation of approximately 0.8 with yields and sector performance moving in opposite directions (e.g., rising yields equate to negative sector performance (and vice versa)). Notably, for the year-to-date, the correlation is unusually positive at 0.8 – this reality is partly reinforced with an inverted 10-year visual and sector performance for Canada and the U.S.”
Despite facing significant geopolitical obstacles, the risk-reward proposition for the mining equities remains reasonably attractive, according to Scotia Capital analyst Orest Wowkodaw, believing commodity fundamentals “appear tight.”
“Russia’s war on Ukraine, escalating COVID related lockdowns in China, the global energy crisis, and rising interest rates due to rampant inflation, are all likely to negatively impact the global macroeconomic outlook in 2022,” he said. “However, the supply side also appears to be under considerable pressure given low visible inventories, growing risks to Russian output, ongoing fiscal uncertainty in LatAm, continuing supply-chain constraints, and rising inflation. As a result, despite significant uncertainty, we are not surprised to see most commodity prices trading near record highs. In the medium to long term, we anticipate the emergence of a new commodities super cycle driven by growing demand from global decarbonization efforts to address climate change amplified by the impact of severe underinvestment in new production capacity.”
For base metals, Mr. Wowkodaw prefers copper exposure, pointing to “very low” inventories and his forecast for a “relatively tight” near-term market.
“While both improved, we remain concerned with over-supply risks in zinc and nickel,” he added. “Given relatively weak Chinese steel mill margins, we see material downside pricing risks for hard coking coal from extremely elevated levels and moderate downside risks for Fe; however, we continue to like the outlook for the premium segment of bulk commodities. Uranium fundamentals are rapidly improving on aggressive inventory stockpiling and the dual Western World agendas of decarbonization, and now, energy independence.”
After making significant increases to his commodity price forecasts through 2026, Mr. Wowkodaw raised his EBITDA projects for companies in his coverage universe by an average of 14 per cent for 2022 and then 12 per cent for 2023 and 7 per cent from 2024.
That led him to raised his rating for Sheritt International Corp. (S-T) to “sector perform” from “sector underperform” with a $1 target, up from 45 cents. The average on the Street is $1.02.
“In light of the materially higher nickel price environment, we view the company’s risk-reward profile as more balanced,” said Mr. Wowkodaw.
He also made similar target changes to other stocks in his coverage universe, noting: We recommend 11 of 24 equities under our coverage.
“Our top picks are CS-T, FM-T, TECK.B-T, and VALE-N (TECK.B-T is our favourite),” he said. “We also highly recommend CCO-T, CIA-T, CMMC-T, ERO-T, FCX-N, HBM-T, and IVN-T. The average implied return for our preferred equities is now 27 per cent (unchanged vs. 27 per cent last quarter).
“With average 2022E-2024 EV/EBITDA multiples of 5.0 times, 4.7 times, and 4.5 times for the large/mid-cap base metal producers (or 4.4 times, 3.7 times, and 3.3 times at spot) vs. 3-year and 10-year average multiples of 5.5 times and 5.9 times, valuations remain reasonably attractive. The equities are currently trading at an implied average Cu price of $4.18/lb. Given the impressive FCF generation for most miners, we anticipate improved shareholder returns to continue, led by FCX-N, LIF-T, TECK.B-T, and VALE-N.”
Ahead of earnings season for Canadian transportation companies, RBC Dominion Securities analyst Walter Spracklin sees “increasing likelihood of a freight recession.”
“Canadian economic activity expanded in March posting its highest level since the [PMI] survey was launched,” he said. “We attribute this to a reopening of the Canadian economy post COVID-19. On the other hand, U truck pricing and freight volumes are beginning to slide, which suggests a potential slow-down in freight activity and which would represent a headwind to revenues at the freight transportation companies in our coverage. While data is mixed, we are taking a more pessimistic view, and increasingly expect consumer spend to shift away from goods and into services, thereby potentially impacting freight volumes at the companies within our coverage.”
Though he largely maintained his financial estimates in a research report released Wednesday, Mr. Spracklin expects his view of the sector’s near-term future, including “potential recessionary headwinds,” to overshadow results, particularly for TFI International Inc. (TFII-N, TFII-T).
“Our Q1 estimate remains unchanged at $1.33 (cons. $1.30) but we point to potential upside resulting from robust demand and pricing conditions in January and February,” he said. “Read-throughs from U.S. truckers highlighted a record operating environment early in the year. However, we expect focus into the quarter to remain on the outlook, which is becoming increasingly uncertain due to decreasing freight volumes and truck pricing.”
Accordingly, after lowering his target multiple for Montreal-based company to better reflect the potential turbulence, he cut his target for TFI shares to US$97 from US$125 with an “outperform” rating. The average is US$127.80.
“Our target multiple is in line with peers and reflects solid operational performance. We continue to be impressed by management’s execution,” he said.
Mr. Spracklin reaffirmed Cargojet Inc. (CJT-T) as his “top name in transportation,” maintaining an “outperform” recommendation and his Street-high $302 target (versus the $242.83 average).
“Following successive quarters of strong operating results for CJT, investors remain cautious around the long-term supply situation for air cargo when passenger aircraft return and therefore the capacity risk associated with CJT’s fleet expansion,” he said. “Key however is a recently announced strategic agreement with DHL (5-year term + 2 year renewal option), which we view as reducing the risk associated with the fleet expansion. The DHL deal commits 13 of CJT’s 19 aircraft and therefore leaves two 767′s and four 777′s for additional growth and diversification, in addition to improved asset utilization that can be deployed for further growth on its existing fleet. Based on our 5-year valuation framework, we see implied upside of more than 80 per cent at current prices. CJT remains our top name in Transportation.”
Touting its “attractive industry dynamics with a mouthful of M&A opportunities to grow,” Desjardins Securities analyst Gary Ho assumed coverage of Dentalcorp Holdings Ltd. (DNTL-T) with a “buy” recommendation, calling it a “quality compounder.”
“DNTL is Canada’s leading dental practice consolidator with 458 locations at the end of 2021,” he said. “Despite this, it commands only a 3-per-cent share of the massive $18-billion highly fragmented dental market, which provides ample runway for M&A growth. We see the recently announced dental care proposal for low-income Canadians as a slight benefit.”
“Why we like the story. (1) A business model offering downside protection through more than 80 per cent recurring patients/revenue, a non-discretionary spend and cash-pay arrangement with minimal credit risk, as well as upside growth from M&A and organic growth (double-digit growth in practices, pro forma revenue and EBITDA every year since inception). (2) A highly fragmented industry ripe for consolidation (15,000 practices, of which 95 per cent are independent). (3) DNTL’s management team has a successful M&A track record of acquiring, integrating and retaining more than 180 practice additions in the past three years despite COVID-19 restrictions. (4) Ample financial flexibility (more than $550-million of 1Q22 pro forma dry powder). (5) Solid 3.5–4.5-per-cent-plus same-practice sales growth, driven by price, volume and mix, augmented by the orthodontics and implant insourcing programs, technology and PC Health/Loblaw partnership. Our chat with a group benefits insurer confirms our positive views.”
Expecting M&A activity to accelerate in the first half of 2022, Mr. Ho has a $21 target for Dentalcorp shares. The current average is $20.39.
Calling it a leader in the North American dry electrical transformer market with a “diversified” customer base and seeing its “high-end focus and industry reputation” creating pricing power, Canaccord Genuity analyst Matthew Lee initiated coverage of Hammond Power Solutions Inc. (HPS.A-T) with a “buy” rating on Wednesday.
“In our view, Hammond’s long track record of operational excellence and eye toward expansion will allow it to achieve above-industry growth while maintaining a robust cash flow profile that enables shareholder returns,” he said.
“Hammond is a dominant player in the dry transformers space, which puts it in a position to capitalize on electrification trends across North America. We see several positive catalysts for the name over the medium term, including (1) escalating demand for electrical equipment, (2) geographical expansion, (3) accretive acquisitions, and (4) the potential for further dividend increases. Hammond currently trades at 4.8 times EV/F22 estimated EBITDA, which is a stark discount to the 13.2 times of its larger peers. While some of this discount is warranted by Hammond’s lower liquidity and more niche business model, we believe that as the firm proves its ability to drive mid-single-digit revenue growth, generate 8-10-per-cent FCF yield, and deploy its capital to grow its product suite, the discount should close.”
Seeing it trading at a “substantial” discount to peers, Mr. Lee set a target of $15.50 per share. The current average is $16.25.
“We believe that HPS’ valuation is attractive, trading at 4.8 times NTM [next 12-month] EBITDA, a far cry from the 13.2 times of its large multinational peers,” he said. “While a discount is naturally justified given lesser scale, we believe that as investors recognize Hammond’s combination of stability and growth, the gap should close.”
In other analyst actions:
* RBC’s Keith Mackey raised Ensign Energy Services Inc. (ESI-T) to “outperform” from “sector perform” with a $6 target, up from $3.25 and above the $4.28 average.
* TD Securities’ Greg Barnes cut Barrick Gold Corp. (ABX-T) to “buy” from “action list buy” with a US$31 target. The average is US$27.03.
* CIBC World Markets’ Todd Coupland initiated coverage of Copperleaf Technologies Inc. (CPLF-T) with a “neutral” rating and $18 target. The average is $22.
“Copperleaf’s large total addressable market (TAM) and competitive position support our forecast for 25-per-cent revenue growth in 2022 and 47 per cent in 2023,” he said. “We expect growth in 2023 and beyond to improve as the company’s investments from its 2021 IPO yield new customers within its core and emerging segments.
“While we believe Copperleaf is an excellent company, it is a bit too early to pay for our upside scenario given that the company is unlikely to see the benefits of its IPO investments until late 2023 at the earliest given its long average sales cycle of 19 months.”
* Following its recent $61-million acquisition of two European office properties, Canaccord Genuity’s Christopher Koutsikaloudis cut his Inovalis Real Estate Investment Trust (INO.UN-T) target by $1 to $9, keeping a “hold” rating. The average is $9.46.
“While we are encouraged by initial signs that management has shifted the REIT back into ‘growth mode’, we acknowledge that investor sentiment has deteriorated since the beginning of this year,” he said. “In this context, we do not believe Inovalis is likely to trade in line with its NAV in the near term given the REIT’s elevated payout ratio (170 per cent based on 2022 estimated AFFO), low liquidity, and continued uncertainty regarding future office demand.”
* In response to its operational update, including a 2022 production guidance raise, Stifel’s Cody Kwong hiked his Obsidian Energy Inc. (OBE-T) target to $17.25 from $14.50 with a “buy” rating, calling it a “meaningful uplift ... based on solid operations year-to-date and intriguing relative valuation.” The average on the Street is $13.19.
* Scotia Capital’s Jeff Fan raised his target for shares of Rogers Communications Inc. (RCI.B-T) to $87 from $80, exceeding the $74 average, with a “sector outperform” rating.
“RCI share price has been strong (up 23 per cent year-to-date and 25 per cent since Oct 1/21) driven by the expectation of improving wireless fundamentals and the market rotation to defensive names,” he said. “But despite the rise, we estimate RCI’s relative valuation (including Shaw synergies) is still attractive at 8.5 times NTM [next 12-month] EV/EBITDA (12-per-cent discount relative to the Big 3 average. We believe further valuation and share price upside will be driven by strong Q1/22 results, the closing of the Shaw acquisition by mid-June, and merger synergies, which we do not believe the Street has fully factored into their estimates. By delivering the above, we think a 5-per-cent discount (9 times) would be more appropriate and in line with its 10-year average. Hence, we are increasing our target price.”
* With the release of a final Feasibility Study for Phase 1 of its flagship Grota do Cirilo project in Brazil, Canaccord Genuity’s Katie Lachapelle bumped her Sigma Lithium Resources Corp. (SGML-X) target by $1 to $25 with a “speculative buy” rating. The average is $22.50.
* After hosting senior management for investor meetings, Scotia Capital’s Robert Hope raised his TC Energy Corp. (TRP-T) target to $78, above the $70.12 average, from $72 with a “sector outperform” rating.
“With a highly contracted and utilized pipeline system, TC Energy does not see the current commodity price environment materially improving near-term cash flows. However, it does give management further confidence that it will be able to secure additional projects to keep the project backlog at its already-elevated level. TC Energy is in discussions with customers on how it can expand its systems to help facilitate production growth and increasing exports and serve coal-to-gas power conversions. Additional projects could be sanctioned in the coming quarters that would add to cash flow in the middle part of the decade. Given its large project list and what it views to be an attractive set of development projects, the company does not believe M&A is required at this point. Our go forward estimates increase slightly to reflect a moderately higher U.S. gas pipeline outlook. Longer term, we continue to believe its U.S. gas pipeline business will present significant opportunities for TC Energy that will underpin mid- to high-single-digit cash flow growth.”
“TC Energy’s shares have been strong in 2022 as investors have become more confident in its longer-term growth profile and as the share price has been recovering from arguably oversold levels in late 2021.”