Inside the Market’s roundup of some of today’s key analyst actions
While acknowledging Guru Organic Energy Corp. (GURU-T) is “testing investors’ patience with a second consecutive quarter of single digit revenue growth,” Stifel analyst Martin Landry expects an acceleration in growth in the second half of this year, pointing to the further reopening of the economy, increased marketing spending and the impact of price increases implemented in mid May.
“GURU’s focus on expanding its brand outside of Quebec and into the rest of Canada and part of the U.S. seem to be paying off as per management’s comments on the evolution of market share,” he said. “According to management, GURU as grown its market share from 0 per cent to 2.5 per cent in a leading convenience store banner in western Canada over a one-year period. Also, in certain stores, GURU reached a market share upwards of 4 per cent. While these pockets of success may be a small sample, they are reassuring and support our thesis that over time, there is significant upside from GURU outside of Quebec.”
Shares of the Montreal-based organic energy drink maker fell 4.8 per cent on Tuesday following the release of second-quarter results before the bell. Mr. Landry attributed that decline to investor disappointment over the pace of revenue growth (7.5 per cent year-over-year versus his 11.5-per-cent forecast, due largely to the impact of the COVID outbreak on sell-through), noting Guru is “perceived as a high growth story.”
“However, the single digit revenue growth is deceiving as Q2FY22 volumes increased by 26 per cent year-over-year, an acceleration from Q1FY22 when volume increased 22 per cent year-over-year,” he said. “Despite the lower than expected revenues, Adj. EBITDA loss came in better than expected at $3.7-million, compared to our estimates of $6-million, as GURU’s selling and marketing expenses came in $2.3-million below our expectations.”
With Guru poised for a significant marketing push in the third quarter, Mr. Landry thinks further expansion outside of Quebec is likely.
“With COVID-19 restriction behind us, GURU will by focusing on brand activation in the second half of the year with a multitude of marketing campaigns and initiatives. GURU will launch its largest national marketing campaign to date “Good Energy for the Everyday”, which will be featuring (1) a comprehensive summer sponsorship and sampling program with over 30 events from May to September, (2) a national out-of-home and digital campaign from June through August, (3) the official sponsorship of CTV’s “The Amazing Race Canada”, which is the most watched summer series in Canada and (4) a multitude of in-store promotional activities in leading retailers across Canada, in connection with another month of in-store activation push supported by PepsiCo in July,” he said.
Reiterating his “buy” recommendation, Mr. Landry reduced his target to $11 from $15 to “reflect the decrease in valuation multiple of peers and overall contraction in valuation of public equities.” The average target on the Street is $12.90.
“In our view, GURU has the potential to more than double its sales levels in the next four years. This strong growth is expected to come from the brand’s expansion outside of Quebec,” he said. The convenience store channel accounts for more than 60 per cent of sales of energy drinks, and GURU has just started to expand into that channel outside of Quebec. In our view, the distribution partnership with PepsiCo is a de-risking event for the execution of the company’s growth plan.”
Elsewhere, CIBC World Markets analyst John Zamparo downgraded the stock to “neutral” from “outperformer” with a $12 target, down from $14.
“We are downgrading GURU to Neutral on concerns of moderating short- and medium-term sales growth at a time when investors pivot further away from unprofitable, high-multiple stocks. EBITDA losses should intensify over the next few quarters, and growing revenue may require greater marketing investments than anticipated. We have moderated our F2022 & F2023 sales estimates by 7 per cent on average, now reflecting a CAGR [compound annual growth rate] of 27 per cent (previously 33 per cent), and we introduce our F2024 sales forecast,” said Mr. Zamparo.
Echelon Partners’ Amr Ezzat cut his target to $14 from $20 with a “buy” rating based on “a tempering” of his short- and medium-term outlook for revenues growth as well as a “recalibration” of his valuation parameters.
“GURU is on pace to more than double revenues in three years and is currently the fastest-growing energy drink brand in Quebec’s convenience and gas stores,” said Mr. Ezzat. “In early 2018, the Company began implementing its sales strategy in select California markets resulting in early success as evidenced by strong growth in conventional grocery and convenience stores. Namely, GURU is currently the fastest-growing energy drink brand and the top organic energy drink in Bay Area convenience stores (excluding performance energy and private label brands). Our long-term modelling sees GURU gain 1.3-per-cent market share penetration in North America in 10 years, yielding revenues of $400-million. We note the Company’s current market share in its core QC market is 13-15 per cent and, while its market share is negligible outside of QC, the Company has aggressively grown in number of doors, showcasing early success in its expansion plans. We expect the Company to generate 30-per-cent EBITDA margins at the abovementioned top-line level.”
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In a separate note, Mr. Landry called the second-quarter results of Flow Beverage Corp. (FLOW-T) “weak” and suggested it will require additional financing before the end of the year.
Shares of the Toronto-based company, which sells flavoured water in sustainable packaging, plummeted 23.1 per cent on Tuesday after it reported revenue of $8.9-million, down 21 per cent year-over-year and well below the estimates of both Mr. Landry ($13.7-million) and the Street ($13.3-million). An adjusted EBITDA loss of $6.9-million was also higher than their forecast of a $5.9-million forecast.
“The decline in net revenue comes despite FLOW adding 10,000-plus POS sequentially, which suggests that velocity at retail as been declining,” said the analyst. “The company’s branded water net revenues decreased by 8 per cent year-over-year, which led to FLOW revising its FY22 guidance now calling for branded water sales growth of 25 per cent to 30 per cent year-over-year compared to 45 per cent to 55 per cent previously. Cash burn remained elevated during the quarter coming in at $7 million, excluding working capital investments, which brought the company’s cash balance to $25.5 million and reduces the company’s flexibility.”
Seeing its cash balance as “a focus,” Mr. Landry expects Flow to seek additional financing in the near term, expecting it could come through an asset-backed loan rather than dilutive equity financing.
Reducing his 2022 and 2023 projections in response to the company’s reduced guidance, he cut his target for its shares to $1 from $1.50, below the $2.83 average on the Street, with an unchanged “buy” recommendation.
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While calling its second-quarter results “soft” as it continues to fight through supply chain disruptions, National Bank Financial analyst John Shao emphasized Blackline Safety Corp.’s (BLN-T) “overall growth remained strong in a tough environment where peers saw flat or even negative growth.”
On Thursday, the Calgary-based company, which provides workplace connected safety technology, reported revenue of $16.7-million and an EBITDA loss of $6.4-million. Both fell short of the Street’s expectations ($17.2-million and a $5.8-million loss) but fell in line with Mr. Shao’s estimates ($16.5-million and a $6.3-million loss).
“Given the increasing difficulty in sourcing certain components and the rising materials costs, the Company has reallocated its R&D resources towards the existing products (G7) which has led to a delay in the release of G6 to October,” he said. “On the margin front, FQ2 essentially followed the same pattern as the previous quarter with a weak product gross margin while the adj. EBITDA line was under pressure as the Company remained on course to front-load its investments in products and sales channels.”
Expecting a planned price increase to help margins beginning in the fourth quarter, Mr. Shao said he continues to like Blackline’s “competitive product offering and its unique hardware-enabled SaaS model.”
Maintaining an “outperform” rating, he cut his target to $6 from $9, pointing to a revised cash flow estimate as well as “a higher execution risk from the delayed G6 launch and the changing valuation multiple of the comparable group which has seen a 26-per-cent year-to-date decline in EV/Sales multiple.” The average is $7.31
“Our investment thesis remains unchanged,” he said. “We believe Blackline’s technical edge comes from its connectivity that enables flows of data for greater visibility of employee activities and their work environment. While the gas detection and employee monitoring markets are niche markets, the Company has been replicating its success in the energy market to other verticals and we estimate Blackline only accounts for approximately 1 per cent of the market share.”
Elsewhere, looking for “breakeven visibility,” Canaccord Genuity’s Doug Taylor downgraded Blackline to “speculative buy” from “buy” with a $6 target, down from $7.
“Following Blackline’s Q2 results, we have pared back near-term revenue expectations given the ongoing impact of supply chain challenges, with the company continuing to anticipate an inflection in growth in H2/22,” said Mr. Taylor. “Management has also begun to discuss more controlled expenditures as key product line extensions advance toward launch. We believe beginning to march back toward FCF neutrality alongside revenue growth is the key deliverable to reinflate Blackline’s valuation in a market increasingly focused on profitability. With that said, Blackline’s cash resources are now $30-million, which means balance sheet flexibility is limited if further delays are experienced. The related increased risk profile leads us to move our rating.”
Others making changes include:
* Raymond James’ Bryan Fast to $9 from $10 with an “outperform” rating.
“Our thesis for Blackline remains based on a very large and lucrative long-term opportunity, a view that was reinforced after our recent visit and conversations with key members of the team,” he said.
* Echelon Partners’ Amr Ezzat to $6 from $10 with a “buy” rating.
“We believe a much more aggressive return profile is possible beyond our target price should the Company successfully transition into a positive cash flow generator,” he said.
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In a research report released Wednesday titled A Sweet Spot For Profitability, CIBC World Markets’ Jamie Kubik thinks the impact of rising prices is “outpacing” inflation for Canadian energy companies.
“While we believe we are in a higher-for-longer price cycle, producers have not meaningfully adjusted capital spending plans to drive commensurate production growth, which is unique versus prior upcycles,” he said. “Although we have seen operators continue to mark spending programs higher due to the impact of inflation and supply chain tightness, we maintain our view that price realizations should continue to outpace cost inflation for the space.
“That said, we see three sources of cost inflation that investors need to be mindful of as we move into H2/22 and 2023. Rising capital costs, taxes and royalties each have the potential to soften free cash flow yields. The timing lag could also see 2022 as a profitability sweet spot for the sector, offering a prime opportunity for increased share repurchases and balance sheet repair. We see the royalty companies as attractive versus E&Ps given they offer a natural inflation hedge; however, we do see ample valuation support across E&Ps, and our top ideas at this juncture include ARX, ERF, NVA, SDE and TOU.”
Mr. Kubik upgraded PrairieSky Royalty Ltd. (PSK-T) to an “outperformer” recommendation from “neutral” and raised his target for its shares to $26 from $24, exceeding the $22.77 average on the Street.
Conversely, he lowered his recommendation for shares of Freehold Royalties Ltd. (FRU-T) to “neutral” from “outperformer” with a $19 target. The average on the Street is $20.14.
“We see the royalty companies (FRU, PSK, TPZ) as offering a strong hedge against inflationary pressures; however, our return to target on PrairieSky is the strongest of the three royalty companies under coverage, thus prompting the upgrade,” he said. “We expect PrairieSky will continue to benefit from a broad-based increase in industry drilling on its mineral title acreage within Western Canada. Our price target for Freehold is at the top end of our expected valuation range on the shares, and although we expect the stock to appreciate, our expected return is below that of PrairieSky and Topaz. We believe organic production growth in the U.S. portfolio for Freehold could see the stock potentially push for further multiple gains versus its royalty peers, and is a key item we will be looking for with Q2 results.”
Mr. Kubik and colleagues Dennis Fong, Christopher Thompson raised their targets for these stocks:
- Birchcliff Energy Ltd. (BIR-T, “neutral”) to $15 from $11. Average: $13.
- Crescent Point Energy Corp. (CPG-T, “outperformer”) to $16 from $13.50. Average: $14.29.
- Enerplus Corp. (ERF-T, “outperformer”) to $28 from $23. Average: $22.50.
- Kelt Exploration Ltd. (KEL-T, “outperformer”) to $12 from $8. Average: $9.84.
- Nuvista Energy Ltd. (NVA-T, “outperformer”) to $18 from $14. Average: $15.63.
- Paramount Resources Ltd. (POU-T, “neutral”) to $50 from $40. Average: $42.75.
- Peyto Exploration & Development Corp. (PEY-T, “neutral”) to $22 from $15.50. Average: $17.60.
- Spartan Delta Corp. (SDE-T, “outperformer”) to $22 from $16. Average: $17.77.
- Tamarack Valley Energy Ltd. (TVE-T, “outperformer”) to $8 from $7.50. Average: $8.12.
- Topaz Energy Corp. (TPZ-T, “outperformer”) to $30 from $26. Average: $28.40.
- Tourmaline Oil Corp. (TOU-T, “outperformer”) to $90 from $85. Average: $82.73.
- Vermilion Energy Inc. (VET-T, “neutral”) to $34 from $32. Average: $36.39.
- Whitecap Resources Inc. (WCP-T, “outperformer”) to $15 from $14.50. Average: $14.98.
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Following better-than-expected fourth-quarter results, featuring new customer wins and expansion within its existing base, Scotia Capital analyst David Weiss upgraded Coveo Solutions Inc. (CVO-T) to “sector outperform” from “sector perform,” citing ongoing “strong” performance, a “resilient” enterprise customer base, a path to profitability and “an attractive valuation given the firm’s growth profile.”
“Q4 results reflected total revenue growth of 46 per cent, driven by strong SaaS subscription revenue growth of 52 per cent (more than 30-per-cent organic),” he said. “Results were above management’s prior implied Q4 guidance, and bookings were above plan, with commerce bookings up 125 per cent. The firm’s net expansion rate remained strong at 110 per cent (112 per cent last quarter) and the firm saw a current RPO backlog increase of 52 per cent, which we view as supporting FY2023 revenue estimates. The firm indicated it ended F2022 with 600 customers, up from 475 customers in Q2 of FY22.
“The company mentioned that it continues to experience strong demand (e.g. the strongest growth in commerce) and has not seen any negative customer impacts across the business. In addition, Coveo reported gaining traction in Europe, reflecting contributions from the Qubit acquisition. The company mentioned adding a number of new customers in the quarter, e.g. Roche, UiPath, and Infinera.”
Emphasizing its “business resiliency” from an enterprise customer base with a “favourable” contract structure and seeing its multiple verticals providing “diversification benefits,” Mr. Weiss thinks the valuation for Corveo and its peers have now reached “bargain territory.”
“Overall, we believe that the steep selloff in the technology sector, including Coveo and its peer group (e.g. CVO shares declined 65 per cent from IPO at $15.00 per share), has resulted in valuations that are now well into bargain territory, with peer valuations now almost 2 standard deviations below the 4-year average,” he said. “While the potential exists for further multiple compression, our view is that current valuations represent a good entry point for firms offering competitive products with the potential to deliver growth. When examining CVO shares against the 2 primary peer groups used in our relative valuation, shares are currently trading well below average despite offering higher growth (based on consensus on CY2023 estimate). To help guide our scenario analysis for CVO, we took a deeper look at how software valuations fared during prior downturn periods. We note that the steep declines in valuation multiples for select software peers over the past 7 months from above 13.0 times to the current ~4.7 times (with a 10.1 times 4-year average NTM EV/Revenue multiple) represents a 64-per-cent decrease, corresponding with compressions seen at the trough of past financial crises.”
The analyst cut his target to $9 from $14. The average is $10.95.
“We view the firm’s stock as a means to participate in a key theme, namely growth in digital information and the need to organize, search, and find relevance in this ongoing secular trend,” he said. “We believe Coveo will continue to deliver strong double-digit top-line growth over our forecast horizon, with continued demand for cloud-based search and relevance software from both new and existing customers. We believe Coveo is well positioned to consider selective M&A and will focus on small tuck-in technology purchases. The company could also represent an interesting asset for larger peers looking to add to their search/relevance technology stack along with an existing book of business.”
Other analyst making changes include:
RBC’s Paul Treiber to $13 from $14 with an “outperform” rating.
“Coveo reported solid Q4 (Mar-qtr) revenue above RBC/ consensus,” he said. “Management disclosed Coveo’s sales pipeline remains robust, despite the macro environment. Bookings were the second highest in Coveo’s history and FY23 revenue guidance is in line with our expectations, while also appearing conservative. Maintain Outperform, as we see Coveo achieving solid growth and we expect Coveo’s discount to peers to narrow.”
* National Bank Financial’s Richard Tse to $13 from $18 with an “outperform” rating.
“Bottom line, the FQ4 results have the Company tracking in line with the investment thesis laid out in our recent initiation,” Mr. Tse said. “While we acknowledge the lack of profitability is likely the main driver weighing on CVO, that was in line with our forecasts given the early growth (investment) stage of the Company. However, the current environment is heavily discounting those names. Given our thesis had that profitability scale occurring in FY25, we continue to believe long-term investors will be rewarded, particularly at the current stock price.”
* Canaccord Genuity’s David Hynes to $10 from $15 with a “buy” rating.
“The issue for the stock is still-high losses, which based on updated guidance for F2023, points to (29 per cent) operating losses this year,” said Mr. Hynes. “On the surface, low-30-per-cents organic growth and near-30-per-cent operating losses doesn’t paint a very compelling picture. The flip side of this argument is that (a) Coveo is still relatively subscale when it comes to the typical public company, and fast growth companies at this size often have comparable losses, and (b) management has set a pretty conservative bar for both FQ1 and the year ahead, which makes us think the “real” numbers could come in quite a bit better than what estimates suggest. Coveo has committed to a focus on cost discipline in the current environment, which is the right thing to say, but the unit economics of the business do seem to support continued investment. The bottom line is that CVO shares are trading at less than 2.0 times EV/R on C2023 for a business that’s growing north of 30 per cent, landing leading enterprise accounts, and is still early in its growth trajectory. We’ve been shying away from stories with high losses, but at a certain point, there’s a price for everything, and this seems too cheap.”
* BMO’s Thanos Moschopoulos to $9 from $17 with an “outperform” rating.
“While investor sentiment has clearly turned bearish for unprofitable small-cap tech stories, we believe CVO is trading at too steep of a discount to comps—given its growth rate, competiive position, and seasoned management team (which has successfully navigated through prior cycles). We’ve raised our estimates, but have reduced our target price to reflect the recent multiple compression across the SaaS universe,” said Mr. Moschopoulos.
* TD Securities’ David Kwan to $10 from $9.50 with a “buy” rating.
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While Roots Corp. (ROOT-T) delivered “strong” first-quarter results, Canaccord Genuity analyst Matthew Lee expects a “challenging macro backdrop” to weigh on profitability moving forward.
Roots to relaunch retro Beaver Canoe brand this summer
Before the bell on Tuesday, the Toronto-based clothing retailer reported revenue of $43.1-million, up 15.3 per cent year-over-year and above the forecasts of both Mr. Lee ($41.4-million) and the Street ($38.9-million) as all its stores reopened and saw increased customer traffic. An EBITDA loss of $3.2-million was higher than the Street’s projection (a loss of $2.2-million) but was better than Mr. Lee’s estimate ($4.5-million loss).
“DTC [direct-to-customer] sales in the quarter reached $37.4-million, representing 19-per-cent growth year-over-year,” he said. “The increase in sales was primarily attributable to the reopening of all Roots locations coupled by a significant increase in corporate store traffic. Looking forward, we expect revenue growth to remain solid as the company enacts price increases in its core products and generates more traffic to its stores, particularly those in tourist destinations.”
“Roots noted that with elevated freight costs and its current production flows, it expects an impact of 150–200 basis points on its DTC gross margin in the second half of the year. Management, however, does not expect inventory delays, which is especially crucial given that 70 per cent of its sales are generated in the last two quarters. Given that Roots has not seen a significant change in purchasing habits with its recent price increases, we expect that the firm will continue having discipline on promotions and strategically raise prices throughout the year to partially offset inflationary pressures. We forecast gross margins of 58 per cent throughout the year, which is down modestly from F21 levels.”
Mr. Lee called Roots’ balance sheet “strong,” allowing it to “weather the current environment.”
“ROOT ended the quarter with net debt/EBITDA at 0.8 times,” he said. “In terms of capital allocation going forward, management remains judicious in its decisions to deploy capital given potential macroeconomic challenges. The firm noted that it plans to continue buying back shares opportunistically to reach its previously announced 2 million goal but is not necessarily considering shareholder returns beyond that point.”
Keeping a “hold” rating, he trimmed his target for Roots shares to $3.75 from $4.50 based on “modest” estimate adjustments and a reduced multiple. The average is $4.65.
“We have tapered our EBITDA expectations for the second half of F22 into F23 given uncertainty around supply chains, transportation, and inflation,” he said. “Given the significant share price declines for peers over the past six months (SHOO: down 26 per cent, GOOS: down 49 per cent, LULU: down 29 per cent), we have opted to reduce our valuation multiples on ROOT, offset somewhat by the roll-forward of our model.”
“While Roots’ brand and omnichannel strategy continue to resonate with consumers and we are constructive on geographical expansion, we maintain our HOLD rating based on the opaque outlook around supply chains and the geopolitical environment.”
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In other analyst actions:
* CIBC’s Kevin Chiang cut his Bombardier Inc. (BBD.B-T) target to $36 from $45, keeping a “neutral” rating. The average on the Street is $56.58.
“We have adjusted our estimates for BBD’s share consolidation (one share for every 25 pre-consolidation shares) and its $350-million tender offer for senior notes,” he said. “We have lowered our EV/EBITDA price target multiple to 5 times from 5.5 times though to reflect the de-rating we have seen in other pure-play cyclical industries (i.e., autos) despite the near- to medium-term outlook for business jets remaining favourable. We continue to see BBD track ahead of its targets while benefiting from healthy industry trends. That said, growing concerns over a recession limit BBD’s re-rate opportunity.”
* Following “mixed” first-quarter results, Echelon Partners’ Andrew Semple trimmed his Street-low target for Fire & Flower Holdings Corp. (FAF-T) to $4.50 from $5, keeping a “speculative buy” rating. The average is $9.70.
“Though we continue to see reasons for optimism longer term, we believe investors are likely to be tepid with the deterioration of the Company’s EBITDA, at a moment when capital markets are being fickle with growth company valuations and demanding better earnings visibility,” he said. “We continue to view the shares as undervalued, though note implied upside is lean for the cannabis industry in the context of significant TTM [trailing 12-month] share price declines for substantially all cannabis companies. Further upside to our DCF valuation is possible as high-margin digital revenues continue to build, and as the Company deploys the cash expected from Alimentation Couche-Tard.”
* Cowen and Co.’s Jeffrey Osborne reduced his target for Li-Cycle Holdings Corp. (LICY-N), a Toronto-based lithium-ion battery recycling company, to US$10 from US$14, below the US$11.88 average, with an “outperform” recommendation, while BMO’s Robin Fiedler cut his target to US$12 from US$14 also with an “outperform” rating.
“.Our valuation was always based on LICY’s 2025 earnings potential to better capture what we viewed as a reasonable expectation for a full two-Hub operation. It now seems that will likely prove optimistic given operational and financial prudence. As a result, we reduce mid-term volumes, earnings, and thus our target price accordingly. However, we do not waver with our conviction on the LICY thesis and favorable position as a well-capitalized first mover with strong commercial partnerships,” said Mr. Fiedler.
* Following the announcement of amendments to its proposed strategic alliance with Hexo Corp. (HEXO-T), Canaccord Genuity’s Matt Bottomley cut his Tilray Brands Inc. (TLRY-Q, TLRY-T) target to US$7 from US$9, keeping a “buy” rating. The average is US$7.32.
David Leeder