Inside the Market’s roundup of some of today’s key analyst actions
A pair of equity analysts on the Street adjusted their recommendations for shares of Sierra Wireless Inc. (SWIR-Q, SW-T) following late Tuesday’s announcement that California chip maker Semtech Corp. has agreed to buy the Vancouver-area communications technology vendor for US$31 a share, the two companies said late Tuesday.
Not anticipating additional bidders and believing the price is “a fair outcome” for Sierra Wireless shareholders, Canaccord Genuity’s T. Michael Walkley moved Sierra to “hold” from a “buy” recommendation with a US$31 to match the offer, up from US$27 previously and above the US$25.19 average on the Street.
“We view the $31 per share cash offering as a solid outcome for Sierra Wireless shareholders, as it represents a 30-per-cent premium to Sierra Wireless’s 30-day volume weighted average share price,” he said. “Further, with Phil Brace and team returning the company to its core competencies and driving much stronger revenue and earnings growth, we believe his team created strong shareholder value during his brief tenure. Following our increased estimates after another quarter well above consensus, we estimate the deal price at 14 times EV/EBITDA on our increased C2023 estimate. Given the market environment, we believe this is a fair valuation and expect the deal to likely close at this price.”
Elsewhere, CIBC World Markets’ Todd Coupland raised the company to “neutral” from “underperformer” with a US$31 target, up from US$15.
RBC Dominion Securities’ Paul Treiber raised his target to US$31 from US$28, maintaining a “sector perform” rating.
“The takeout implies a 359-per-cent return for shareholders since Sierra reached an agreement with Lion Point Capital and two new independent directors were appointed to Sierra’s board on April 16, 2020,” he said. “While bulls were hoping to see more progress on Sierra’s rapid turnaround, particularly since CEO Phil Brace has been at the company for only a year and momentum has been strong (see below), we believe it is a positive outcome for shareholders. Moreover, the all-cash transaction provides shareholders a definitive return in a down market.”
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Despite reporting in-line second-quarter results, Raymond James analyst Michael Shaw lowered Gibson Energy Inc. (GEI-T) to “market perform” from “outperform” based on valuation.
“Gibson is currently trading at 11.7 times our 2022 estimated and 11.0 times our 2023 estimated EBITDA, both above the mid-point of its historic valuation range,” he said. “The equity is among the best performing over the last 12 months and, in the context of the higher interest rate environment, in our view is fairly valued.”
Adjusting for a one-time payment in its infrastructure segment, Gibson reported adjusted EBITDA of $109-million, matching Mr. Shaw’s estimate and near the consensus on the Street ($110-million). However, the company reduced its 2022 growth spending outlook to a range of $100-million to $125-million from $150-million previously.
“We suspect a large part of the revision is due to the delay in the in-service date for the Trans Mountain Expansion pipeline, which pushed back the need for tanks in Edmonton,” the analyst said. “The tanks from TMX will ultimately be required, and we view this as a timing item rather than a fundamental change in need for storage at the Edmonton terminal. Nonetheless, the lower 2022 growth spend raises questions around where GEI will allocate growth capital beyond its terminalling assets.”
Mr. Shaw raised his target for Gibson shares to $26.50 from $25, exceeding the $25.93 average.
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ATB Capital Markets analyst Nate Heywood said Capital Power Corp.’s (CPX-T) “strong” first-quarter results and “constructive” market outlook have provided “confidence for upward estimate revisions.”
Investors had a muted reaction to Tuesday’s premarket release, sending shares of the Edmonton-based power producer down 0.06 per cent despite results that topped expectations. Earnings before interest, taxes, depreciation and amortization of $319-million topped Mr. Heywood’s estimate of $278-million by 14 per cent, which he attributed to higher generation across the fleet and high power prices in Alberta.”
The beat also prompted Capital Power to raised its full-year 2022 adjusted EBITDA guidance to $1.24-$1.28-billion from $1.11-$1.16-billion. Its adjusted funds from operations range rse to $700-$740-million from $580-$630-million.
“In the near term, we expect Capital Power to continue investing heavily in growth initiatives, with a significant focus on the Genesee 1 & 2 repowering, accompanied by recent efforts on carbon capture and renewable projects in both Canada and the U.S.,” said Mr. Heywood. “Additionally, management has demonstrated its appetite for natural gas generation M&A with the recent Midland Cogen acquisition, an example of acquiring mid-life assets with attractive contracting profiles. The Company continues to improve its contracted cash flows through PPAs, which we expect to be a consideration on any potential development and M&A activity.”
Citing “the high generation utilization of the fleet and tight merchant power pricing environment,” he raised his 2022 EBITDA projection by 2 per cent to “capture the strong quarter and tailwinds heading into H2/22, including high power pricing.”
“Looking beyond 2022, our 2023 and 2024 estimates have climbed modestly higher as we have slightly increased our utilization expectations and availability estimates following continued strong operational performance,” said Mr. Heywood.
That prompted the analyst to raised his target for Capital Power shares by $3 to $49, keeping a “sector perform” rating. The average on the Street is $49.27.
“The Company boasts an attractive dividend yield of 4.7 per cent, supported by a modest 2022 payout ratio of 37 per cent,” he said. “With a 2023 estimated EV/EBITDA of 8.0 times, we note that Capital Power is trading at a discount to the peer average of 11.2 times, although we attribute the discount to its exposure to thermal generation – a business line that may continue to see future investment.”
Others making target changes include:
* Desjardins Securities’ Brent Stadler to $53 from $52 with a “buy” rating.
“Once again, CPX’s quarterly results were well ahead of bolstered expectations, which enabled the company to increase the midpoint of its EBITDA and AFFO guidance ranges by 11 per cent and 19 per cent, respectively. We believe this recent string of solid quarters speaks to the reliability of thermal assets and their ability to fire and take advantage of attractive and volatile power prices. Reflecting the strong quarter and some other modest model tweaks, we have increased our target,” said Mr. Stadler.
* Scotia Capital’s Robert Hope to $49 from $46 with a “sector perform” rating.
“Capital Power’s Q2/22 results were well ahead of expectations largely on the back of strong contributions from its Alberta assets. We move up our estimates for 2022 and are in the upper half of the revised guidance range. Our 2023 and 2024 cash flow estimates also increase, though less so. We increase our target price ... to reflect our higher estimates as well as a higher valuation multiple on the Ontario assets given an improved outlook in that market,” said Mr. Hope.
* RBC’s Maurice Choy to $50 from $45 with a “sector perform” rating.
“With strong power prices and dark/spark spreads in Alberta offering CPX’s baseload generation portfolio the opportunity to generate solid cash flows (particularly in the near term), CPX’s capital allocation approach is high on the market’s focus,” said Mr. Choy. “Certainly, the solid cash flows not only help support the upgraded 6-per-cent annual dividend growth guidance through 2025, but also fund committed and future organic/inorganic growth initiatives (if not also reduce future new common equity needs).”
* CIBC World Markets’ Mark Jarvi to $50 from $49 with a “neutral” rating.
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Though it displayed “solid” top line growth in the second quarter, Raymond James analyst Stephen Boland downgraded Definity Financial Corp. (DFY-T) to “market perform” from “outperform” based on valuation concerns.
“The stock is trading at 1.6 times our 2023 ending book value,” he said. “As we forecast a low teen ROE [return on equity] for the coming year, we believe the valuation is at fair levels.”
After the bell on Tuesday, the Toronto-based firm reported income per share for its second quarter of 42 cents, exceeding the 30-cent forecast from the Street but below Mr. Boland’s 48-cent estimate.
“The overall combined ratio was 95.8 per cent compared to 92.2 per cent in 1Q22 and 94.1 percent in 2Q21,” he said. “This quarter included 5.8 per cent of cat losses. The Personal Property results were materially impacted by storm activity in the quarter. Sonnet continued its strong premium growth and accounted for almost 9 per cent of premiums. Definity now has $910 million in current excess capital and leverage available to deploy effectively towards accretive M&A and partnerships. We also note the persistent hard market conditions across commercial and personal property lines.”
Mr. Boland raised his target for Definity shares to $36 from $34.50. The average is $37.91.
Elsewhere, seeing the property and casualty insurance industry “well positioned” for 2022, National Bank Financial analyst Jaeme Gloyn called Definity as “a land grab story with an ROE expansion kicker” following a “solid” quarterly beat.
Keeping an “outperform” rating, Mr. Gloyn raised his target by $1 to $39.
RBC’s Geoffrey Kwan hiked his target to $43 from $40 with an “outperform” rating.
“DFY has reported very good earnings in the three quarters since its IPO, with gross written premiums +12.0–12.5 per cent year-over-year in each of the quarters (vs. DFY’s target of double-digit growth) and a combined ratio of 94 per cent, at the positive end of DFY’s target of mid-90s or better,” said Mr. Kwan. “We think continued strong execution on its growth strategy should see its valuation discount to its closest peer narrow over time. Looking ahead, potential catalysts include potential acquisitions and greater clarity on the Canadian Government’s plans to allow demutualized P&C insurers to convert to a corporate structure more quickly than the current two-year wait period. Definity’s Q2/22 results demonstrate why P&C insurance is our favorite sector and why Definity is one of our “sleeper” best ideas for 2022: (1) positive fundamentals and favorable industry conditions; (2) potential catalysts; (3) very defensive investment ideas; and (4) attractive valuations. We view the shares as attractively valued (1.8x P/BV) and raise our price target.”
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After its first-quarter financial results fell short of expectations, analysts on the Street expect the profitability of Neighbourly Pharmacy Inc. (NBLY-T) to continue to hurt by a higher-than-usual labour costs as difficulties in replacing retiring pharmacists persist.
Shares of the Toronto-based network of independent pharmacies fell 9 per cent on Tuesday after the premarket earnings release. Revenue rose 34 per cent year-over-year to $114.4-million and EBITDA jumped 11 per cent to $11.3-million. However, both missed consensus forecasts ($115.9-million and $12.4-million, respectively).
IA Capital Markets analyst Chelsea Stellick attributed much of the miss higher-than-anticipated labour costs as vacancies continued to be unfilled.
“Unexpectedly, new prescriptions and in-person physician appointments remained below pre-pandemic levels, posing a headwind particularly to the clinic locations in NBLY’s network,” she added.
“We are confident these almost 10-per-cent Adj. EBITDA margins of this quarter and last represent the bottom for margins, given that Rubicon will immediately benefit margins in Q2/F23 as synergies are implemented and corporate costs are diluted as a percentage of revenue.”
Calling the headwinds “transient,” Ms. Stellick said Neighbourly’s business “continues to perform well, generating substantial free cash flow on a stabilized basis that will continue to be deployed to build out Canada’s fastest growing pharmacy network.”
Keeping a “buy” rating, she lowered her target for its shares to $35 from $38. The average on the Street is $31.55.
Meanwhile, National Bank Financial’s Zachary Evershed said he expects pressure from relief pharmacist costs will persist through the remainder of the company’s current fiscal year and through the first half of fiscal 2024 until next graduating cohort of new pharmacists hits the labour market in August of 2023.
At that time, he anticipates margins should “step up rapidly,” adding to improvement brought by the acquisition of Rubicon Pharmacies.
“As anticipated, profitability remained depressed due to the incremental costs of covering open positions with relief pharmacists,” he said. “Management noted vacancy rates were significantly higher relative to last year and pre-pandemic levels as openings created by retirements in rural communities have been difficult to fill. However, management believes this is the point of maximum pain and that pressure from reliance on relief pharmacists should abate with the second graduating cohort of new pharmacists in 12 months’ time. In the meantime, NBLY is focusing on moving labour-intensive compliance pack and compounding work out of rural markets and into central fill locations. Currently, NBLY is working to expand central fill capacity in AB, opening a hub in BC towards the end of August, leveraging Rubicon’s capacity in SK and planning for a new facility in ON.”
Mr. Evershed trimmed his target to $25 from $26.50, reiterating a “sector perform” recommendation.
“Though we value defensive organic growth with M&A upside, given the tight return to target, we rate NBLY Sector Perform,” he said.
Elsewhere, others making changes include:
* Desjardins Securities’ Chris Li to $25 from $26 with a “hold” rating.
“We believe the 9-per-cent sell-off was excessive following NBLY’s slightly softer-than-expected 1Q results,” said Mr. Li. “While industry pressures will persist near-term, they are largely transitory. Relative valuation has improved with NBLY now trading at 13.1 times PF EBITDA, slightly above 12.4 times for other high-growth mid-cap consumer companies. We believe NBLY is well-managed and defensive, with compelling growth through M&A. We prefer to wait for one quarter of stability in Rx growth and margin before becoming more positive.”
* RBC’s Irene Nattel to $37 from $38 with an “outperform” rating.
“Q1/F23 solid and generally as forecast, although ongoing COVID disruptions had a slightly more pronounced impact than we had anticipated on labour costs and clinic volumes. Accordingly, we are fine-tuning our F23E/F24E and target to $37 (-$1); F25E essentially unchanged. We reiterate our constructive outlook for NBLY and remind investors that both labour and Rx count headwinds are transient, industrywide phenomena that disproportionately impact small, independent pharmacists and should help keep M&A pipeline and discussions buoyant over our forecast horizon,” she said.
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TD Securities analyst Graham Ryding raised target prices for a group of diversified financial firms in his coverage universe on Wednesday.
His changes include:
- AGF Management Ltd. (AGF.B-T, “buy”) to $8 from $7.50. The average on the Street is $7.57.
- CI Financial Corp. (CIX-T, “hold”) to $14.50 from $16. Average: $18.94.
- Fiera Capital Corp. (FSZ-T, “buy”) target to $10.50 from $11. Average: $10.21.
- IGM Financial Inc. (IGM-T, “buy”) target to $44 from $48. Average: $43.57.
- Onex Corp. (ONEX-T, “buy”) target to $100 from $115. Average: $101.80.
- Sprott Inc. (SII-T, “hold”) to $50 from $58. Average: $52
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With “mounting recessionary concerns and rising rates,” Desjardins Securities analyst Jerome Dubreuil predicts “a period of capital preservation ahead” for healthcare companies in his coverage universe.
“Although healthcare is resilient relative to other industries, access to capital markets has deteriorated and caused our coverage companies to increasingly focus on profitable growth, which may not be all that bad long-term,” he said.
Citing renewed investor focus on profitability and free cash flow versus growth as well as the impact of higher interest rates, the analyst reduced his valuations, leading to lower target prices for the companies’ shares.
“Given our view that health tech continues to provide strong utility for users, we believe concerns on churn/the slowdown related to the reopening of the economy are overblown,” he said.
In order of preference, Mr. Dubreuil’s changes are:
* LifeSpeak Inc. (LSPK-T, “buy”) to $4.50 from $6. The average is $3.21.
“We have reduced our revenue expectations for the quarter to account for HR teams being busy with the return to office, some of management likely being focused on the situation with the large contract and economic uncertainty,” he said. “We nonetheless continue to forecast strong organic growth driven by cross-selling with recent M&A targets, as well as success in both the enterprise and embedded segments. Our forecast assumes that LSPK will not renew its contract with the large client”
* Dialogue Health Technologies Inc. (CARE-T, “buy”) to $7.50 from $10. Average: $7.61.
“. Margins reported last quarter were disappointing given the company had recorded costs related to the Scotiabank onboarding but began generating revenue only in 2Q22; profitability should therefore have improved,” he said. “Moreover, we believe management is adapting its model to better suit the market’s increased attention to profitability; we believe the company understands that having a sustainable, self-financed business will put it in a position to better capture opportunities. With regard to our EBITDA forecast, our improved margin estimates more than offset our reduced revenue expectations for 2Q22.”
* Think Research Corp. (THNK-X, “buy”) to $1.25 from $1.75. Average: $1.91.
“We believe turning sustainably EBITDA positive would be a catalyst for the stock given the market’s increased preference for profitable companies. We highlight that the acceleration in marketing investments expected by management in the previous quarter could affect near-term profitability as this decision could take a few months before translating into additional sales,” he said.
* Well Health Technologies Corp. (WELL-T, “hold”) to $6 from $7. Average: $8.27.
“While the longer sales cycles noted by U.S. peers represent a risk for the other healthcare stocks we cover, we believe WELL has relatively limited exposure to this issue. We were pleasantly surprised by the company’s pre-released results for 2Q, which showed that it might slightly exceed prior expectations. WELL’s growth can be attributed to continued strength in omni-channel visits as well as a continuing trend of strong U.S. business. We highlight the contrast between these good results and how poorly valuations have performed recently.”
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In other analyst actions:
* Despite “strong” quarterly results, Scotia Capital’s Jason Bouvier downgraded International Petroleum Corp. (IPCO-T) to “sector perform” from “sector outperform” with a $20 target, up from $17 and above the $18.88 average.
“PCO’s Q2 cash flow beat consensus due to lower production costs and cash taxes as well as higher production,” he said. “Management has increased its capex guidance for accelerated drilling, value-add projects, and cost inflation. IPCO now expects to be at the high end of its 2022 production guidance. We have increased our target price ... due to IPCO’s cash flow beat, strong balance sheet, and increased 2023 production on higher capital spending. However, we have downgraded IPCO to Sector Perform because the stock’s recent outperformance has caused its implied return to be more in line with our other Sector Perform rated companies.”
* Ahead of its post-market earnings release on Thursday, Canaccord Genuity’s Yuri Lynk cut his AirBoss of America Corp. (BOS-T) target to $20 from $35.50 with a “buy” rating, calling its near-term outlook “dim.” The average is $30.07.
“We feel a different approach is warranted in forecasting AirBoss’ financial results,” he said. “After all, the company hasn’t announced a major contract award since March 2021. As such, we do not feel it makes sense to continue to build awards into our forecast only to have to remove them if they don’t materialize. This change in approach leads to our new 2022 EBITDA estimate of $40 million versus $69 million previously while our 2023 EBITDA estimate goes to $43 million from $91 million.”
* Scotia Capital’s Himanshu Gupta lowered his Choice Properties REIT (CHP.UN-T) target by 50 cents to $15, which is 6 cents below the average, with a “sector perform” rating.
“We think the playbook has been very clear – CHP trades like a go-to defense name during periods of higher uncertainty,” he said. “CHP outperformed the REIT sector by 900 basis points year-to-datte, and also outperformed the REIT sector during the start of the COVID-crisis. Given the macro backdrop, we think CHP ‘defense trade’ has still more legs. The element of protection comes from continued grocery cap rate bifurcation. Grocery cap rates have outperformed other retail categories in the last several quarters – a trend likely to continue in the current environment, in our view.”
* Scotia Capital’s Divya Goyal raised her target for shares of Converge Technology Solutions Corp. (CTS-T) by $1 to $12 with a “sector outperform” rating. The average is $11.40.
* Scotia Capital’s Mario Saric lowered his InterRent REIT (IIP.UN-T) target to $16.75 from $17.50 cents with a “sector outperform” rating. The average is $16.95.
“Bottom line, due to regulatory concerns, CAD Apartment REITs look like the ‘defensive laggards’ some investors are looking for amid economic uncertainty. We think IIP offers growth and value, with our other top CAD Apartment pick (CAP REIT) perhaps a bit more defensive in nature (less growth; more stability),” said Mr. Saric.
* Projecting “modestly softer” EBITDA over the next year, National Bank Financial’s Mike Parkin trimmed his Kinross Gold Corp. (K-T) target to $8.25 from $9.25, reiterating an “outperform” rating. The average is $8.44.
“Kinross remains a Top Pick as we continue to see a strong re-rating potential vs. senior peers on a much improved geopolitical risk profile now that the exit from Russia is fully complete,” he said.
* Scotia Capital’s Orest Wowkodaw bumped his Sherritt International Corp. (S-T) target to 55 cents from 50 cents with a “sector perform” rating. The average is 96 cents.
“Sherritt released better-than-anticipated Q2/22 results. 2022 operating guidance was reaffirmed and planned capex was lowered,” he said. “The Moa expansion project remains on track for approval in H2/22. Overall, we view the update as positive for the shares.
“We rate Sherritt SP based on a mixed risk-reward profile. Despite elevated Ni-Co prices, we remain concerned with the company’s high debt leverage, relatively weak balance sheet, and ongoing uncertainty regarding the future of the power business.”
* In response to a “generally negative” second-quarter earnings release, Canaccord Genuity’s Dalton Baretto cut his SSR Mining Inc. (SSRM-T) target to $26 from $31 with a “buy” rating. The average is $31.72.
“The significant EPS beat was driven by tax accounting. EBITDA was in line with our estimate, which was toward the bottom end of the consensus range; we note that in-line EBITDA comes despite higher sales volumes and revenue vs. our estimates as costs were also higher. Consolidated production guidance is unchanged, but management has made material upward revisions to its cost guidance for the year. We note here that in addition to adjusting our 2022 cost estimates upward, we have also increased our estimates for 2023 and 2024 as our previous estimates were far too low for the current environment,” he said.
* IA Capital Markets’ Chelsea Stellick raised her Valeo Pharma Inc. (VPH-T) target to $1.50, matching the average on the Street, from $1.40 with a “buy” rating.
“[Tuesday morning, Valeo Pharma (VPH) reported asset acquisitions and financing,” she said. “These acquisitions significantly increase Valeo’s upside potential, although at the cost of becoming overleveraged. Collectively, yesterday’s announcements are clearly a net positive as VPH will benefit from the operating leverage created by The Great F2021 Scale Up, particularly with its new best-in-class allergy asset Allerject. Given the portfolio quality and market opportunity, VPH continues to grow organically and inorganically as the Company pursues economies of scale.”
David Leeder