Inside the Market’s roundup of some of today’s key analyst actions
Brookfield Business Partners L.P.’s (BBU-N, BBU-UN-T) “attractive” returns from its investment in Westinghouse Electric Co. ”prove out [its] business model,” according to National Bank Financial analyst Jaeme Gloyn.
After the bell on Tuesday, Brookfield Business announced a deal to sell Westinghouse, its nuclear technology services operation, to a consortium led by Cameco Corp. (CCO-T) and Brookfield Renewable Partners LP (BEP.UN-T) for US$4.5-billion plus more than US$3-billion in assumed debt.
“BBU acquired Westinghouse out of bankruptcy in 2018 and nearly doubled its profitability and generated a 60-per-cent IRR [internal rate of return], $4.5-billion of total profit and 6 times its invested capital,” the analyst said. “More importantly in our view, the transaction is proof that BBU’s management can monetize large-scale assets with reasonably attractive returns, a long-held point of investor concern partially contributing to the 49-per-cent NAV [net asset value] discount.”
Mr. Gloyn expects the proceeds from the deal to be used to initially pay down corporate borrowings and then to “potentially fund further investments in the Tech and Healthcare strategies.”
Keeping an “outperform” rating for Brookfield Business shares, he raised his target to US$36 from US$34. The average is US$33.88.
“We believe BBU’s diversified portfolio of companies across sectors/geographies continues to deliver solid results,” said Mr. Gloyn. “In addition, we hold a favourable view of BBU’s recent flurry of acquisition activity and ongoing build into the technology sector. Moreover, the monetization of Westinghouse increases our confidence in management’s ability to monetize Clarios next. Overall, we anticipate BBU’s successful execution/integration will drive the shares higher.”
Copper Mountain Mining Corp.’s (CMMC-T) US$230-million sale of its wholly-owned Eva Copper Project and its exploration land package in Australia to Harmony Gold Mining Co. (HMY-N) strengthens its balance sheet and “reduces risk, which is understandable in this market environment,” according to Haywood Securities analyst Pierre Vaillancourt.
Though he thinks it is “foregoing long-term opportunity,” he raised his rating for the Vancouver-based company to “buy” from “hold,” touting the near-term financial gain from the project, which was purchased for $78-million in April of 2018 with $30-million spent on it since then, and “improvements at the Company’s operations and a strengthening metals price environment.”
“The sale of the asset therefore represents an attractive return on capital and strengthens CMMC’s balance sheet, helping to provide capital to deliver on the new mine plan and the 65 ktpd expansion in 2028,” said Mr. Vaillancourt.
“The Eva project was fully permitted, with a feasibility study that could have led to the construction of a mine with comparable production to Copper Mountain. In addition, the surrounding 4,000-square-kilometre Cloncurry property offered a number of prospective targets, some of which could have been satellites to Eva. The Feasibility study for Eva featured an open pit mine with annual production of 1.5 million pounds at a C1 cost of US$1.44 per pound over a 15-year mine life, starting potentially in 2024, for a capex of US$443-million. This production profile would have tripled CMMC’s current attributable production.”
Recommending investors “buy as CMMC recovers from a difficult 1H22,” he raised his target for its shares to $2.25 from $2. The average target is $3.27.
“With the stock down nearly 50 per cent year-to-date, better operational performance in 2H22, and a stronger balance sheet, we believe CMMC will recover in the near term,” said Mr. Vaillancourt. “In the long term, prospects are more modest, as CMMC remains a one mine company with no clear avenues for diversification beyond the Copper Mountain mining complex.”
Corus Entertainment Inc. (CJR.B-T) is “going through a rough patch,” according to Scotia Capital analyst Maher Yaghi, who expects the “erosion” of traditional television viewership to continue.
“The combination of a weakening economy and tight supply chain for some of the company’s customers has caused management to recently guide down expectations for the upcoming Q4 results on reduced advertising revenues,” he said. “Since then, estimates have been significantly revised down and the stock is being punished on fears this warning could be a prelude to more pain down the road.”
“We expect the pressure from the continued increase in Cord Nevers and lower viewership from existing cable subscribers to exert pressure on traditional broadcasting business models. While the Canadian broadcasting system is somewhat more protected than the U.S. one, we still believe that declining TV subscribers and continued drift of content and viewership onto unregulated services, such as Netflix and YouTube, will result in the diversion of more advertising dollars onto other platforms away from traditional TV. In addition, the recent announcement of a potential launch of ad-supported Netflix and Disney services could cause additional advertising dollars to move online.”
Also expecting radio to endure a “fragmentation and movement of listenership to online” but seeing opportunities to “extract more value” from that business, Mr. Yaghi initiated coverage of the Toronto-based media company with a “sector perform” recommendation on Wednesday, seeing it current stock valuation “close to pricing in the same level of business deterioration as the print business saw back in the early 2010s.”
“In an environment of increasing interest rates and a worsening economic outlook, valuation for broadcasters both in Canada and the United States has taken a significant haircut,” he said. “Investors are pricing in a significant deterioration of the business akin to the declines we saw in the newspaper business back in the early 2010 when they traded at 3.5-4 times EBITDA. We don’t believe the business is likely to exhibit similar declines in the near future; however, until we see an improvement in advertising trends we prefer to remain cautious. We do, however, point out that privatization of the business is not out of the realm of possibility given the stock trading at close to 45-per-cent FCF yield.”
The analyst set a target for Corus shares of $4. The average on the Street is $4.06.
“From a public market perspective, we have taken a measured view of the outlook, and we are using an EV/EBITDA valuation with a target multiple of 4.5 times,” he said. “We will be looking for signs of improved trends in the business, which we would reconsider in our valuation multiple; however, the rate of advertising decline in the business, as previewed by management for Q4, gives us pause.”
Seeing “significant” upside for its flagship Windfall gold project in Quebec, Scotia Capital analyst Ovais Habib initiated coverage of Osisko Mining Inc. (OSK-T) with a “sector outperform” recommendation.
“Osisko maintains an active drilling and exploration program at Windfall with 10 active drill rigs, and we expect additional exploration results in the coming weeks and months,” he said. “We see potential for value accretion as the resource base expands through ongoing drilling and exploration, including at depth where the deposit remains open and where the company has been reporting additional high-grade intervals beneath the limits of the existing resource.”
Mr. Habib thinks high-grade, low-cost production in Canada makes Osisko “an attractive acquisition target” moving forward.
“We expect Osisko to produce more than 250,000 ounces of gold annually with production commencing in 2025 (conservatively, one year later than the PEA study),” he said. “All-in sustaining costs (AISC) are expected to remain stable at approximately US$717 per pound (LOM average), and it appears additional upside for expansion remains at depth where the deposit remains open. We believe this combination creates a suitable target for a major or mid-cap producer looking to augment its production profile with low-cost ounces.”
Believing its current share price “represents a good entry point to invest in a well-managed gold development company with significant potential for exploration and production upside,” he set a one-year target of $4.25. The average on the Street is $5.58.
“Using the spot gold price, Osisko is currently trading at 0.56 times P/NAV5%, compared with development peers that trade at an average of 0.53 times,” said Mr. Habib. “In our view, the company should trade at a premium to its peers given Windfall’s location in a tier-one jurisdiction and its high-grade, low forecast operating costs, and significant exploration upside. As Osisko continues to execute its exploration and development plans, we expect a commensurate upward share price rerating. We think the current market valuation of Osisko reflects a significantly discounted value for its current resources and reserves, and we believe there is considerable exploration upside, with additional near-term potential catalysts not currently being reflected.”
CIBC World Markets’ Scott Fletcher made a series of target price reductions on Wednesday.
His changes include:
* Altus Group Ltd. (AIF-T, “neutral”) $53 from $58. The average is $64.63.
Analyst: “As AIF continues to reposition itself as an intelligence-as-a-service provider to the CRE industry, our quarterly focus is on progress made on upselling/cross-selling new capabilities, integration of data across the product suite, and organic growth within the Altus Analytics recurring revenue base. Altus Analytics growth has accelerated in recent quarters, and continued strong performance from the Analytics segment would be a further sign of progress on the new strategic vision. Other areas of focus in the quarter include the performance of recently acquired businesses (Rethink, Reonomy), the impact of the macro-environment/FX headwinds, and signs of improved profitability. We have updated our estimates to reflect an estimated 2% FX headwind as well as minor revisions to our 2023 property tax and corporate cost estimates. As a result of those changes, we reduce our price target”
* Dialogue Health Technologies Inc. (CARE-T, “neutral”) to $3.50 from $4. Average: $6.
Analyst: “Dialogue’s Q3 earnings follows a recent business update that warned of the non-renewal of a major EAP customer and headline Q3 revenue numbers that that were projected to be below Street expectations. With headline results already known, the focus in the quarter will be on forward looking commentary related to the sales pipeline and whether the business is still on track to hit its target of Adj. EBITDA and FCF profitability by the end of 2023. In response to the outlook provided at the end of September, we have adjusted our F2023 estimates to factor in the Optima non-renewal and reduced our price target”
* Stingray Group Inc. (RAY.A-T, “outperformer”) to $8 from $8.50. Average: $7.90.
Analyst: “With the broader advertising industry entering a period of uncertainty as corporates pull back on ad spending, Stingray’s Q2/F23 will provide an important update on the prospects of the Stingray Advertising Business. With Q1/F23 results, management noted that in-store retail advertising spend is not as heavily impacted by macroeconomic concerns given the nature of the products being advertised, and we will be watching for results and commentary that is supportive of that statement. We will also be looking for an update on the changing cost profile of the business and whether margin expectations for the B&C and Radio segments need to be further recalibrated in the wake of advertising weakness. We have updated our forecast to factor in weaker advertising markets, particularly in the Radio segment, which has resulted in our price target declining”
Analyst: “We continue to view TRI’s 80-per-cent recurring revenue and legal, accounting, and enterprise customer base as attractive in an uncertain macroeconomic environment. We are forecasting 5.5-per-cent ‘Big 3′ constant currency revenue growth in Q3 and we expect TRI’s market-leading product suite to give it pricing power at the time of contract renewal, helping to offset FX headwinds on European revenue (18 per cent of revenue in Q2/21). We are modeling a 300 bps sequential decline in adjusted EBITDA margin in Q3 given the timing of Change Program spending and seasonal softness in the Tax segment. We believe TRI remains a quality defensive investment with stable and growing FCF generation and multiple options for capital return. We reduce our price target .... as we re-mark TRI’s LSEG stake at market value.”
* Well Health Technologies Corp. (WELL-T, “outperformer”) to $7 from $7.50. Average: $7.96.
Analyst: “We maintain our view that WELL’s combination of essential healthcare services, growing virtual care offerings, and free cash flow growth makes for an attractive investment in the current environment. WELL has established a track record of meeting or beating Street expectations, with 10 straight quarters with revenue and adjusted EBITDA above or in line with estimates, and we expect that streak to continue with Q3 results. Following a strong Q2 in which organic growth accelerated to 21 per cent year-over-year, we continue to watch the trajectory for organic growth, margin performance at MyHealth and CRH, and any changes to 2022 guidance or capital allocation priorities. We adjust our target multiple on WELL’s virtual services revenue from 2.5 times to 2.0 times to reflect market valuations, reducing our price target.”
He’s now estimating a third-quarter earnings per share loss of US$11.79 versus a gain of US$15.21 previously.
“The primary revisions in 2022 were the Q3/22 catastrophe loss changes (we now assume roughly $500 million of catastrophe losses in the quarter versus $300 million previously), as well as a $500 million unrealized loss assumption accounting for mark-to-market losses based on Q3/22 financial market performance,” he said.
Mr. Dwelle’s full-year 2022 EPS estimate falls to a loss of US$23.61 from a prior earnings projection of US$4.25. For 2023, he’s expecting earnings of US$78.75, down from US$$79.25.
Maintaining an “outperform” rating for Fairfax shares, he lowered his target to US$700 from US$725. The average is $942.62 (Canadian).
“Fairfax’s underwriting units continue to deliver excellent results and its investment portfolio has likewise begun delivering improving returns as some of its associate/affiliate holdings are monetized,” said Mr. Dwelle. “We would look for these things to continue as Fairfax’s insurance companies are well positioned to capitalize on improved P&C pricing and have a track record of opportunistic growth in such environments. Our thesis is that Fairfax’s long-term track record of double-digit book value growth will continue and the current valuation provides an attractive risk-reward entry point for those willing to back the company’s long-term investment track record. Fairfax has a deep cash position and ample access to capital, which gives it the flexibility to be opportunistic as well as patient.”
Improving fundamentals in the senior housing sector are not properly reflected in equity valuations, according to Canaccord Genuity analyst Christopher Koutsikaloudis, who reiterated his “positive outlook.”
“Our constructive outlook for seniors housing fundamentals over the next few years is based on an accelerated pace of growth in Canada’s elderly population, which should push occupancy levels higher, along with a slower pace of development,” he said in a research note released on Wednesday.
“Recovery in occupancy would lead to material increase in cash flow. Cushman & Wakefield forecasts that growth in demand for seniors housing should outpace new supply by 0.5 per cent annually from 2024-2031, based on the growth in Canada’s elderly population and the increase in supply expected over this period. As a result, the national average seniors housing occupancy rate is expected to reach 92.5 per cent by early 2024 and 95 per cent by the end of 2026, up from 85.5 per cent in 2021. Higher occupancy levels should lead to a material improvement in cash flow for Chartwell and Sienna over the next few years.”
Mr. Koutsikaloudis reaffirmed Chartwell Retirement Residences (CSH.UN-T) as his top pick in the sector, maintaining a “buy” rating and $13 target. The average is $13.21.
“Following the sale of its longterm care portfolio earlier this year, Chartwell is Canada’s only ‘pure play’ on private pay seniors housing, which, relative to LTC, should benefit from greater operating leverage as occupancy increases,” he said. “Chartwell currently trades at 10.9-times one-year forward AFFO, compared to on average, 16.3 times between 2011 and 2019. Put differently, Chartwell’s current enterprise value per bed is $198,000, whereas replacement costs are in the range of $400,000 to $600,000 per bed. As operating performance improves and cash flow recovers, we believe there is the potential for a meaningful re-rating of Chartwell’s valuation, which should translate into very strong unitholder returns.”
The analyst kept a “buy” recommendation and $15.50 target for shares of Sienna Senior Living Inc. (SIA-T). The average is $15.84.
In response to its decision to walk away from its planned purchase of British environmental consulting firm RPS Group PLC, a group of equity analysts on the Street trimmed their targets for shares of WSP Global Inc. (WSP-T) on Wednesday.
Those making adjustments include:
* Desjardins Securities’ Benoit Poirier $185 from $187 with a “buy” rating. The average on the Street is $179.46.
“While we had expected WSP to make one final bid for RPS, we view this decision by management as a disciplined one as the acquisition was not that accretive for WSP,” said Mr. Poirier. “We expect a neutral market reaction by investors given WSP’s proven M&A track record and a now-reloaded balance sheet which is ready to fire.”
* Raymond James’ Frederic Bastien to $190 from $195 with an “outperform” rating.
“At the time of the competing offer, we noted that management had room to raise its bid for RPS, but would not overpay,” he said. “In fact, WSP has terminated efforts to acquire publicly-traded businesses for this exact reason in the past, including Sweett Group, another Brit outfit. While the acquisition would have added 5,000 employees to WSP’s headcount, the decision to let RPS go demonstrates good capital discipline, in our view. We fully expect further opportunities to arise, potentially at more attractive valuation metrics given the shifting macro backdrop. In the meantime, we are trimming both our forecasts and target on the stock.”
* BMO’s Devin Dodge to $176 from $180 with an “outperform” rating.
“In our view, the decision to walk away from a potential bidding war for RPS Group reflects WSP’s desire to balance financial discipline with the growth ambitions in its 2022-2024 strategic plan. Moreover, we believe the M&A pipeline is currently active, which should provide WSP with opportunities to redeploy the capital that was earmarked for RPS Group into other acquisitions in the near term,” said Mr. Dodge.
Barclays analyst John Aiken cut his earnings expectations for Canadian insurance companies on Wednesday.
“Despite higher yields, the continued decline in equity valuations will likely dampen earnings growth in the quarter driven by lower asset levels within the wealth operations and seed losses. Additionally, we anticipate losses from Hurricane Ian to weigh heavily on the P&C reinsurance businesses of the lifecos,” he said.
That view led him to cut his target prices:
- Great-West Lifeco Inc. (GWO-T, “equalweight”) to $32 from $37. The average on the Street is $35.89.
- Manulife Financial Corp. (MFC-T, “overweight”) to $29 from $30. Average: $26.96.
- Sun Life Financial Inc. (SLF-T, “overweight”) to $63 from $67. Average: $68.
In other analyst actions:
* Following an Investor Day event and property tour in Montreal last week, Raymond James’ Brad Sturges cut his Minto Apartment REIT (MI.UN-T) target to $19.50 from $22, keeping a “strong buy” recommendation. The average is $21.70.
“Minto offers one of the deepest NAV discounts in our coverage universe, which we believe is a partly a reflection of the REIT’s below-average trading liquidity, but provides significant value at current trading levels. Importantly, Minto noted that it could become active in selling non-core, rent-controlled buildings, and redeploying capital into new building, non-rent controlled MFR properties. As previously disclosed, Minto has explored the sale of its Edmonton MFR portfolio,” he said.
* BMO’s Peter Sklar lowered his Maple Leaf Foods Inc. (MFI-T) target by $5 to $26, below the $35 average on the Street, with an “outperform” recommendation.
“For Q3/22, the Primary Pork Processing Margin did not improve from the depressed Q2/22 level, was volatile, and at times negative,” said Mr. Sklar. “For 2023, given the more challenging geopolitical outlook, we believe the magnitude of the recovery we had been projecting in pork markets has likely been too optimistic. As a result, we have substantially lowered our Q3/22 and full year 2023 earnings estimates; we are low among the published consensus estimates. Notwithstanding, we see value in MFI as our revised target price of $26 generates over a 30-per-cent potential return.”
* BMO’s Stephen MacLeod reduced his target for Tricon Residential Inc. (TCN-T) to $17 from $19 with an “outperform” rating. The average is $18.95.
“The timing and proceeds from the sale of Tricon’s remaining 20-per-cent interest in its U.S. MFR portfolio were both largely as expected, as the transaction was well-telegraphed by management. The portfolio sale represents good value, and the transaction is a further step in Tricon streamlining its strategy to focus on the SFR growth opportunity. While we have lowered our estimates and target price to reflect the transaction as well as the impact of higher rates, we continue to see a long runway for growth,” he said.