Inside the Market’s roundup of some of today’s key analyst actions
The macroeconomic backdrop for Canadian Tire Corp. Ltd. (CTC.A-T) is “cloudy” due to “sequentially weakening consumer health,” according to National Bank Financial analyst Vishal Shreedhar, who is looking for improvement in its retail execution when third-quarter results are released on Nov. 10.
“We believe that management has executed well throughout the pandemic,” he said. “We anticipate further benefits as operational efficiency initiatives and digital improvement programs continue to roll out. We expect investors to be focused on consumer demand trends (given mixed results from certain U.S. retailers, heightened macroeconomic uncertainty and media reports of a more promotional retail environment in the U.S.), cost control, supply chain/inventory management, and the company’s expectations for the holiday season (management indicated it made a decision to bring in fall/winter inventory earlier than the prior year).”
Mr. Shreedhar is projecting earnings per share of $3.80, below the consensus forecast on the Street of $3.96 and last year’s result of $4.20. He attributed the almost 10-per-cent year-over-year decline to “softer” results from its Financial Services segment, due to macroeconomic uncertainty and “dampening” credit activity, as well as higher costs in retail.
The analyst does expect positive same-store sales growth across its retail banners, including gains of 3.0 per cent for Canadian Tire, 10 per cent for Mark’s and 5 per cent for SportChek.
“Last quarter, management indicated strong retail sales, highlighting disproportionate growth in auto and clothing (Q2/22),” said Mr. Shreedhar. “Similarly, management noted that inventory was in good shape (suggesting no meaningful margin risk); we are looking for improvement in this metric, with lower year-over-year inventory growth of 11 per cent vs. 18 per cent last quarter. In addition, we are looking for sequential improvement in Retail SG&A growth trends (excl. Petroleum); we project SG&A deleverage of 90 basis points year-over-year, down from 120 basis points year-over-year in Q2.”
Maintaining an “outperform” recommendation for Canadian Tire shares, Mr. Shreedhar cut his target to $196 from $213. The average is $203.
“The lower price target largely reflects a decrease in our valuation multiples to reflect increasing pressure on discretionary retailers and growing uncertainty with consumer financial health,” he said.
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Valuations for “low-risk” regulated utilities have now reached “compelling” levels, said Raymond James analyst David Quezada.
That view led him to upgraded Fortis Inc. (FTS-T) and Emera Inc. (EMA-T) to “outperform” recommendations from “market perform” previously.
“Caught up in the wake of indiscriminate selling during recent market volatility, shares of Fortis and Emera have declined 20 per cent and 16 per cent respectively from recent highs (vs. the TSX down 7 per cent),” said Mr. Quezada. “Accordingly, we now see compelling value in these low-risk regulated names with each stock approaching key valuation support levels. Looking at Fortis specifically, we highlight the current 17.5 times 2023 P/E multiple, is in line with a support level seen numerous times since 2005.
“Thus, while we acknowledge the cycle of rising rates may not yet be complete, we stress that looking back over an extended period; this stock has only seen a valuation level below this a handful of times, including the 2009 financial crisis and 2020 COVID-19 outbreak, but otherwise trading in a relatively tight range of roughly 16-23-times forward P/E. Similarly, looking back at Emera’s historical trading range, we see trough valuation levels of roughly 16 times, not far from the stock’s current 16.8-times multiple which is toward the lower end of the stock’s 14-23 times historical range. We also note that, except for these periods of historical uncertainty, Emera has also seen strong valuation support at around current levels. In light of this, as well as our constructive fundamental view of each name ... we are moving each of Fortis and Emera to Outperform from Market Perform.”
The analyst also thinks both Emera and Fortis have “grown, diversified, and added premium utility assets,” emphasizing their expanding presence south of the border.
“While current valuations are compelling, in isolation, we further highlight that each of Fortis and Emera have meaningfully diversified over the historical period during which these trading ranges were established while also adding significant scale and high quality assets,” he said. “In fact, comparing Fortis’ current footprint to 2005, we note the company now operates in 16 jurisdictions, up from 7, having diversified throughout the U.S. and also adding what we consider to be one of the most premium utility subsidiaries in North America in interstate transmission company, ITC, in 2016. Over this period, the company’s rate base, customer connections and market cap, have also expanded substantially). Meanwhile, Emera has also made significant inroads in the US, acquiring high quality utilities including Tampa Electric, People’s Gas, and New Mexico Gas through the acquisition of TECO Energy. This move into the U.S. for each of Fortis and Emera is noteworthy given generally superior regulatory characteristics in the U.S., where allowed ROEs tend to range from 9-11 per cnet (Canada 8-9 per cent) and equity thickness typically above 50 per cent (Canada 40 per cent).”
He maintained his targets for both companies. They are:
* Emera at $61. The average on the Street is $64.77.
“Supported by a lengthy runway of organic investments at the company’s Florida utilities (where 70 per cent of the company’s capital plan is focused), we believe Emera’s rate base growth stacks up well vs. NA peers with overall rate base growth guidance of 7-8 per cent out to 2024,” he said. “Meanwhile, the company’s growth outlook could also see a boost from potential investments meant to accelerate Nova Scotia’s transition away from coal power generation (which are supported by legislated renewable targets), most notably, the large scale Atlantic Loop project. At 5.1 per cent, we also consider EMA’s dividend to be safe and highly attractive at current levels. We continue to regard EMA’s Florida utilities as among the most attractive of those owned by the Canadian peer group.”
* Fortis at $58. Average: $60.68.
“With $31.1-billion in rate base spread across 10 regulated businesses, we believe Fortis is among the most diversified utilities in North America,” he said. “Meanwhile, transmission and distribution represent 93 per cent of these assets, further bolstering our view of FTS as a go-to defensive name. From a growth perspective, we regard Fortis as extremely well positioned to benefit from huge amounts of transmission investments required to connect renewables throughout the Midwest.”
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Canaccord Genuity’s Derek Dley expects a “challenging” operating backdrop to continue to weigh on the financial performance of Maple Leaf Foods Inc. (MFI-T) when it reports third-quarter results on Nov. 8.
“For the Meat Protein Group (MPG), we expect solid top-line performance exhibited over the last few quarters to continue based on demand strength for the company’s sustainable and branded meats offerings that the company carried into the quarter,” he said. “Further, we expect this to be augmented by further price increases passed through by the company, with the most recent ones being enacted over the months of August and September. That said, we believe this will be somewhat moderated by a modest pullback in consumer spending and/or any product switches into private label offerings following the price increases. Accordingly, our revenue forecast of $1,196 million for the MPG translates to an increase of 4 per cent year-over-year.
“Margin-wise, however, we expect the headwinds encountered by Maple Leaf in the prior quarter, namely continued material and consumer inflation not fully offset by price increases, historically weak processor spreads and packer margins, and negative FX movements, especially for the Japanese Yen, to continue to weigh on near-term margins. Alongside, we note that while the company has seen labour retention improve compared to the beginning of the year, management noted that it continues to operate in a challenging environment from a hiring perspective. Accordingly, our MPG EBITDA forecast of $102 million represents an EBITDA margin of 8.5 per cent, a drop of 50 basis points compared to Q2/22 and down 4.7 percentage points year-over-year.”
Overall, he’s projecting revenue of $1.238-billion, up 4 per cent year-over-year and in line with the consensus’ $1.238-billion estimate. His EBITDA estimate of $78-million falls below the Street’s $84-million projection.
Mr. Dley trimmed his target for Maple Leaf shares to $30 from $35, below the $32.83 average, with a “buy” rating.
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Fire & Flower Holdings Corp.’s (FAF-T) proposed amendments to its existing investor agreement with Alimentation Couche-Tard (ATD-T) provide a modest boost to its near-term liquidity but also a “significant” reduction to the retailer’s buy-in price, said Echelon Capital Markets analyst Andrew Semple.
That led him to lower his recommendation for the Toronto-based cannabis company to “hold” from “speculative buy” previously.
Fire & Flower shares dropped 7.7 per cent on Tuesday after it announced amendments to the Series C common share purchase warrants issued to an indirect wholly owned subsidiary of ACT. It also revealed an $11-million loan with ACT.
“We view the overall impact of the proposed amendments to the Series C warrants as appearing favourable to ACT over FAF,” said Mr. Semple. “The amendments would extend the maturity date of a portion of the warrants and reduce the exercise price of the warrants by 32 per cent in relation to the 20-day VWAP [volume-weighted average price], both being amendments that increase the value of the warrants to ACT while likely resulting in lower proceeds and a deferred timeline to receiving these proceeds for Fire & Flower. In return, ACT will complete an equity private placement in Fire & Flower of $5-million at $1.65 per share upfront (a 20.8-per-cent discount to the last closing price), which provides some nearterm liquidity. The private placement shares issued would offset the number of replacement Series C warrants to be issued. However, on the balance, we believe the costs of repricing the warrants (a significant portion of the capital structure) and extending maturity appear to outweigh the benefits of immediate liquidity. We would prefer to see alternative sources of capital emerge.”
The analyst said the announcement has made him “more cautious on the near-term outlook for Fire & Flower’s share price performance.”
“We were somewhat surprised by the announcement, since it appeared the Fire & Flower was on the cusp (less than 8 months) of a material liquidity injection at a higher implied valuation (125 per cent of VWAP) than currently proposed (85 per cent of VWAP),” he said. “We suggest some potential reasons as to why the Company may have pursued this agreement: 1) the Company has higher liquidity needs than we predicted (where other capital alternatives may have not available at reasonable terms), 2) ACT could have expressed hesitancy to exercise Series C warrants per the current terms, or 3) ACT is exerting its influence. There may be other important reasons that are not yet clear to us, though the possibilities we list are not favourable to current shareholders, and so we have become more cautious in our recommendation. We also note the recent resignation of CFO Judy Adam as she transitions to a different publicly traded company as another potential reason for overhang on the shares.”
Mr. Semple does see Fire & Flower shares as “undervalued,” noting his revised 12-month target of $3 per share, down from $3.50 and below the $4.09 average on the Street, represents “reasonably healthy upside” of 56.3 per cent.
“We 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,” he added. “Despite the implied upside to our target price, we believe a Hold rating is warranted at this time due to the following circumstances. We believe Fire & Flower’s shares may be insensitive to positive catalyst events while the ACT investor agreement proposal is being considered by shareholders, in the event that the agreement is approved, and until the Company has appointed a new CFO. Another positive catalyst could be the Company clearly demonstrating progress towards (or achieving) positive EBITDA. We note that the consensus forecast is for Fire & Flower to achieve positive EBITDA for full year 2023, which is above our own expectations (we forecast EBITDA positive in H223), which could indicate we are conservative in our financial outlook.”
Elsewhere, ATB Capital Markets’ Frederico Gomes cut the stock to “sector perform” from “outperform” with a $2.80 target, down from $4.50.
“We believe the private placement and loan will immediately strengthen FAF’s capital position, and the proposed amendments increase the certainty that ATD will exercise the warrants,” said Mr. Gomes. “However, the amendments also reduce the warrants’ exercise price, thus having a (material) dilutive impact to shareholders. We have reduced our PT to $2.80 to account for this dilutive impact, a higher discount rate (on higher risk-free rates), and slightly lower growth estimates. We have downgraded the stock to Sector Perform due to a less attractive risk-reward implied by our lower price target, in line with the peer group.”
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In a research note titled Data is the new smoking gun, Stifel analyst Suthan Sukumar initiated coverage of Magnet Forensics Inc. (MAGT-T), calling it a “proven market leader well positioned for continued share gains” and touting its “highly defensive model but strong structural tailwinds suggest upside potential ahead.”
“MAGT is disrupting the digital forensics industry with a next-gen platform that is modernizing the current digital investigation workflow which remains slow, siloed and ripe for transformation,” he said. “Amidst the ongoing proliferation of data and devices, with digital evidence now in more than 90 per cent of criminal cases, combined with the rising scale and complexity of cybercrimes, we see MAGT as well positioned for greater share gains in both its core public sector market and an emerging enterprise market, providing a long runway for strong growth and continued profitability as the company transitions from a Rule of 40 profile to a Rule of 50. With unique pure-play exposure to cybersecurity, an important secular theme, we believe MAGT should be viewed as a core holding in Canadian Tech and see the current share price as an attractive buying opportunity.”
Mr. Sukumar set a target of $40, exceeding the average on the Street of $37.72.
“MAGT trades at 5 times fiscal 2023 estimated Revenues, a material discount to cybersecurity and comparable Rule of 40 software peers, at 8 times and 10 times, respectively, despite stronger growth and EBITDA profitability with FCF support, which should merit higher multiples, in our view,” he said. “Ongoing, disciplined execution on penetrating the largely greenfield enterprise market and sustained wallet share gains in the established public sector should drive a continued balance of strong growth and profitability, driving multiple expansion towards peers.”
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Iamgold Corp.’s (IMG-T) US$360-million sale of its 95-per-cent interest in Rosebel Gold Mines N.V. to Zijin Mining Group Co. is “a very prudent management move,” according to National Bank Financial analyst Mike Parkin.
He said the purchase price of the deal, which will also release Iamgold from about US$41-million in obligations for certain equipment leases, “screens very favourable.”
“Divesting Rosebel also helps to de-risk and bridge a major portion of the funding gap to deliver Cote which continues to be the focus of the market,” Mr. Parkin said.
“As a result of [Tuesday’s] asset sale, we have revised our financing assumptions to model a potential conservative worst-case of US$100-million 10-per-cent debt raise and a US$300-million equity raise (prev. US$500-million and US$300-million, respectively). We continue to see an opportunity for IAMGOLD to reduce (and potentially eliminate) its funding gap through the potential sale of Boto (and surrounding exploration projects) and terming out the repayment of its 2022 gold prepayments (due in 2024). We believe that if IAMGOLD can sell the Boto Complex, we can start to see significant upside for equity holders as a result of a potential reduced need for equity issuance to close the funding gap on Cote. Our estimates are heavily dependent on IAMGOLD delivering Cote on or very near to budget. IAMGOLD also continues to exhibit elevated sensitivity to the gold price, with our NAV exhibiting a 4:1 sensitivity to our gold price assumptions.”
Maintaining a “sector perform” rating for Iamgold shares, Mr. Parkin raised his target to $2.25 from $2.10. The average is $2.30.
Elsewhere, BMO’s Jackie Przybylowski cut her target to $1.25 from $1.50 with a “market perform” rating.
“The sale will meaningfully narrow the capital requirement remaining to fund the completion of IAMGOLD’s Côté project, which is a material de-risking step for the project. However, it impacts near-term cash flows and it increases exposure to Burkina Faso for those cash flows, in the near term,” she said.
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In a research report released Wednesday previewing third-quarter earnings season for Canadian energy exploration and production companies, ATB Capital Markets analyst Patrick O’Rourke made a series of target prices increases for stocks in his coverage universe in response to higher price projections for Brent crude oil through 2025.
“While commodity strip has remained strong in a historical context and accordingly corporate Upstream FCF forecasts remain favourable into 2023, recessionary discussions have added to crude volatility (the Q3/22 Crude Volatility Index was up 35 per cent relative to the same quarter in 2021) have added a layer of complexity to return of capital discussions,” he said. “Capital return strategies have remained prominent with investors, where we will be watching for execution whether it by way of special dividends or share buybacks. Investors will favour companies that appear to be sticking most closely to its messaging and meeting capital distribution targets (with ERF and TOU as prominent examples). The shift to return of capital via codified messaging has generally acted as a tailwind for equity performance, and we view SDE and ATH as the most likely candidates jump on to the return of capital bandwagon between now and the end of 2022.”
For oil sands companies, his changes were:
- Cenovus Energy Inc. (CVE-T, “outperform”) to $35 from $34.50. Average: $33.21.
- Imperial Oil Ltd. (IMO-T, “sector perform”) to $72 from $70. Average: $74.71.
His large-cap changes were:
- ARC Resources Ltd. (ARX-T, “outperform”) to $24.50 from $23. Average: $24.72.
- Crescent Point Energy Corp. (CPG-T, “outperform”) to $15 from $14. Average: $15.12.
- Enerplus Corp. (ERF-T, “outperform”) to $24 from $23. Average: $23.50.
- Tourmaline Oil Corp. (TOU-T, “outperform”) to $100 from $90. Average: $96.25.
- Vermilion Energy Inc. (VET-T, “sector perform”) to $38 from $36. Average: $41.64.
- Whitecap Resources Inc. (WCP-T, “outperform”) to $16 from $15.50. Average: $15.13.
His mid-cap changes were:
- Birchcliff Energy Ltd. (BIR-T, “outperform”) to $14 from $13. Average: $14.44.
- Kelt Exploration Ltd. (KEL-T, “outperform”) to $10 from $9.50. Average: $10.02.
- Nuvista Energy Ltd. (NVA-T, “sector perform”) to $15 from $14. Average: $16.48.
- Spartan Delta Corp. (SDE-T, “outperform”) to $16.50 from $15. Average: $19.79.
He also raised his target for Prairiesky Royalty Ltd. (PSK-T) to $22 from $20, keeping a “sector perform” rating. The average is $23.91.
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Jefferies initiated coverage of a group of Canadian energy companies on Wednesday.
They include:
- Canadian Natural Resources Ltd. (CNQ-T) with a “hold” rating and $80 target. The average on the Street is $94.95.
- Cenovus Energy Inc. (CVE-T) with a “buy” rating and $35 target. Average: $33.21.
- Suncor Energy Inc. (SU-T) with a “hold” rating and $44 target. Average: $54.47.
The firm also gave Ballard Power Systems Inc. (BLDP-Q, BLDP-T) a “hold” recommendation and US$6 target, below the US$11.59 average.
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Desjardins Securities analyst Gary Ho reduced his financial forecast and valuation for Dominion Lending Centres Inc. (DLCG-T) due to a “softer” housing outlook ahead of the Nov. 10 release of its third-quarter results.
He’s now projecting funded mortgage volumes to $18.5-billion from $20.6-billion and core DLC EBITDA to $11.3-million from $12.6-million, “driven by slower housing activity and home prices.”
Mr. Ho pointed to September’s Canadian Real Estate Association report in justifying his industry view, noting: “Sales activity (not seasonally adjusted) decreased 32.2 per cent year-over-year and was 12 per cent below the pre-pandemic 10-year average for the month. While sales activity moderated from May to August, the decline accelerated in September (worth monitoring). There were 3.7 months of inventory on a national basis, up slightly from 3.5 months at the end of August but still well below the long-term average of 5+ months. The MLS home price index edged down 1.4 per cent month-over-month, not a small decline historically but smaller than in June, July and August. However, we note that monthly prices increased slightly in a few Ontario markets in the Greater Golden Horseshoe.”
Maintaining a “buy” rating for Dominion Lending Centres shares, he lowered his target to $5 from $5.50. The average is $5.50.
“While sentiment on the housing/mortgage sector has waned, our positive thesis is predicated on: (1) a rebound in funded mortgage volumes in 2023/24; (2) reflagging efforts to add new brokers could bolster DLC growth; (3) an established fintech play in Newton/Velocity, a business which is already EBITDA- and FCF-positive; and (4) a potential privatization scenario providing share price upside,” he said.
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Canaccord Genuity’s Matthew Lee said Playmaker Capital Inc.’s (PMKR-X) Investor Day event on Tuesday raised his “confidence” in the Toronto-based digital sports company’s “path towards viewership growth and improved monetization across the entirety of its media footprint.”
“In addition to its presentation, the firm announced its acquisition of Wedge, a data-driven affiliate marketing platform, which we believe will accretively accelerate PMKR’s foray into affiliate partnerships,” he added.
“Our key takeaway from the event was management’s focus on driving direct sales and affiliate revenue, which we see as a natural evolution given its engaged userbase and growing OSB/iGaming opportunities. For H2/22, management remains confident in viewership growth, and we believe that the company’s positioning in the football space will allow it to maximize the impact of the World Cup in Q4.”
Adding the US$31.21-million acquisition of Wedge Traffic Ltd. to his financial projections, Mr. Lee bumped his target for Playmaker shares to $1 from 95 cents. The average is $1.09.
“Playmaker currently trades at 2.7 times EV/F23 estimated revenue or 8 times EV/F23E EBITDA, which we believe is very reasonable given the firm’s ability to generate both organic growth and profitability,” he said. “We continue to value the firm at 5 times revenue, which translates into a $1.00 target. Notably, our estimates do not bake in further acquisitions, which could add substantial shareholder value.”
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In other analyst actions:
* Calling it a “conductor of dramatic investment upside,” PI Financial’s Ben Jekic initiated coverage of Nanoxplore Inc. (GRA-T) with a “buy” rating and $6 target. The average is $8.59.
“A 52-per-cent decline year-to-date prices-in bearish macro signals as the new investment cycle will dramatically expand graphene supply,” he said. “GRA’s reach of industry verticals that is building up fast for such a sentiment, and market’s refocus on underlying secular trends (EV, ESG) will advance stock recovery. GRA’s growth funnel with high customer switching costs, will expand sales 2 times-plus reaching $209-million with EBITDA at $29-million in FY25, enabling robust buying opportunity over the next 12-months, and a 107-per-cent upside potential.”
* In the firm’s third-quarter earnings preview for the precious metals sector, Stifel’s Ian Parkinson downgraded Superior Gold Inc. (SGI-X) to “hold” from “buy” with a 50-cent target, down from $1.50. The average is 91 cents.
“Our precious metal Top Picks for Q4 are AEM, IAU, KNT, MAG, and OSI,” said Mr. Parkinson and his colleagues.
* TD Securities’ Craig Hutchison cut Ero Copper Corp. (ERO-T) to “hold” from “buy” with a $16.50 target. The average is $20.18.
* Scotia Capital’s George Doumet reduced his Park Lawn Corp. (PLC-T) target to $33 from $37 with a “sector outperform” rating. The average is $37.69.
“We are lowering our margin assumptions for the upcoming quarters given continued pressured pre-need (albeit improving over Q2)/at need volumes (which are trending below historical levels) and continued pricing/costs lags,” he said. “We expect improving quarter-over-quarter trends (from an organic growth and margin standpoint), with the most meaningful improvements expected in the Q4/Q1 timeframe.
“PLC shares are down 40 per cent-plus year-to-date with the company’s trading multiple compressing by ~30%. As is the case with most of our M&A growth centric-stories, we expect the multiple to expand once we see a stabilization in organic volumes and improved visibility on the margin recovery. PLC’s growth via acquisition model remains healthy with a material public/private arbitrage gap (at 3 times to 5 times on EBITDA) and adequate balance sheet capacity to fund future M&A (at 2 times 2023 estimatedexit vs. an estimated comfort zone closer to mid 3 times).”
* CIBC World Markets’ Todd Coupland lowered his target for Shopify Inc. (SHOP-N, SHOP-T) to US$35 from US$42.50, keeping a “neutral” rating. The average on the Street is US$40.89.
“Shopify will report its Q3 results on October 27 prior to market open,” he said. “FactSet’s Q3 revenue growth estimate of 19 per cent year-over-year (our estimate 17 per cent) should be achievable. While web traffic in Q3 to Shopify’s Plus customers remained relatively stable compared to that in Q2 (SimilarWeb), MasterCard e-commerce spending improved markedly to 10 per cent (from 0.5 per cent last quarter) and is roughly in line with Shopify’s gross merchandise volume (GMV) growth expectations of 12 per cent. Given these improving trends, we believe investors should hold Shopify shares.
“One risk to highlight, though, is that the 2023 FactSet growth forecast of 23 per cent is, in our view, still well above trend growth rates. We lower our price target from $42.50 to $35, based on 7 times (previously 9 times) our 2023 sales forecast (prior 2022), plus net cash. The reduction in the multiple aligns our price target with constituents of the Bessemer NASDAQ Cloud Index that share similar revenue growth expectations. Companies in the top quartile currently trade at 7 times one-year forward sales (vs. the median at 4 times). This compares to Shopify’s pre-pandemic average multiple of 11 times.”
* Barclays’ Teresa Chen cut her TC Energy Corp. (TRP-T) target by $2 to $65, below the $68.50 average, with an “equal-weight” rating.
David Leeder