Inside the Market’s roundup of some of today’s key analyst actions
With fewer options for investors to gain exposure to the Canadian industrial real estate sector following Summit Industrial REIT’s $4.5-billion sale to Singapore’s giant sovereign wealth fund, National Bank Financial analyst Matt Kornack thinks Nexus Industrial REIT’s (NXR.UN-T) “trading prospects” are improving.
“With the take-out of Summit at attractive pricing we expect incremental investor demand as the REIT continues to re-focus into an institutional quality Canadian pure-play industrial REIT,” he said.
After the bell on Monday, the Toronto-based REIT reported in-line third-quarter results, which Mr. Kornack said displayed “stable occupancy, solid spreads and active growth profile.” Funds from operations per unit of 21 cents matched his forecast and represented a 2-cent improvement from the same period a year ago.
“Nexus’ Q3 results were largely in line with expectations and management remains optimistic about the trajectory in Q4 and into 2023 as they achieve sizable renewal spreads on maturities in their SW Ontario portfolio,” the analyst said. “Disposition activity continued in and subsequent to quarter-end but largely revolved around non-core industrial and retail properties with office asset sales on the back burner until market conditions normalize. In a market where liquidity has been hard to come by for some, NXR continued to benefit from strong relationship lending, providing access to capital and supporting an addition $300-million plus of purchasing power. This is enough to fund current acquisition and development commitments but will take leverage higher.”
Maintaining a “sector perform” recommendation for Nexus units, Mr. Kornack bumped his target to $10.75 from $9.75. The average is $13.
“We are raising our target largely due to recent M&A activity supporting valuations within the pureplay Canadian industrial space. NXR’s progress on capital recycling along with activity post quarter and early 2023 forward purchases further cement the REIT’s transition away from noncore assets,” he said. “That said, execution risks remain with a residual 15-per-cent exposure to retail and office assets as well as upcoming capital commitments that will add to leverage.”
Elsewhere, others making changes include:
* IA Capital Markets’ Gaurav Mathur to $14 from $15.50 with a “strong buy” rating.
“The REIT has a long growth runway with rental rate increases that are much higher than its publicly listed peer set in the Canadian industrial sector,” said Mr. Mathur. “Post the recent M&A activity in the Canadian industrial sector, we agree with management that the REIT is well-positioned to be the next pure-play Canadian industrial REIT. Management continues to high-grade its portfolio while maintaining capital allocation discipline by focusing on redevelopment projects, recycling capital, and being opportunistic on the acquisitions front.”
* Raymond James’ Brad Sturges to $13.25 from $14 with a “strong buy” rating.
“Last week, Summit Industrial Income REIT (Summit) agreed to be acquired by GIC and Dream Industrial REIT (DIR), leaving a lack of larger market capitalization investment options for those investors seeking pure-play exposure to the Canadian industrial property market. Within the smaller-capitalization Canadian REIT grouping with significant Canadian industrial asset exposure that are jockeying to replace Summit, we believe Nexus has put itself in position to execute on its strategic plans to be viewed as the next pure-play Canadian industrial REIT,” said Mr. Sturges.
* Canaccord Genuity’s Mark Rothschild to $12 from $11.75 with a “buy” rating.
While Scotia Capital analyst Mario Saric continues to think Northwest Healthcare Properties REIT (NWH.UN-T) possesses “many positive attributes,” including improving per unit growth along with lower leverage,” he lowered his recommendation for its units to “sector perform” from “sector outperform” after a “rough” third quarter.
“On one hand, NWH’s healthcare portfolio (with contractual rent bumps reflecting recent elevated inflation + one of the longest WALTs in our universe) should outperform if we enter a global recession/economic slowing,” he said. “Indeed, we note NWH has outperformed the CAD REIT sector by a solid 9 per cent during COVID (we upgraded to SO just before the pandemic; flat year-to-date). In addition, perhaps equity requirements on JV acquisitions going forward will decline (theoretically driving higher ROE transactions).
“On the other hand, higher leverage, contracting asset manager multiples, a smaller-than-expected initial UK portfolio recapitalization (leaving lingering questions over interim elevated leverage) and a couple of consecutive challenging quarters are concerning to us, possibly diluting said ‘defensiveness’ in the minds of investors. We remain quite constructive on NWH’s global asset manager proliferation (we think NWH has a clear competitive advantage) but it may take a bit longer than expected for the benefits to emerge (and therefore lower valuation in the interim). Clearly we will monitor progress on those fronts, in addition to valuation, in terms of revisiting our thesis going forward, given our constructive view on the asset manager longer-term.”
Mr. Saric maintained a $15.50 target, exceeding the $13.96 average.
Elsewhere, CIBC’s Dean Wilkinson reduced his target for to $14 from $14.75 with an “outperformer” rating.
Scotia Capital analyst George Doumet is “expecting healthy trends to continue” when Alimentation Couche-Tard Inc. (ATD-T) reports its second-quarter 2023 financial results on Nov. 22.
“We are modestly ahead of consensus for Q2 and expect general trends to be a continuation of what we saw in Q1,” he said. “More specifically, we expect U.S. Merchandising to remain healthy and for fuel to be driven by strong margins (and for the volume recovery to remain muted). We expect some softness in Europe and a more flat performance in Canada.
“Looking above and beyond the quarter, ATD is one of our preferred consumer names, and we believe the company remains well positioned to execute on its organic initiatives, allowing it to sustain backcourt comp momentum and expand its fuel margin outperformance (vis-à-vis the industry). The balance sheet remain pristine at 1.3 times and valuation is undemanding with the shares trading at 16 times NTM p/e [next 12-month price to earnings] (vs. a five-year average closer to 17 times).”
For the quarter, Mr. Doumet is forecasting revenue of US$17.7-billion and adjusted earnings per share of 83 US cents, both exceeding the consensus estimates on the Street of US$17.6-billion and 80 US cents. He’s expecting same-store sales growth to stay flat in the United States at 3.5 per cent with narrow gains in Europe (3 per cent from 2.8 per cent in the previous quarter, pointing to higher prices and new offerings.
“In Canada, we expect lower growth and softer margins, particularly as result of competition in the age-restricted category, and forecast SSS growth/gross margin of 1 per cent/32.8 per cent (vs. negative 1.3 per cent/33.1 per cent last quarter and negative 2.1 per cent/32.3 per cent last year),” he said.
Mr. Doumet raised his target for Couche-Tard shares to $68.50 from $66 with a “sector outperform” rating. The average is $69.77.
“Our positive view on Couche-Tard is predicated on the company’s ability to grow through M&A as well as organically, as it has generated positive comparable sales consistently throughout its history,” he said. “Importantly, the company drives industry-leading gross margins through its focus on private label and growth in its fresh food offer. C-store trends and the need for convenience and time-savings position Couche-Tard well to gain share from the traditional food retail segment. Couche-Tard is a proven integrator of acquisitions that stands to benefit from further consolidation of the fragmented c-store industry. The company has a proven ability to manage costs below inflation, to share best practices across its organization and to extract operational efficiencies and acquisition synergies, which in turn drive high return on equity and high conversion of EBITDA to free cash flow.”
Tuesday’s 18.8-per-cent drop in the share price for Sylogist Ltd. (SYZ-T) brings investors “a unique opportunity to consolidate a position in a quality operator which boasts high-visibility, double-digit growth,” according to Echelon Capital Markets analyst Amr Ezzat.
While the Calgary-based software company reported fourth-quarter revenue and earnings after the bell on Monday that met expectations, investors reacted to a reduction to its quarterly dividend (to 1 cent from 12.5 cents).
“We view the dividend cut ... as a necessary step to free up resources ($11-million per annum) that the Company can use to pursue its growth strategy more effectively,” said Mr. Ezzat in a research note titled Opportunity Seldom Knocks Twice. Double-Digit, High-Visibility Growth, at a 10%+ FCF Yield. Buy the Dip.
Sylogist reported revenue for the quarter of $14.2-million, up 31.8 per cent year-over-year and matching the Street’s expectation. EBITDA slipped 14.5 per cent to $4.1-million, below the consensus estimate of $4.4-million.
“This marks the third consecutive quarter of positive organic growth at almost 6 per cent, in continuation from last quarter’s 7 per cent,” he said. “Management’s commentary in the conference call was constructive, pointing to a year of accelerated growth in 2023, whereby their target is low double-digit, organic, top line growth.”
After adjusting his valuation parameters for the tech sector, Mr. Ezzat lowered his target for Sylogist shares to $11 from $14.25 with a “buy” recommendation. The current average is $11.88.
“From an investor’s perspective, we believe the management team and BOD refresh is the steppingstone needed to rejig the business model after years of stagnation,” he concluded. “We believe using multiples on short-term estimates significantly (and incorrectly) undervalues SYZ shares as they give no recognition to the Company’s evolving growth profile. As such, we derive our $11.00/shr target price using a DCF analysis. We expect the Company’s evolving growth profile and M&A to act as key catalysts in driving valuation. We believe the Company’s scope of potential acquisitions extends from technology-focused to client-focused tuck-ins.”
In a separate note, Mr. Ezzat lowered his NanoXplore Inc. (GRA-T) target to $7 from $8.50 with a “speculative buy” rating, while Raymond James’ Michael Glen trimmed his target to $5.50 from $6 with an “outperform” rating. The average is $8.01.
“NanoXplore Inc. reported FQ123 results [Monday] evening which saw customer sales and EBITDA coming in roughly in line with our estimates but below Street expectations,” Mr. Ezzat said. “Concurrent with the quarterly release, the Company provided an updated five-year strategic plan. Namely, the Company is looking to invest $170-million over the next five years to be directed towards increasing graphene & battery materials capacity by 16,000 tons per annum (“tpa”) and to expand its Sheet Molding Compound forming capacity by investing in an additional 10M lbs of capacity. We are encouraged by the Company’s growth trajectory, noting the increased customer demand. We expect visibility on the capex program financing ($170-million) as well as VoltaXplore (we estimate $500-million in total for the JV partners) to be the next catalysts to drive stock performance. We are maintaining our Speculative Buy rating and lowering our target price ... as we recalibrate the valuation parameters of our coverage universe (namely, our discount rate moves to 15.0 per cent, up from our previous 13.0 per cent). We believe a more aggressive return profile is possible should the Company be successful in developing its energy storage initiatives and transition into a positive cash flow generator.”
After better-than-expected third-quarter financial results, Canaccord Genuity analyst Doug Taylor sees “an increasingly healthy cash burn and balance sheet dynamic” for Dialogue Health Technologies Inc. (CARE-T).
“The quarter was ahead of pre-announced ranges, particularly in terms of profitability with the cash burn continuing to narrow,” he said. “The outlook provided by management for Q4 suggests more of the same as the company works towards the goal of sustained profitability in late 2023. This narrowing cash burn, combined with a robust balance sheet position, supports our view that the company has the resources to ferry itself to profitability.”
After the bell on Monday, the Montreal-based telehealth provider reported quarterly results that were narrowly higher than its preannounced range from September. However, the analyst thinks investor focus should be on its guidance, which he sees as “better than expectations, suggesting another step towards profitability.”
“Management provided Q4 guidance for revenue of $24.5– 25.0-million vs. Street $26.2-million (Canaccord Genuity estimate $24.3-million), gross margin of 51–53 per cent vs. Street 47.3 per cent (CGe 49 per cent), and adj. EBITDA loss of $3.0–2.5-million vs. Street a loss of $3.6-million (CGe a loss of $3.5-million),” said Mr. Taylor. “We note some Street models had not factored in the recent pre-announcement; we believe the guidance is better than many expected including our own model. The company also stuck to its outlook for consistently narrowing EBITDA and cash burn en route to profitability in late 2023. Given less than $2.5-million cash used in Q3 and $58.7-million in cash on hand, the company is in a comfortable position to continue to execute on its growth strategy.”
Citing “the impact of rising interest rates on pre-profit growth names and a slightly slower profitability ramp for Dialogue post-breakeven,” Mr. Taylor trimmed his target for Dialogue shares to $5 from $6 with a “speculative buy” rating. The average is $5.23.
“Despite the impact of rolling off a large, low-margin Optima contract, the company expects to deliver revenue growth in the 30-per-cent-plus range in the fourth quarter and indicated that demand and pipeline metrics remains high,” he said. “Regarding the most recent Tictrac acquisition, management noted that pipeline conversion is below initial expectations, particularly in international markets. With that said, the earnout structure took this potential into account, and the company has seen relatively better uptake of the new Wellness solutions in Canada where integration with the broader IHP suite and Dialogue’s partners is tighter. The company pointed to expectations of several new product launches, including a new mental health training product and a new rehab/return to work offering by the end of 2023.”
Others making changes include:
* Desjardins Securities’ Jerome Dubreuil to $5 from $7.50 with a “buy” rating.
“CARE reported results which were above expectations (and pre-released results) as strong margins took centre stage. While we see near-term headwinds in certain business lines on a standalone basis (EAP, OHS and Wellness), the benefits of the integration strategy were on full display in 3Q22, with the best member growth in seven quarters. CARE also provided a 4Q outlook, with better-than-expected adjusted EBITDA,” said Mr. Dubreuil.
* National Bank’s Endri Leno to $6.75 from $8.50 with an “outperform” rating .
“Overall, CARE’s business is progressing well in Canada as the company continues to see demand for its offerings both from expansion of services with existing clients and new wins - notably 65 per cent of the new wins in Q3 were for 2+ services (vs. 59 per cent in Q3/21). We expect these types of wins to continue and to contribute, alongside a 50-per-cent-plus GM and stable cost structure, towards CARE’s breakeven / profitability target of 2023 year end,” said Mr. Leno.
* Scotia Capital’s Adam Buckham to $5.50 from $8 with a “sector outperform” rating.
“While Q3 results were for the most part in-line, it’s clear that the CARE team is delivering progress,” said Mr. Buckham. “CARE shares were up almost 8 per cent [Tuesday] on a Q3 print that we viewed as mostly in-line after adjusting for the loss of a legacy customer at Optima. While in-line, what we would highlight is that CARE’s underlying business continues to track in the right direction. KPI’s such a TTM net retention rate remains robust (117 per cent in the Q), churn remains low (2,800 members within mid-market and enterprise segments), and execution on new signings were solid ($6-million in Q3). As important, the CARE team is delivering line of sight to profitability, with two sequential improvements, and a Q4 guide that implies more is on the way. We believe that this is likely what was in focus [Tuesday].”
Touting its “first mover advantage in battery metals refinement, H.C. Wainwright analyst Heiko Ihle initiated coverage of Toronto-based Electra Battery Materials Corp. (ELBM-Q, ELBM-X) with a “buy” recommendation on Wednesday, pointing to its “one-of-a-kind” cobalt refinery in Temiskaming, Ont.
“Electra Battery Materials is actively recommissioning and constructing a brownfield battery materials refinery in Ontario, Canada,” said Mr. Ihle in a note. “This is quite special as a majority of battery metals processing occurs within China and their operation represents a one-of-a-kind facility for North America. In turn, Electra offers a significant domestic opportunity, as North America looks to meaningfully reduce its reliance on Electric Vehicle (EV) materials originating in China.”
" At present, the company’s refinery is expected to see commissioning in the spring of 2023. In turn, Electra’s management team has already negotiated a series of supply and feedstock agreements to provide operational longevity.”
The analyst thinks the refinery “should impact the entire market,” providing incentive for increased domestic production.
“In our view, this should ultimately mitigate supply chain inconsistencies and reliance on geopolitically challenging countries, such as the Democratic Republic of Congo (DRC), which produces roughly 70 per cent of the world’s cobalt,” he said.
Mr. Ihle also emphasized Electra’s “strong ESG focus,” noting: “While Electra’s refinery looks to fill a growing battery metals supply and demand gap, we emphasize the project’s North American location, and in turn, the stringent environmental, social, and governance (ESG)criteria that come with operating in Canada. In our view, Electra’s refinery should provide a localized source of battery-grade cobalt to various end-users, as 80 per cent of the global cobalt refining capacity comes from China. As a result, we believe Electra’s refinery should provide a sustainable supply of cobalt while maintaining operational transparency under rigorous ESG standards.”
He set a target of US$7.75 per share. The current average is $10.31 (Canadian).
“In our opinion, Electra’s largest catalyst going forward remains the commissioning of the firm’s battery materials refinery in 2023,” said Mr. Ihle. “We believe this milestone should provide significant de-risking and provide operational cash flow, which can then be used to fund the advancement of other growth projects. We also highlight that the company’s demonstration plant for black mass recycling has begun operating, which should generate valuable data in interpreting the economic viability of the project. Beyond the self-sustaining nature of Electra’s refinery operation, we also emphasize the potential development of the company’s Iron Creek project as we believe the site could provide feed for the refinery in the long-term. Importantly, while Electra expects to begin generating cash flow from cobalt sales in the summer of 2023, the company also has a clear path to production growth given its existing contract.”
In other analyst actions:
* In response to its US$606-million takeover offer from Triple Flag Precious Metals Corp. (TFPM-T), Stifel’s Ingrid Rico downgraded Maverix Metals Inc. (MMX-T) to “hold” from “buy” with a $5.25 target, down from $7.75. The average on the Street is $6.89.
“We have a positive view on the combination and its creation of a robust intermediate royaltyco that we believe will be positioned for valuation multiple re-rate,” she said.
* Following weaker-than-expected first-quarter 2023 results, Canaccord Genuity’s Scott Chan cut his Axis Auto Finance Inc. (AXIS-T) target to 65 cents from 75 cents with a “speculative buy” rating. The average is 78 cents.
“We note that overall loan growth was good in a tough industry backdrop (particularly for its core auto subprime loan book). Credit conditions could be challenged near term (i.e. high inflation) and from fears of a Canadian recession. We believe other verticals, such as commercial (i.e., equipment financing) and DriveAxis provide near-term support,” said Mr. Chan.
* Canaccord’s Doug Taylor reduced his target for CloudMD Software & Services Inc. (DOC-X) to 25 cents from 40 cents, maintaining a “hold” rating. The average is 74 cents.
“We have updated our forecasts following CloudMD’s below-expected Q3 results and recent divestitures and are maintaining a HOLD rating,” he said. “Management continues to focus on right-sizing the operation and disposing of non-core assets. Progress was made on both fronts, with more to come in Q4/Q1, given significantly increased cost optimization targets. The company also speaks to the expectation of returning to ‘double-digit’ organic growth with profitability forecast in the back half of the year. In the meantime, cash burn continues, and the company’s balance sheet does not leave a lot of room for further disruptions or delays in achieving this objective. On lower estimates, our target is now $0.25 (from $0.40), and until we get closer to sustained profitability, we believe there is better risk/reward elsewhere within the digital health landscape.”
* Scotia’s Kevin Krishnaratne cut his Enthusiast Gaming Holdings Inc. (EGLX-T) target to $3.75 from $5 with a “sector outperform” rating. The average is $4.27.
“Following recent ad spend headwinds observed in EGLX’s Q3 results and across other media peers, we’ve reduced our revenue forecasts for Q4 and CY23,” he said. “That being said, our thesis that EGLX serves as an important source of Gen Z eyeballs highly coveted by brands remains unchanged. The company posted 50 per cent year-over-year Direct Ad Sales growth in a challenging environment and launched new initiatives including NFL Tuesday Night Gaming, a collaboration between NFL players and video game content creators that is poised to help brands better connect with younger audiences.”
* RBC’s Mark Dwelle cut his Fairfax India Holdings Corp. (FIH.U-T) target by US$1 to US$17, matching the consensus, with an “outperform” rating.
“Fairfax India’s Q3 results were driven by strong unrealized gains across key segments,” said Mr. Dwelle. “Book value per share improved on a sequential basis despite FX and rising interest rates. Transaction activity has been modest, but we think could pick up once proceeds from the sale of its IIFL Wealth Management stake are received. Most of Fairfax India’s positions have seen rising values as the Indian economy has rebounded and Covid impacts wane. We view Fairfax India as well positioned for these positive trends to continue in 2023.”
* Canaccord’s Doug Taylor cut his Farmers Edge Inc. (FDGE-T) target to 40 cents from $1 with a “hold” rating, while National Bank’s Richard Tse trimmed his target to 30 cents from 50 cents with a “sector perform” rating. The current average is $1.28.
“We have made further reductions to our model and target price accordingly on Farmer’s Edge as we see very little to anchor an investment thesis at this point,” said Mr. Taylor. “While Q3 featured a narrower sequential cash burn and a new $20M in targeted incremental cost savings, there remains significant questions around the company’s ability to navigate a growth turnaround amid a shrinking acreage base and an updated go-to-market strategy still in its infancy. Combined with our expectation for the remaining $55M credit facility from Fairfax to be drawn over the coming year, dilution concerns challenge the case for equity ownership for incremental FDGE shareholders.”
* Desjardins Securities’ Kyle Stanley trimmed his Flagship Communities REIT (MHC.U-T) target to US$21, matching the average, from US$22.50, keeping a “buy” rating, while Raymond James’ Brad Sturges cut his target to $22 from $23 with an “outperform” rating.
“Flagship reported in-line 3Q22 results,” he said. “Its ability to deliver 4–5-per-cent AMR growth and 200–300 basis points of occupancy gains annually while maintaining an elevated NOI margin ranks it as a top-quality compounder within our coverage. Our forecast calls for 9-per-cent annualized FFOPU [funds from operations per unit] growth through 2024 despite its units trading at a material 33-per-cent discount to NAV [net asset value].”
* CIBC’s Dean Wilkinson lowered his target for H&R REIT (HR.UN-T) to $16 from $16.50 with an “outperformer” rating. Others making changes include: RBC’s Jimmy Shan to $15 from $15.75 with a “sector perform” rating and National Bank’s Matt Kornack to $14.25 from $13.50 with an “outperform” rating. The average is $15.68.
“Operating performance remains healthy driven primarily by growth (albeit decelerating) from its residential portfolio,” said Mr. Shan. “We view H&R’s capital allocation activities positively, with its emphasis on NCIB funded by asset sale and prudence in its development activities. HR remains committed to focusing on growth asset classes. Execution will be choppy as asset sale environment is weak, especially for office. Having outperformed year-to-date, HR’s trading discount to our NAV estimate looks more in line with its various ‘sum-of-the-parts’ peers.”
* Stifel’s Cody Kwong reduced his Headwater Exploration Inc. (HWX-T) target by $1 to $9.50 with a “buy” rating. The average is $9.89.
* CIBC’s Anita Soni cut her Kinross Gold Corp. (KGC-N, K-T) target to US$4.70 from US$5 with a “neutral” rating, while Canaccord’s Carey MacRury lowered his target to $7.25 (Canadian) from $8 with a “buy” rating. The average is US$5.38.
“We have lowered our target price ... on the back of lower 2023 estimates following Kinross’ Q3/22 results, guidance revisions, and commentary on ramp-ups at La Coipa and Tasiast as well as mine optimization results at Round Mountain,” said Mr. MacRury. “Our BUY recommendation is based on Kinross’ improving production profile, lower geopolitical risk profile, growth potential from Great Bear, and attractive valuation. Kinross’s shares have been among the best performers among the senior producers since the recent gold low on September 26, gaining 30 per cent vs. the S&P/TSX gold index up 25 per cent. We view the company’s valuation as attractive with Kinross currently trading at 0.5 times NAV and well below the senior average of 0.7 times.”
* RBC’s Pammi Bir lowered his Sienna Senior Living Inc. (SIA-T) target to $14, below the $14.88 average, from $15 with a “sector perform” rating, while National Bank’s Tal Woolley cut his target to $14 from $14.50 with an “outperform” rating.
“On the back of in line Q3 results, our stable outlook on SIA is intact,” said Mr. Bir. “Operationally, we expect SP NOI [same property net operating income] to continue recouping lost ground through 2023. However, we scaled back the pace of recovery as elevated cost pressures will likely persist in the near-term across both the retirement and LTC segments. While retirement occupancy advances may temporarily pause, we expect advances to resume next year, supported by its successful localized strategies.”
* JP Morgan’s Arun Jayaram cut his Vermilion Energy Inc. (VET-T) target to $34 from $38 with a “neutral” rating. The average is $39.86.