Inside the Market’s roundup of some of today’s key analyst actions
While George Weston Ltd. (WN-T) continues to possess “strong” assets, Desjardins Securities analyst Chris Li is “waiting for a better re-entry point” given a shrinking holding company discount.
Accordingly, he downgraded his recommendation for its shares to “hold” from “buy” following Tuesday’s quarterly earnings report.
“While we had expected that it would take some time for a more consistent pace of share buybacks and improvement in macro conditions to be a catalyst for the holdco discount to narrow from mid-teens to low teens, this has been achieved faster than expected, with the holdco discount now at only 9 per cent,” said Mr. Li. “Considering GWL’s simplified corporate structure, with two high-quality assets—L (52.6 per cent) and CHP.UN (61.7 per cent) — nd no acquisitions in the foreseeable future as GWL is focused on creating shareholder value through growing L and CHP.UN, we believe a high-single-digit holdco discount is appropriate. The discount could further narrow if investors believe there is potential for privatization by the Weston family, which owns 55 per cent of WN. But, we do not view this as a likely scenario in the foreseeable future.”
Noting his new “hold” rating is based on a limited total return potential of less than 10 per cent, Mr. Li raised his target by $1 to $174. The average target on the Street is $184.71.
Other analysts making changes include:
* RBC Dominion Securities’ Irene Nattel to $204 from $203 with an “outperform” rating.
“Our constructive outlook on WN is predicated on our favourable outlook for more than 52-per-cent-owned Loblaw (TSX: L) augmented by share buyback funded largely through participation in L NCIB. With a strong balance sheet and net cash at GWL Corporate more than $400-million, in our view, WN will stick to its playbook of steady, consistent NCIB execution,” she said.
* BMO’s Peter Sklar to $172 from $166 with a “market perform” rating.
“As a parent company of two publicly traded entities, Loblaw and Choice REIT, which, respectively, report their earnings prior to George Weston’s, we consider George Weston’s quarterly earnings to be non-eventful. George Weston’s 2022 outlook is unchanged, indicating that it expects adjusted net earnings from continuing operations to increase due to the results from Loblaw and Choice REIT, which remains the case and is consistent with Loblaw’s revised EPS growth guidance of ‘high-teens,’” said Mr. Sklar.
* CIBC World Markets’ Mark Petrie to $204 from $193 with an “outperformer” rating.
“Share buybacks remain the top priority for excess cash flow and we take note that the holdco discount has steadily narrowed in the last two months and now sits at 11 per cent,” he said.
* Scotia Capital’s George Doumet to $175 from $168 with a “sector perform” rating.
Viewing the risk-reward proposition for Magna International Inc. (MGA-N, MG-T) to have “balanced out” after its shares reached his target price, Citi analyst Itay Michaeli downgraded the Canadian auto parts manufacturer to “neutral” from “buy” on Wednesday.
“With the stock having performed well as of late despite mixed Q3 results (Q3 EPS miss with’22 margins/FCF guided down), we think risk/reward has now balanced,” he said. “Additionally, our revised 2023/4 estimates are 1 per cent/10 per cent below consensus, and recent signs of tight 2023 supply chains (i.e. per SPG’s latest downward global auto production outlook revisions) suggest less production-related upside next year.”
Mr. Michaeli said he remains “constructive on the long-term story” for the Aurora, Ont.-based company, “including on our prior points around Magna’s relative defensiveness and lesser exposure to trim-mix fluctuations.”
“We also think the stock could conceivably react well to the company’s next 3-year forward guidance update (expected early next year), as well as the ramp of the Fisker Ocean in H2′23. But with the stock having reached our price target following a mixed Q3, we think risk/reward is now balance,” he added.
His target for Magna shares remains US$62. The average is US$71.53.
“The primary risk to stock performance is the potential volatility in light vehicle demand in North America and Europe. If demand proves weaker or further off than our expectations, Magna’s profits could come under pressure. Other risks to the stock not achieving our target price include production cyclicality, execution risk of launching new programs, raw material prices, price reductions to OEM customers and labor relations,” he noted.
National Bank Financial analyst Cameron Doerksen expects “a more challenging market for consumers” to weigh on sentiment around BRP Inc. (DOO-T) shares in the near-term.
However, ahead of next week’s release of its third-quarter 2023 results, he thinks its valuation “already reflects a cautious outlook” and anticipates the Valcourt, Que.-based recreational vehicle manufacturer will outperform the industry.
“We believe expected retail softness in the coming quarters can at least be partially offset by BRP’s aggressive roll-out of new products across its portfolio,” said Mr. Doerksen in a report released Wednesday. “Notably, Sea-Doo Switch pontoon bookings for model year 2023 were 3 times the model year 2022 production level indicating that consumer interest in this all-new product category is very strong. In addition, the first year of production of BRP’s new boat models with the Stealth Technology (launched in the summer) are essentially sold out.”
“At the end of fiscal Q2, BRP dealer inventory was still down 44 per cent versus pre-pandemic levels. Polaris indicated that at the end of its Q3, its dealer inventories were still down approximately 50 per cent versus Q3/19. Re-stocking demand should provide a buffer against softer retail sales into F2024 with BRP management pegging this as a $1.4 billion revenue opportunity just to get back to 70 per cent of pre-pandemic levels of inventory in its dealer network.”
Ahead of the Nov. 30 release of its results, Mr. Doerksen is projecting revenue of $2.33-billion for the quarter, up 46.8 per cent year-over-year and in line with the Street’s forecast of $2.323-billion. He estimates adjusted earnings per share will rise 64.7 per cent to $2.44, exceeding the consensus view by 10 cents.
However, citing “growing signs of a broader weakening consumer demand,” Mr. Doerksen said he’s ”exercising further caution” and cutting his BRP forecast for the remainder of fiscal 2023 and fiscal 2024. His new 2024 EPS forecast of $11.50 “sits well below” the current consensus of $12.36.
“Consumer confidence, which we view as an indicator of broader retail demand, has declined in both Canada and the U.S. over the last few months,” he noted. “Canadian consumer confidence declined from post-COVID onset highs in 2021 and has approached pandemic lows through the summer and into the fall (although still above levels seen in 2015-16). U.S. consumer confidence is now below the low-water marks of the onset of the pandemic. With inflation at multi-decade highs and interest rates much higher, we expect powersports retail will face more headwinds in the coming quarters. Polaris’ ORV retail was down 4 per cent sequentially in Q3 and the company.”
While noting its valuation is currently “historically inexpensive,” Mr. Doerksen reduced his target for BRP shares to $130 from $136, maintaining an “outperform” rating. The average target on the Street is $129.87.
“On our updated F2024 estimates, BRP is only trading at 5.9 times EV/EBITDA, well below the stock’s historical (5-year) forward average of 8.5 times,” he said. “On P/E [price-to-earnings], DOO is trading at only 8.0 times earnings versus its historical average (5-year) multiple of 15.8 times. Indeed, even if BRP’s EPS next year came in at only 50 per cent of our current expectations (an extremely unlikely scenario, in our view), the stock would still be trading at around its long-term forward average. Valuation for the stock is at its lowest since the company’s IPO in 2013.”
Believing Alamos Gold Inc. (AGI-N, AGI-T) “will continue its peer-leading share price performance through next year,” Scotia Capital’s Trevor Turnbull raised his recommendation to “sector outperform” from “sector perform” on Wednesday.
“The company is on track to achieve this year’s lowest costs per ounce in Q4 due to the ramp-up of the La Yaqui Grande high-margin heap leach,” he said. “This continuing ramp-up into 2023 is expected to more than offset inflationary pressure, and we anticipate that even with 5-per-cent inflation the year-over-year costs will improve as production increases to 460-500 koz for the next two years. Costs should improve again in 2024 from higher grades scheduled at the Island Gold mine.
“In our opinion, Alamos offers a better risk–reward proposition given its demonstrated operation track record and inflation-offsetting higher-margin production growth. We believe investors will rotate into operators from royalty and streaming companies as the gold price increases. We feel the selection criteria will not be predominantly discount to valuation, but quality of assets, diversification, and location of mines. We think Alamos is compelling at a 6-per-cent discount to its spot gold valuation versus the mid-tier peer group at a 27-per-cent discount.”
Touting its “diversified and sustainable” operations in Ontario and Mexico, which he calls “some of the world’s most favourable for mining investment,” as well as its fully funded growth without debt, Mr. Turnbull raised his target for Alamos shares to US$11 target from US$10, above the US$10.12 average.
Reviewing third-quarter earnings season for base and previous metals producers, Raymond James analyst Farooq Hamed downgraded both First Quantum Minerals Ltd. (FM-T) and Kinross Gold Corp. (KGC-N, K-T) to “market perform” from “outperform” on Wednesday.
For First Quantum, he said his move is primarily due to valuation concerns, seeing its recent share price appreciation yielding a negative return to his valuation.
“Beyond valuation, we have short term concerns regarding the final outcome of the Law 9 negotiations related to Cobre Panama and upcoming multi-year guidance which we expect to show lower than previously expected production in Zambia in the short term. We continue to view FM as a high quality copper producer,” said Mr. Hamed, who reduced his target by $1 to $28, which is below the $29.44 average on the Street.
For Kinross, Mr. Hamed cited its “lowered 3-year production guidance, increased operating cost expectations and lower long term production expectations at the Round Mountain mine.”
His target fell to US$4.50 from US$5.50. The average is US$5.37.
Mr. Hamed also made these target adjustments:
- Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “outperform”) to US$65 from US$64. Average: US$61.75.
- Hudbay Minerals Inc. (HBM-T, “outperform”) to $9 from $7.50. Average: $9.28.
However, believing “pricing and housing dynamics are not currently supportive,” he initiated coverage with a “neutral” recommendation on Wednesday.
“In our view, WFG offers interesting and large-scale lumber and oriented strand board (OSB) exposure in North America and OSB in selected European markets,” said Mr. Kuske. “WFG holds roughly a 10-per-cent market share of North American lumber along with a ~30% share of OSB markets after the 2021 Norbord acquisition. We like the company’s positioning and longer-term approach to value creation, however, housing market dynamics (i.e., generally decelerating trends), declining lumber and OSB prices from past peaks keep us on the sidelines. A combination of improved housing trends, greater commodity prices or a lower share price would support a more constructive outlook.
“Is this time different? Our simple answer to that short question is ‘yes.’ In the last two decades (more focused on the post-Global Financial Crisis era of 2008-2009), both WFG’s core businesses in lumber and OSB became more consolidated, and demand is still well below past peaks. Pandemic-related dislocations in supply and somewhat rather unexpected surges in demand (e.g., lockdown era related home renovation projects) helped elevate pricing to levels not witnessed in prior cycles with very robust margins. Notably, WFG took excess cash flows to buy back more than US$2-billion of stock since 2020 – to us, that data point provides ample evidence of the team’s discipline around capital returns.”
He set a target of US$100 per share, which falls below the US$108.33 average on the Street.
Citing the dilution from its most recent financing and the possibility of additional funding requirements, Desjardins Securities analyst Jerome Dubreuil lowered Think Research Corp. (THNK-X) to “hold” from “speculative buy” previously.
“We continue to see solid tailwinds over the long term for the company, but the recent covenant situation (which has not been fully addressed), our reduced estimates and the significant integration work remaining have us moving to the sidelines for now,” said Mr. Dubreuil.
On Monday, the Toronto-based digital healthcare software solutions provider announced it has drawn a second advance (of $3-million) from its convertible facility. It also announced a non-brokered equity financing of $3-million with “confirmed subscriptions for the significant majority.”
“While it is encouraging to see investors supporting THNK’s business plan, the financing will generate material dilution (13 per cent for the equity financing alone if completed),” said Mr. Dubreuil. “The company also indicated that liquidity and minimum EBITDA covenants have been lifted until December 31, but not for all credit agreements. This lifting of the covenants further signals Beedie’s support but indicates that the cash position and EBITDA generation have missed management’s expectations.”
While the company reiterated its fourth-quarter guidance, the analyst cut his forecast, citing “seasonality, the revenue recognition pattern for clinical research studies, higher interest rates and our expectation of additional working capital requirements to support growth.”
That led him to lower his target for Think shares to 55 cents from $1. The average is 91 cents.
Elsewhere, Canaccord Genuity’s Doug Taylor cut his target to 60 cents from $1.50, reiterating a “speculative buy” rating.
Despite continuing to have “strong conviction” on the potential for its SavvyWire product as it continues to gain traction on both sides of the border, Raymond James analyst Rahul Sarugaser lowered his recommendation for Opsens Inc. (OPS-T) to “outperform” from “strong buy,” expecting continue macroeconomic headwinds to keep its shares range-bound in the near-term.”
Following in-line fourth-quarter results, Mr. Sarugaser reiterated his view that SavvyWire, a guidewire in transcatheter aortic valve replacements (TAVR) procedures, has “strong” commercial potential that could drive top-line revenue for the Quebec City-based medical device cardiology-focused company of more than $100-million by 2026. During the quarter, Opsens received approval from the United States Food and Drug Administration for the 3-in-1 guidewire.
“All eyes remain on OPS’ launch of SavvyWire,” he said. “During the conference call, management indicated that the SavvyWire launch is proceeding ahead of schedule in all geographies: in Canada, SavvyWire is being used in 9 centres with more than 200 units shipped (more than 50 per cent repeat orders); in the U.S., OPS is already shifting from its limited launch stage (5 centres) to Phase 1 which will immediately expand OPS’s base to 10 centres with the goal of deeply penetrating 20 centres in the near-term. We’re encouraged by this fast ramp and evidence of strong traction. As a result of the SavvyWire roll-out, costs were up materially, as expected (S&M: up 19 per cent quarter-over-quarter, 198 per cent year-over-year; R&D: down 2 per cent quarter-over-quarter, up 68 per cent year-over-year), with OPS burning $4.2-million, leaving $23.8-million in cash at FYE22.”
Though he also sees “relatively rapid progress toward European market penetration,” Mr. Sarugaser trimmed his target for Opsens shares by $1 to $5, citing “sustained med-tech sector multiples’ weakness.” The average target on the Street is $4.03.
While acknowledging the “volatile environment” for junior mining companies, Haywood Securities analyst Pierre Vaillancourt thinks Amex Exploration Inc. (AMX-X) “offers attractive upside on the strength of its high grade resource and district potential,” leading him to initiate coverage with a “buy” rating on Wednesday.
The Montreal-based company is developing the Perron project within the “underexplored” Chicobi belt of the Abitibi region of Quebec. It’s currently completing a multi-year drilling program with the plantto release an initial resource by the middle of the next year following by a preliminary economic assessment.
“Results to date have been impressive, including a number of multi-ounce gold intercepts,” he said. “The initial resource is planned for mid-2023, which we believe could reach in excess of 2Moz, with potential to grow considerably larger.”
“We look for a strong initial resource with considerable expansion upside, complemented by base metal potential. As a result, we believe interest by producers will be high, providing an attractive takeover opportunity.”
Seeing “strong economics” from the project and an “attractive” valuation, Mr. Vaillancourt urged investors to “buy for large resource with high grade potential,” seeing a target of $4 per share, which exceeds the $3.44 average.
“Our target price of $4.00 reflects a 0.7-times multiple of our fully financed, fully diluted NAV5%, and accounts for the achievement of successful milestones at the Perron Gold project,” he said. “Our target multiple is on the low end of the range for gold developers (0.7–1.0 times), reflecting the early stage of the project, and upcoming funding requirements. The target is supported by the Perron project’s low geopolitical risk and its potential to become a large, low-cost gold mine.”
Echelon Capital analyst Gabriel Gonzalez expects Ascendant Resources Inc. (ASND-T) to attract increasing investor attention as it continues “rapidly advancing” its Lagoa Salgada project in Portugal.
“In our view ASND has flown under the radar as it has worked to increase its Lagoa Salgada stake and demonstrate technically and commercially viable recoveries,” he said. “We believe the Company is set to begin announcing funding plans for advanced development and eventually construction, raising its visibility among investors. We are looking for a mix of stream/royalty financing, followed by debt and equity to finance construction in early 2024 to have the 5,500 tons per day, 130 million pounds per year ZnEq project in production by 2025. The project’s designation as a Project of National Interest by the Portuguese government could also help expedite the receipt of project permits/licenses and de-risks the project through government agency pre-vetting.”
Resuming coverage of the Toronto-based miner following a recent visit to the volcanogenic massive sulphide (VMS) project, Mr. Gonzalez emphasized the Ascendant has “substantially completed advanced metallurgical studies to support a Bankable Feasibility Study and demonstrated significant copper-focused exploration and resource growth potential.”
“The Company is on track to increase its stake in the project to 80 per cent (from 50 per cent, since May 2022), and begin the road to project financing and construction, which we believe will make it a relevant go-to name in the base metal developer space,” he said.
Touting the potential to “significantly” increase its copper content and the expectation to “incrementally optimize/improve recoveries,” Mr. Gonzalez reiterated a 40-cent target for the company’s shares. The current average is 35 cents.
“We believe that with updated metallurgy, increase in ownership to 80 per cent (currently 50 per cent), a BFS, and stream agreement in place to finance near-term obligations and longer-term build capex, the potential for Lagoa Salgada to become a producing mine will become evident and lead to a re-rating in the Company’s share price which has otherwise flown under the radar since it sold the producing El Mochito mine in Honduras and while metallurgical work at Lagoa Salgada has been pending,” he concluded.
Seeing “little room for error” in its current funding plans, RBC Dominion Securities’ Nelson Ng downgraded Evergen Infrastructure Corp. (EVGN-X) to “sector perform” from “outperform.”
“EverGen has a number of opportunities to grow its RNG portfolio, but we believe the shares will be range-bound as the market focuses on near-term execution of its core expansions, including the NZWA project, which is not fully funded,” he said.
“Management estimates that they’ll move forward with its NZWA expansion project ($30-33-million of remaining capex) in mid-2023 (2024 COD). From a funding perspective, the company will have roughly $5.5-million in cash and $16-million allocated from the credit facility for the project, leaving roughly a $10-million funding gap. Management expects the rest of the funding to come from government grants (applied for over $20-million of grants) and free cash flow generated by the company (our 2023 ACFFO forecast is $2.7-million).”
Also emphasizing the impact of rising interest rates, Mr. Ng cut his target for shares of Vancouver-based renewable natural gas infrastructure platform to $3 from $5, below the $6.81 average.
“We see upside in the shares if management successfully applies for government grants and develops the NZWA project on time and within budget,” he said.
In other analyst actions:
* RBC Dominion Securities’ Tom Callaghan initiated coverage of Slate Office REIT (SOT.UN-T) with a “sector perform” rating and $4.75 target. The average target on the Street is $4.70.
“With its concentration on suburban and secondary markets, and international diversification, SOT occupies a unique niche amongst Canadian office REITs,” he said.. “While our neutral stance is driven by total return expectations vs. the broader REIT/ REOC sector, and a cautious outlook on the office subsector, the recently launched strategic review could serve as a potential catalyst for units.”
* In a previous metals note, Stifel’s Ian Parkinson and Ingrid Rico trimmed their targets for Kinross Gold Corp. (K-T, “buy”) to $9 from $10, B2Gold Corp. (BTO-T, “buy”) to $7 from $7.25, Eldorado Gold Corp. (ELD-T, “buy”) to $16.50 from $17 and Endeavour Silver Corp. (EDR-T, “hold”) to $5.50 from $6.50. The averages are $7.92, $6.96, $12.86 and $6.12, respectively.
* ATB Capital Markets’ Waqar Syed raised his Calfrac Well Services Ltd. (CFW-T) target to $13 from $11.50 with an “outperform” rating, while Stifel’s Cole Pereira increased his target to $13 from $12 with a “buy” rating. The average is $11.08.
* Desjardins Securities’ Kyle Stanley cut his Canadian Net Real Estate Investment Trust (NET.UN-T) target to $7.75 from $8.25, while Echelon Capital’s David Chrystal bumped his target to $8 from $8.50 with a “buy” rating. The average is $7.81.
“Results were accompanied by a modest 1.5-per-cent distribution increase, the REIT’s 11th consecutive annual hike,” said Mr. Chrystal. “Acquisition volume has slowed as the transaction market digests volatile interest rates. We expect the REIT’s external growth will be muted in the near term given a period of price discovery, and slightly elevated leverage. Modest organic growth should be generated from 2023 lease renewals and contractual escalations, augmented by the delivery of several small development properties.”
* TD Securities’ Daryl Young raised his target for shares of Dentalcorp Holdings Ltd. (DNTL-T) to $14.50 from $13 with a “buy” rating. The average is $14.85.
* CIBC World Markets’ Scott Fletcher initiated coverage of DRI Healthcare Trust (DHT.UN-T) with an “outperformer” rating and $11.50 target. The average is $14.98.
“We view DRI Healthcare Trust (DHT) units as an attractive way to provide exposure to the pharmaceutical and biotech industry without taking on the risks inherent to the drug development and marketing process,” he said. “DHT owns a portfolio of top-line royalties on approved, medically necessary drugs that are price inelastic and relatively immune to economic cycles. With a fund manager that has a long history of successful royalty investments and a limited cost profile that leads to 80-per-cent-plus adjusted EBITDA margins and strong cash flow conversion, we have confidence that DHT will reinvest cash flow in new, attractive royalty opportunities over time.”
* Canaccord Genuity’s Yuri Lynk trimmed his Good Natured Products Inc. (GDNP-X) target to 75 cents, below the 84-cent average, from $1.20 with a “speculative buy” recommendation.
“In our view, the stock has been impacted by a slower-than-expected transition of the IPF and Ex-Tech acquisitions to plant-based feedstock and, more importantly, the negative impact rising rates have had on small cap. growth companies’ valuations. While debt levels and covenants bear watching, we are of the view that GDNP’s valuation does not reflect the company’s strong organic growth and stable margins,” he said.
* Seeing tax reforms in Colombia “meaningfully” decreasing his cash flow and pointing to “elevated political risks,” Scotia Capital’s Kevin Fisk dropped his target for Parex Resources Inc. (PXT-T) to $24 from $29 with a “sector perform” recommendation. The average is $35.21.
* RBC’s Pammi Bir raised his Summit Industrial Income REIT (SMU.UN-T) to $23.50 from $21.50 with a “sector perform” rating. The average is $23.21.
* Coming off research restriction following its upsized $70-million equity offering to fund its a $200-million asset acquisition from Enerplus Corp. (ERF-T), National Bank’s Dan Payne bumped his target for Surge Energy Inc. (SGY-T) shares to $15 from $14, reaffirming an “outperform” rating. The average is $14.69.
“Pro-forma the transaction, the company’s corporate strategy & orientation remain intact to maximize free cash in support of long-term sustainable cash dividend growth through its augmented scale at 25 mboe/d (87-per-cent liquids) and increased orientation to high-quality assets, with complements of a moderated decline (23 per vcent), augmented netback and expanded inventory of low capital efficiency opportunities, the company expects to maintain production under a 50-per-cent payout in support of a 20-per-cent FCF yield,” said Mr. Payne. “That excess cash will continue to be directed towards de-leveraging and sustainable dividend increases, immediately expanded by 14 per cent (5-per-cent cash yield, 13-per-cent payout), while its return of capital framework remains intact for a potential doubling of its payout & dividend through mid-2023 (implications towards $18 per share at a 5-per-cent yield).”