Inside the Market’s roundup of some of today’s key analyst actions
CIBC World Markets analyst Todd Coupland raised his recommendation Shopify Inc. (SHOP-N, SHOP-T) on Monday to “outperformer” from “neutral” in reaction to a recent pullback in its share price as well as “improved confidence” in his forecast for the Ottawa-based company due to better-than-expected Black Friday Cyber Monday e-commerce sales.
“Over BFCM, Shopify merchant gross merchandise value (GMV) grew by 19 per cent year-over-year,” he said in a research note. “This supports our Shopify Q4 GMV [gross merchandise volume] growth forecast of 12 per cent (vs. FactSet 9 per cent). Our own expanded web traffic analysis of Shopify merchants affirms our view and also showed Q4 growth of 12 per cent. Finally, a number of key issues are setting up to resolve themselves, including a possible integration agreement with Amazon on Buy with Prime (BWP) that would benefit Shopify’s merchants and Shopify itself. For these reasons we recommend investors buy its shares.”
Mr. Coupland emphasized Shopify’s growth rate continues to “normalize toward more realistic levels” despite linger recession fears.
“Contributions are predominantly driven by Merchant Solutions growth on the back of record attach rates of Payments, Capital, Shopify Partners, and Deliverr,” he said. “Together, these are yielding a rising take-rate on GMV. An offset is that Subscription Solutions growth should be slower on lower MRR growth from discounted plan pricing. We are pleased to have improved confidence in our forecast and see a path to a number of key issues that are starting to resolve themselves. These include the possibility of a commercial resolution and integration with Amazon on its BWP button in the right way. Recall that in Q3, Shopify indicated that an “immaterial” number of Shopify merchants currently use BWP. The primary reasons are clunky integration and security risks around customer data. In our view, Shopify’s talks with Amazon could yield a mutually beneficial solution that helps their merchants and contributes to Shopify’s GMV growth.”
Touting its “large market opportunity” and expect its pace of growth to exceed its peers, Mr. Coupland maintained his target for Shopify shares of US$50. The average target on the Street is US$40.91.
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The current trading multiples for Canadian auto parts manufacturers “look attractive in the context of [a] mild recession (followed by recovery),” according to Scotia Capital analyst Mark Neville.
“While it is not necessarily our job to forecast recessions, it certainly feels like the risk of a recession as we enter 2023 is elevated (i.e., the Fed is aggressively tightening in the face of softening economic data, the yield curve is inverted, etc.),” he said. “Our estimates assume a mild recession in 2023 and modest recovery (not V-shaped) in 2024.
“On that basis, we find trading multiples for the group of North American auto suppliers undemanding. If one is more bullish on economic prospects, then multiples would likely appear extremely attractive – e.g., MGA currently trades at approximately 7.5 times P/E [price-to-earnings] on consensus 2024 estimates, in what would be a recovery scenario (i.e., consensus estimates assume more than a modest recovery in 2024, in our view). In a recovery scenario, we believe the stocks would likely trade well above 7.5 times.”
In a research report released Wednesday, Mr. Neville warned current multiples would be a larger concern if a a deeper and more protracted economic slowdown emerges, given the potential a recovery in industry sales would be “potentially multiple years away.”
“Looking back over approximately 45+ years of data, a few things became clear: (i.) interest rates alone don’t appear to have a meaningful impact on the level of auto sales (a view we long held), (ii.) the broader economy (i.e., jobs and GDP growth, etc.) largely dictates the direction and level of industry sales, (iii.) in the event of a deep and protracted economic downturn, similar to the early 1980′s, early 1990′s, and 2008/2009 recessions, industry sales would likely see meaningful declines and could take multiple years to recover, (iv.) recent industry sales levels have been limited by supply chain constraints, but the level of sales is not historically weak (i.e., not at recessionary levels) or much different from the level of sales heading in the early 1980′s and early 1990′s recessions; so, while inventory restocking should provide some support to production levels (e.g., we estimate approximately one million units), in our opinion, the restocking argument alone would not be enough to support a bullish thesis in the event of a deep and protracted recession,” he said.
After introducing his 2024 financial estimates, Mr. Neville increased his target prices for companies in his coverage universe due to adjustments in his valuation base.
“With macro (and, therefore, earnings) risks elevated, we continue to prefer large cap autos to small, and less financial leverage to more,” he said.
His changes are:
* ABC Technologies Holdings Inc. (ABCT-T, “sector perform”) to $6 from $5.50. Average: $5.50.
* Linamar Corp. (LNR-T, “sector outperform”) to $90 from $80. Average: $78.20.
* Magna International Inc. (MGA-N/MG-T, “sector outperform”) to US$75 from US$65. Average: US$72.12.
“MGA trades at 13.1 times P/E on our 2022 estimates,” he said. “While we forecast essentially flat industry production volumes, we expect a meaningful improvement in profits in 2023E (e.g., we forecast 26-per-cent growth in adjusted EPS for MGA) as inflationary costs are (at least partially) recovered and production schedules should become more predictably (even if not at a higher level). In our opinion, if the market was convinced that 2022 was the trough, MGA (and the other suppliers) would be trading at higher multiples.”
* Martinrea International Inc. (MRE-T, “sector perform”) to $16 from $13. Average: $14.67.
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InterRent Real Estate Investment Trust’s (IIP.UN-T) valuation “fails to capture” [its] strong 2023 organic growth prospects,” according to Raymond James analyst Brad Sturges.
“We are upgrading InterRent REIT to a Strong Buy from an Outperform rating, to reflect: 1) strong and improving Canadian multifamily rental (MFR) fundamentals that can support InterRent’s above-average 2023 organic growth prospects; 2) InterRent’s historical track record of generating above-average SP-NOI [same property net operating income] and AFFO [adjusted funds from operations] per unit growth year-over-year; 3) its attractive relative valuation discount to its NAV estimate and to its historical average P/AFFO multiple; and 4) the potential for InterRent to be a privatization / M&A candidate given the high-quality nature and intensification/development opportunity inherent within its Canadian MFR real estate portfolio.”
Mr. Sturges thinks Ottawa-based InterRent is set to benefit from further tightening in the Canadian multi-family residential leasing conditions, which he said is driven by the federal government’s increased immigration targets as well as a rise in foreign students returning to urban areas.
“We believe the conclusion of The Feds’ Canadian MFR sector review, combined with a limited operating and taxation impact for InterRent, could be a material near-term positive catalyst,” he said.
The analyst reiterated a $15.75 target for InterRent units. The current average is $14.85.
“InterRent currently trades at an approximately 22-per-cent discount to its NAV estimate of $15.50, compared to a historical premium of 4 per cent over the past 5 years,” he said. “Further, InterRent trades at 25 times 2023 estimated AFFO, which is 6 times turns lower than its 5-year historical average. While InterRent also trades at an 8 times P/AFFO premium to its Canadian MFR peers (historical average: 8 times), we believe InterRent’s premium valuation is warranted given its historical track record of delivering above-average SP-NOI, AFFO/unit and NAV/unit growth year-over-year.”
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Desjardins Securities analyst Chris MacCulloch thinks Cenovus Energy Inc.’s (CVE-T) portfolio optimization is primed to “hit paydirt” in 2023, predicting “significant acceleration of capital returns.”
“The company is poised to benefit from a significant ramp-up in downstream capacity next year with the planned return of the newly rebuilt Superior refinery, along with the restart and consolidation of the Toledo refinery, both of which will provide improved physical integration and additional corporate exposure to lucrative crack spreads,” he said.
On Tuesday, the Calgary-based company announced plans to boost production to 2023 with the expectation of rising global demand. It set a capital budget of $4-billion to $4.5-billion, up from $3.3-billion to $3.7-billion this year, and projects total upstream production to increase more than 3 per cent year over year to 800,000 and 840,000 barrels of oil equivalent per day.
“From our perspective, there were no major surprises in the headline numbers from the 2023 guidance release, with capital spending, upstream production and downstream throughputs all closely aligning with our previous forecast,” said Mr. MacCulloch. “However, upon working through the detailed cost guidance, we quickly discovered that our estimates were conservatively set, which was the key driver of our target bump. As a result, CVE’s 2023 FCF profile now appears even more compelling at just shy of $6-billion based on current strip prices, despite the recent deterioration in WTI prices and widening of WCS differentials, which translates into a 12-per-cent FCF yield.
“More importantly, virtually all of the spoils of elevated commodity prices and improved asset integration, particularly on the downstream side, will be distributed to shareholders in 2023 via capital returns, with the company still on track to meet its $4-billion net debt floor by year-end 2022. As a reminder, we expect incremental returns to continue leaning heavily on share repurchases based on management’s previous commentary that it views buybacks as the optimal method of returning capital when the stock is below $30 per share. In light of recent macro-driven volatility and weakness in the equity market, including for CVE, it stands to reason that the company will remain highly aggressive on the buyback front. Either way, we expect the balance of discretionary FCF to be returned through additional variable dividend payments, which could ramp up meaningfully in 2023 in the event of renewed commodity price and/or equity price strength, two events that are typically correlated in this business.”
Maintaining a “buy” recommendation for Cenovus shares, Mr. MacCulloch raised his target to $33 from $31. The average on the Street is $33.50.
Elsewhere, Raymond James’ Michael Shaw increased his target by $1 to $33 with an “outperform” rating.
“Cenovus’ 2023 budget and guidance underscores the strength of its upstream assets and the potential of its downstream business,” he said. “The mid-point of CVE’s 800 to 840 mboe/d upstream production guidance was ahead of the 815 mboe/d consensus estimate, and operating costs guidance at Christina Lake and Foster Creek were both in-line with our estimates. This highlights the quality of CVE’s in-situ oil sands projects in a challenging cost environment.”
“At our current commodity price estimates for 2023 (US$80 WTI; US$18 WCS diff), we estimate CVE will return $8.4-billion in cash to shareholders through a combination of base dividends, share repurchases and special dividends – 17 per cent of its current market cap. CVE’s FCF yield is the highest among our Canadian integrated and oil sands producers at 18 per cent and the shift to 100-per-cent FCF payout should continue to support the equity.”
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BMO Nesbitt Burns analyst Deepak Kaushal thinks Softchoice Corp.’s (SFTC-T) management has “built a strong organic growth engine.”
Also touting “a focused, accountable and productive sales team and a loyal customer base that is large and growing,” he initiated coverage of the Toronto-based IT service provider with an “outperform” recommendation on Wednesday.
“We believe the company’s core strength is derived from 30 years of providing customers with top tier expertise in leading software technologies, combined with an institutionalized culture of delivering customer value and driving sales growth which has built a strong reputation and customer base in the IT services market,” said Mr. Kaushal. “As an investment, Softchoice offers diversified exposure to the latest trends in enterprise software, with a capital-light model that offers long-term profit, cash flow and dividend growth, commensurate with growing digital transformation across the broader economy. Although we see several headwinds in the near-term, we are confident in management and the Board’s ability to maintain Softchoice’s role as a trusted IT advisor, and believe the recent pull back in stock price and valuation offers a good entry point for long-term investors.”
While the analyst expects a slowdown in 2023 versus its long-term target of double-digit growth, he predicts “sustained double-digit EBITDA growth and an acceleration in FCF, which should de-lever the business and expand valuation.”
“We expect resilient demand for cloud computing solutions, particularly in the commercial/mid-market and believe continued operational efficiency improvements can sustain double-digit EBITDA growth,” he said. “Notably, we expect even higher free cash flow growth as one-time investments end, which we expect to boost market value.
“Beyond this, we think changing partner programs and large enterprise disintermediation will require Softchoice to evolve deeper into new cloud computing technologies and higher value consulting services and application development, with increased focus on commercial/mid-market managed services. We think this will require continuous investment and evolution, and even a return to strategic M&A, but we are confident management has the ability and the foundation to drive continued success, and grow value for customers and shareholders.”
Mr. Kaushal set a target of $20 per share. The average is $23.50.
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Equinox Gold Corp.’s (EQX-T) sale of a significant portion of its holdings in Solaris Resources Inc. (SLS-T) should be viewed as “a positive move,” according to National Bank Financial analyst Mike Parkin, who thinks the move should reduced the need for future equity raises to fund its Greenstone JV development project.
On Tuesday before the bell, Equinox annnounced it has sold 11 million of its 15.6 million common shares in Solaris for gross proceeds of US$51.7-million.
“We have previously noted that it would be preferred for Equinox to liquidate all or a portion of its robust equity portfolio to close the funding gap we estimate exists for the project,” said Mr. Parkin. “To be conservative, we had not assumed any portfolio sales in our base case model and thus, today’s news comes as upside to our previous estimates. We believe that Equinox’s remaining portfolio continues to boast the potential to significantly further de-risk the financing of Greenstone.”
“As a result of the sale of Solaris shares, we see the magnitude of our equity dilution decrease, while we continue to expect the US$700-milloon plus US$100-million accordion RCF to be maxed out through 2Q23. Our estimated capex development budget for Greenstone remains unchanged at US$1.28-billion (100 per cent). We believe we continue to be conservative by not modeling any further sales within the equity portfolio, which we note would reduce the need for additional equity dilution beyond the existing ATM offering and provide upside to our estimates. We value Equinox’s equity portfolio at US$210-million (after the sale of the 11.0 million Solaris shares).”
Reiterating a “sector perform” rating for Equinox shares, Mr. Parkin bumped his target to $5.50 from $5. The average is $5.76.
Elsewhere, BMO’s Ryan Thompson raised his target to $6.50 from $6 with an “outperform” rating.
“We are not overly surprised by the sale given the large amount of capital currently being deployed at Greenstone,” said Mr. Thompson. “We had previously assumed EQX improved its liquidity position entirely with its own equity; we have reduced the size of the equity plug in our model to $100-million (to match the size of the ATM) from our prior assumption of $250-million, which had a positive NAV impact.”
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AbraSilver Resource Corp.’s (ABRA-X) $10-million bought deal provides it flexibility beyond the Pre-Feasibility Study for its flagship Diablillos project in the Argentine Puna region, according to National Bank Financial analyst Don DeMarco.
“The financing represents a modest 5-per-cent dilution and provides ABRA with increased liquidity as it progresses through material catalysts, including the ‘JAC’ zone maiden MRE and Diablillos PFS (H1/23),” he said.
After the financing, consisting of the private placement of 27 million shares at 37 cents apiece, Mr. DeMarco now sees the Toronto-based advanced-stage exploration company’s liquidity as “adequate” through the PFS, which he calls the “next de-risking milestone.”
“Positively the PFS is expected to include JAC, and for a potential start small scenario, initially at 7,000 tons per day to mine and process near surface high grades from JAC, scalable to 10,000 tons per day to mine the Oculto deposit,” he said. “Moreover, the expanded total resource base (up 22 per cent is expected to temper the updated mine plan based on Reserves only.”
Maintaining an “outperform” rating for AbraSilver, Mr. DeMarco, currently the lone analyst covering the stock, trimmed his target to 55 cents from 60 cents.
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As his patience “wears thin” following “another quarter of disappointing revenue growth and ongoing balance sheet challenges,” HC Wainwright analyst Scott Buck downgraded Versus Systems Inc. (VS-Q), saying “no clear inflection point has us move to the sidelines.”
On Nov. 14, the Vancouver-based company, which has developed a in-game prizing and promotions engine for online gaming and streaming events, reported revenue for its third-quarter of US$316,819, up only 4 per cent year-over-year.
“This represents a slowing from the first half of 2022 in which revenue grew by greater than 7.0 times year over year,” said Mr. Buck. “Given the lack of meaningful revenue growth and the current pace of losses, despite some cost reductions, we believe the company will need to raise additional capital under less favorable conditions than what we previously had modeled. While we believe the company’s second screen engagement products should see increasing adoption over time and the integration of advertising should be a meaningful contributor to revenue long term, near-term visibility around timing remains unclear. As a result, we are moving to the sidelines and waiting for an improved balance sheet and signs of more meaningful revenue growth before getting more constructive on VS shares.”
Seeing capital constraints remaining a headwind for Versus shares, he lowered his recommendation to “neutral” from “buy” but increased his target to US$2 to reflect a recently completed 1-for-15 reverse share split. He’s currently the lone analyst covering the stock.
“While the company has done a nice job in reducing cash operating expenses, with cash used in operations and investing down 25.0 per cent sequentially in 3Q22, a quarter end cash balance of only $1.0-million is troubling,” the analyst said. “On October 6, 2022, the company completed a private placement and issued 412,292 common shares at a price of $2.715 raising approximately $1.0-million. On December 2, 2022, the company filed an amended F-1 statement suggesting net proceeds from an offering of $1.6-million. This is well below what we believe may be required over the next 12 months given current revenue levels. We anticipate the company may need to comeback to the capital markets in early 2023. Management has previously indicated that it believes it more beneficial to raise a little at a time as improving underlying performance should allow the company to raise capital at more attractive levels as uncertainties are removed. However, we believe considerable investor concerns will remain in place until the company raises 12 months’ worth of required cash or begins to recognize a significant increase in quarterly revenue.”
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In other analyst actions:
* RBC Dominion Securities’ Andrew Wong trimmed his Aclara Resources Inc. (ARA-T) target to $1.10 from $1.25, maintaining an “outperform” rating. The average is 75 cents.
“We are encouraged by Aclara’s most recent corporate updates including an increased resource estimate at Penco, improved recoveries from lab test results, and ongoing community engagement,” said Mr. Wong. “We view the valuation as favourable with shares trading well below cash-on-hand and see upside optionality if the project gets back on track as heavy rare earths remain critical to the new energy transition and prices remain elevated. We view permitting as a key risk, but are encouraged by management’s focus on this area.”
* CIBC’s Cosmos Chiu raised his Fortuna Silver Mines Inc. (FVI-T) target to $5.85 from $5 with a “neutral” rating. The average is $5.82.
* Deutsche Bank’s Gabrielle Carbone raised her Lululemon Athletica Inc. (LULU-Q) target to US$450 from US$434, above the US$392.48 average on the Street, with a “buy” recommendation.
* Barclays’ Jeanine Wai cut her Ovintiv Inc. (OVV-N, OVV-T) target to US$60 from US$69 with an “overweight” rating, while Citi’s Scott Gruber raised his target to US$66 from US$65 with a “buy” rating. The average is US$68.79.
“While we see certain other E&Ps as able to return more cash to shareholders over, we see OVV having an attractive valuation (EV/DACF multiple and FCF/EV yield) at our 2022 base case commodity price deck, and model the company hitting its $3.0-billion debt target by year-end 2022 (and therefore eventually shifting incremental cash to additional shareholder returns),” said Mr. Gruber.
* Stifel’s Cody Kwong trimmed his Parex Resources Inc. (PXT-T) to $30 from $35, keeping a “buy” rating. The average is $34.76.
“Parex provided an operational update as well as, its 2023 budget to kick off its investor day presentations in Bogota, Colombia,” he said. “The company exceeded 60,000 barrels of oil equivalent per day, which is a major milestone for PXT and sets the stage for positive momentum in 2023, particularly after production disappointments over the past several months. The 2023 budget will see a lower capital outlay in order to optimize FCF which will be directed to shareholders in the form of a possible increase to dividends and share buybacks. The NCIB application will be renewed for 2023. We come away positively predisposed despite our target price rolling back to $30.00 per share due to formal recognition of Colombia’s new tax regime.”
David Leeder