Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Nelson Ng thinks Algonquin Power & Utilities Corp. (AQN-N, AQN-T) has gained “some optionality” from the U.S. Federal Energy Regulatory Commission’s rejection of its US$2.65-billion acquisition of Kentucky Power, “which could work in shareholders’ favour.”
“Based on our read of the FERC denial order, we believe that if AQN and AEP file another application to the FERC (AQN is required to use reasonable best efforts to close the transaction), they should be able to eventually get the transaction approved,” he said. “However, the process could take longer than the April 26, 2023 Outside Date, and AQN may have the option to terminate the transaction and pay the $65 million termination fee. We believe shareholders would prefer that AQN does not move forward with the KP transaction.”
With its TSX-listed shares down 50.1 per cent year-to-date through Tuesday, Mr. Ng does not see Algonquin to access equity markets to fund growth over the next several years. Instead, he expects internal funding of its capital plans through asset sales, retained cash flow, its dividend reinvestment plan and balance sheet.
“Under this scenario, if AQN acquires KP, we believe AQN would need to cut the dividend, accelerate asset sales, and shrink its capital plan to bolster its balance sheet,” he said. “We believe the obvious asset to divest would be its $1.3 billion stake in Atlantica Sustainable Infrastructure (although this has not been specifically discussed by the company it is a relatively passive investment in a publicly listed company with limited strategic value, in our view), which could fund most of the $1.4-billion KP equity purchase price. We forecast that the 2022 and 2023 payout ratio (based on EPS) to exceed 100 per cent at the current dividend. Since the company will need to internally fund growth, we believe AQN will need to lower its long-term payout ratio target of 80-90 per cent.
“If AQN does not acquire KP, we expect asset sales and a dividend cut will still take place, but the magnitude could be smaller and the timing could be at a more measured pace, since AQN should have more financial flexibility with a stronger balance sheet.”
Mr. Ng had expected the Kentucky Power deal to close in January with an annual Investor Day event following in February. However, he now sees that plan “in limbo,” believing the questions around the acquisition could “materially change the course of management’s near-term and five-year outlook.”
Taking a “a more conservative view on valuation given the uncertainties heading into 2023,” he cut his target for Algonquin shares to US$8 from US$12, reiterating a “sector perform” recommendation. The average on the Street is US$11.08.
“AQN currently trades at 8.9 times consensus 2024 EPS, and 10.0 times TTM [trailing 12-month] Adjusted EPS,” he said. “Due to the earnings mix at AQN, we believe that a lower earnings multiple compared to peers is appropriate, and we prefer a sum-of-the-parts valuation approach.”
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Canadian Pacific Railway Ltd.’s (CP-T) “generational” US$31-billion acquisition of Kansas City Southern makes a “best-in-class operator” even better, according to ATB Capital Markets analyst Chris Murray.
In research reports released Wednesday before the bell, he initiated coverage of CP with an “outperform” rating, while giving rival Canadian National Railway Ltd. (CNR-T) a “sector perform” recommendation.
“CP lured Mr. Hunter Harrison out of retirement in 2012 which marked the beginning of a major operational turnaround,” said Mr. Murray. “The Company’s operating ratio has gone from the lowest amongst Class 1 peers to best-in-class after implementing precision scheduled railroading (PSR) in 2013. We expect this trend to continue given management’s proven operating capabilities combined with a constructive outlook for price/volume trends over the near to medium term with CP’s proposed acquisition of KCS representing a significant catalyst for growth over the coming years.”
The analyst sees the pending acquisition of Kansas City Southern as “a transformative opportunity” for CP, leading to the establishment of the first Canada/US/Mexico rail network and providing both companies with “greater scale, capabilities, and route densification.”
“The combination of CP and KCS (“CPKC”), which currently interchange in Kansas City with no existing overlap, would result in greater geographic reach and support more efficient linkage between key origination and destination markets for several freight types while providing diversification benefits given KCS’ chemical/merchandise volumes and established infrastructure in the Southern U.S. and Mexico,” he said. “We expect the transaction to be approved by the STB in Q1/23 given the complementary routing of the two networks and environmental benefits expected to be realized through the conversion of truck volumes to rail.”
“Management expects to unlock $1.0-billion synergies under CPKC by end of year three, largely based on anticipated revenue synergies with leverage expected to normalize to 2.5 times concurrently. We view the synergy targets as conservative and see meaningful potential upside over the longer-term given the breadth of the cross-selling opportunity, particularly around intermodal volumes, management capabilities, and the favourable underlying economics of freight rail, which we expect to underpin longer-term value creation.”
He set a target for CP shares of $120. The average target on the Street is $113.83.
For CN, Mr. Murray sees “an operational improvement story with more to be told.”
“CN operates North America’s sole tri-coastal network which provides the Company, and its customer base, with direct access to global markets,” he said. “The Company’s decades of consolidation to build its network makes replication essentially impossible with a limited threat of disintermediation. Competition is limited and underpins a highly rational pricing environment, expected to endure with established infrastructure supporting captive volumes.”
“Operating performance drifted from bestin-class to middle of the pack over the past five years with CN’s operating ratio increasing from 59.8 per cent in 2017 to 61.2 per cent in 2021 with expectations for a below 60 metric in coming years. Tracy Robinson, an outsider and former CP executive, was brought in to lead an operational turnaround at Company that pioneered scheduled railroading under Hunter Harrison’s leadership and controls the best network in the industry.”
He thinks CN’s free cash flow profile is likely to “drive longer-term returns to shareholders.”
“Strong FCF generation and improving margin supported by moderating CapEx and an improving operating margin profile is likely to be disproportionally returned to shareholders with limited alternatives,” he said. “CN’s balance sheet remains relatively under levered positioning the Company to remain opportunistic around share repurchases, which could accelerate over the near-term as broader market weakness has contributed to more attractive valuations.”
While Mr. Murray thinks CN has “made progress” in 2022, he sees its Investor Day event in May as crucial for shareholders, seeing the likelihood of the introduction of its strategy for coming years.
“While operational performance had slipped in recent years, the Company has been regaining its footing and we expect further details on how management is expected to drive shareholder returns in coming years,” he said.
He set a target of $180 per share, which exceeds the $160.79 average.
Elsewhere, Evercore ISI’s Jonathan Chappell raised his targets for CP to US$84 from US$81 with an “outperform” rating and CN to US$134 from US$123 with an “in line” rating.
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The third-quarter fiscal 2023 results from BlackBerry Ltd. (BB-N, BB-T) were a “mixed bag,” according to RBC Dominion Securities analyst Paul Treiber.
“Cybersecurity revenue missed our estimates and [key performance indicators] remain weak,” he said. “IoT design-phase revenue reached another new quarterly high, a positive leading indicator, even though IoT revenue was just in line. BlackBerry’s patent sale appears back on track and is expected to conclude ‘shortly.’”
Mr. Treiber said the Waterloo, Ont.-based company’s in-line headline results mask a notable miss from its Cybersecurity business, which he called “disappointing.”
After the bell on Tuesday, BlackBerry reported revenue of US$169-million, down 8 per cent year-over-year but matching the forecast from both the analyst and Street. Non-GAAP earnings per share of a 5-US-cent loss was 3 US cents better than the Mr. Treiber’s expectations. However, Cybersecurity revenue came in “soft” at US$106-million, down 17 per cent versus his US$114-million projection.
“Annual recurring revenue declined 13 per cent year-over-year, dollar net revenue retention dropped to 84 per cent from 85 per cent Q2, and deferred revenue decreased 11 per cent year-over-year (flat sequentially),” he said. “Cybersecurity billings rose only 1 per cent quarter-over-quarter and were down 8 per cent year-over-year. Management called out that the environment is becoming more difficult, with deals taking longer to close. BlackBerry expects sequential billings growth Q4 and anticipates a return to positive ARR growth by 2H/FY24 (vs. 1H/FY24 previously), as the headwind from UEM SMB [unified endpoint management software for small and midsize businesses] churn diminishes. Management reiterated its outlook for FY23 Cybersecurity revenue, which assumes the close of several large government contracts Q4.”
Mr. Treiber does see “robust” momentum from the company’s Internet of Things (IoT) design-phase revenue, calling it “a leading indicator of future royalty revenue and shows BlackBerry’s traction in the market.”
However, citing “a slower ramp in Cybersecurity, given elongating sales cycles and UEM churn,” he cut his revenue and earnings estimates for fiscal 2023 and 2023, leading him to reduced his target for BlackBerry shares to US$5.50 from US$6 with a “sector perform” rating. The average is US$5.24.
“We believe that BlackBerry’s valuation appropriately reflects BlackBerry’s near-term fundamentals, opportunities, and potential risks,” said Mr. Treiber. “BlackBerry is trading at 2.4 times FTM EV/S [forward 12-month enterprise value to sales], below cybersecurity peers at 5.4 times. BlackBerry’s valuation is now below its 5-year average of 4.5 times, down from a peak of 10.0 times.”
Elsewhere, other analysts making adjustments include:
* Canaccord Genuity’s T. Michael Walkley to US$4.50 from US$5 with a “hold” rating.
“While management has created a cogent long-term strategy and several parts of the business are turning the corner toward improving growth trends, we await more proof in execution on the new Cybersecurity product roadmap, evidence of cross-selling opportunities emerging, growing software and services revenue, and the potential for upside to our estimates before becoming more constructive on the shares,” he said. “Given the macro environment and elongated deal timing, we are lowering our revenue estimates and maintain our HOLD rating. Given our lowered estimates and the ongoing compression of cybersecurity software multiples, we reduce our price target.”
* Raymond James’ Steven Li to US$7 (the high on the Street) from US$8 with a “market perform” rating.
“In-line 3Q but only because License gave a boost. IoT/QNX was in-line but Cyber 3Q revenues missed consensus and ARR continued to decline. Management commentary on the call implies another decline for Cyber ARR in 4Q but then starting to bottom in F1Q24/F2Q24. Even though UEM is predominantly regulated customers, there is still a meaningful portion that is SMB/mid-market where customers do not prioritize the security aspect as much leading to churn. We have tweaked our revenue forecasts and target lower.”
* CIBC’s Todd Coupland to US$4.20 from US$4.50 with an “underperformer” rating.
* TD Securities’ Daniel Chan to US$3.75 from US$4.25 with a “reduce” rating.
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The announcement of five pipe coating project commitments in South America for a combined value of over $200-million “bodes well” for Shawcor Ltd. (SCL-T) going into the potential sale of its Pipeline & Pipe Services (PPS) segment, said Canaccord Genuity analyst Yuri Lynk, pointing to a stronger outlook for future cash flows.
“We therefore increase the range that we believe PPS could sell for to between $170 million (its net asset value) and $280 million, which at the mid-point implies a $225 million valuation (vs. $180 million previously),” he said.
With that expectation and following the completion of it sale of its Argentine subsidiary, Socotherm, Mr. Lynk emphasized Shawcor now possesses “substantial balance sheet optionality.”
“At the end of Q3/2022, net debt-to-EBITDA (trailing 12 months) stood at 1.46 times, below the company’s 1.5 times target,” he said. “Capital allocation priorities include over $100 million of organic growth opportunities, tuck-in acquisitions, share repurchases, and the reinstatement of a dividend. In this vein, earlier this month the company announced it acquired Kanata Electronic Services, a manufacturer and supplier of specialty cable assemblies and wire harnesses for the nuclear and aerospace industries to be integrated into Shawflex within the Automotive & Industrial segment. Kanata generated $3-million in revenue in the first nine months of 2022. The terms of the transaction were not disclosed.”
Maintaining a “buy” recommendation for the shares of the Toronto-based oilfield services company, Mr. Lynk raised his target to $15.75 from $14.50. The average is $15.69.
Other changes include:
* National Bank’s Michael Robertson to $16 from $14 with an “outperform” rating.
* BMO’s John Gibson to $17 from $15 with an “outperform” rating.
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Following the US$282-million sale of its interests in exploration and development projects in Senegal, Mali and Guinea to Moroccan mining company Managem, a pair of equity analysts on the Street upgraded their recommendations for Iamgold Corp. (IMG-T, IAG-N).
Tuesday’s announcement came a day after the Toronto-based miner announced a deal to give an additional 10-per-cent interest in the Côté Gold Joint Venture to partner Sumitomo Metal Mining Co. Ltd. in exchange for a contribution of approximately $340-million in 2023 to Iamgold’s funding for the project.
“IMG has addressed its significant funding risk; shifting now to execution and delivery of Cote and regaining operational track-record. 2023 will be an important execution year to regain investor confidence,” said Stifel’s Ingrid Rico, moving her recommendation to “hold” from “sell” previously.
Her target for Iamgold shares rose to $3.25 from $2.50. The average on the Street is $3.04.
“Disappointing execution on the construction of the Côté Gold project has been undermining confidence in the company and the future of projections of operational performance,” said Ms. Rico. “With proceeds from asset sales and financing arrangement with JV partner, Sumitomo, the company has addressed its significant funding risk; shifting now to execution and delivery of Côté and regaining operational track-record. We believe 2023 will be an important execution year to regain investor confidence.”
Elsewhere, CIBC World Markets’ Anita Soni moved the miner to “neutral” from “underperformer” with a US$2.10 target, up from US$1.50.
“The added liquidity facilitates the build of the Cote Gold project, which is 70-per-cent complete and on track for early 2024, and ensures the company has the option to exercise its repurchase option on the 10-per-cent interest in Cote Gold,” said Ms. Soni.
Elsewhere, others making changes include:
* Canaccord Genuity’s Carey MacRury to $3.15 (Canadian) from $3 with a “hold” rating.
“With the asset sales and Sumitomo financing agreement, and assuming no further capex increases at Côté, we believe the current funding gap for the construction of Côté has been addressed,” he said. “We now forecast ND/EBITDA peaking at 2.5 times in 2024, versus 4.8 times in 2023 prior to these two funding announcements.”
“We note that the proceeds from the sale of the African assets could be used to help repurchase the incremental 10-per-cent interest sold to Sumitomo, or settle the gold prepay agreement that comes due in 2024 (we believe rolling it forward is another option).”
* Raymond James’ Farooq Hamed to US$2 from US$1.75 with an “underperform” rating.
“Based on the latest guidance for remaining capex at the Cote Gold project and timing of the Sumitomo payments, we believe the proceeds from these transactions along with IAG’s expected OCF in 2023 should be sufficient to fund IAG’s remaining attributable capex for the Cote Gold project (expected to start production in early 2024) while maintaining adequate working capital on the balance sheet thereby removing any near-term overhang of dilutive financing,” said Mr. Hamed.
“Assuming the asset sales close (Rosebel – previously announced and Bambouk) and capex remains on budget, we believe funding risk for IAG at the Cote Gold project has been effectively removed. We have updated our model and increased our valuation multiples to reflect the lower risk. However, we maintain an Underperform rating on IAG as we believe there is still significant risk in delivering the Cote project that still has a year of development work ahead,$1-billion in expected spending ahead of completion and a history of cost over runs.”
* TD Securities’ Steven Green to $4 from $3.25 with a “buy” rating.
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Seeing “significant investor catalysts ahead,” Haywood Securities’ Pierre Vaillancourt raised his recommendation for Canadian Nickel Company Inc. (CNC-X) to “buy” from “hold” previously.
He made the move following Monday’s announcement of the acquisition of a 100-per-cent interest in the past-producing Texmont property situated between the company’s Deloro and Sothman properties south of Timmins, Ont. It is expected to provide “near-term smaller scale production potential” and is seen as “highly complementary” to its flagship Crawford Nickel-Cobalt Sulphide Project.
“Texmont provides an opportunity for CNC to fulfill near term demand from EV consumers, and with smaller scale production potential, offers investors an option in CNC as a future producer, well in advance of what can be expected from the large scale Crawford project,” said Mr. Vaillancourt.
He expects Canadian Nickel to complete its feasibility for Crawford in the first quarter of 2023 with an " ambitious goal of obtaining permits by 2025, leading to first production before the end of 2027.”
“In addition, CNC is in discussions with a strategic investor for a 10-20-per-cent stake which could be announced in 1Q23, as well as potential partners for a processing plant to treat Crawford concentrate,” said the analyst.
He raised his recommendation based on significant share price depreciation (57 per cent year-to-date), an enticing valuation (price-to-net asset value of 1.4 times), a “resurgent” nickel price and “upcoming catalysts.”
Mr. Vaillancourt maintained a $2.50 target. The average on the Street is $3.93.
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Scotia Capital analyst Divya Goyal sees Alithya Group Inc. (ALYA-T) as “one of the up and coming IT Services company in North America with robust growth potential, led by a strong executive management team.”
In a research report released Wednesday titled Promising Future; Lofty Goals, she initiated coverage of the Montreal-based digital strategy and technologies company with a “sector perform” recommendation.
“In recent years, Alithya reported strong growth driven by its organic and acquired revenues, with some recent acquisitions being transformational in nature,” said Ms. Goyal. “We expect the company to realize robust cross-sell synergies from these acquisitions while expanding its business offerings. The company has a growing geographic presence and has established itself as one of the go-to service provider for Microsoft and Oracle solutions across certain key industries like Insurance, Healthcare and Energy. While we believe management has been diligently executing the company’s growth strategy, it currently falls short on profitability resulting in negative free cash flows, as compared to other IT services companies in our coverage.”
The analyst said an improvement in profitability and cash flow generation will be the key factors for a future re-rating.
“Alithya’s ROIC [return on invested capital] has improved from 2 per cent in F2019 to 4 per cent in F2022, and estimated to increase by 600 basis points in F2024, as compared to its WACC [weighted average cost of capital] at 7.5 per cent,” she said. “We believe the company should stay laser-focused on improving the overall business profitability through increased cross-selling efforts while managing its cost base through increased permanent employee base/outsourcing efforts. As per our estimates (incl. no new acquisitions), we expect the company to generate ROIC of 8.5 per cent by F2024 increasing to 11.5 per cent by F2025E.”
Ms. Goyal set a $3 target for Alithya shares, which falls 35 cents below the current average on the Street.
“The company is currently trading at approximately 8.5 times against Q2/24,” she said. “Given the current macroeconomic outlook, we consider this to be a reasonable valuation multiple for the company and have used the same multiple against our NTM [next 12-month] one-year forward estimates resulting in estimated price target of $3.00. We have not factored in any new acquisitions in our financial model and consider our estimates to be reasonable. We believe Alithya has solid growth potential and the company management is well-aligned with shareholder goals. However, as stated above we consider profitability and deleveraging to be two key areas for Alithya to focus on, as we believe these will help the company become free cash flow positive, truly generating value for its new and existing shareholder base.”
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In other analyst actions:
* Following Tuesday’s announcement of its new CFO and a plan to renew its normal course issuer bid, Acumen Capital’s Trevor Reynolds trimmed his target for AutoCanada Inc. (ACQ-T) to $40 from $43 with a “buy” rating.
“ACQ highlights that they haven’t seen the same destruction in used vehicle values and sales volume that has been well documented in the U.S. but do remain cautious at this time,” he said. “While we believe our estimates to be adequately risked, uncertainty clearly remains as to how impactful increasing rates and inflationary pressure will be on consumer demand and pricing. As a result of the uncertainty, we are reducing our target multiple.”
* TD Securities’ Michael Tupholme increased his target for Bird Construction Inc. (BDT-T) to $9 from $8 with a “hold” rating. The average is $9.88.
* TD Securities’ Vince Valentini lowered his Corus Entertainment Inc. (CJR.B-T) target to $4.50 from $5 with a “buy” rating. The average is $3.11.
* Zephirin Group initiated coverage of Greenbank Capital Inc. (GBC-CN) with a “buy” rating and a 80-cent target.
* TD Securities’ Menno Hulshof reduced his Imperial Oil Ltd. (IMO-T) target by $1 to $81, above the $79.39 average, with a “buy” rating.
* BMO’s Ben Pham raised his target for Keyera Corp. (KEY-T) to $34, matching the average, from $33.50 with an “outperform” rating, while CIBC’s Robert Catellier increased his target to $35 from $33 with an “outperformer” recommendation.
* Wells Fargo’s Colin Langan cut his Magna International Inc. (MGA-N, MG-T) target to US$60 from US$62 with an “equal weight” recommendation. The average is US$72.63.
* TD Securities’ Craig Hutchison bumped his Taseko Mines Ltd. (TKO-T) target to $2.50, above the $2.35 average, from $2.25 with a “buy” rating, , while Stifel’s Alex Terentiew raised his target to $2.60 from $2.40 with a “buy” rating.
David Leeder