Inside the Market’s roundup of some of today’s key analyst actions
Analysts were taken by surprise after The Globe and Mail was first to report late Tuesday that Laurentian Bank of Canada (LB-T) is undergoing a strategic review to maximize stakeholder value and possibly sell itself.
In reaction to the news, which was later confirmed by Laurentian, National Bank of Canada raised its price target to C$51 from C$39. Veritas Investment research upgraded its rating to a “buy”, with a price target of $42. CIBC’s price target went up to $60 as it upgraded the stock to an “outperformer” rating. And Cormark Securities set a $43 price target while it upgraded its rating to “buy” from “market perform.”
The average analyst target on the Street is now $42.69, according to Refinitiv Eikon data, up more than $3 from before the news hit and close to where the stock was trading Wednesday afternoon. That’s up about 27% on the day.
Views differed significantly on whether a transaction was likely to be concluded.
Desjardins Securities analyst Doug Young, in a note released late Tuesday, said he sees the potential sale “as slightly positive” for the bank.
“While acquiring LB could make financial sense for most of the Big 6 banks, it is unclear whether any of them would benefit from this deal strategically,” Mr. Young said.
Mr. Young, for now, is keeping a “hold” rating on the stock with a C$35 price target.
Analysts at National Bank of Canada thought differently. They said that they expect every “big-6 bank” of the country to be interested, as a deal is likely to boost earnings of each of the lenders.
“In our view, BNS (desire to reduce International segment proportional contribution) and TD (facing questions about future capital deployment) are the most motivated buyers,” National Bank analyst Gabriel Dechaine said in a note.
Cormark Securities analysts said they see Bank of Nova Scotia and Canadian Imperial Bank of Commerce as the “most plausible potential acquirers” of Laurentian Bank.
Stifel analyst Mike Rizvanovic said a price tag in the C$1.8-billion to $2.2-billion range might be reasonable. This “at the mid-point translates to ~C$45/sh, a 38% premium to the most recent closing price. That would imply a price to book value multiple of ~0.75x, which we believe is reasonable given LB’s current return on equity of ~8.0% (note that Home Capital sold at 1.09x BV and had a higher ROE in the ~11% range).”
CIBC analyst Paul Holden, in a note published before markets opened this morning, attempted to put a value on a potential transaction as well. Prior to today’s stock move, Laurentian Bank was trading at 0.56x price to book value. “Given the historical range for P/BV (1.0x-1.2x for much of 2010-2017) and recent transactions (Home Capital Group at 1.1x) we would not be surprised to see an offer price of around 1.0x P/BV or at least close to. Upside at 1.0x P/BV is 78% and upside at 0.9x is 61%,” he said. For his part, he expects multiple interested bidders.
Then there was Scotiabank analyst Meny Grauman, who expressed doubt that any deal could get done at all.
“Although there is probably some upside to the current share price if a deal can get done, we are not at all sure that it can,” Mr. Grauman said in a note to clients. “For a long time now we have believed that LB was in a tough strategic position — not a Big 6 bank and not a tech-enabled neo bank and that view still holds. Furthermore, as the sale of HSBC Canada illustrates in-market deals tend to come with significant expense synergies that can make a transaction very accretive. However, we believe that the strategic rationale for acquiring LB is not very strong, and any deal for the bank must contend with significant political and retention risks given the regional dynamics of the country.”
This view was echoed by BMO analyst Sohrab Movahedi. “All the large banks in our coverage universe have the financial flexibility to make the case for a strategic tuck-in acquisition of LB’s size, but what may prove challenging is making the case such an acquisition would be a strategic priority at a time of stricter regulatory capital requirements,” the BMO analyst said.
Several analysts made significant cuts to their price targets on Aritzia Inc. (ATZ-T) after the clothing retailer took them off guard Tuesday with a cut to its forward guidance.
Aritzia reported solid fiscal first quarter 2024 results, with net revenue of $463-million beating the Street consensus by $1-million, and adjusted EBITDA of $32-million also $1-million ahead of the Street.
But the good news ended there. Slower store traffic during the first week of June and other factors led the company forecasting revenue for the second quarter of fiscal 2024 to be flat to slightly down vs. last year’s $526 million, while gross margin is expected to decline 750 basis points year over year (an incremental 100 bps worse than previously expected) and selling, general and administrative expenses as a percentage of revenue is projected to decline 550 basis points year over year (an incremental 150 basis points worse than expected).
That guidance, according to analysts, means adjusted EBITDA for the fiscal second quarter is projected at about $19-million, well below the consensus forecast of $29-million.
Canaccord Genuity cut its target price to C$37 from C$50, CIBC cut its target to C$30 from C$44, RBC cut its target price to C$46 from C$57, BMO cut its target price to C$37 from C$50, Stifel GMP cut its target price to C$40 from C$50 and TD Securities cut its target price to C$32 from C$50.
TD also downgraded its rating on Aritzia to “hold” from “buy”.
The average analyst price target is now C$37.50, down from $50.14 a month ago.
“All told, we acknowledge that the quarter has created an added element of uncertainty in the near-term, with demand expectations clearly lower than they were about three months ago,” commented Canaccord analyst Derek Dley.
“Having said that, we remain optimistic about Aritzia’s growth prospects beyond F2024, with new boutique openings weighted towards the end of the year and 20% square footage growth slated for F2025, along with higher levels of innovation slated to return to Aritzia’s assortment for the Spring 2024 selling season. Though we imagine uncertainty surrounding demand will keep some investors on the sidelines in the near-term, Aritzia’s medium-to-long term growth prospects keep us BUY-rated,” Mr. Dley said in a note to clients.
RBC analyst Irene Nattel, who continues to rate the retail “sector perform”, also expressed some optimism about the company’s longer-term outlook despite near-term challenges.
“Although FQ1 results were in line with expectations, slowing consumer demand/downward revision to guidance due to multiple cost headwinds, many of which should be transient, will likely further weaken investor confidence and conviction to own,” Ms. Nattel said in a note to clients.
“But we think long-term organic growth opportunity for ATZ is virtually unmatched in the space, underpinned by accelerating brand penetration and magnitude of store growth runway in the US, growth of omnichannel and expansion into new categories,” she said.
BMO analyst Stephen MacLeod, meanwhile, said shareholders may have to sustain more pain in the short-term. “Management has identified some levers to pull around new product innovation, driving economies of scale, completing infrastructure investments and pursuing about $60-million in cost savings. However, we believe the stock will remain under pressure in light of moderating sales and margin headwinds,” he said.
CIBC upgraded MTY Food Group Inc. (MTY-T) to “outperformer” from “neutral” while raising his price target to C$75 from C$69 in the wake of the company’s second quarter financial results.
MTY reported normalized adjusted EBITDA of $74.6-million, well ahead of consensus of $65.5-million. Revenue of $305-million was ahead of Street forecasts of $278-million.
CIBC analyst John Zamparo said the upgrade reflects “slighter higher” earnings estimates and an increased target multiple, as he now sees the stock going for 18 times earnings, up from 17.
“We believe MTY’s potential achievement of positive net unit growth should support a re-rate and add incremental investors,” Mr. Zamparo said in a note to clients. “Although this achievement may take a few more quarters, this development would represent a step-change versus years past. Moreover, the business’ largest banners are performing admirably, and M&A should return as a likely driver next year, as leverage declines to sub-3x. If the stock can feature low-single-digit unit growth, low- to mid-single-digit comp growth and also growth from acquisitions, then we believe MTY should trade measurably higher than its historical figure of 16x. We consider MTY to be well positioned for an ongoing recessionary consumer environment.”
There were other analysts raising price targets as well: National Bank of Canada raised its target price to C$70 from C$69, RBC raised its target price to C$71 from C$69, and TD Securities raised its price target to C$70 from C$67.
The average analyst price target is now C$72.79, up from $71.07 a month ago.
“We consider results to be solid given good performance across most key metrics,” National Bank analyst Vishal Shreedhar said in a note to clients. He is maintaining an “outperform” rating.
“We remain constructive on MTY given attractive valuation, expectations of improving operational performance (digital sales, menu innovation, marketing, data analytics), and medium-term supportive capital allocation outcomes such as acquisitions and potential NCIB. That said, we also acknowledge heightened risk related to the macroeconomic backdrop,” Mr. Shreedhar said.
Analysts are reacting this morning to the announcement Tuesday that Alberta-based energy producer TransAlta Corp. (TA-T) will acquire the outstanding common shares it does not already own of TransAlta Renewables Inc. (RNW-T) in a cash-and-equity deal valued at $1.38-billion.
Credit Suisse cut its target price on TransAlta Renewables to C$13 from C$14.5 and downgraded its rating to “neutral” from “outperform”. Atb Capital Markets also cut its target price on TransAlta Renewables to C$13 from C$14 and changed its rating to “tender” from “sector perform”.
Credit Suisse analyst Andrew Kuske called it a “somewhat long-awaited effort” to align the two companies closer together.
“The nature of the transaction is rather unique, in part, given the interplay between the two TransAltas at multiple levels. As a result, we don’t foresee a competitive offer for RNW and, perhaps more importantly, transactional dynamics look additive to TA – lessening the issue of vulnerability from an extended offer,” Mr. Kuske said in a note to clients. “Very simply, the overhang issues associated with both RNW and TA (relationship specific along with financial and operational for RNW) look collectively positive – albeit raise questions of renewable valuation given the new mark.”
Raymond James analyst David Quezada also reduced his price target on TransAlta Renewables, to $13 from $15.50.
“Given RNW’s rising cash tax profile (an incremental $50-55 mln in costs for 2024), modest growth outlook, and elevated payout ratio, we believe the timing for majority shareholder TransAlta (TA-TSX) to consolidate its ownership in RNW (Market Perform) makes logical sense,” said Mr. Quezada. “While the $13.00 per RNW share being offered is below our price target and equates to an 8.0x 2024 EV/EBITDA, which is a discount to recent transactions, we also see little potential for another bidder and therefore recommend investors tender shares.”
BMO analyst Ben Pham reiterated a C$20 price target on TransAlta (TA) and also took a favourable view of the transaction.
“Not only is the anticipated free cash flow per share accretion higher than what we initially expected, it reinforces our view that the market should gradually shift to a consolidated SOTP [sum-of-the-parts valuation] analysis for TA once the RNW overhang clears,” Mr. Pham said in a note. “Our net asset value still points to $20/sh, meaningful upside from current levels. With the attractive valuation (~35% discount to our coverage) and our expectation for no superior proposal to emerge for RNW, we maintain our outperform rating.”
The average analyst price target on TransAlta Renewables is now $12.62.
“High Tide is currently the leading non-franchised cannabis/accessory retailer in Canada, utilizing a retention-oriented discount loyalty program that has already amassed greater than 1 million members,” Mr. Bottomley said. “With a strong consumer following, High Tide’s retail locations have consistently outperformed provincial per-store averages in what is still a saturated Canadian landscape.”
He noted the company currently operates 153 retail locations, spanning five Canadian provinces, with a leading national retail market share that sits at more than 8 per cent of Canada’s C$4.7-billion legal cannabis market.
He said he likes High Tide for its differentiated exposure in a saturated Canadian cannabis retail sector.
“On the back of a focused M&A strategy and ongoing customer engagement via growth in its loyalty plan membership base, High Tide has been able to consistently outperform overall macro-level trends. At current run-rates, we estimate that High Tide’s 153 retail locations are currently producing ~C$395M in revenues – or close to C$2.6M per store (>2x the average dispensary in Canada),” the Canaccord analyst said.
“As High Tide is not Canadian Licensed Producer (LP) or involved in the direct cultivation/production of cannabis, we believe the company represents a differentiated opportunity in the Canadian landscape as most LPs (largely wholesalers) have struggled with achieving/maintaining profitability given industry pricing pressures and infrastructure saturation throughout the country.”
The average analyst price target is C$5.88.
In other analyst actions:
Baytex Energy Corp (BTE-T): RBC cuts target price to C$8 from C$9
Canadian Natural Resources Ltd (CNQ-T): RBC cuts target price to C$82 from C$85. UBS also initiated coverage with a “buy” rating and C$90 price target, saying the company has the “best in class” upstream assets, with the highest shareholder returns.
Canadian Pacific Kansas City (CP-T): Bernstein raises target price to C$111 from C$108
Cenovus Energy Inc (CVE-T): RBC cuts target price to C$27 from C$28. UBS also initiated coverage with a “neutral” rating with a price target of C$26, saying that while the company has competitive oil sands assets, its downstream operations need improvement.
Imperial Oil Ltd (IMO-T): RBC cuts target price to C$75 from C$78. UBS also initiated coverage with a “buy” rating and C$80 price target, commenting that the company’s integrated operations “allows for full chain margin capture.”
MEG Energy Corp (MEG-T): RBC cuts target price to C$24 from C$25
Suncor Energy Inc (SU-T): RBC cuts target price to C$49 from C$51. UBS also initiated coverage with a “buy” rating and target price of C$48. UBS said Suncor is the “best downstream operator” and that its upstream cash costs are expected to come down
Vermilion Energy Inc (VET-T): RBC cuts target price to C$22 from C$24
Netflix Inc (NFLX-Q): UBS raises target price to US$525 from US$390 in a report titled “positive paid sharing data supports accelerating growth”
Draftkings Inc (DKNG-Q): Benchmark raises target price to US$32 from US$26. BofA Global Research raises price objective to US$35 from US$25 and upgrades rating to “buy” from “neutral”
Tesla Inc (TSLA-Q): Citigroup raises price target to US$278 from US$215