Inside the Market’s roundup of some of today’s key analyst actions
While rates are remaining high, valuations for Canadian renewable power producers remain “depressed and oversold,” according to National Bank Financial analyst Rupert Merer.
“Our coverage of renewable power developers has performed poorly over the last couple of years, with headwinds from higher bond yields and lower production that resulted from uncooperative weather,” he said. “With rates remaining high, we are lowering our targets to reflect higher bond yield forecasts for the next 12 months. However, we believe that the sector is more oversold now than at any time since we have started covering the stocks, with an average implied cost of equity at about 11.8 per cent, which is high relative to historical levels and relative to the market.”
In a research report released Wednesday titled Rates are staying high and IPP stocks are staying low... for now, Mr. Merer argued growth opportunities in Canada are “better than they have been for years,” bringing the potential for investor gains in the future.
“Over the last couple of years, investors in the renewable power sector had concerns for the return on investment in new renewable energy projects as inflation hit the cost of new projects. However, power prices on new contracts have also increased to compensate for higher equipment costs (power prices on offer are up 40 per cent to 60 per cent in most markets) and returns on growth have recovered. The IPPs with exposure to the Canadian market are well positioned. Canadian power demand is forecasted to double by 2050, and RFPs [request for proposals] for renewable energy and capacity in Canada’s largest provinces appear to have less competition than international markets. So far, NPI, INE and BLX have had success in recent RFPs in Ontario and Quebec for wind power and battery capacity. There are more RFPs to come in Canada, and given the operating scale and strong relationships that the Canadian companies have, we believe they should continue to be successful.”
Given that potentially fruitful backdrop, the analyst touted “attractive” returns to target prices for the companies based on upcoming catalysts.
“With an increase in our 12-month forecast for the U.S. and Canadian 10-year bond yields to 3.7 per cent and 2.9 per cent, respectively (was 3.4 per cent and 2.5 per cent), we increased our target discount rates and lowered targets,” said Mr. Merer. “With this, we moved to Sector Perform on AY. However, we believe the stocks are oversold and should recover over the next year as confidence builds in the outlook for future cash flows and growth. Our top picks on return to target are INE, NPI, PIF and BLX.”
The analyst downgraded U.K.-based Atlantica Sustainable Infrastructure PLC (AY-Q) to “sector perform” from “outperform” after lowering his near-term estimates, citing “limited visibility on growth, an unfinished strategic review, persistent interest rate headwinds and a soft quarter.”
His target slid to US$20 from US$23. The average target on the Street is US$22.28, according to LSEG data.
Mr. Merer also made these other target adjustments:
- Algonquin Power & Utilities Corp. (AQN-N/AQN-T, “sector perform”) to US$6.75 from US$7.25. The average is US$7.67.
- Boralex Inc. (BLX-T, “outperform”) to $39 from $41. Average: $39.67.
- Brookfield Renewable Partners LP (BEP-N/BEP.UN-T, “outperform”) to US$28 from US$31. Average: US$28.18.
- Innergex Renewable Energy Inc. (INE-T, “outperform”) to $15, remaining a Street high, from $16. Average: $11.31.
- Northland Power Inc. (NPI-T, “outperform”) to $32 from $34. Average: $31.82.
- Polaris Renewable Energy Inc. (PIF-T, “outperform”) to $19 from $20. Average: $23.
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While he thinks fundamentals support long-term upside for forest products companies and sees them remaining in “deep value territory,” Raymond James analyst Daryl Swetlishoff reduced his earnings expectations for 2024.
“Once again, the seasonal lumber trade has outperformed the market with lumber up 25 per cent and building materials stocks up 21 per cent (vs the TSX up 17 per cent) since last Halloween,” he said in a Wednesday report. “While typically peaking in February (around Super Bowl) the trade extended into March this year; we expect largely due to weather issues. However, with Southern Yellow Pine (SYP) lumber prices and Spruce-Pine-Fir (SPF) CME lumber futures selling off we expect the trade is getting long in the tooth.”
“Despite the gains, the sector remains undeniably inexpensive with price-to-book valuations underscoring bargain-basement value. In fact, Canfor and Interfor exhibit valuations in line with the Covid-low while only marginally trading above historic troughs observed during the Great Financial crisis (2008). While some investors may opt to reduce exposure, tightening market fundamentals along with cheap absolute and relative valuations support our continued constructive outlook over the next 12-18 mos. Accordingly, we recommend adding to positions should commodity pricing pull back over the summer months.”
The analyst said he’s “cautious” on first-quarter results though his refreshed financial estimates “positioned marginally below consensus estimates for the bulk of our coverage list.”
“Most of the decline can be attributed to lagging SYP lumber markets with the current spread surpassing 5 times historic norms!,” he said. “With current price quotes implying break-even margins for the U.S. South region we expect additional curtailment announcements to stem further declines. Conversely, OSB pricing continues to run ahead of our forecasts leading to a boost to West Fraser’s consolidated EBITDA forecast.”
Given that short-term concern, Mr. Swetlishoff downgraded Interfor Corp. (IFP-T) to an “outperform” recommendation from “strong buy” recommendation. His target for its shares remains $30, which exceeds the consensus on the Street of $28.60.
“Our short-term downgrades notwithstanding, our lumber and OSB supply/demand models predict improved wood products pricing, which when coupled with depressed current valuations backstop an attractive mid-term setup,” he noted. “Home building activity, especially for wood intensive single family starts continued to surprise to the upside and the recent existing home sales data portends improved Repair & Reno (R&R) market potential. On the supply side, we highlight contracting NA shipments combined with reduced Euro imports support 20-35 per cent higher building materials commodity forecasts through 2025. Despite the seasonal rally, wood products stocks continue to trade well below tangible book value; a situation we don’t expect to persist given improving fundamentals. Accordingly, we advocate investors take advantage of potential volatility to position for longer term opportunities.”
“With 50 per cent of wood products earnings coming from rallying OSB, we maintain our Analyst Current Favorite pick West Fraser at Strong Buy. Doman Building Materials also remains a top pick warranting our highest investment rating given its reduced earnings volatility and recent accretive M&A.”
He has a “strong buy” recommendation and US$105 for West Fraser (WFG-N, WFG-T) and a “strong buy” rating and $10.75 target for Doman (DBM-T). The averages are US$101 and $10.29, respectively.
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Stifel’s Martin Landry thinks a lack of brand awareness in the United States suggests a “long growth runway” for Aritzia Inc. (ATZ-T), arguing its future success will be determined by its execution south of the border given “it is a market with significant white spaces for the company”
The equity analyst recently conducted a survey of 425 women in the United States to get insights on the Vancouver-based clothing retailer, finding minimal brand awareness but improving perception.
“Our survey results suggest that Aritzia’s aided brand awareness in the U.S. is low with only 14 per cent of respondents recognizing the brand,” said Mr. Landry. “However, we view this result positively as it suggests a long growth runway for Aritzia in the United States. Further, we believe that continued store network expansion could drive brand awareness higher towards other apparel brands such as Lululemon, H&M, and Zara, which all have aided brand awareness above 50 per cent, according to our survey results.
“80 per cent of respondents who know the Aritzia brand state that their perception has improved in the last 12 months. It is difficult to measure brand momentum, but these results were surprisingly positive and suggest that the Aritzia brand has a strong momentum currently in the United States.”
Mr. Landry found 89 per cent of respondents who already shop at Aritzia are expecting to increase their spending, which he calls “an impressive result,” supporting his view of the momentum the brand currently possesses. He emphasized U.S. store rollout could act as catalyst for future sales growth.
“Amongst the factors, which would lead consumers to spend more at Aritzia, having proximity to a store ranks as the most important factor, according to our survey results,” he said. “This supports Aritzia’s ongoing store rollout strategy with square footage growth of 20-25 per cent in CY2024 driven primarily by 11 to 13 new boutiques, all located in the United States. As new stores open, it could act as a catalyst for new customer growth, potentially leading to an acceleration in comparable sales growth as opening new stores remains Aritzia’s best customer acquisition strategy.”
While his forecast for Artizia’s first-quarter is narrowly lower than the consensus with adjusted earnings per share projected to slid 26 per cent year-over-year to 26 cents (versus the Street’s 32-cent estimate), Mr. Landry expects investor focus to be on fiscal 2025 guidance when it reports on May 2.
“Our FY25 estimates call for an EPS of $1.85, in-line with consensus estimates of $1.84,” he said. “We expect FY25 revenues to grow by 15 per cent year-over-year boosted by an 8-per-cent network expansion and comparable sales growth of 4.8 per cent. We expect EBITDA margins to reach 14.1 per cent, up 480 basis points year-over-year in-line with comments by management on margin expansion potential. We see downside risks to our comparable sales assumption and upside potential to our margin assumptions.”
“While FY24 has been a difficult year for Aritzia, with 600 basis points of margin pressure stemming from various factors, we believe these issues are not permanent. Hence, in FY25, Aritzia expects adjusted EBITDA margin to begin its recovery and increase by 500 bps to 14 per cent. However, looking post FY25, we see a potential for EBITDA margin to return to levels realized in FY22 of 19 per cent, which aligns with management FY27 targets. This could potentially translate into an EPS above $4.00 per share, more than a double from our current FY25 EPS estimate.”
Reiterating his “buy” recommendation for Aritzia shares, he raised his target by $8 to $42, matching the average on the Street.
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While he continues to expect a “solid” 2024 business performance from Indiva Ltd. (NDVA-X), Echelon Partners analyst Andrew Semple sees a lack of regulatory reform on edible cannabis products and the launch of a strategic review adding “uncertainties” to its investing case, leading him to lower his recommendation for its shares to “hold” from “speculative buy” previously.
On Tuesday, the London, Ont.-based cannabis operator announced it has retained SSC Advisors as its financial advisor to in “the evaluation of potential strategic alternatives intended to maximize shareholder value, including but not limited to, financing alternatives, a merger, amalgamation, plan of arrangement, consolidation, reorganization or other similar transactions.”
“We continue to forecast Indiva navigating through the tough market environment in 2024 and exiting the year in a stronger position,” Mr. Semple said. “However, recent updates including the Health Canada report failing to recommend an increase in THC limits for edible products, a tough capital markets environment for raising capital, and the commencement of a strategic review at a lower equity valuation increase uncertainties for the year ahead.
“As such, we decided to move our rating to Hold (prev. Speculative Buy), considering the risk/reward dynamic has shifted unfavourably due to the above factors.”
The analyst said the outcome from the Health Canada report could have “represented a meaningful catalyst for the business, as well as allowing for additional room for potential dilution.” He said that lack of reform had the biggest impact on his bullish stance.
“Simply increasing the THC limit in edibles products from the restrictive 10mg cap could have easily doubled the market demand for edibles given this category is typically 12-15 per cent of sales in mature U.S. states compared to 5-6 per cent of sales in Canada,” said Mr. Semple. “With 90 per cent of Indiva’s revenues attributable to edible products, this would have been a material driver for the business.”
Currently the lone analyst on the Street covering the stock, he cut his target to 12 cents from 15 cents.
“We expect operations to perform well in Q423 and in 2024,” he said. “Indiva will benefit from innovative in-house product launches. Management is targeting Q423 sales above $10-million, and our Q423 EBITDA forecast is $1.18-milion. At this level, Indiva should achieve breakeven positive cashflow from operations in Q423 (prior to NWC changes). With Indiva on the cusp of operating cashflow generation, further revenue growth should result in meaningful operating leverage to cashflow. We still see underlying value in the business that is above its current valuation.”
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While ATB Capital Markets analyst Tim Monachello expects Mattr Corp.’s (MATR-T) first quarter of 2024 to be “modestly weaker” than the end of the last fiscal year, he thinks it will represent a a long-term EBITDA floor as it “breaks through transitory headwinds and catches medium-term tailwinds from in-flight capacity additions that should be commissioned beginning in H2/24.”
He resumed coverage of the Toronto-based materials technology company, formerly known as Shawcor Ltd., on Wednesday following a $175-million offering of unsecured 7.25-per-cent notes maturing in 2031 that will replace its $150-million 9-per-cent 2026 issue. He called the refinancing positive as it “secured a materially lower fixed cost of debt as it embarks on its ambitious growth trajectory to organically double revenue through 2030.”
“We expect a relatively in-line quarter from MATR when it reports Q1/24 results on May 14, 2024,” said Mr. Monachello. “The company guided to results being modestly lower in Q1/24 from Q4/23 levels; that said, we believe Q1/24 adj. EBITDA is likely to set a resilient long-term floor as MATR pushes past transitory headwinds and simultaneously catches long-term tailwinds from in-flight capital expansion projects in 2024. Specifically, management has visibility to a ‘significant upward shift’ in Q2/24, and expects that H2/24 should be stronger than H1/24 given the planned commissioning of MATR’s two new Composite Technologies manufacturing facilities with two additional Connection Technologies facilities coming online in late 2024 and early 2025. As such, we believe all eyes should be on the progress of these projects, the expected trajectory of earnings through year-end, and any changes to MATR’s M&A plans that are likely to feature the acquisition on a U.S.-based wire and cable platform at some point in 2024. In terms of shareholder returns, we understand MATR intends to renew its NCIB when it is eligible in June 2024, and continue to be active in its share repurchase program at perhaps a $10-million-per-quarter clip.”
He has an “outperform” recommendation and $23.25 target for Mattr shares. The average on the Street is $22.96.
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In a separate report, Mr. Monachello called Schlumberger Ltd.’s (SLB-N) US$8-billion acquisition of ChampionX Corp. (CHX-Q) “a clear positive” for CES Energy Solutions Corp. (CEU-T).
Shares of the Calgary-based company surged over 9 per cent on Tuesday following the premarket announcement of the all-stock transaction for ChampionX, which is largest purveyor of production chemicals globally and the largest competitor to CEU’s North American production chemicals business.
“CEU currently trades at 5.4 times 2024 estimated EV/EBITDA (5.2 times EV/EBITDAS) vs CHX at 9.9 times (based on SLB closing share price and a 0.735 exchange ratio),” said Mr. Monachello. While we believe there are a number of fundamental factors that justify some premium for CHX vs CEU, we believe a roughly 82-per-cent market premium provides a strong upside marker for CEU investors. Our sum-of-parts analysis (see suggests that even provided conservative assumptions, CEU should justify a valuation multiple in the 5.5 times-6.0 times range (the range we employ within our formal valuation), and in less conservative scenarios, we believe CEU could justify up to a 7.0-8.0 times multiple. This suggests a per share equity valuation in the $5.60-$8.15/share range. At its current price, our modeling suggests CEU offers 10-per-cent and 14-per-cent FCF yields in 2024 and 2025 (after growth capex and working capital investment, before distributions and repurchases).”
”Given that SLB was not materially involved in North American production chemicals the competitive landscape should be largely unchanged; that said, CEU has historically had success taking share from larger more internationally focused peers as CEU’s go-to-market strategy is rooted in its North American focus and ability to nimbly provide high levels of customer support that larger multi-national competitors have struggled to compete with. As a marginal negative, the acquisition of CHX will extinguish the only suitable public peer for CEU.”
Mr. Monachello also emphasized TSX Composite Index inclusion is also in CES’s “cross hairs.”
“Based on current market valuations, our modeling suggests CEU is priced at just below the level required for TSX index inclusion (our calculations suggest $5.28/share). If CEU shares can surpass this threshold before the June rebalancing it could offer a medium-term catalyst for funds flow to CEU shares,” he said.
Maintaining an “outperform” recommendation for its shares, he increased his target to $6.50 from $5.25. The average is $6.08.
Elsewhere, Stifel’s Cole Pereira raised his target to $7.50 from $5.50 with a “buy” rating.
“While CHX is significantly bigger, we view this as reinforcing the thesis laid our in our recent OFS sector note that valuations need to move higher to reflect the improved earnings stability for the sector, reinforcing further valuation upside for CEU,” said Mr. Pereira. “CEU currently trades at 4.9 times 2025 estimated EV/EBITDAS, and re-rating to 6.0-8.0 times would imply an equity value of $6.73-9.63/sh, or 30-87-per-cent potential upside. Our CEU estimates are unchanged, but we are increasing our 2025E EV/EBITDAS target multiple to 6.5 times from 5.1 times to reflect improving peer valuations. This increases our target price to $7.50/sh from $5.50/sh, while we reiterate our Buy rating and our view that CEU represents one of the best ideas in the sector.”
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In other analyst actions:
* JP Morgan’s Sebastiano Petti cut his targets for BCE Inc. (BCE-T) to $47 from $54 and Telus Corp. (T-T) to $24 from $27 with “neutral” recommendations for both. The averages on the Street are $54.29 and $26.19, respectively.
* Eight Capital’s Adhir Kadve raised his East Side Games Group Inc. (EAGR-T) to 90 cents from 55 cents with a “neutral” rating. The average is $1.83.
“East Side Games Group reported a mixed set of results in Q4, with revenues continuing to come in below our and consensus expectations, but margins materially outperforming,” said Mr. Kadve. “Top-line performance continues to be impacted by a lack of game launches and lower user acquisition (UA) spending by ESGG. To that end, the company saw revenue decline by 25 per cent in F23, and the company slashed UA spending in F23 by 39 per cent. On profitability, recall that the company had significant restructuring through H2/F23, which drove the EBITDA beat and is expected to continue to yield benefits in F24. The company will continue to rationalize UA spending, and thus we see revenues remaining flat year-over-year and the company maintaining its profitability orientation.”
* Scotia’s Kevin Krishnaratne lowered his target for Enthusiast Gaming Holdings Inc. (EGLX-T) to 35 cents from 50 cents with a “sector perform” rating. The average is 82 cents.
“While we fully agree with management’s decision to focus on its owned and operated properties to drive a significantly better margin profile (we estimate GM-percentage moving to 60 per cent in CY24 vs. our prior estimate 40 per cent) alongside meaningful reductions to its cost base (25-per-cent headcount reduction + exit of running ad tech infrastructure on its own), the impact of such changes won’t start to be evident until at least Q2, with a clearer picture more likely in Q3/Q4,” he said. “Our revenue forecast moves meaningfully lower on mix shift, with GP estimates moving down more modestly and Adj. EBITDA profits still in sight for CY24 (more a 2H story). Pursuant to changes to our forecast and a lowering of our target multiple to 0.7 times 2025 GP (vs. 1.0 times previously) on elevated execution risk on the strategy shift near term, our target moves to $0.35.”
* Desjardins Securities’ Alexander Leon, currently the lone analyst covering Inovalis Real Estate Investment Trust (INO.UN-T), reduced his target to $1 from $1.25 with a “hold” rating.
“INO reported 4Q23 operating results after market close on March 28 which were below our expectations,” he said. “Total portfolio occupancy continues to trend lower, and progress on the asset recycling program was limited; however, management is beginning to execute on the simplification of the corporate structure. Our revised forecast continues to reflect conservative assumptions and excludes any asset sales or capital redeployment—execution provides upside.”
* Canaccord Genuity’s Roman Rossi cut his NG Energy International Corp. (GASX-X) target to $1.40 from $1.50, keeping a “buy” rating. The average is $1.58.
David Leeder