Inside the Market’s roundup of some of today’s key analyst actions
Following weaker-than-anticipated second-quarter financial results and a reduction to its full-year guidance, National Bank Financial analyst Cameron Doerksen lowered his recommendation for TFI International Inc. (TFII-N, TFII-T) to “sector perform” from “outperform,” seeing potential gains from the bankruptcy of U.S. giant Yellow Corp. (YELL-Q) already baked into its share price.
“To be clear, we remain positive on the long-term prospects for TFII as we continue to see earnings growth tailwinds for TFII in 2024 and beyond driven by margin improvement in the U.S. LTL segment, and we also believe 2024 will offer a better freight backdrop,” he said in a research note released Wednesday. “Furthermore, we see upside for TFII from additional M&A, both the tuck-in variety as well as potentially a larger scale acquisition. Finally, we do expect TFII will see incremental volume tailwinds stemming from the market exit of U.S. LTL carrier Yellow Corp.
“However, TFII shares are up approximately 28 per cent so far in 2023 (S&P/TSX up 6 per cent) and have made a significant move higher in recent weeks (20 per cent plus since mid-July) as the market looks to potential benefits accruing to all LTL carriers due to Yellow Corp’s ceasing of operations this past weekend. We expect TFII will capture incremental volumes and should benefit from firmer pricing in the LTL segment, but we believe much of this is already reflected in the stock (we note that our 2024 forecast now assumes a 13-per-cent increase in LTL segment revenue for TFII and a significant improvement in margins). In the meantime, the broader trucking market, both in the U.S. and Canada, may now be in a bottoming phase, but we still expect a challenging freight backdrop for at least the next two quarters.”
On Monday after the bell, the Montreal-based company reported revenue of US$1.791-billion, below both Mr. Doerksen’s US$2.036-billion estimate and the consensus forecast on the Street of US$1.8881-billion. Adjusted earnings per share of US$1.59 also missed projections (US$1.64 and US$1.77, respectively).
“As evidenced by Q2 results, freight markets remain challenging overall and are likely to remain so in the near term,” the analyst said. “We nevertheless still expect TFII to see earnings tailwinds in 2024 and beyond from expected margin expansion in the LTL segment. We also expect TFII to continue to be active on M&A (3 tuck-ins closed in Q2).”
While management lowered its 2023 EPS guidance to US$6-US$6.50 from US$7-US$7.25, below Mr. Doerksen’s previous estimate of US$6.56 and the consensus of US$6.77, Mr. Doerksen emphasized the new range does not incorporate the recent gains from Yellow Corp.’s failure, noting “there is likely upside to the 2023 guide.”
“The exit from the market of Yellow Corp. will likely lead to some share gains for TFII as shippers look to move volumes to other large national LTL players,” he said. “TFII’s U.S. LTL operations have recently been running at 23,000 shipments per day, but management noted that in recent days, shipments have increased to 26,000 and revenue per shipment has firmed about 3.5 per cent since early July. If these revenue trends hold, there should be a nice revenue tailwind for TForce Freight in the coming quarters.”
Mr. Doerksen raised his target for TFI shares to US$183 from US$165. The average target on the Street is currently US$140.21, according to Refinitiv data.
Elsewhere, other analysts making target adjustments include:
* Desjardins Securities’ Benoit Poirier to $192 (Canadian) from $171 with a “buy” rating.
“We see TFII’s available capacity as a significant competitive advantage vs its LTL peers,” said Mr. Poirier. “That being said, we are conservatively forecasting the known increase to 26,000 shipments per day (driving US$244-million of incremental revenue) and a 3-per-cent US LTL price increase (driving US$100 of incremental revenue). We now estimate that TFII will end 2023 with adjusted EPS of US$6.35 followed by US$8.22 in 2024 as its OR further improves and the pricing/volume gains take effect.”
“TFI remains our favourite transportation name. We continue to like the name as we see sizeable potential opportunities for value creation as management executes on its capital-deployment strategy over the long term (M&A, dividend and buybacks).”
* RBC’s Walter Spracklin to US$155 from US$120 with an “outperform” rating.
“While TFII’s stock is hitting all-time highs despite a highly challenging macro environment; we believe this is warranted and see further upside on the basis of: 1) the expectation for up to $500-million in tuck-in transactions in 2023 (with balance going to buyback) — up from $300-million prior; 2) $2-billion-plus in dry powder for a larger transaction, expected in 2024; 3) management’s demonstrated track record in successfully executing on M&A deals; 4) a fundamentally more attractive LTL sector; and 5) unique revenue growth opportunity stemming from Yellow shut-down,” said Mr. Spracklin.
* Scotia’s Konark Gupta to $180 from $165 with a “sector perform” rating.
“The quarter played out as we had anticipated with an EPS miss and another guidance cut due to the ongoing freight recession,” he said. “However, guidance appears conservative as it excludes potential LTL tailwinds from Yellow’s failure and relatively visible tuck-ins, which causes us to remain above the top end of guidance range and very modestly increase 2024/2025 estimates. Our key assumptions in largely maintaining estimates are that TFII gains/retains market share from Yellow with margin accretion and improves the U.S. LTL OR to low-80-per-cent’s by 2025. As such, we see a path to full $8.00 EPS recovery potentially in 2024, with the help of macro and future tuck-ins. The stock already appears to be pricing in most of the potential EPS rebound though, which keeps us on the sidelines with our Sector Perform rating.”
* BMO’s Fadi Chamoun to US$130 from US$125 with a “market perform” rating.
“TFII has begun to see volume acceleration from the closure of YELL (not covered), which should help to improve U.S. LTL network density and operating ratio. However, with a challenging freight backdrop for F2023, the company has reduced its full-year earnings expectations,” said Mr. Chamoun.
* CIBC’s Kevin Chiang to US$156 from US$139 with an “outperformer” rating.
“Our main takeaway from TFII’s Q2 results and earnings call is that TForce Freight (TFF) is building solid momentum even in a challenging freight environment. We remain optimistic that TFII will benefit from the disruption in the U.S. LTL industry, which should help accelerate the restructuring within TFF,” said Mr. Chiang.
* TD Securities’ Tim James to US$158 from US$144 with a “buy” rating.
* JP Morgan’s Brian Ossenbeck to US$150 from US$130 with an “overweight” rating.
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National Bank Financial analyst Dan Payne thinks Strathcona Resources Ltd.’s proposed acquisition of Pipestone Energy Corp. (PIPE-T) in an all-stock deal that will value the combined business at $8.6-billion “sits relatively in line with recently historical transactions and ultimately implies fair value for the entity.”
That led him to move his recommendation for shares of Pipestone to “tender” from “sector perform” previously, calling the transaction, which will create Canada’s fifth-largest oil producer, “a logical conclusion for the company.”
“Exposure to the pro-forma business could offer long-term diversity and option value across the basin, with that value to be better distilled upon close and visibility through guidance (valuation estimated within); we are changing our rating on PIPE,” said Mr. Payne.
He lowered his target for Pipestone shares to “an at-the-market level” of $2.70 from $3.50. The average target on the Street is $3.39.
“The implication of this transaction and others recently noted suggests increasing tension for consolidation of Montney/Duvernay assets, with a number of new entrants and private capital proving increasingly active in the fairway,” said Mr. Payne. “This should hold relatively positive read-through to the likes of CR/ KEC/KEL/LGN (largely trading at 3-4 times) amongst others (AAV/BIR/NVA, etc.) as the narrative is compounded by consolidation for LNG off-take (LNG Canada consortium needs molecules).”
Elsewhere, RBC’s Luke Davis downgraded Pipestone to “sector perform” from “outperform” with a $2.75 target, down from $3.50.
“The deal was completed at market, well below recent Montney transactions, though we see strong strategic merit with the Pipestone assets likely better suited within a larger entity,” said Mr. Davis.
“In our view, Pipestone’s asset base is better suited within a larger well-capitalized entity with the pro-forma business checking the box on size/scale for market relevance. In addition, Pipestone’s Montney gas/condensate volumes should serve as a natural hedge to Strathcona’s heavy oil portfolio. Strathcona has outlined a staged approach to growth in reaching up to 325 kboe/d (inclusive of well-defined greenfield opportunities), alongside further equity funded M&A, which we expect management will use to increase the public float.”
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“Resetting expectations” after the updated plan for its Las Chispas mine in Mexico revealed lower production, reduced reserves and higher costs, RBC Dominion Securities analyst Michael Siperco downgraded SilverCrest Metals Inc. (SIL-T) to “sector perform” from “outperform”
“We continue to see Las Chispas as a high margin mine, generating significant near term FCF at an in-line relative valuation, however we think investors will need more visibility into resource/production growth before the stock can trade again at a material premium to peers,” he said.
“Las Chispas is still a solid, high margin mine post-update, and the rampup to date (with 2Q results 9 Aug) has been inline with our forecasts while generating positive FCF. Even on our reduced production forecasts, at spot prices we see $60-70-million per year of mine site FCF generation, with net cash of $50-million expected exiting 2Q23 helping to support the stock at these levels.”
Mr. Siperco lowered his target to $7.50, below the $10.44 average, from $12.
“Our reduced target multiples reflect lower visibility into upside vs. the original plan, including potential for mill expansion/higher production, higher grade production, and mine life extension,” he added.
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A series of equity analysts on the Street raised their financial projections and target prices for shares of EQB Inc. (EQB-T) following the release of stronger-than-expected results, raise to its 2023 guidance and dividend increase after the bell on Tuesday.
The Toronto-based firm logged adjusted earnings per share of $2.98, easily exceeding the consensus projection on the Street of $2.58 as loans under management jumped 3 per cent from the previous quarter and net interest margins grew 0.07 per cent. EQB now expects diluted earnings per share growth of 18-22 per cent, up from its previous 10-15 per cent forecast.
It also bumped its quarterly dividend by 3 per cent to 38 cents per share.
“EQB delivered a record quarter for EPS, which was comfortably above our forecast and consensus,” said TD Securities’ Graham Ryding. “NIM was stronger than expected, up 7 basis points quarter-over-quarter. Noninterest income was also strong, and non-interest expenses were lower than expected. Somewhat offsetting were higher-than-expected PCLs, and arrears moving materially higher q/q. Our revised estimates are towards the high end of guidance (revised higher).”
“NIM continues to surprise to the upside, which is driving our higher earnings forecasts toward the high end of guidance. Loan growth is fairly muted, as expected, for personal, but commercial loan growth is solid and offsetting. Credit trends appear to be normalizing, but EQB has a strong track record of managing credit, in our view.”
Mr. Ryding raised his target for EQB shares to $90 from $88, keeping a “buy” rating. The average target is currently $90.88.
Others making changes include:
* RBC’s Geoffrey Kwan to $97 from $91 with a “buy” rating.
“Despite the uncertainty regarding the near-term outlook for the housing/mortgage market, we think EQB continues to execute well on its growth strategy. Within our small cap coverage, EQB remains our best idea,” said Mr. Kwan.
* National Bank’s Jaeme Gloyn to $90 from $88 with an “outperform” rating.
“Another quarter of surprise NIM upside, solid non-interest income, and stable expense growth that drove upgraded guidance will take the shares higher, in our view,” he said. “Our upward revised estimates and PT reflect this outlook (as well as EQB’s shift to an Oct. 31 year-end). On the other hand, the PCL miss and slight cracks in the credit picture will temper some of the share price upside.”
* Raymond James’ Stephen Boland to $98 from $89 with an “outperform” rating.
“EQB’s diversified funding model and growing retail deposit base has been the key differentiator for the bank this year,” said Mr. Boland. “As many larger banks have seen NIM pressures due to rising deposit costs, EQB’s NIM has expanded 12 basis points year-to-date (7bp of expansion in 2Q). EQ Bank — a zero-fee retail banking solution which has been critical to the company’s recent success — has seen its customer base grow 31 per cent year-over-year to 367,790. This level of growth is remarkable considering many smaller banks have historically struggled to take deposit market share from the Big 6 in Canada. EQ Bank looks well poised for further growth in 2H23 following the company’s recent launch in Quebec and continued benefits from the ‘Make Bank’ marketing campaign.”
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While he deemed Neighbourly Pharmacy Inc.’s (NBLY-T) first-quarter 2024 financial results as “solid, highlighted by a strong sequential acceleration in pharmacy same-store sales growth,” Desjardins Securities analyst Chris Li said he’s continues to “prefer to wait for better visibility on some of the catalysts” before becoming bullish on its shares.
The Toronto-based company surged 10.4 per cent on Tuesday after it released better-than-anticipated results, driven by overall same-store sales growth of 4.1 per cent that topped Mr. Li’s 2.8-per-cent estimate.
“NBLY’s results reflect a solid sequential improvement in pharmacy SSSG (to 5.1 per cent from 0.2 per cent) driven by script count nearing pre-pandemic levels and early benefits from the expanded scope of practice in BC and Ontario,” he said. “While pharmacist relief costs will continue to weigh on near-term margins, they should ease starting in 2H. The M&A pipeline remains solid with a greater focus on sites with higher EBITDA contributions and staffing availability, while testing lower multiples. Operational improvement and organic growth initiatives are on track and should start contributing to margins in 2H.”
After trimming his multiple to bring it more in line with the current valuation, Mr. Li cut his target for Neighbourly shares by $1 to $20, keeping a “hold” recommendation. The average on the Street is $26.33.
“While we believe the current valuation (approximately 11 times 12-month forward pro forma EBITDA) is fair given current market conditions, upside potential could come from: (1) margin improvement starting in 4Q as labour cost pressures ease and operational improvements ramp up; (2) better visibility on the pace of M&A; (3) progress on leverage reduction/falling interest rates; and (4) higher ROIC [return on invested capital],” he said.
Elsewhere, others making changes include:
* Scotia Capital’s George Doumet to $24 from $24.50 with a “sector outperform” rating.
“NBLY’s Q1 financials were largely in line with Street expectations (and so was the Q2 margin guidance). Internals exceeded expectations – with pharmacy same-store sales coming in ahead of expectations, while the smaller front store saw a deceleration driven by softer cold/flu demand,” he said. “Looking ahead, while we acknowledge that margin normalization is a 12+ month journey, we are encouraged by the company-specific initiatives underway, including improved pricing, inventory and w/cap management and a better front of store.
“In the context of current valuation (approximately 8.5 times EBITDA on F25E EBITDA), we forecast stable 3-per-cent SSS growth and improved visibility on the cadence of margin improvement from today’s trough levels as enough to move the stock higher. We expect the NBLY to acquire at the middle of its 10-per-cent to 20-per-cent EBITDA growth target and for leverage to land at 3.6 times exiting F24.”
* BMO’s Stephen MacLeod to $21 from $23 with a “market perform” rating.
“We find Neighbourly’s pharmacy roll-up story a compelling investment thesis. We see a handful of nearterm headwinds, including increased costs related to pharmacist vacancies and modest acquisition synergy opportunities. While risk-reward on the stock has improved, valuation is consistent with where the stock has traded LTM [last 12 months],” said Mr. MacLeod.
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Eight Capital analyst Phil Skolnick sees Logan Energy Corp. (LGN-X) as “a highly differentiated company by virtue of its ability to generate significant growth and get rewarded for it.”
In a research report released Wednesday titled An Eruption of Growth, he initiated coverage of the Calgary-based company, which began trading on the Venture Exchange on July 18, with a “buy” recommendation.
“The company is targeting organic growth of over four times to about 20 MBOE/d [thousand barrels of oil equivalent per day] in less than five years,” said Mr. Skolnick. “The key is that there has been little to no capital deployed on LGN’s asset base as SDE was largely focused on the development of its oil-weighted Montney assets. We estimate that LGN has the inventory and wherewithal to generate 40-50-per-cent average annual production growth with liquids weighting to grow from the current 24 per cent. This is supported by over 500 identified drilling locations that lie across 193,000 net acres of liquid-rich natural gas Montney lands held at an average 95-per-cent w.i. The company also has a 50-per-cent w.i. in the 120 MMcf/d 13-11 Simonette gas plant, which has 80 per cent of unutilized capacity, all of which is available to LGN.
“We see upside potential in the guidance as LGN is not accounting for improvements from more modern drilling & completion techniques. The company’s near-term guidance assumes conservative cost and well performance ... Testing more modern completion techniques should yield increased production growth expectations, in our view. To that end, even when using a blend of modern and legacy type curves, we are almost 15 per cent and 10 per cent above consensus 2024 and 2025 estimated production, respectively.”
Believing Logan has the balance sheet strength to “provide top-tier per share growth” and expressing confidence in its management’s “ability to deliver,” the analyst thinks Logan will eventually will sell itself to a larger peer.
“But the fundamentals speak for themselves, and therefore, we support owning the stock,” he said.
Currently the lone analyst covering the stock, Mr. Skolnick set a target of $2.20, representing 203-per-cent upside to Tuesday’s closing price.
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In other analyst actions:
* ATB Capital Markets’ Patrick O’Rourke increased his Athabasca Oil Corp. (ATH-T) target to $4.50 from $4.25, keeping an “outperform” rating. The average is $4.21.
* CIBC’s Anita Soni bumped her target for Centerra Gold Inc. (CG-T) to $11 from $10.60 with an “outperformer” rating, while National Bank’s Michael Parkin cut his target to $12 from $12.50 with an “outperform” recommendation. The average is $10.50.
* Barclays’ John Aiken raised his CI Financial Corp. (CIX-T) target to $18 from $16 with an “equalweight” recommendation. The average is $20.
“We are anticipating pressure on management fees as well as cost inflation to drive a year-over-year earnings retracement for the asset managers despite modestly higher asset levels when compared to last year. Heading into reporting, we have made modest changes to our estimates to reflect reported asset and sales levels,” said Mr. Aiken.
* RBC’s Geoffrey Kwan increased its target for First National Financial Corp. (FN-T) to $43 from $40 with a “sector perform” rating. Other changes include: Scotia’s Phil Hardie to $43 from $40 with a “sector perform” rating and CIBC’s Nik Priebe to $44 from $40 with a “neutral” rating. The average is $40.83.
“First National’s second-quarter results likely provided another data point demonstrating its business model’s strength. Underlying core earnings and key performance indicators, including mortgage origination volumes and Mortgages Under Administration (MUA), came in well ahead of expectations,” said Mr. Hardie. “Despite intense competition and reduced mortgage volumes due to the impact of rising mortgage rates, the company managed to increase its Mortgages Under Administration (MUA) by upper single digits on a year-over-year basis and at a mid-teen run rate. Challenging market conditions are likely to persist through the remainder of the year with softer mortgage volumes, however we expect core earnings to rise year-over-year.”
* CIBC’s Mark Petrie moved his George Weston Ltd. (WN-T) target to $215 from $209 with an “outperformer” rating. Other changes include: BMO’s Tamy Chen to $172 from $180 with a “market perform” rating, Scotia’s George Doumet to $181 from $183 with a “sector perform” rating and Desjardins Securities’ Chris Li to $177 from $192 with a “hold” rating. The average is $195.29.
“WN’s holdco discount has widened from high-single-digit percentage a few months ago to approximately 16 per cent currently,” said Mr. Li. “We believe this is partly driven by cautious sentiment on the REITs (CHP.UN accounts for 25 per cent of its NAV). While we believe high-single-digit percentage is an appropriate holdco discount over the longer term given WN’s simple corporate structure with two high-quality assets, we are increasing our target holdco discount to be more in line with current levels until market conditions improve.”
* Stifel’s Cole Pereira cut his Gibson Energy Inc. (GEI-T) target to $27 from $28.50 with a “buy” rating. Other changes include: TD Securities’ Linda Ezergailis to $25 from $26 with a “buy” rating and RBC’s Robert Kwan lowered to $27 from $28 with an “outperform” rating. The average is $25.32.
“With the Q2/23 results coming in largely in line with our forecast, we attribute part of the share price weakness to conference call disclosures around rail contract expirations as well as potential softness at the other terminals and pipelines division,” said Mr. Kwan. “With the closing of the South Texas Gateway Terminal acquisition, we believe investors will be looking to the company’s ability to optimize and de-risk the asset via the contracting of additional loading windows as well as extending the term of existing contracts at the facility.”
* RBC’s Luke Davis raised his Gran Tierra Energy Inc. (GTE-T) target to $12 from $10 with a “sector perform” rating. The average is $16.46.
“Gran Tierra pre-released Q2/23 volumes with cash flow impacted by a one-time FX charge. The company provided a solid reserve update, inclusive of the Suroriente extension, resulting in a material increase across each category. We expect management will remain focused on debt repayment and improving financial flexibility, with volumes now trending toward the upper end of the guidance range,” said Mr. Davis.
* Following better-than-expected second-quarter results, ATB Capital Markets’ Martin Toner cut his Thinkific Labs Inc. (THNC-T) to $4 from $4.50 with an “outperform” rating. The average is $3.98.
“Management reiterated its expectation of exiting 2023 with a profitable adjusted EBITDA run rate, and has continued to optimize its cost structure,” he said. “Q2/23 represented the third consecutive quarter of paid customer growth, an encouraging sign for the future, how improvements in 2023 have been incremental. The Company remains cautious in predicting a re-acceleration of growth and remains focus on new products and improving its go-to market approach. Near term progress was highlighted through average revenue per user (ARPU) growth, payments penetration and a building product pipeline. We continue to believe that Thinkific is an undervalued asset, with significant long term growth potential. We believe the progress toward profitability de-risks the story and should result in a higher share price.”
* Desjardins Securities’ Chris MacCulloch raised his Topaz Energy Corp. (TPZ-T) to $27.50 from $27 with a “buy” rating. The average is $27.33.
“Tough crowd out there! In our view, the stock was unfairly penalized yesterday (August 1), despite posting results which exceeded consensus expectations while providing a modest quarterly dividend bump,” he said. “Moreover, the market papered over impressive well results in core plays during the quarter, which effectively backfilled production disruptions from the Canadian wildfires. We continue highlighting that TPZ retains elevated exposure to two of the premier plays in North America — the BC Montney and Clearwater — which is expected to continue driving production growth.”
* After a “strong” second-quarter, National Bank Financial’s Rupert Merer raised his target for 5N Plus Inc. (VNP-T) to $4.75 from $4.25 with an “outperform” rating. The average target is $4.50.
“We updated our model for Q2 results and for an improved outlook for the remainder of this year,” he said. “VNP maintains guidance for $35-million to $40-million in adj EBITDA this year, though we believe it could beat this if the semiconductor business remains strong with growth in its space solar and terrestrial solar operations. With the strength of Q2 and an increase to our forecasts, we are increasing our target ... to reflect our confidence in VNP’s execution. This multiple remains at a discount to our peer group of speciality materials companies, which generally have lower growth and lower margins than VNP.”
David Leeder