Inside the Market’s roundup of some of today’s key analyst actions
DA Davidson’s Gil Luria sees Shopify Inc. (SHOP-N, SHOP-T) as “new and improved” following its first Investor Day event since 2019, expressing “increased conviction in the company’s ability to gain market share, expand into the greater commerce market, and monetize merchant relationships through a variety of cross-sell and upgrade opportunities.”
He said the Tuesday session focused on “the big picture and disproving current myths about the business,” including the state of its addressable market, the durability of its business model and the impact of small and mid-sized business.
“We came away incrementally more positive about our outlook on SHOP based on current upmarket momentum and the various GTM [go-to market] initiatives being put in place to drive profitable growth at scale both in the business’s primary markets (North America) and internationally,” said Mr. Luria. “Evidence of upmarket progress includes the fact that approximately 18 per cent of mid-market accounts ($2M-$20-million of annual GMV [gross merchandise volume) are growing more than 40 per cent year-over-year and 25 per cent of large accounts ($20M-$125-million of annual GMV) are growing more than 40 per cent meaning the current mid-market brands on Shopify are the enterprise clients of tomorrow. Not only is Shopify well positioned to grow with existing customers, its adding new enterprise merchants through a number of different on ramps. Investments made to build out strategic and system integrator partnerships has been another source of new business with Shopify’s partnerships ecosystem contributing $20-billion GMV to its pipeline. The combination of upmarket progression and new merchant momentum supports our long term view that Shopify is developing the default platform of choice for entrepreneurs with the structure to monetize the end-to-end transaction process.”
The analyst also came away pleased with the Ottawa-based e-commerce giant’s commitment to product innovation and sees business-to-business opportunities as “one of many long term growth vectors.”
“Shopify’s #1 priority is creating the best platform in the world and putting into place the people and culture to support it while its #2 priority is generate profit, so the company can do more of #1,” he said. “We believe this philosophy is important to put into context the current growth trajectory of SHOP. Management is long-term oriented and is creating one system that has the capabilities and features needed to deliver value to merchants (online and offline). Going forward we expect SHOP to balance profitable growth with investments in product innovation resulting in durable growth.”
“In the most recent quarter (3Q23) B2B GMV on the Shopify platform nearly doubled year-over-year highlighting strong momentum expanding the types of merchants Shopify serves. The company also identified innovation of its platform, monetization through cross-sell and upgrades, and growth of its core merchant base as additional drivers of durable growth. We believe that the combination of these catalysts will help drive more than 18-per-cent revenue growth in 2024 and continued double-digit growth beyond.”
Expressing “increased confidence in Shopify’s ability to generate profitable growth, expand into the greater commerce market, and monetize merchant relationships through a variety of cross-sell and upgrade opportunities,” Mr. Luria raised his target for the company’s shares to US$86 from US$75, reaffirming a “buy” recommendation. The average target on the Street is US$71.16, according to Refinitiv data.
Elsewhere, a pair of analysts downgraded Shopify shares on Wednesday before the bell:
* ATB Capital Markets’ Martin Toner to “sector perform” from “outperform” with a $105 (Canadian) target.
“During the event, SHOP highlighted the internal work completed to achieve its new “shape”, updates product initiatives, and growth vectors for the Company,” said Mr. Toner. “Following a banner 2023, SHOP enters 2024 with a re-focused mission to growing global commerce and a growing cash profile to help fuel its rapid pace of innovation. The Company emphasized the merchant focused, performance based and profitable culture. SHOP also displayed enough data that indicated that the top of funnel is very healthy and can support strong growth over the near and medium term. Our confidence is improved in our growth estimates, but given relatively high levels of growth in our forecasts, on a large revenue and GMV base, we are not increasing our estimates. We believe the Company effectively reinforced the confidence that underwrites one of the highest P/GP multiples in mid to large-cap technology. Despite the strong outlook, we downgrade SHOP to Sector Perform given the low return to our target price.”
* Wedbush’s Scott Devitt to “neutral” from “outperform” with a US$68 target, up from US$66.
“While we continue to hold a favorable view of Shopify’s overall strategy and competitive positioning within eCommerce, shares have risen 53 per cent since the company reported 3Q23 results on November 2nd and now trade at a significant premium relative to software peers across key valuation metrics,” he said. “Shares are trading above our revised target price of $68 and currently trade for 17.8 times EV/2025E gross profit (vs. peer group average of 9.6 times) and 43.1 times EV/2025E adj. EBITDA (vs. peer group average of 30.1 times). We see limited room for further multiple expansion, and without incremental catalysts emerging from the investor day, we are lowering our rating to Neutral. Our outlook for the business remains positive, and we expect revenue to grow 22 per cent and 20 per cent in 2024 and 2025, respectively, while adj. EBITDA margins rise to 21 per cent in 2025 from 10.8 per cent in 2023 as the company continues to exercise cost discipline following its RIF earlier this year and the sale of the logistics business to Flexport. While Shopify’s growth and margin trajectory is encouraging, we think current valuation already reflects upside to our numbers and consensus. In a bull case scenario where annual GMV growth outpaces our base-case by 250bps each year and take rate and margin rise faster than our estimates, shares would still trade for 37.4 times EV/2025E adj. EBITDA. We see opportunities for greater upside elsewhere in our eCommerce coverage and recommend investors allocate to Amazon (AMZN, Outperform) and MercadoLibre (MELI, Outperform) for exposure.”
Other analysts making target changes include:
* RBC’s Paul Treiber to US$100 from US$80 with an “outperform” rating.
“Shopify has made numerous and at times controversial changes to its business over the last year (logistics divestiture, headcount reductions, mgmt. changes),” said Mr. Treiber. “At the same time, growth and profitability have increasingly exceeded expectations. Shopify’s investor day provided data points to better understand the drivers of the company’s recently improved performance and importantly laid out how it intends to sustain a high pace of innovation and execution going forward.”
* Stifel’s J. Parker Lane to US$75 from US$65.
“Shopify delivered an upbeat message to investors in New York on Tuesday, outlining the path to continuing to deliver 20-per-cent revenue growth for the foreseeable future,” said Mr. Lane. “While stopping short of providing any meaningful mid/long-term targets, management outlined multiple vectors for durable growth including its core merchant base, expanding the type of merchants it serves, driving merchant GMV growth, cross-sell and up-sell for higher attach rates, and innovating with new products, features, and AI. The company is doing so while operating at a higher level of operational discipline, and emphasizing profitable growth. Overall, we are impressed with its multiple levers of growth, and believe its strong reputation and win rates among merchants, along with continued innovation, will help the company capitalize on its ambitious goal of becoming a one-stop-shop for all commerce.”
* Roth’s Darren Aftahi to US$85 from US$70 with a “buy” rating.
“The event primarily focused on products and platform functionalities that enable SHOP to be an all-encompassing offering for unified global commerce. We believe SHOP is continuing to develop new tools to foster a more durable growth curve for merchants by utilizing this online and offline global approach,” he said.
* TD Securities’ Daniel Chan to US$80 from US$65 with a “hold” rating.
* Canaccord Genuity’s David Hynes to US$86 from US$70 with a “buy” rating.
Desjardins Securities analyst Chris MacCulloch remains “constructive” for the Canadian oil and gas sector moving into 2024, seeing the commissioning of the TMX pipeline and further advancement of LNG Canada as “two critically important projects that will break the shackles which have held industry back from realizing its full potential for far too long.”
“After a decade and a half of planning, delay and frustration that frequently shook both the Canadian energy sector and the political system, it is hard to believe that the big day is almost here — an expansion of egress that will unleash Canadian hydrocarbons on the world,” he said. “We refer initially, of course, to the TMX project which is tentatively scheduled to come online in 2Q24, with linefill potentially commencing early in the new year; this will provide a conduit for Canadian heavy oil producers to access U.S. West Coast and Asian refining markets. More importantly, it will expand oil pipeline takeaway capacity from the WCSB by 590 mbbl/d, thereby hopefully casting massive blowouts in WTI‒WCS differentials to the dustbin of history. As an aside, those completely avoidable differential blowouts have left every Canadian citizen and foreign shareholder of a Canadian energy company considerably poorer, with tens of billions of dollars literally siphoned into the hands of US refiners and commodity marketers, all down to the missteps of Canadian politicians of all stripes, both federal and provincial. But we digress. Not to be undone, Canadian natural gas will also begin accessing overseas markets shortly thereafter with the first 2.0 bcf/d phase of LNG Canada currently running ahead of schedule after recent completion of the Coastal GasLink pipeline, with the first train likely coming online in the next 12‒18 months. For what it’s worth, you can rinse and repeat most of the above comments with respect to Canadian natural gas.”
In a research report released Wednesday, Mr. MacCulloch touted “incredibly exciting times” for the industry “as it prepares to unleash its full unbridled potential after being arbitrarily restrained for far too long in our view.”
“Meanwhile, the sector also happens to be attractively valued, despite recent multiple expansion, with balance sheet deleveraging now effectively complete, which should drive a significant acceleration of capital returns,” he said. “For all those reasons, we firmly believe that Canadian oil & gas equities are attractively positioned for investor portfolios in 2024. However, we maintain our view that investors need to remain vigilant with respect to security selection and given that most of the easy gains are now likely in the rearview mirror for the Canadian oil & gas sector in the absence of a sharp pickup in commodity prices (which appears unlikely, from our perspective).”
Mr. MacCulloch named a pair of stocks as his “top picks” for 2024:
* Arc Resources Ltd. (ARX-T) with a “buy” rating and $31 target, rising from $30.50. The average on the Street is $27.45.
“ARX is uniquely positioned in the Canadian energy landscape as an organic growth story while retaining flexibility to remain a capital return monster offering prospective investors a discounted valuation. Despite sterling performance in 2023, even brighter days lie ahead,” he said.
* Cenovus Energy Inc. (CVE-T) with a “buy” rating and $34.50 target, down from $35.50. The average is $33.12.
“We believe that headwinds can (and will) turn into tailwinds given that the past misfortunes were not structural in nature. In fact, with a slew of upstream growth projects currently in the pipeline, including the Sunrise optimization project and the return of the Terra Nova FPSO (10 mboe/d), we expect production to begin hitting full stride in 2024, with operational momentum moving into the late 2020s,” he said. “Furthermore, reconciliation of past events provides greater understanding of a discounted stock valuation which is now far too lucrative to ignore, in our view. For reference, the stock is currently trading at an estimated 2025 EV/DACF [enterprise value to debt-adjusted cash flow] multiple of 4.7 times at strip prices, a significant discount vs its oil-weighted large-cap peers (6.4 times) while offering a 10.6-per-cent FCF yield (vs peers at 9.3 per cent).”
He also said seven other companies are “worthy of honourable mention.” They are:
* Canadian Natural Resources Ltd. (CNQ-T) with a “buy” rating and $108 target, up from $103. Average: $99.02.
Analyst: “CNQ will by all expectations remain the go-to name for generalist investors seeking exposure to Canadian energy. And why not? Renowned as an industry leader in operational efficiencies and strict capital discipline, the company is now staring down the twin prospect of a more than $100-billion market capitalization and a triple-digit stock price, underpinned by a diverse production base with decades of inventory and a heavy oil–weighted production base poised to capitalize on narrowing WTI‒WCS differentials when TMX comes online. While acknowledging that valuation remains rich by any measure, firmly positioned atop the Desjardins E&P coverage universe, it also remains one of the best-insulated investment opportunities for shareholders wary of commodity price risk, poised to begin returning 100 per cent of FCF to shareholders in early 2024 through buybacks and a base dividend currently sporting a competitive 4.4-per-cent yield.”
* Enerplus Corp. (ERF-T) with a “buy” rating and $23 target, down from $24.50. Average: $25.24.
Analyst: “ERF continues providing one of the best value propositions in the Canadian energy sector, currently trading at an estimated 2025 EV/DACF multiple of 3.3 times (vs peers at 4.3 times) while offering a 12.0-per-cent FCF yield at current strip prices. Armed with a pristine balance sheet and deep drilling inventory, and firmly focused on North Dakota, we believe the company could be a beneficiary of the M&A super cycle currently unfolding south of the border.”
* Tamarack Valley Energy Ltd. (TVE-T) with a “buy” rating and $6 target (unchanged). Average: $6.08.
Analyst: “TVE remained highly disciplined in 2023 and not coincidentally has started emerging from its debt-laden slumber on the back of a non-core asset disposition earlier this fall, which accelerated balance sheet repair. That is incrementally positive for investors as it puts the company one step closer toward activating the next tranche of capital returns, which are poised to accelerate to 50 per cent of FCF when net debt reaches $900-million —a 1Q24 prospect at strip prices, as previously noted. Meanwhile, we believe that TVE has been flying under the radar as a producer that will significantly benefit from narrowing WTI‒WCS differentials when TMX comes online after materially lagging its heavy oil‒weighted peers in 2023. On that note, the stock remains attractively valued.”
* Advantage Energy Ltd. (AAV-T) with a “buy” rating and $13.25 target, down from $13.75. Average: $12.76.
Analyst:”AAV once again graces our list as a preferred name within the small/mid-cap natural gas space, and for good reason. The business model remains substantially unchanged with the company still targeting FCF per share growth through 10-per-cent annualized organic growth, which is further augmented by an aggressive share buyback program that is currently receiving 100 per cent of corporate FCF. While softer natural gas prices have temporarily taken some of the sizzle out of share buybacks, AAV retains among the highest torque within the Desjardins E&P coverage universe to a potential recovery as fundamentals begin improving moving into 2025, when we also expect the first phase of LNG Canada to come online.”
* Tourmaline Oil Corp. (TOU-T) with a “buy” rating and $85 target, down from $86. Average: $84.09.
Analyst: “TOU remains the go-to name for most generalist investors looking to dip their toes into natural gas, which is not surprising given the company represents the pinnacle of quality in the Canadian energy landscape. At its core is a top-tier management team which has proven to be a responsible steward of shareholder capital and among the savviest acquirers of assets. Although insider interests are clearly aligned with shareholders, the quantum of special dividends witnessed over the last 12 months will almost certainly moderate heading into 2024 given softening natural gas prices and with a larger allocation of FCF temporarily earmarked for the balance sheet after it recently closed the acquisition of Bonavista Energy Corporation.”
* Freehold Royalties Ltd. (FRU-T) with a “buy” rating and $18.75 target, down from $19.50. Average: $19.08.
Analyst: “FRU had a relatively quiet 2023, temporarily pausing its US acquisition spree after scooping up assets in some of the hottest plays in 2021‒22. This approach has been prudent given that US production adds have proven to be lumpier than initially expected, thereby providing the company with more time to continue building knowledge of the assets while also allowing the balance sheet to reload dry powder in anticipation of future M&A. Meanwhile, drilling, licensing and permitting on FRU’s royalty lands continue setting records on both sides of the border. Finally, we should also highlight that the stock continues providing a lucrative dividend for income-focused investors, currently yielding 7.7 per cent while the payout ratio is firmly positioned toward the lower end of the 60‒80-per-cent corporate target at strip prices.”
* Topaz Energy Corp. (TPZ-T) with a “buy” rating and $27.50 target, down from $28.50. Average: $27.96.
Analyst: “TPZ also slowed its pace of M&A activity in 2023, executing $66-million of acquisitions to date this year, in stark contrast to the $436-million tally in 2022 as it replenished the balance sheet for future M&A catalysts. The opportunity set remains firmly focused on strongly capitalized producers in western Canada, with an eye toward future growth, particularly in emerging plays such as the Clearwater, and we believe 2024 will provide an opportunity to accelerate M&A. With interest rates stubbornly elevated at multi-year highs, TPZ continues to provide an alternative source of capital to potential consolidators in the Canadian energy sector”
For other large-cap stocks, Mr. MacCulloch trimmed his targets for Imperial Oil Ltd. (IMO-T, “hold”) to $82 from $85 and Suncor Energy Inc. (SU-T, “hold” to $51 from $54. The averages are $86.49 and $54.79, respectively.
Desjardins Securities analyst Jerome Dubreuil said he’s “more positive” on the Canadian telecommunications industry heading into 2024 than he has been all this year, citing “improved visibility, encouraging recent CPI prints and 2023 underperformance.”
However, in a report previewing the year ahead, he cautioned that competition for both wireless and wireline customers has not “stabilized yet,” leading him to “believe a neutral weighting in the sector is appropriate as we enter 2024.”
“It has been an eventful 2H23 for Canadian telecoms with CRTC decisions on MVNO rates and temporary FTTH access, as well as a dynamic Black Friday,” said Mr. Dubreuil. “While the full impact of these events may not yet be in companies’ results or retail telecom market dynamics, at least we now have a much better idea of what the telecom sector is working with. We also expect EBITDA growth to be supported by continual cost consciousness in the sector.”
The analyst named Rogers Communications Inc. (RCI.B-T) as his top pick for 2024, raising his target to $76 from $70.50 with a “buy” recommendation. The average is $72.71.
“We are moving our telecom valuations to 2025, which is when RCI/SJR synergies should be almost fully reflected in the company’s results—this makes RCI attractive on an FCF basis. As the company is on track to deliver on its synergy targets and the veil has been lifted on several regulatory and competition-based unknowns, it is now easier to live with its leverage. We see a reasonably clear path toward deleveraging,” he said.
“As more investors move their valuations to 2025 given companies will report their results in early 2024, we believe the relative undervaluation of RCI should become more apparent. We highlight that the company boasts the highest FCF yield among the Big 3 by an unusually wide margin. We also believe the gap with BCE (8.7 per cent) and T (7.5 per cebt) in terms of the 2025 FCF yield is currently too wide.”
In order of preference, his other ratings and targets are:
* Quebecor Inc. (QBR.B-T, “buy”) with a $41.50 target, up from $39.50. Average: $38.21.
Analyst: “QBR remains high in our pecking order given its rapid deleveraging and the value we see in the Freedom integration. However, we have been surprised by how aggressively peers have matched Freedom’s pricing since the integration. Many investors remain concerned about a potential increase in capex down the road — our new 2025 forecast includes a large capex increase, but FCF yield during this period remains strong at 13.6 per cent. We expect buybacks to accelerate again in mid-2025 when leverage is in the low 3s (our definition)”
* Telus Corp. (T-T, “buy”) with a $27 target (unchanged). Average: $26.76.
Analyst: “Our Buy recommendation on T is largely based on longer-term growth opportunities as we believe 2024 consensus is high and TIXT might turn the corner only in 2H24.”
* Cogeco Communications Inc. (CCA-T, “buy”) with a $70 target, down from $72. Average: $69.68.
Analyst: “CCA is actively exploring the possibility of introducing a wireless service in Canada, the U.S. or both as it aims to bundle its existing wireline customers. However, we see this strategy as generating low ROIC given the low risk-adjusted IRRs on wireless resale. While there are arguments in favour of CCA’s wireless launch, such as an apparent inflection point in wireless/wireline conversion and the documented positive impact on reducing cable churn, we believe that the counterarguments carry more weight ... CCA’s management team might believe wireless/wireline convergence is inevitable and therefore that having wireless is crucial in the long term, but investments in such a venture could affect the ROIC for several years and the market is not always ready to buy into such long-term plans.”
* BCE Inc. (BCE-T, “hold”) to $57.50, up from $57. Average: $56.95.
Analyst: “While we anticipate lower growth for BCE vs peers in the foreseeable future, we believe the stock could perform well if the Canadian macro environment deteriorates. We also believe decent Internet net additions are possible despite the recent capex-cut announcement, which should lead to strong FCF growth.”
Eight Capital analyst Ralph Profiti sees copper equities “well positioned ahead of the next bull run,” expecting “moderate-to-severe” price spikes over the next 3-5 years following a decade of underinvestment in the metal’s supply and as prices “remain well below incentive prices.”
“While medium- to long-term structural shortages in copper are likely inevitable, it’s the unexpected supply and demand shocks that will create a choppy and volatile market,” he said. “Key drivers remain the prospects of a Paris-aligned pathway to net-zero, China demand, and the prospects for developed and emerging economies, continuing supply disruptions to existing mines, and a lack of adequate response to bring on new supply after 2026. We believe the copper mining industry is entering a prosperity-phase where prices relative to current levels are likely to surprise to the upside, established industry participants react slowly to build new capacity relative to previous cycles, established mining districts face tougher regulatory hurdles, and new entrants emerge during the early stages of a ‘company-making’ phase of the cycle. In our view, the next cycle is likely to drive margin upgrades and encourage management and consensus estimates to reconsider long-term commodity assumptions that are currently too low to justify a reasonable risk-adjusted return of 15 per cent.”
In a research report released Wednesday, Mr. Profiti said supply risks and “the lack of a re-invigorated pipeline” will extend the next cycle for copper, predicting a transition to market deficits could come as early as 2026.
“When examining new supply by commodity, we find the industry is not responding fast enough to bring on new mines. This is particularly evident in the case of copper. The slower-than-expected response is partly due to management hesitancy about building new capacity during a period of rising costs and shortages of skilled labor and equipment, a preference for share buybacks and dividends, industry consolidation, as well as increasing risks around fiscal terms and taxation. We estimate a long-term incentive price of $4.35 per pound. Our incentive-price analysis suggests that consensus long-term copper price assumptions are too low given the structurally higher all-in costs of building new capacity. We estimate that in order to justify a reasonable return on investment of 15 per cent on a greenfield copper mine, the price needs to be closer to $4.35 per pound under our revised baseline assumptions for capital costs, operating costs, sustaining costs and royalties & taxation, which compares to the current industry consensus of $3.50-3.75/lb.”
Mr. Profiti initiated coverage of a pair of equities. They are:
* Ero Copper Corp. (ERO-T) with a “neutral” rating and $23.50 target. The average on the Street is $24.
“We believe a premium valuation for ERO is warranted given its low cash cost, as well as lower cash flow implied AISC relative to the peer group, and significant growth in 2024 and 2025 that we estimate will nearly double copper production relative to 2023,” he said. “However, it’s noteworthy that our estimates diverge significantly from consensus, taking into account F/X impacts from a stronger BRL, an expected slower ramp-up of growth projects, and downside risks to free cash flow estimates given the underperformance of copper prices and upside risks to capex as mgmt. completes expansions and construction at Caraíba and Tucumã. Despite our cautious outlook, we do see potential for upside surprises through stronger project execution and exploration, and we see value in ERO’s growth and optionality across its portfolio.
* Metals Acquisition Corp. (MTAL-N) with a “buy” rating and US$15. The average is US$14.
“MTAL offers investors exposure to a high-grade copper mine with an attractive cost profile based on relative cash flow-implied AISC and in a Tier-1 mining jurisdiction. MTAL’s CAS copper mine has an established operating history and substantial recent investments in plant, mine and fleet to support a LOM plan beyond our base case, and significant opportunities to improve productivity, optimize costs, lower the cut-off grade, increase the resource, and extend the mine life, which anchors our valuation proposition.”
Mr. Profiti named Metals Acquisition as one of his top picks in the sector. The others are Capstone Mining (CS-T, “buy” and $9 target), Freeport McMoRan (FCX-N, “buy” and US$55), Hudbay Minerals (HBM-T, buy” and $11.50), Lundin Mining (LUN-T, “buy” and $12.50), Solaris Resources (SLS-T, “buy” and $23.50 target), and Teck Resources (TECK.B-T, “buy” and $70).
RBC Capital Markets analyst Scott Heleniak sees Trisura Group Ltd. (TSU-T) “positioned for growth,” initiating coverage of the Toronto-based specialty insurance provider with an “outperform” recommendation on Wednesday.
“Trisura has been a growth story in recent years through its Canadian operations as well as its expanding U.S. presence,” he said. “We expect the company to deliver healthy premium and fee growth in targeted traditional lines and its fronting fee-based business (both in the U.S. and Canada) over the next few years in what remains an attractive operating environment. Trisura’s recent ROEs have been near the 20-per-cent range and we see mid-to-high teens ROEs or better as sustainable near term.”
Mr. Heleniak called Trisura’s Canadian business “highly profitable and well positioned” and thinks its fee income model is likely “another meaningful source of growth.”
“We view Trisura’s Canadian operation as well positioned with a solid market position in key lines and established distribution relationships,” he said. “The combined ratios in this unit have been excellent, averaging around 80 per cent in the past seven quarters. We believe that P&C market conditions and pricing are conducive to continued healthy premium growth trends continuing in 2024. We are modeling in net written premium growth of 22 per cent for the Canadian operation for 2024.
“Trisura has established itself as one of the largest fronting companies in the U.S. where the company acts as an intermediary amongst risk bearers for a fee. Trisura’s U.S. fronting operations is larger and more developed, but the company is expanding its Canadian fronting operation as well. We see further opportunities for growth on the fee side and its U.S. fronting operation could also open the door for expansion into traditional U.S. insurance lines.”
Calling it “a high-teen ROE business with room to grow earnings” and seeing its valuation supported by both returns and its growth prospects, Mr. Heleniak set a $40 target for Trisura shares. The average on the Street is currently $52.67.
“The company has been generating ROEs at or near the 20-per-cent range in recent quarters,” he said. “We see good leverage to earnings as earned premium and fee growth continues. Investment income should also remain a tailwind to EPS due to rising yield environment and we are modeling in 20-per-cent net investment income growth for 2024.”
“While there doesn’t appear to be a good comp for Trisura, we think the current price/ book valuation of 2.7 times is reasonable for a company that we expect to generate strong EPS and top-line growth over the next few years (as well as mid-to-high teens ROEs). Our price target is more conservative than the Street due to some uncertainties related to a writedown in Q4/22, of which there still appear to be some minor concerns (we aren’t calling for charges in 2024). Likewise, our target also reflects our view that P&C insurance market pricing for the sector may decelerate slightly (but still remain positive) in 2024.”
A quartet of Canadian companies were named to the inaugural “Best Stock Ideas” list for RBC’s Global Financials Research team.
The group consists of 11 senior analysts and 12 associates, covering global financial companies which include: Large Cap U.S. Banks, Mid-Cap U.S. Banks, U.S. Consumer Finance Companies, European and UK Banks, Canadian Banks; U.S., European and Canadian Insurance Companies; and Diversified U.S., European and Canadian Financial Companies. Collectively, they cover 185 companies.
The list is meant to highlight the best investment ideas within each Financials sector.
“Overall, on a secular basis we believe the period of easy money with zero percent or negative interest rates experienced from 2008-2020 is over,” they said. “However, on a cyclical basis over the next 12 months, with the exception of central banks in Europe, we expect the monetary tightening instituted by central banks will likely end followed by a period of monetary easing that will include a lowering of short-term interest rates. Additionally, we do not see a global recession, albeit economic growth is likely to be slow and certain markets may experience a quarter or two of negative real economic growth, in our view.”
Analyst Darko Mihelic named Bank of Montreal (BMO-T, “outperform” and $134 target) as his top Canadian bank pick.
“We believe the Bank of the West (BoW) acquisition is transforming BMO’s U.S. footprint in an accretive manner for shareholders,” he said. “BMO expects the acquisition to be 7-PER-CENT accretive to EPS in 2024 and to achieve an incremental US$2 billion in run-rate pre-provision pre-tax earnings by the first half of 2026. BMO also now expects the BoW deal to achieve US$800 million in pre-tax cost synergies by Q2/24, up nearly 20 per cent from the bank’s original expectation of US$670 million. In our view, this acquisition differentiates BMO’s growth profile relative to its Canadian peers, particularly those that have not deployed capital inorganically.”
Mr. Mihelic also selected Sun Life Financial Inc. (SLF-T, “outperform” and $76 target) for the insurance sector.
“As of Q3/23, SLF’s underlying ROE was 17.7 per cent, the highest ROE among the Canadian lifecos in the quarter,” he said. “SLF’s medium-term ROE target of 18 per cent-plus is also the highest among the Canadian lifecos. We assume an underlying ROE of 17.8 per cent in 2024 and 18.2 per cent in 2025. We also believe SLF’s earnings volatility over time will be lower than the peer average, justifying a higher valuation multiple versus peers.”
Analyst Geoffrey Kwan picked Element Fleet Management Corp. (EFN-T, “outperform” and $30 target) from specialized finance firms.
“Significant Growth Opportunities: (1) EFN continues to win new clients and cross-sell existing clients additional vehicle fleet services; (2) substantial self-managed market opportunity that EFN estimates is $8-billion per year vs. EFN’s current annual revenues of $1.3-billion,” he said.” EFN’s value proposition is it believes it can save companies/governments 20 per cent vs. what they spend to manage their own fleets; and (3) we think EFN can deliver strong growth even during a recession as the OEM production shortage of past 2+ years left their clients with minimal vehicle replacements, causing a significant increase in fleet ownership costs, so clients are likely to have strong new vehicle demand even in a recession.”
“BAM currently has no principal investments, making it one of, if not the most asset light, within BAM’s peer group. Even though BAM recently discussed making some principal investments (LP commitments to non-Flagship/nonOaktree funds; seeding new strategies), we still think BAM is likely to remain one of the most asset light vs. peers, which we think given BAM’s scale, strong investment track record, growth potential and attractive dividend yield should positively benefit its share price,” he said.
In other analyst actions:
* In response to the Tuesday release of its third-quarter results. CIBC’s Stephanie Price raised her Descartes Systems Group Inc. (DSGX-Q, DSG-T) target to US$85 from US$76, maintaining a “neutral” rating. Other changes include: BMO’s Thanos Moschopoulos to US$88 from US$82 with a “market perform” rating, Raymond James’ Steven Li to US$84 from US$81 with a “market perform” recommendation and Stephens’ Justin Long to US$105 from US$94 with an “overweight” rating. The average is US$87.11.
“We remain Market Perform on DSGX and have raised our estimates and target price following solid Q3/23 results—which demonstrated organic resilience in a tougher macro, as the secular growth in key product segments more than offset softer transaction volumes. We think DSGX can continue to execute successfully on its strategy of delivering consistent EBITDA growth, but on a relative basis prefer other consolidators in our coverage universe,” said Mr. Moschopoulos.
* Following Hudbay Minerals Inc.’s (HBM-T) release of an updated life-of-mine technical report for its recently acquired Copper Mountain mine, Scotia Capital’s Orest Wowkodaw trimmed his target for its shares to $10 from $10.50 with a “sector outperform” rating, while Raymond James’ Farooq Hamed cut his target to $9 from $9.50 with an “outperform” rating. The average is $9.64.
“Although the LOM production and cash cost profile was above our expectations, planned capex investment was markedly higher than anticipated, particularly in 2024-2028,” said Mr. Wowkodaw. “Overall, we view the update as largely mixed for the shares.
“Although we remain concerned by the limited progress in balance sheet deleveraging to date, we rate HBM shares SO based on valuation, significant leverage to higher Cu-Au prices, and takeover optionality.”
* Seeing its Mannville holdings driving “outsized growth,” BMO’s Mike Murphy initiated coverage of Lycos Energy Inc. (LCX-X) with an “outperform” rating and $5.50 target. The average is $7.35.
“As the only public company with pure play exposure to the emerging Mannville multilateral heavy oil play, we view Lycos as well-positioned to deliver a 50-per-cent CAGR [compound annual growth rate] on production over the next three years at top tier capital efficiencies,” said Mr. Murphy. “Primarily utilizing innovative ‘fishbone’ multi-lateral drilling techniques, reservoir contact is maximized with as many as 30 legs per well, at a cost of only $1.6 million. LCX trades at 1.7 times 2024 estimated EV/EBITDA (BMO Deck) relative to peers at 2.2 times.”
* With its $95-million agreement to acquire the remaining common shares of its noncontrolling interest in Intelligent Wellhead Systems, RBC’s Keith Mackey bumped his target for Pason Systems Inc. (PSI-T) to $19 from $18 with an “outperform” rating, while Stifel’s Cole Pereira moved his target to $16 from $15.50 with a “hold” rating. The average is $17.29.
“While we forecast only $17-million of 2024 EBITDAS from the acquisition (up 10 per cent), we believe it has meaningful long-term potential that could drive EBITDAS growth as much as 50 per cent over a number of years,” said Mr. Pereira. “Moreover, PSI has done so without issuing any shares and maintaining its fortress balance sheet, informing our positive view.”
* Following its Investor Day event in Boston on Monday and Tuesday, CIBC’ Jacob Bout increased his Stantec Inc. (STN-T) target to $111 from $110, above the $108 average, with an “outperformer” rating. Others making changes include: Desjardins Securities’ Benoit Poirier to $116 from $104 with a “buy” rating and Raymond James’ Frederic Bastien to $120 from $105 with an “outperform” rating.
“While expectations were high, we are pleased with the 2024–26 strategic plan and long-term targets, which should be well-received by investors,” said Mr. Poirier. “STN will have a much easier time making a large acquisition work financially than in the past as its multiple expansion opens up a larger pool of targets, but we are conservatively excluding unannounced M&A from our forecast.”
“Reiterating our bullish stance. We are pleased with the continued momentum building in the US, the evolution of the M&A strategy toward larger transactions and the accretion opportunities available following STN’s multiple expansion.”