Inside the Market’s roundup of some of today’s key analyst actions
A “foggy” macro environment is reducing investor “visibility” on Canadian National Railway Co. (CNR-T), according to Desjardins Securities analyst Benoit Poirier.
After the bell on Tuesday, the company released 2023 guidance along with its fourth-quarter 2022 results, which Mr. Poirier called “prudent” but acknowledged could “spook the market” given a lack of clarity on volumes, its operating ratio and free cash flow. He thinks its highlights a “softening demand outlook and [a] mild recession is management’s base case.”
“CN expects 2023 adjusted fully diluted EPS growth in the low single digits vs the $7.46 reported in 2022 (implies $7.68 assuming 3-per-cent growth) and consensus of $8.05 (7.9 per cent year-over-year),” the analyst said. “We are not surprised by management’s more conservative approach to start the year. We now expect adjusted fully diluted EPS of $7.82 in 2023 (wasC$7.86).”
“CN did not introduce formal RTM [revenue ton mile] guidance for 2023 but believes it can lift volumes above industrial production. We now forecast 2023 RTM growth of 0.9 per cent in 2023 and a yield (including the impact of FX and fuel) of 1.6 per cent.”
The analyst thinks “demand softness and state of inventories are key themes to monitor in 2023.”
“Management highlighted on the call that it expects to see some softness in certain products in 2023, including multiple blank sailings in international intermodal as North American inventories rebalance, a slow recovery in lumber due to market oversupply and high interest rates dampening demand, soft chemical and petroleum production demand in 1H, and a tight supply of autos although this could change due to the higher interest rate environment,” said Mr. Poirier. “Management expects coal demand to remain strong through 2023, backed by the energy shortage and grain in 1H. We currently view what is occurring in intermodal as more of a normalization of demand/activity from pandemic highs rather than a full collapse. We do not expect the softness in freight to put any significant pressure on CN’s long-term pricing power (we forecast intermodal pricing to increase 3 per cent year-over-year), but we believe it is fair to expect subdued volumes given the state of economic indicators combined with CMA CGM’s loss of market share. We forecast volume on an RTM basis to decrease by 8.5 per cent in 2023. Recall that intermodal represents the largest commodity group for CN (29 per cent of total revenue in 2022).”
Now projecting adjusted fully diluted EPS of $7.82 in 2023 and $8.63 in 2024, down from $7.86 and $8.68 previously, Mr. Poirier trimmed his target for CN shares to $179 from $180. The average on the Street is $160.54.
He maintained a “hold” recommendation, seeing shares as “fully valued” versus historical levels and peers.
“We look forward to the investor day on May 2–3 as it will likely provide more clarity on the long-term outlook,” he concluded.
Elsewhere, others making adjustments include:
* Scotia Capital’s Konark Gupta to $167 from $170 with a “sector perform” rating.
“CNR ended 2022 on a strong note, achieving or exceeding guidance, driven by its renewed focus on pricing and operations, and industry tailwinds,” he said. “However, management guided relatively cautiously (and prudently) vs. expectations due to some uncontrollable factors – macro and regulation. The company raised the dividend by 8 per cent to $3.16 per share annualized. We are trimming our EPS estimates on the back of guidance, although there could be more downside risk or some upside risk, depending on how the macro unfolds this year.”
* ATB Capital Markets’ Chris Murray to $175 from $180 with a “sector perform” rating.
“CN issued a constructive, albeit cautious, outlook for 2023, highlighted by low-single-digit EPS growth, which was below prior ATB estimates. Management is anticipating a slowdown in industrial activity in 2023, which is limiting visibility into volumes in H2/23,” he said. “CN announced an 8-per-cent dividend increase with the results, and guidance included management’s intention to repurchase $4.0-billion of its shares by January 2024. Overall, CN delivered a solid quarter, as its operational turnaround continues to take shape, though guidance came in below expectations, and we expect shares to be under pressure when the market opens.”
* Credit Suisse’s Ariel Rosa to $128 from $133 with a “neutral” rating.
“CN specified that its outlook includes an expectation for a mild recession, which would likely weigh on intermodal and industrial products volume while also weighing on pricing,” she said. “Visibility on Grain volumes is likely to support growth through 1H23, but the outlook is murky for 2H. Alternatively, CNI shares traded lower after-hours, partly reflecting its premium valuation, which we have cautioned allows limited room for disappointment. CN simultaneously announced an 8-per-cent dividend increase and a $4-billion planned buyback (above our $2.7-billion. estimate), suggesting its concerns about the economy are contained, supporting our view that its outlook likely skews conservative.”
* BMO’s Fadi Chamoun to $180 from $185 with an “outperform” rating.
“With strong visibility into H1/23, CNR appears to be building conservatism into its H2/23 outlook amid macro uncertainty. We expect the stock to come under pressure given lower growth projection and valuation multiple risk amid weaker growth. However, lower guidance could setup CNR to outperform if the economy does stabilize/improve in H2/23 while positioning the stock for a more conservative outcome,” said Mr. Chamoun.
* CIBC’s Kevin Chiang to $175 from $181 with a “neutral” rating.
* Cowen and Co.’s Jason Seidl to US$123 from US$122 with a “market perform” rating.
* Stephens’ Justin Long to US$122 from US$127 with an “equal-weight” rating.
* JP Morgan’s Brian Ossenbeck to $168 from $167 with a “neutral” rating.
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Metro Inc.’s (MRU-T) first-quarter 2023 financial results were “solid” as the grocery retailer “slightly” exceeded expectations on most key line items, according to National Bank Financial analyst Vishal Shreedhar, who saw “trends largely intact relative to the last quarter.”
The Montreal-based company reported total sales of $4.671-billion, up from $4.317-million a year ago and above the analyst’s $4.647-billion estimate. Earnings before interest, taxes, depreciation and amortization (EBITDA) rose to $460-million from $424-million and also topped Mr. Shreedhar’s estimate ($453-million) as traffic increased and food same-store sales met expectations (7.5 per cent).
Grocer Metro says more price hikes to come as vendors continue requests for increases
“Management highlighted lower gross margin year-over-year due to higher cost of goods sold in food, partly offset by pharmacy and cosmetics,” said Mr. Shreedhar. “MRU continues to anticipate heightened capex of $800-million in F23 associated with its supply chain modernization. The benefits from management’s supply chain improvement investments have already started to manifest.
“Management continues to note an ongoing consumer shift towards value, including discount stores, private label and promotion. This factor, combined with the inability to fully pass on inflation pressured the food gross margin rate.”
In response to the quarterly release, Mr. Shreedhar raised his 2023 and 2024 earnings per share projections to $4.32 and $4.61, respectively, from $4.27 and $4.58.
That led him to bump his target for Metro shares to $80 from $79 with a “sector perform” rating. The current average is $78.40.
“We believe that MRU is a solid company which has delivered superior longterm performance supported by strong execution and capital allocation; however, these favourable attributes are adequately reflected in valuation, in our view,” he said. “For reference, MRU trades at 11.0 times our NTM [next 12-month] EBITDA vs. the five-year average of 11.1 times and L/EMP [Loblaw/Empire] at 8.2 times/6.7 times, respectively.”
Elsewhere, others making changes include:
* CIBC’s Mark Petrie to $76 from $72 with a “neutral” rating.
* TD Securities’ Michael Van Aelst to $77 from $76 with a “hold” rating.
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It could be a “range-bound year” for Enbridge Inc. (ENB-T), according to BMO Nesbitt Burns analyst Ben Pham, lowering his recommendation for its shares to “market perform” from “outperform” previously.
While his medium- and long-term outlook for the Calgary-based company remains “positive” with the expectation for “robust” growth, Mr. Pham thinks the cash flow picture for its Mainline pipeline system is “softening.”
“The anticipated commissioning of the TMX project in late Q4/2023 will likely have a significant impact on Western Canada oil egress and direction, including diverting volumes away from ENB’s Mainline,” he said. “We had previously been modelling 50,000 barrels per day volume compression, and now we are moving that up to 150,000 bbls/d. This is still well below the incremental 590,000 bbls/d being added on the TMX project (every 100,000 bbls/d is $100-million EBITDA to ENB or approximately 0.5 per cent). If our assumption proves out, we believe the perceived market value of the Mainline (and potentially oil pipelines in general) could also come under pressure (oil pipes is 55 per cent of ENB’s EBITDA).”
“Luckily, the other parts of ENB’s business mix are seeing strong infrastructure development. The gas utility in Ontario is growing EBITDA at a 7-per-cent clip for 2023E and about 40 per cent of the $17B secured backlog is in multibillion dollar LNG export related connections. And renewables, though small part of the portfolio today, is growing at an accelerated pace in both European off-shore wind and in potentially N.A. on-shore. The combination of these levers should soften the potential Mainline downside risk”
With those Mainline concerns, Mr. Pham lowered his earnings and cash flow projections for 2024 and 2025, leading him to cut his target for Enbridge shares to $55 from $60. The average on the Street is $58.25.
“Owning ENB shares in the medium-term and long-term should pay off due to steady infrastructure expansion (esp. in LNG export, regulated gas utility, and renewables) and modest dividend growth. Nevertheless, the stock has done well, is facing near-term Mainline headwinds, and probably has limited valuation expansion given current trading levels. As such, our target valuation is now 12.5 times EV/EBITDA from 13.0 times,” he said.
In a separate research report released Wednesday previewing quarterly earnings season, Mr. Pham shifted his preference to utilities over pipelines within his Canadian Energy Infrastructure coverage universe.
“The change is driven by: (i) relative performance. The pipeline group has outperformed utilities two consecutive years in a row (28 per cent vs. 11 per cent in 2021 and 10 per cent vs. down 10 per cent in 2022),” he said. “Compared with last year, forward utility P/E valuations compressed by 3.5 times to end the year at 16.0 times, while pipeline valuations were relatively flat year-over-year at 15.0 times. The robust commodity price environment, new organic growth announcements, easing of energy transition risk, and capital return initiatives (including share buybacks) all supported share price performance for the pipeline group. Those positive trends will likely continue, but probably reflected into share prices already; (ii) our expectation that 10-year bond yields decline during 2023 and the market will gradually shift to more defensive equities, such as the utility sub-sector. At the same time, inflation concerns are easing – headwinds for utilities in 2022 that should turn into tailwinds into 2023 (on a relative basis); and (iii) selective themes in the utility sector, such as our expectation for strong Alberta power prices (CPX, TA), upside to renewables growth (BEP, BLX, INE, and NPI), and potential unlocking of value in utility stocks ALA, AQN, and EMA. In other words, it could be again a stock picker’s market in Canadian Energy Infrastructure for 2023.
“After considering 2022 performance, relative valuations, growth differences, and macro drivers, we have adjusted our Top 5 Best Ideas to AltaGas (ALA), TransAlta (TA), Northland Power (NPI), Pembina Pipeline (PPL) and Emera (EMA).”
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Scotia Capital analyst Phil Hardie continue to see opportunities across the Canadian Diversified Financials space entering 2023.
In a research report released Wednesday, he said there remains attractive opportunities for investors, believing “best position is through a barbell approach that balances defensive names with appealing value plays.”
The analyst said his game plan is to ”remain defensive in the first half of 2023 but to also look for value.” He’ll then transition to transition into higher beta plays, including asset managers “as well as some attractive prospects with smaller cap lenders,” when “uncertainties recede and market sentiment shifts.”
“The degree of economic weakness in 2023 and outlook for the trajectory of recovery will likely be the factors that separate the leaders from the laggards across the Canadian diversified financials space, however, relative valuation will also play a critical role,” he added. “P&C insurance continues to be well positioned for those taking a defensive stance within the Canadian financials space; however, in the wake of relatively strong stock performance for a number of companies through 2022, investors will likely need to be more selective on valuation to drive outperformance. We think key themes for the P&C space will include (1) personal auto line performance as return to the office builds momentum and a new normal for driving patterns evolves, (2) inflationary trends, and (3) duration of the current pricing cycle.
“Recession risks and the expected impact of recession have put pressure on the valuations of the smaller cap lenders in 2022. We expect mortgage lenders to experience a significant decline in origination volumes and moderate loan growth in 2023. Subprime consumer lenders have already pivoted their focus toward lower-risk loans and migration up the credit ladder for new borrowers. We believe this will not only de-risk these companies but also serve as a source of growth. We expect this group to continue to deliver solid EPS growth in 2023. Given the uncertain macroeconomic conditions, we expect the stocks to continue to trade below fundamental valuations in the near term; however, greater clarity or a shift in the outlook could serve as a key inflection point for stocks in the back half of 2023.”
Calling it his “top value play,” Mr. Hardie named Fairfax Financial Holdings Ltd. (FFH-T) as his “top pick” for the year.
“We see attractive opportunities for investors to buy Fairfax shares, given their discounted valuation that likely does not truly reflect the company’s underlying earnings power,” he said. “Fairfax’s valuation discount relative to its direct peer group has widened relative to its long-term average despite its enhanced ROE and growth potential. We remain bullish that Fairfax is well-positioned to successfully navigate the current environment with the recent rise in interest rates likely to provide a strong tailwind for its short-duration fixed-income portfolio. As a result, we expect further acceleration of its interest and dividend income as the company benefits from reinvesting capital in the higher rate environment and the short-duration portfolio mitigates the downside risk of capital erosion if rates rise further. We anticipate the pricing environment to remain favourable in the next 12 to 18 months with the hard market continuing across commercial lines, supporting an increase in underwriting leverage and is an additional lever to grow its BVPS. We also think the value approach to investing is likely to bode well for the upcoming environment with a more modest return from equity markets anticipated. Fairfax has demonstrated resilience through the business cycle and turbulent financial markets, but we view it as a less-defensive play than more traditional publicly listed insurers. At this stage of the market cycle, this likely provides an attractive balance: downside protection thanks to the relative resilience of insurance operations through a potential recession, and upside potential when markets recover.”
Mr. Hardie has a “sector outperform” rating and a target of $1,050 for Fairfax Financial shares, up from $995 previously. The average target on the Street is $994.29.
He also made these other target price changes:
- AGF Management Ltd. (AGF.B-T, “sector perform”) to $8.75 from $8.50. The average is $8.36.
- CI Financial Corp. (CIX-T, “sector perform”) to $19 from $17. Average: $18.94.
- Definity Financial Corp. (DFY-T, “sector outperform”) to $44 from $43. Average: $42.77.
- IGM Financial Inc. (IGM-T, “sector perform”) to $45 from $44. Average: $43.13.
- Intact Financial Corp. (IFC-T, “sector outperform”) to $231 from $224. Average: $222.23.
- Power Corp. of Canada (POW-T, “sector perform”) to $39 from $38.50. Average: $36.88.
- TMX Group Ltd. (X-T, “sector perform”) to $164 from $165. Average: $154.
“Other top ideas by investment style: For defensive quality, our name remains Intact, and for small-cap growth, we like Trisura,” he said. “We continue to like Definity and believe it is attractive for GARP investors looking for a defensive mid-cap play with solid growth prospects. Our other top value ideas include: Guardian Capital, Onex and Brookfield Business Partners. goeasy is on our radar, but a reduced risk to the economic outlook, and a broader shift in investor sentiment and risk appetite are likely needed for the stock to sustain a meaningful rebound.”
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National Bank Financial analyst Gabriel Dechaine sees a “favourable” outlook for Canadian life insurance companies in the first half of the year “especially versus banks.”
“The lifecos are relatively resilient to recessionary forces, have less regulatory pressure on them at the moment, and stronger equity markets bode well for their (relatively large) Wealth operations,” he said. “These attributes should support their performance relative to the banks. We believe, though, that performance outlook will be measured in months, not years. For starters, the valuation discount of the lifecos to the banks has nearly halved (though still at a reasonable 10 per cent). More importantly, we believe that if the rate hike cycle shifts to a more dovish stance in the second half, there could be greater interest in the banks (and rotation out of the lifecos). Finally, as it relates to upcoming results, we believe strong intra-quarter performance of the lifecos eats into their potential upside. Our top pick ‘into the quarter’ is SLF, owing to potential improvement at MFS, continued strong Group insurance results, and another quarter of positive investment income.”
Ahead of the start of earnings season on Feb. 8, Mr. Dechaine raised his targets for lifeco stocks after introducing his financial projections for 2024, seeing average earnings per share growth of 10 per cent, which he said is “partially a reflection of more depressed growth rates (i.e., of 4 per cent year-over-year).”
“Lifecos outperformed the market by 400 basis points in 2022 while also outperforming the banks by 900 bps along the way,” he said. “The latter comparison is an important one for investors and was remarkable since it represented only the second period of outperformance over the banks since 2015 (and 7th in the last 22 years). We believe the main driver revolved around recessionary fears. Whereas the lion’s share of a bank’s business is inherently linked to the economic cycle, a much smaller portion of a lifecos is so.”
“All companies have disclosed the earnings/book value impact of IFRS 17. What uncertainty remains, however, lies in the actual reporting of results under the new regime. All companies have guided to greater volatility of reported earnings, while core earnings should be less affected. The gap between the two measures (to the extent it’s wider) could be viewed in a less flattering light.”
Increasing his target prices by an average of 7 per cent to reflect his estimates and changes to his valuation models, Mr. Dechaine’s changes are:
* Great-West Lifeco Inc. (GWO-T, “sector perform”) to $36 from $35. The average on the Street is $34.30.
* IA Financial Corp. Inc. (IAG-T, “outperform”) to $88 from $78. Average: $87.
* Manulife Financial Corp. (MFC-T, “sector perform”) to $26 from $24. Average: $26.70.
* Sun Life Financial Inc. (SLF-T, “sector perform”) to $69 from $66. Average: $69.75.
Elsewhere, CIBC’s Paul Holden made these target adjustments
* Great-West Lifeco Inc. (GWO-T, “neutral”) to $37 from $32. Average: $34.30.
* IA Financial Corp. Inc. (IAG-T, “neutral”) to $85 from $74. Average: $87.
* Manulife Financial Corp. (MFC-T, “underperformer”) to $27 from $23. Average: $26.70.
* Sun Life Financial Inc. (SLF-T, “outperformer”) to $71 from $65. Average: $69.75.
“Many of the themes that worked against the lifecos in 2022 have started to shift in the opposite direction.” said Mr. Holden. “Our 2023 EPS estimates move up on higher AUM, an improving outlook for Asia and the bounce in European equity and FX markets. With this note we also adjust our forward estimates for disclosed IFRS 17 impacts. While we are tempted to get more positive on the sector given improved trends, our revised price targets based on IFRS 17 estimates and historical P/E multiples show modest upside. SLF remains our lone Outperformer while we maintain an Underperformer on MFC.”
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After a difficult 2022 for independent power producers and infrastructure stocks, iA Capital Markets analyst Naji Baydoun is more optimistic about this year, believing the outlook for growth remains “solid.”
“Most of our coverage universe posted negative share price performance in 2022, primarily due to persistent inflationary pressures which have impacted both company costs and the monetary policy outlook,” he said in a report released Wednesday. “As (1) interest rates shot higher, and (2) due to uncertainty around the ultimate levels at which rates could stabilize (and the path to get there), equities in our coverage universe were impacted by the rising cost of capital. Despite these negative macroeconomic headwinds, we note (1) positive industry developments (i.e., increased global commitments to decarbonization), and (2) solid underlying company fundamentals and growth outlooks. On average, companies across our coverage universe delivered negative 5-per-cent total shareholder returns (TSRs) in 2022, while our Top Picks generated a 2-per-cent compounded TSR compared to negative 6 per cent for the S&P/TSX Composite Index.
“The upside is in the balance sheet (not growth). Underlying consensus estimates broadly increased throughout 2022; the combination of improving growth expectations and declining share prices have made select equities more attractive to own. Although incremental growth initiatives and continued project de-risking/execution remain important drivers of shareholder value creation, we believe that funding will be the key catalyst to watch in 2023. Given the higher cost of capital environment, companies that can efficiently source low-cost non-dilutive capital should be best positioned to deliver the most amount of upside potential.”
Mr. Baydoun thinks the fundamental outlook for most companies in his coverage universe is encouraging, predicting “healthy” near-term and medium-term growth outlooks.
“Broadly speaking, we expect companies under coverage to be able to deliver mid to high single-digit cash flow per share growth over the medium-term, with a handful of companies also expected to provide investors with dividend growth relatively in line with overall cash flow per share growth over time,” he said. “When looking at the evolution of underlying consensus estimates over 2022, we note particularly strong upward revisions at companies that (1) had positive torque to higher power prices (NPI, BLX, INE, TA, CPX), (2) executed on accretive M&A opportunities (INE, CPX, BIP, PIF, HEO), and (3) benefited from margin expansion and positive exposure to inflationary dynamics (SXP, BIP). On the flip side, we note substantial downward revisions to estimates at businesses with (1) negative exposure to supply-chain and inflationary cost pressures (ARE, BDT), (2) significant project delays (UGE), and (3) weaknesses in their balance sheets/financial risk profiles (AQN). The broad variance of performance (both from a financial and share price perspective) reinforces the potential excess return generation that can be achieved from active management in the Power & Infrastructure sectors (in our view).”
He named a pair of stocks as his “top picks” for the first quarter of the year. They are:
* TransAlta Corp. (TA-T) with a “strong buy” rating and $16 target, matching the average on the Street but down from $16.50 previously.
“We consider TA our preferred merchant and value IPP play in the Canadian Power sector,” said Mr. Baydoun. “TA offers investors (1) a balanced mix of contracted and merchant powe rexposure, (2) improving balance sheet and cash flow fundamentals, (3) long-term upside to rising Alberta power prices, (4) a discounted relative valuation versus IPP peers, and (5) both downside protection and upside optionality from Brookfield’s strategic support. We continue to like TA’s clean energy transition plan, which we believe should (1) reduce the Company’s risk profile, (2) drive additional growth and diversification, and (3) support valuation multiple expansion over time (see here for more details). For 2023, we see the strong Alberta power market environment as a key near-term tailwind to financial performance; this should also support excess FCF generation, which provides capital allocation optionality (e.g., buybacks, self-funded internal and external growth initiatives). We expect TA to make steady progress on its existing growth and announced positive FID on new renewable power projects; the Company’s success in potentially accelerating its organic growth in 2023 could also provide additional comfort for investors about the Company’s overall trajectory. Finally, additional clarity on a potential corporate simplification plan could also support a higher relative valuation.
* Brookfield Infrastructure Partners LP (BIP.UN-T) with a “strong buy” rating and US$46 target, down from US$47.50 but above the $44.87 average.
“We view BIP as a unique and diversified way for investors to play the broad long-term infrastructure investment theme, with (1) access to a global, large-scale infrastructure investment platform (ownership interests in more than US$70-billion of assets), (2) defensive cash flows (90 per cent of FFO regulated/contracted), (3) visible and sustainable organic cash flow growth (6-9 per cent per year, CAGR [compound annual growth rate] 2022-27E), (4) potential upside from accretive M&A, and (5) attractive income characteristics (4-per-cent yield, 60-70-per-cent long-term FFO payout, and a 5-9 per cent per year dividend growth target). BIP has delivered record financial results in 2022 and once again easily beat its capital deployment targets. The Company and management’s exceptional execution track record gives us confidence that it can continue to exceed its internal objectives and deliver double-digit cash flow per share growth over the medium-term. We expect large-scale asset monetizations to (1) surface/crystalize underappreciated value from BIP’s existing portfolio, and (2) support funding for growth initiatives (i.e., internal sourcing of capital for M&A). We also see the potential for BIP to capitalize on market volatility/dislocations to execute on strategic and accretive M&A opportunities (supported by its robust access to capital). By our calculations, the shares are currently trading at some of the most attractive valuation levels on per-unit-of-growth in recent years; we continue to see BIP as a standout growth vehicle for long-term shareholders in the current macroeconomic context.”
Mr. Baydoun also made these target changes:
- Brookfield Renewable Partners LP (BEP.UN-T, “buy”) to US$38 from US$40. Average: $37.14.
- Capital Power Corp. (CPX-T, “hold”) to $50 from $52. Average: $52.31.
- TransAlta Renewables Inc. (RNW-T, “buy”) to $14.50 from $15.50. Average: $14.31.
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While its fourth-quarter results largely fell in line with his expectations, Echelon Capital analyst Amr Ezzat lowered his rating for Blackline Safety Corp. (BLN-T) to “buy” from “speculative buy” given concern over its “increased risk profile.”
Before the bell on Tuesday, the Calgary-based connected safety technology firm reported revenue of $22-million, up 14.3 per cent year-over-year but narrowly lower than Mr. Ezzat’s estimates of $23.6-million. An EBITDA loss of $7.7-million was better than the analyst’s forecast of a loss of $9.3-million due to better gross margins and expense reductions.
“Blackline Safety Corp.’s FQ422 results saw sales come in slightly below estimates while EBITDA losses were slightly narrower on the Company’s cost cutting initiatives,” he said. “The quarter continues to reflect meaningful cash outflows, with free cash flow coming in at negative $16.5-million for the quarter following on last quarter’s $20.6-million outflow. While we are encouraged by the Company’s initiatives to transition into a positive EBITDA and cash flow generator, we see heightened liquidity requirements as we go into the seasonally softer first half of the year. Although the Company is currently in a positive net cash position, we expect cash burn to continue (albeit at a more modest pace), leaving little wiggle room for any unforeseen headwinds.”
Seeing fiscal 2023 as “pivotal in proving out [the] sustainability of its business model,” Mr. Ezzat cut his target for Blackline shares to $3.50 from $5 after trimming his full-year sales and EBITDA projections. The average target is $4.97.
“We believe a much more aggressive return profile is possible beyond our target price should the Company successfully transition into a positive cash flow generator,” he said.
Elsewhere, other changes include:
* Canaccord Genuity’s Doug Taylor to $4 from $5 with a “speculative buy” rating.
“While the quarter featured minimal contributions from early G6 shipments, the company made material progress in narrowing the EBITDA loss profile while shoring up the balance sheet. Looking ahead, management hinted toward more liquidity-bolstering and cost-saving measures, while our attention remains on the broader G6 launch over the coming months as the key top-line catalyst,” said Mr. Taylor. “On that front, the company maintained a target of 45 - 50k G6 units shipped in F2023, with expectations for improving overall hardware and service margins as pricing initiatives take hold. We are reiterating our SPECULATIVE BUY recommendation and lowering our target price to $4.00 (from $5.00), largely reflecting a higher discount rate in our DCF as the company executes against its G6 target and works toward breakeven adj. EBITDA and FCF over the coming year.”
* TD Securities’ David Kwan to $5.50 from $6 with a “speculative buy” rating.
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In other analyst actions:
* TD Securities’ Brian Morrison downgraded Magna International Inc. (MGA-N, MG-T) to “hold” from “buy” with a US$69 target from US$76. Others making target changes include: JP Morgan’s Ryan Brinkman to US$72 from US$74 with an “overweight” rating and CIBC’s Krista Friesen lowered her target for to US$72 from US$74 with an “outperformer” rating. The average is US$73.86.
* Mr. Morrison raised his Martinrea International Inc. (MRE-T) target by $1 to $16 with an “action list buy” rating. The average is $15.50.
* After reducing his WTI price expectation for 2023, Canaccord Genuity’s John Bereznicki downgraded PrairieSky Royalty Ltd. (PSK-T) to “hold” from “buy” with a $24 target, up from $22.50 but below the $25.23 average.
“With the change in our commodity price assumptions, our cash flow estimate for PSK decreases by 5 per cent in 2023,” he said. “With the stock price increasing by 6.1 per cent since the start of the year, we believe PSK’s stock is fairly valued at 12.5 times 2023 estimated EV/DACF [enterprise value to debt-adjusted cash flow]. As such, we have both increased our 12-month target price on PSK to $24.00 from $22.50 and reduced our recommendation to HOLD from Buy. Our $24.00 target price on PSK reflects a 13.1 times 2023 estimated EV/DACF multiple, compared to the royalty group average of 10.1 times.”
* Jefferies’ Mitch Ryan cut his Newcrest Mining Ltd. (NCM-T) target to $25 from $26 with a “buy” rating.
David Leeder