Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Walter Spracklin is taking a “more conservative view” on the Canadian airlines/aerospace sector for the next year, saying he’s “cautious on the sustainability of high pricing as consumer confidence weakens and the percentage of non-mainline carrier fleet expands putting pressure on prices.”
In a research report released Wednesday, he revealed the firm’s Get Out and Travel (GOAT) index, which analyzes consumer patterns, inflected downward in the second quarter for the first time, which he said is “a sign that travel demand may potentially be turning over.” He also emphasizing travel search interest is trending lower.
“Generally, the airlines/aerospace sector underperformed the market in Q2, except for [Air Canada], which significantly outperformed on robust summer travel demand and normalizing fuel prices,” said Mr. Spracklin.
“Based on the data and associate trends, we are increasing our Q2 estimates for AC (due to fuel cost declines) and take a more conservative view in our out-year estimates, supported by weakening travel indicators observed in the RBC Elements data. The remainder of our coverage Q2 estimates remains unchanged ahead of reporting season. Key areas of focus for us this quarter will be: 1) sustainability of higher airfares, given macro concerns and new entrants, 2) update on booking trends, 3) the impact of materially higher labour costs and pilot negotiations, and 4) expansion of capacity, especially as infrastructure issues persist.”
For Air Canada (AC-T), the analyst raised his second-quarter EBITDA estimate to $903-million from $895-million, exceeding the $895-million consensus on the Street, solely based on lower fuel prices.
“Additionally, our 2024 estimates remain below consensus and guidance ($3.5-billion to $4-billion) as we see multiple headwinds facing the airline industry after the summer travel season,” he noted. “These include the sustainability of higher fares, increased new entrants, weakening leading indicators supported by our Heatmap and increased costs. The key focus for us into the quarter will be on airfares, pilot contract negotiations, and persistent infrastructure delays. Our target multiple increases to 5 times (from 4.5 times) on robust summer travel demand and lower fuel costs.”
Reiterating a “sector perform” recommendation for its shares, Mr. Spracklin raised his target to $25 from $23. The average on the Street is $29.90, according to Refinitiv data.
Calling it “a strong business in the midst of a tough operating environment,” he added: “Despite unprecedented industry conditions, we believe Air Canada has done a commendable job navigating an exceptionally challenging industry environment. Going forward, we believe upside is limited in the medium-term given: (1) sustainability of high fares in a recession; (2) increased new entrant activity increasing competition, (3) increased operating costs and pilot contract renewal; and (4) business travel plateau.”
Mr. Spracklin also increased his target for Exchange Income Corp. (EIF-T, “outperform”) to $71 from $70. The average is $66.77.
“We flag EIF as attractively valued, in our view, with valuation not reflecting our expectation for mid-teen 3-year EBITDA CAGR 2022 to 2025,” he said.
“Our Q2 estimate remains unchanged at $147-million, ahead of consensus $143-million on higher Aviation EBITDA. Our 2023 EBITDA estimate also remains unchanged at $568-million, toward the top end of guidance for EBITDA of $540-million to $570-million, and ahead of consensus $559-million. We now value EIF off our 2025 EBITDA estimate of $708-million (cons. $675-million) to fully capture new business wins; and discount back one-year at 8 per cent.”
The analyst reaffirmed Bombardier Inc. (BBD.B-T) as his “top pick” in the sector, seeing it “attractively valued at a 40-per-cent discount to peers.” He kept an “outperform” rating and Street-high $103 target for its shares, exceeding the $79.54 average.
“Our Outperform rating reflects our view that the company presently screens as an attractive deep-value opportunity with the transition to a pure-play biz jet company now complete,” he said. “While risks remain with the execution of strategic objectives, we see the existing business as less complex and the cost structure as more streamlined, which should eventually support a return to FCF breakeven on a sustainable basis.
“With Bombardier now finishing a multi-year period of high investment spend to develop and position its product and service portfolio, 2023 should be an important transition year. The company has pursued ways to further deleverage the balance sheet through strategic alternatives (i.e., asset sales), and we believe BBD has sufficient liquidity to absorb smaller issues that may still arise.”
Elsewhere, Raymond James’ Savanthi Syth raised her Air Canada target to $30 from $28 with an “outperform” rating.
“We are increasing our 2023E/24E/25E EBITDA for Air Canada by 7 per cent/4 per cent/2 per cent to $3.7-billion/$4.0-billion/$4.2-billion and EBIT by 15 per cent/7 per cent/4 per cent to $2.0-billion/$2.30-billion/$2.5-billion,” she said.. “This reflects a lower fuel outlook (our Brent forecast still well above the forward curve), somewhat larger and earlier impact from an assumed amended pilot contract, 2 ppts lower 2023 year-over-year capacity forecast, greater cargo segment headwinds, and modestly weaker FX. We continue to believe the fundamental set up for AC remains favorable due to still recovering demand (particularly in long-haul international markets) and commercial initiatives (such as the newly implemented Transborder JV with United), which should blunt the impact of any economic slowdown and structurally lower corporate travel demand. Moreover, as discussed previously, while new entrants in Canada have garnered much attention, we believe the discipline shown by the two largest players in focusing on areas of strength will have more meaningful earnings implications. As such, along with the strong liquidity position, we reiterate our Outperform rating on AC.”
In a research report titled Dead reckoning in a rapidly shifting environment, RBC Dominion Securities analyst Paul Quinn said he expects second-quarter financial results in the paper and forest products sector to continue the weak trend established late in 2022.
“Building material prices remain very low,” he said. “Pulp prices have materially weakened over the last six months, led by lower consumption in China, capacity adds and record inventory levels. Paper prices appear to be holding, but operating rates are weak. Containerboard markets are sloppy with market-related downtime attempting to offset the new mill start-ups. Timber prices remain weak across North America due to weak lumber and other end use consumption. During the Q2 earnings season, we suspect investors will again focus on the macro, with the effects of a potential recession looming large across most commodities. While we wait for an inflection point in the economy, interest rates and overall confidence, we note that valuations remain near historic lows.”
Citing the impact of falling pulp prices, Mr. Quinn upgraded Mississauga-based KP Tissue Inc. (KPT-T) to “outperform” from “sector perform” with a $12 target, rising from $10. The average target on the Street is $10.90.
“After a couple of years of being on the wrong side of increasing pulp prices, KP Tissue is now poised to benefit from materially lower input costs with the significant decline in prices since mid-2022 that has accelerated in 2023,” he said. “Preliminary July list prices for NBSK and BEK are now 25 per cent and 33 per cent, respectively, below peak levels reached in 2022. We think elevated inventory levels are likely to preclude a meaningful rally in pulp prices over the medium term.”
“Our Adjusted EBITDA estimate for 2025 of $275-million implies approximately 5-per-cent year-over-year growth from our 2024 estimate. Year 2 of the TAD Sherbrooke has exceeded its ramp-up curve. The company noted with Q123 results that its start-up of the facial line and paper machine line as part of its Sherbrooke expansion project are tracking to Q423 and the end of 2024, respectively, and expected to be a growth catalyst for 2023 and beyond. In addition, the company successfully implemented a strategy to manage pricing and costs over the last two years. As a result, we have raised our EBITDA financial forecasts for 2023 & 2024, up 9 per cent and 11 per cent respectively.”
For Canadian companies in his coverage universe, he also raised his targets for Canfor Corp. (CFP-T, “outperform”) to $30 from $27 and West Fraser Timber Co. Ltd. (WFG-N/WFG-T, “outperform”) to US$110 from US$105.
Conversely, he cut his target for Greenfirst Forest Products Inc. (GFP-T, “sector perform”) to $1.25 from $1.50. The average targets are $29.60, US$104.17 and $1.25, respectively
“In Canada, we like IFP, CFP, CAS, KPT & DBM. In the US, we like LPX, CLW, SLVM & WY,” he concluded.
While National Bank Financial analyst Cameron Doerksen warns NFI Group Inc. (NFI-T) “still needs to execute on its planned production ramp and there remain lingering risks around supply chain improvement,” he thinks its financial results are likely to “trend much more positively later in 2023 and beyond, which will support a higher share price.”
Ahead of the release of its second-quarter results, he applauded the Winnipeg-based bus manufacturer’s increasing balance sheet flexibility and improving competitive position with demand “continuing to be strong.”
“NFI has indicated that it expects to complete all elements of its comprehensive refinancing plan prior to the release of Q2 results on August 2nd,” said Mr. Doerksen. “As we have previously noted, the refinancings and new credit agreements provide NFI sufficient cash and financial flexibility (with key covenants waived through Q2/24) to execute on the production ramp expected to begin later in 2023. Based on our updated modeling, we see NFI’s net-debt/EBITDA (excluding convertible debentures) at 3.0 times at the end of 2024, well within the updated covenant of 3.5 times.
“In addition to underlying demand for new transit buses remaining very strong supported by committed government funding, NFI’s competitive positioning has improved with the exit of Nova Bus and Prevost from the U.S. transit markets. As detailed in this note, NFI is in a particularly strong position in both New York City and Chicago to replace Nova Bus as a supplier.”
For the quarter, he trimmed his revenue projection to $536-million, down from $549-million previously, but he raised his EBITDA estimate to a loss of $5-million from a loss of $6-million. His fully adjusted earnings per share forecast improved by 2 cents to a loss of 51 cents, matching the current consensus on the Street.
“Ongoing improvements in the supply chain is the key watch item for NFI as it prepares to ramp up bus production in the latter half of 2023 and through 2024,” said Mr. Doerksen. “Assuming the supply chain cooperates, we see a path for significantly higher EBITDA and free cash flow generation for NFI in 2024 and 2025.”
After introducing his fiscal 2025 estimates, the analyst increased his target for NFI shares to $16 from $12, keeping an “outperform” recommendation. The average on the Street is $12.33.
“Given that 2024 will still be a transition year for the company, we feel it is appropriate to roll out a 2025 forecast and shift the basis for our valuation to that year, which we would consider to be a more ‘normalized’ year for earnings for NFI. However, to remain conservative reflecting the ongoing supply chain risk, we apply a 6.0 times EV/EBITDA multiple resulting in a new target,” he concluded.
National Bank Financial analyst Zachary Evershed believes Neighbourly Pharmacy Inc.’s (NBLY-T) reliance on relief pharmacists likely weighed heavier than originally anticipated during its first quarter of fiscal 2024 based on a reversal in the improvement of open job postings, leading him to lower his margin estimate.
“Our channel checks reveal that Neighbourly’s open positions count reversed course early in June, giving up prior improvements in vacancies,” he said in a research note. “Even though the gross number of job openings does include postings that are most likely irrelevant to margin recovery (e.g., delivery drivers, clerks), we believe it is nevertheless directionally indicative of reliance on relief pharmacists at levels higher than we anticipated. As such, we are now forecasting $19.2 million in EBITDA on 10.0-per-cent margins (was 10.3 per cent) in the quarter, reflecting an adjustment lower to account for increased expenses owing to staffing challenges, though still up 20 bps year-over-year.
“Looking farther ahead, we still anticipate some margin recovery this year as incoming graduating pharmacists enter the workforce this summer, with a more categorical improvement next year, recouping the majority of the 80 basis points labour headwind. However, we highlight the risk that pharmacists currently working for NBLY may seek larger cost of living adjustments as they take note that newer employees are being paid top dollar to ensure the company is able to attract its fair share of graduating students. We do not believe this outcome is reflected in our current estimates, and may represent further downside to our profitability forecasts.”
Ahead of the scheduled Aug. 1 release of its quarterly results, Mr. Evershed is projecting revenue of $192.3-million, up 68.1 per cent year-over-year but below the consensus forecast of $192.3-million. He estimates adjusted EBITDA will rise 70.9 per cent to $19.2-million, also under the Street’s expectation of $19.8-million. However, his adjusted earnings per share estimate of 6 cents, matching other analysts, is a drop of 34.2 per cent from the same period a year ago.
Reiterating a “sector perform” rating for the Toronto-based company’s shares, he trimmed his target to $20 from $20.50. The average on the Street is $26.72.
“As we remain wary that the tight market for new hires may yield higher labour costs in the rest of the network in the coming year, and given the balance sheet remains a limiter on the pace of M&A growth in the current interest rate environment, we maintain a cautious stance,” said Mr. Evershed.
Two of the three analysts on the Street covering Goodfood Market Corp. (FOOD-T) raised their target prices for its shares following Tuesday’s release of better-than-anticipated third-quarter results.
The Montreal-based company jumped 12.1 per cent following the premarket report which saw adjusted EBITDA jump to $3.3-million, exceeding the consensus forecast of $1.3-million on stronger margins and lower-than-anticipated expenses.
“Goodfood’s leaner cost structure contributed to a second consecutive quarter of positive adjusted EBITDA despite fewer active customers,” said Desjardins Securities’ Frederic Tremblay. “In addition to a beat on adjusted EBITDA, we were pleased to see free cash flow move into positive territory in 3Q, thanks to profitability improvement, working capital management and Goodfood’s transition to a capex-light model. The next major milestone that management will work toward is balancing growth and profitability in FY24.”
Keeping a “hold” rating for Goodfood shares, Mr. Tremblay moved his target to 75 cents from 70 cents. The average is 68 cents.
“While we are pleased with increased revenue per customer, we note another decline in the number of active customers in 3Q (down 4 per cent quarter-over-quarter),” he said. “Seasonal trends lead us to believe that the customer base will shrink again in 4Q. However, ongoing efforts to enhance the customer experience, potential expansion of distribution channels and a targeted marketing strategy have the potential to fuel an increase in the number of active customers in FY24. While we see a risk that rejuvenating the business could require significant financial resources for promotions/marketing, we are reassured by management’s insistence on positive adjusted EBITDA and by its intention to fund growth with internal cash flow.”
Elsewhere, Canaccord Genuity’s Luke Hannan bumped his target to 65 cents from 60 cents with a “hold” rating.
“The key takeaway from the quarter, in our view, has to do with management’s outlook for F2024,” said Mr. Hannan. “Customer growth moving forward will have a higher mix of reactivations (30-40 per cent of customers coming from reactivations now vs. 20 per cent a year ago), which are inherently higher margin due to their familiarity with the Goodfood brand. As well, the company stated its acquisition costs for customers that previously had never engaged with the Goodfood brand have improved as well, improving the lifetime values of net new customers for the company moving forward. Each of these developments bode well for Goodfood’s near-to-medium term margin potential.”
“We’ve come away from Q3/F23 earnings results incrementally more positive on FOOD’s profitability potential moving forward. We’ll wait to see whether the company can consistently deliver healthy top-line growth before becoming more constructive on the shares.”
Stifel’s Martin Landry reiterated a “hold” rating and 65-cent target.
“Goodfood reported good Q3FY23 results which were mostly in-line with our expectations. While revenues continued to decline rapidly, profitability improved and came-in slightly above expectations,” said Mr. Landry. “Management continues to be disciplined with customer acquisition, which resulted in a decline of 5,000 customers sequentially and a decline of 44 per cent year-over-year. The lower customer count explains mostly Goodfood’s 37-per-cent revenue decline year-over-year. On the positive side, Adj. EBITDA came-in at $3.3 million a significant improvement from the $10.6 million loss last year. Goodfood seems to have stabilized its cash burn and could generate positive free cash flows in FY24. Under such a scenario, the company appears de-risked vs. a year ago, which should be reflected in improved valuation. Our conviction is low on Goodfood’s ability to return to a growth mode given the macroeconomic environment and competitive landscape. Hence, absent limited growth potential in our view, we remain HOLD rated on the shares.”
Calling it a “countercyclical growth opportunity,” Scotia Capital analyst Cameron Bean initiated coverage of Logan Energy Corp. (LGN-X) with a “sector outperform” recommendation on Wednesday, touting its management’s “track record of value creation in the small cap growth space.”
The Calgary-based company began trading on the TSX Venture Exchange on Tuesday following the spin-out of the early stage Montney assets of Spartan Delta Corp.
“Logan is a Canadian-listed small cap oil and gas producer led by key former team members of Spartan Delta Corp. (Spartan Delta; SDE-T; rated Sector Outperform), from which Logan was spun out,” he said. “The company is advancing an oil- and liquids-focused production growth and asset advancement strategy reminiscent of the classic junior exploration and production (E&P) model (high growth through outspending cash flow).
“We believe Logan is well positioned to pursue this strategy and create value for investors. Our thesis and recommendation are based on Logan’s (1) proven management team; (2) timely, countercyclical strategy of advancing an underappreciated Montney asset base at the same time as long-term players and recent entrants compete for a shrinking pool of available assets; and (3) strong potential for asset base advancement through the application of modern drilling and completion technology.”
Currently the lone analyst covering Logan, Mr. Bean set a target of $1.65 per share.
“In our view, the multi-year reduction in upstream oil and gas investment (particularly exploration investment) and hollowing out of the junior E&P sector point to a potentially advantageous environment for a well-capitalized junior company such as Logan,” he said. “We believe the company’s plan to advance and grow its underappreciated Montney asset base is well timed and could yield strong returns for investors. We expect consolidation to continue in the Montney and expect asset valuations to increase as long-term players and recent entrants (including three notable new entrants in the last 16 months) compete for a diminishing pool of available assets. Importantly, Montney asset valuations have materially increased over the last three years, with Spartan Delta’s recent asset sale yielding $7,300/acre, or $55,000/boe/d [barrels of oil equivalent per day] versus the Q3/20 Kelt Exploration Ltd. Inga asset sale at $3,600/acre, or $36,000/boe/d. Based on precedent transactions, we estimate the market value of Logan’s asset at $1.20/share, with a line of sight beyond $2.00/share if the company successfully executes its plans.”
In other analyst actions:
* After a tour of two of Well Health Technologies Corp.’s (WELL-T) Vancouver clinics, TD Securities’ David Kwan raised his target for its shares by $1 to $8.50, above the $8.30 average on the Street, with a “buy” rating.
“WELL remains our top pick. We expect its superior execution to-date to continue, highlighted by its strong organic and M&A-driven growth and healthy margins and FCF that we believe should allow it to take advantage of a very attractive M&A environment,” said Mr. Kwan.
“Restaurant EPS is around the corner, and we see Q2 a story of choppier traffic, lapping price and moderating wage/commodity pressures. We see CMG, MCD and YUM best positioned, and looking for reasons to warm up on SBUX postrecent underperformance,” said Mr. Fadem.
* Barclays’ Teresa Chen cut her target for TC Energy Corp. (TRP-T) to $51 from $52, below the $60.24 average, with an “equalweight” rating.
* Cormark Securities’ David McFadgen cut his Telus Corp. (T-T) target to $28, below the $29.47 average, from $32 with a “buy” rating.
* JP Morgan’s Arun Jayaram lowered his Vermilion Energy Inc. (VET-T) target to $26 from $28 with an “overweight” rating. The average is $25.69.