Inside the Market’s roundup of some of today’s key analyst actions
Canaccord Genuity analyst Scott Chan reduced his valuations for Canadian banks on Wednesday in response to to “the challenging U.S. operational environment post the SVB failure.”
“We are lowering our Canadian bank target P/E [price-to-earnings] multiples mainly to reflect the challenging U.S. operational environment and potential impact to EPS (e.g., deposit outflows to higher ST securities, slower loan growth due to tighter lending standards, NIM pressure) post SVB failure (probably lead to higher regulatory standards for small-medium sized US regional banks and M&A consolidation),” he said. “SVB had a niche client base mainly focusing on VC/PE early stage technology and biotech, etc. We believe U.S. Mega bank stocks will likely be beneficiaries coming out of this (i.e., increase deposit market share, IB activities, volatility benefits trading, abide by higher regulatory standards). Our Group target prices (avg.) are revised down 8 per cent with most downside towards TD and BMO.”
In a research report released before the bell, the analyst emphasized National Bank of Canada (NA-T) and Bank of Nova Scotia (BNS-T) do not have exposure to U.S. P&C banking. Accordingly, he thinks they are “likely relatively better positioned near term from ongoing uncertainty.”
David Berman: Now might be the time to take advantage of bank stocks
“Liquidity (i.e., run-off on deposits) has been the primary issue facing recent bank failures (e.g., SVB, Signature Bank, Credit Suisse),” he added. “Due to the oligopoly nature of the Big-6 Canadian banks, we expect Canadian deposits to remain resilient (Q1/F23: Group total deposits up 3 per cent quarter-over-quarter).
“Currently, the Canadian Big-6 Group P/E (NTM) trades at P/E of 9.0 times, representing 13-per-cent discount since Q2/19. Compared to down south, U.S. Mega banks trade at 9.1 times (17-per-cent discount) and large U.S. select Regional banks trade at 6.5 times (50-per-cent discount). Overall, we would look to opportunistically add to Canadian bank stocks on down market days with the Group (avg.) offering a dividend yield of 5.0 per cent. For Q2/F23E, we continue to anticipate slight dividend increases across all banks (except TD) with Group (avg.) growth of 3 per cent.”
Mr. Chan’s target changes are:
- Bank of Montreal (BMO-T, “buy”) to $130.50 from $151. The average on the Street is $141.99, according to Refinitiv data.
- Bank of Nova Scotia (BNS-T, “hold”) to $70.50 from $74. Average: $73.38.
- Canadian Imperial Bank of Commerce (CM-T, “hold”) to $63 from $66.50. Average: $65.13.
- National Bank of Canada (NA-T, “hold”) to $99 from $104.50. Average: $106.75.
- Royal Bank of Canada (RY-T, “hold”) to $133 from $137. Average: $142.27.
- Toronto-Dominion Bank (TD-T, “buy”) to $86.50 from $104. Average: $100.27.
Raymond James analyst Jeremy McCrea thinks Crescent Point Energy Corp.’s (CPG-T) release of a report on its Kaybob Duvernay assets will “likely mark a major change” in investor perceptions, leading him to raise his recommendation for its shares to “outperform” from “market perform.”
The 73-page document was the focus of a presentation held for analysts on Tuesday.
“One of the key attributes to successful investing is to recognize pivotal moments within businesses,” he said. “For E&P companies, that typically involves a new play or improved field economics that ultimately gets reflected in a multiple expansion more near-term. When Crescent Point bought into the Duvernay in 2021, the play had the potential to change the profitability of the company, yet with a mixed history of corporate challenges with investors, it would require meaningful evidence that changes were real. So after 2 years, with a number of revised completion advancements, and multiple well-pads later, it feels as if we’re at that pivotal moment for Crescent Point’s Duvernay play. Yes, there is still risk with future locations, however there is a gap today between investor perception and where the Duvernay has progressed today. As investors review the 73 page Duvernay slide deck, this play looks to rank 2nd quartile in our Canadian basin economic play book – with potential to improve still. With size and scale ($8-plus billion in bluesky undrilled locations in the Duvernay alone), and the company trading essentially at its PDP reserve value, there seems to be a mismatch.
“We find these mismatches are some of the most important factors in identifying names with high upside potential. The company had previously struggled with profitability and its risk-return profile, but we believe this Duvernay technical session left analysts/investors with increased clarity around CPG’s inventory depth, well economics, and the company’s capacity to generate FCF over the longer term.”
Mr. McCrea said the document highlighted significant improvements in drilling and completions and is likely to build investor confidence around inventory and production rates.
“Overall, given the non-core asset sales seen over the last few years, we wouldn’t be surprised to see more capital shifting to the Duvernay, and other ‘less economic’ basins, that will continue to improve CPG’s profitability. Crescent Point isn’t the most profitable company in our coverage today, but it has the play to build on over the next several years, which could ultimately translate into a multiple expansion as well,” he said.
The analyst bumped his target for Crescent Point shares to $12 from $11.50. The average is $13.96.
Elsewhere, Stifel’s Cody Kwong reiterated his “buy” rating and $15.50 target.
“We believe this update will kickstart a long overdue re-rating for the stock, as it specifically addressed drilling inventory, type curves, and play economics that we believe were poorly understood up till now,” said Mr. Kwong. “Now, with a clear view on the long term profitability and sustainability of the Duvernay as an anchor asset for Crescent Point through the next 10 years, a balance sheet that can now be viewed as conservative, and an attractive return of capital plan, we are reaffirming our target price of $15.50/sh and Buy recommendation.”
BlackBerry Ltd.’s (BB-N, BB-T) latest agreement to sell most of its legacy smartphone patents in a deal that could be worth as much as US$900-million is “better than feared, less than hoped,” according to RBC Dominion Securities analyst Paul Treiber, emphasizing it “now involves less cash upfront and is highly dependent on the earn-out.”
“In our view, the news is a slight positive for the stock, which was discounting any value for the patents,” he said. However, the risk-adjusted present value is below the previous agreement.”
Shares of the Waterloo, Ont.-based technology company jumped 5.1 per cent on Tuesday following the premarket announcement of the deal with a subsidiary of Key Patent Innovations for an upfront payment of US$170-million. It follows a failed attempt to sell the bulk of its intellectual property in a US$600-million move a year ago.
“Unlike the previous sale to Catapult, which has been terminated, the sale to KPI is not subject to any financing conditions,” said Mr. Treiber. “The transaction is conditional on HSR and Investment Canada Act approval.
“Valuation is dependent on the earn-out. BlackBerry is only receiving $170-million cash upfront, with $30-million cash payable by the third anniversary of the agreement. For the earn-out, BlackBerry will receive 8 per cent of the first $500-million profits generated from the patents, 15 per cent of the next $250-million, 30 per cent of the next $250-million, and 50 per cent of all subsequent profits. BlackBerry’s previous sale agreement with Catapult involved $450-millioncash upfront and a $150-million promissory note.”
Mr. Treiber said the deal provides BlackBerry will “balance sheet visibility.”
“BlackBerry currently has $445-million cash and equivalents and $365-million convertible debentures, which are due in November 2023,” he said. “With the $170-million upfront cash from the patent sale, we believe BlackBerry is likely to repay its outstanding convertible debentures in November. At that point, we estimate BlackBerry will have $288-million net cash.”
Reducing the value of patents in his financial forecast, the analyst cut his target for BlackBerry shares to US$4.25 from US$4.50, reiterating a “sector perform” recommendation. The average target on the Street is US$4.77.
“BlackBerry remains in the midst of its turnaround; while BlackBerry’s IoT business is performing well, Cybersecurity is struggling,” he said. “However, BlackBerry is trading at a discounted valuation. BlackBerry is currently trading at 2.4 times FTM EV/S [forward 12-month enterprise value to sales], below cybersecurity peers at 5.8 times and compares against its 5-year historical range of 1.7-10.0 times (average 4.3 times).”
In response to a “relatively better” start to 2023 compared to its U.S. multi-family residential REIT peers, Raymond James analyst Brad Sturges lowered his rating for BSR Real Estate Investment Trust (HOM.U-T, HOM.UN-T) to “outperform” from “strong buy” previously.
“BSR’s unit price has been relatively more stable in 2023 YTD (positive total return: 3 per cent), versus its larger market capitalization U.S. multifamily rental (MFR) REIT peers (average negative total return: 5 per cent),” he said.
Mr. Sturges kept a US$17 target for the Little Rock, Ark.-based company. The average is $18.38.
“Given its relatively more stable start in 2023 year-to-date, BSR now trades at a similar P/AFFO multiple valuation versus its larger-cap U.S. MFR peers on average,” he concluded. “However, we believe its below-average trading liquidity may somewhat limit its P/AFFO multiple recovery in the near-term in light of this relatively similar valuation to its larger market capitalization U.S. MFR REIT peers. We continue to forecast BSR’s 2023E SP-NOI [same-property net operating income] growth year-over-year to be in the mid-single-digit range year-over-year, in line with BSR’s and its U.S. MFR peers’ growth guidance for the year. Further, we are forecasting BSR to generate 2023 estimated FD AFFO/unit growth of 8 per cent year-over-year, which is also in-line with its U.S. MFR peer average.”
National Bank Financial analyst Adam Shine expects “weak” second-quarter result from Corus Entertainment Inc. (CJR.B-T) when it reports on April 13, seeing the Street’s earnings expectations “looking too high” given an increase in programming spending.
“While looking for a recovery in TV ad sales later this calendar year and an easing of TV expenses due to timing in H2/23 as well as less Cancon requirements in fiscal 2024, we may be getting closer to a near-term bottom on the stock as we move through spring,” he said.
Mr. Shine is now estimating total revenues of $342.8-million, up from $342-million previously but down 5.2 per cent year-over-year and 7.0 per cent from the first quarter. He projects earnings before interest, taxes, depreciation and amortization to fall 32.8 per cent and 25.7 per cent, respectively, to $58.2-million (versus $62.5-million previously). Both are lower than the consensus forecasts on the Street ($344.3-million and $64.9-million).
“We see TV revs down 5.6 per cent (Q1 down 7.6 per cent) due to advertising declining 8.5 per cent (Q1 down 11.4 per cent) amid ongoing slowdown in spending by marketers that began last summer, subscriber fees down 5.0 per cent (Q1 flat) given a plateauing in STACK TV subscriber loading (has helped offset cord-cutting/shaving) and $3.6-million of retroactive rate adjustments in Q2/22, and Other revs up 13.0 per cent (Q1 down 3.0 per cent) amid volatility in this line item which is subject to the timing of TV deliveries and library sales,” said the analyst. “We have TV Adj. EBITDA down 31.2 per cent (Q1 down 26.3 per cent) to $63.8-million with margin 19.9 per cent vs. 27.3 per cent as revs pressure is exacerbated by higher programming costs not just related to evolving Cancon catch-up but also lighter spending last year given the Winter Olympics. Total TV costs were up 5.4 per cent in Q1 and we forecast up 4.0 per cent in Q2, down 3.0 per cent in Q3, and down 2.0 per cent in Q4. As we look for margin pressure to materially ease through H2, it remains to be seen if TV revs revert to growth in Q4.”
After reducing his full-year free cash flow estimate to reflect changes in his working capital assumptions, Mr. Shine trimmed his target for Corus shares to $2.50 from $2.75, maintaining a “sector perform” recommendation. The average target is currently $2.71.
While Dentalcorp Holdings Ltd. (DNTL-T) finally saw a return of capacity to “normal levels” following COVID-19-related restrictions in the fourth quarter of 2022, Canaccord Genuity analyst Tania Armstrong-Whitworth warned its a severe flu season is likely to weigh on results.
“Last year’s flu season, which began in mid-October and lasted through December, was one of the worst on record,” she said. “Patient and provider behaviour was the same as if they had COVID-19. As such, cancellation rates were significantly above normal and similar to levels seen during the Omicron wave in late-2021 to early-2022. Unfortunately, this more than offset any positive impact from increased hygiene capacity.
“With the flu season now behind us and the benefit of increased hygiene capacity flowing through to this year, DNTL has seen same-practice volume growth rebound to 3-per-cent-plus year-over-year in Q1. Alongside price increases that took effect at the beginning of 2023, management believes revenue growth this year could be at or above 4 per cent year-over-year.”
Following recent meetings with the Toronto-based company ahead of Thursday morning’s quarterly release, Ms. Armstrong-Whitworth reduced her same-practice sales growth forecast from 3 per cent year-over-year to nil.
“This assumes the flu had a similar impact on volumes as Omicron,” she said. “We believe this is conservative, considering the elimination of hygiene restrictions and 2022 price increases could have had a somewhat offsetting effect. Still, we’d prefer to err on the side of caution. Leaving our M&A estimate unchanged at $46.9-million pro forma revenue acquired through the quarter results in our Q4 revenue estimate declining from $353.9-million to $330.6-million. This compares to consensus at $334.7-million. We’ve left our operating costs forecast unchanged, therefore, based on the lower top line, our Q4 adjusted EBITDA (IFRS) estimate drops from $65.5-million to $60.6-million (18-per-cent margin). This compares to consensus at $61.6-million.
“Looking forward to this year, we project price increases implemented at the start of 2023 and higher frequency patient visits driven by increased capacity beginning in Q4 will produce 4-per-cent year-over-year same-practice sales growth. This is up from our estimate of 3.5 per cent previously. Nonetheless, our full-year revenue estimate declines from $1,469.0-million to $1,449.2-million, given the lower starting base in Q4. We’ve also modestly reduced our gross profit margin forecast for 2023 from 49.3 per cent to 49.1 per cent given ongoing inflationary pressures. Together, this results in our 2023 adjusted EBITDA (IFRS) estimate declining from $277.1-million to $270.7-million (19-per-cent margin).”
Reiterating a “buy” recommendation for Dentalcorp shares, the analyst cut her target to $13.50 from $15.50. The average on the Street is $14.50.
“Based on multiple re-rating across the peer group, we are also reducing our 2023 EV/EBITDA target multiples to 14.0 times from 15.0 times (IFRS) and to 15.0 times from 16.0 times (US GAAP),” she said. “We believe this better reflects DNTL’s projected slower pace of M&A and resultant EBITDA growth over the near-term. When applied to our reduced 2023 adjusted EBITDA estimate, our PT declines ... Still, with an implied 70 per cent of potential upside from current levels, we reiterate our BUY rating.”
While its short-term financing needs were “satisfied” with a private placement of $40.15-million worth of convertible debentures, Taiga Motors Corp.’s (TAIG-T) ramp-up in production “remains challenging,” according to National Bank Financial analyst Cameron Doerksen, who thinks further capital assistance is likely required.
“Based on Taiga’s cash burn so far in 2023 ($7-8 million per month) and our expectation that the company will need to fund working capital investments needed to ramp-production, our model sees the company needing additional capital before the end of 2023,” he said. “As such, we still see financing as a key risk for the stock.”
“Taiga has launched and has started delivering two electric vehicle models (snowmobile and PWC) that have been well received by the market and we still believe the company has a development lead over other powersports players in electrification. However, the company only delivered 36 personal watercraft in Q4 (versus our forecast for 75 units), down sequentially from the 40 it delivered in Q3. This suggests that the supply chain remains difficult, and the company is facing challenges in ramping production. We expect a production update with the company’s Q4 report next week, but we suspect that the goal to produce 2,500-3,500 units in 2023 will be significantly scaled back. The path to a much higher production rate that will be necessary to hit positive gross margins may also be longer than we were forecasting.”
Mr. Shine emphasized the financing, secured with large shareholder Northern Private Capital ($25.15-million) and Investissement Quebec ($15-million), is “potentially significantly dilutive.”
“Including additional debentures that can be issued in-kind for interest payments (which we expect Taiga will take advantage of), the potential dilution to existing shareholders is 79.5 per cent,” he said.
Incorporating it into his forecast, Mr. Shin dropped his target for Taiga shares to $2 from $5.50, keeping a “sector perform” rating. The average target on the Street is $3.
“We continue to see a need for additional capital by late 2023 or early 2024 to support the production ramp,” he said. “On that front, we now assume 1,360 total unit deliveries in 2023 (skewed to H2), down from our prior forecast of 2,900. We also now forecast a slower ramp of production and assume 21,825 units in 2025, down from 24,600 units previously. We note that this level of production will require additional investment in production facilities and may prove to be optimistic. For 2025, which is the basis for our valuation on the stock, we forecast EBITDA of $36 million, down from $56 million previously.”
Helium Evolution Inc. (HEVI-X) “exposes investors to massive exploration upside,” according to Eight Capital analyst Christopher True.
“The company is the largest publicly traded landholder of helium rights listed on the TSX-V, with 5.5 million acres of permits,” he said. “HEVI estimates that they have over 180 potential helium-bearing geophysical anomalies to be prospected and we believe that if HEVI develops a track record of drilling success, there is a large amount of upside from the current share price given the high impact nature of helium wells on an NPV and returns basis.”
In a research report released Wednesday, Mr. True initiated coverage of the Calgary-based company with a “buy” recommendation, touting its agreement with farmout partner North American Helium as “a key competitive advantage and provides a runway of near-term catalysts.”
“The Farmout Agreement provides a competitive advantage through sharing knowledge of geological/geophysical data with a preeminent helium producer that HEVI could apply to its own operations. The agreement also provides a runway of near-term catalysts from 3 remaining Farmout wells and 3 Seismic Option/Seismic Review wells that can be drilled in the next 12 months. If successful, HEVI can participate in the development by retaining a 20-per-cent working interest in the lands earned by NAH. Additionally, these wells would likely start generating cash upon success as the company is incentivized to put wells on production as quickly as possible given the current price environment.”
After 2022 saw record helium prices, Mr. True expect supply shortages to continue, which he thinks should drive “superior full-cycle economics.”
“The most important event expected to ease the supply shortfall will be the restart of the Amur plant in Russia, where the first helium plant is expected to start in April 2023 and plants 2 and 3 to start in Q2/Q3 of 2023. However, we see risks associated with the startup of the plant and the ability to export helium from Russia due to the world’s response to the Ukraine conflict,” the analyst said.
“Outside of any large exploration successes that can produce at scale in the near term, we do not see any meaningful new supply coming online until QatarGas’ Ras Laffan 4 comes online in 2027 with 1.5 Bcf/yr of capacity. Therefore, we see a period of elevated pricing persisting in the near term, especially as the Russian/Ukrainian conflict persists, which adds geopolitical risk to the Amur plant supply.”
Currently the lone analyst covering the stock, he set a target of 35 cents per share.
“HEVI’s share price has priced in the negative news flow, in our view: HEVI’s share price has underperformed the Helium Explore Co. space since it announced its first two operated dry wells at McCord and the first unsuccessful Farmout well with NAH,” he said. “On the heels of the second unsuccessful Farmout well, the stock reacted neutrally and has since traded between $0.14 - $0.18, or roughly at $1 EV/Ac. We think the company is trading roughly at cash plus land value and believe that any success in the next 10 wells that can be drilled over the next 12 months would potentially lead to a re-rate of the stock. This is due to the high-impact nature of helium wells on an NPV15 basis, where a single well plus facility’s NPV15 is 120 per cent of the company’s current market cap. Additionally, success with NAH could lead to near term cash flows and de-risk HEVI’s land base, which is positive for the stock, in our view.”
In other analyst actions:
* Scotia Capital’s Kevin Fisk upgraded Africa Oil Corp. (AOI-T) to “sector outperform” from “sector perform” and raised his target to $3.50 from $3.25. The average on the Street is $3.30.
“The Venus appraisal program has started and if it’s successful we expect AOI’s indirect interest in Venus to be sold before development spending starts,” said Mr. Fisk. “After adjusting for the Venus exploration upside already reflected in AOI’s share price, we estimate that successful appraisal results could add 60 cents-$1.50 per share of value. This represents 20-50-per-cent upside to AOI’s current share price. Due to this significant exploration upside we are upgrading AOI to Sector Outperform and increasing the target price to $3.50/sh. In our view there is a more than 50-per-cent probability of successful appraisal results, but we are maintaining a speculative risk rating because unfavourable results will meaningfully impact AOI’s share price (approximately 15-per-cent downside risk).”
* Mizuho’s Haendel St. Juste initiated coverage of Tricon Residential Inc. (TCN-N, TCN-T) with a “buy” rating and US$9 target. The average is US$10.08.
* RBC’s Sabahat Khan raised his target for shares of Aecon Group Inc. (ARE-T) to $15 from $12 with a “sector perform” rating. The average is $15.81.
* Credit Suisse’s Andrew Kuske cut his Atco Ltd. (ACO.X-T) target to $49 from $51 with a “neutral” rating. The average on the Street is $49.50.
“On March 2nd , ATCO Ltd. (ACO) reported Q4 2022 headline and adjusted earnings of $0.72 and $0.97 to Class I and Class II shareholders, missed our $1.06,” he said. “In our view, there continues to be underlying value in the ATCO complex – partly attributable to the large position in Canadian Utilities (CU) (that is effectively “free” on a stub basis) along with the other businesses largely focused on the Structures segment. We believe CU trades at a discount to relevant peers largely given the lower earnings growth rate. With the ACO and CU structural relationship, a validation of CU’s growth potential (the largest of the underlying businesses) could result in a meaningful cascading impact into the holdco entity and surface ‘stub’ value. Beyond that dynamic, ATCO’s wholly-owned businesses provide substantially pro-cyclical exposure with the Structures and Ports segment. Structures may benefit from continued growth opportunities from a variety of major global commodity centric projects along with the defense-related work in Northern Canada.”
* Haywood Securities’ Gianluca Tucci increased his target for Bragg Gaming Group Inc. (BRAG-T) to $15, above the $11.69 average, from $14 with a “buy” rating, while Canaccord Genuity’s Matthew Lee bumped his target to $13.50 from $12.50 with a “buy” rating.
“Bragg reported Q4 results with revenue and EBITDA both above our estimates,” said Mr. Lee. “The company delivered impressive growth in the quarter, benefiting from its geographical expansion and some betting tailwinds associated with the World Cup. Along with the quarter, Bragg provided updated F23 guidance featuring revenue of €93-97M and EBITDA of €14.5-16.5M. Both were above our estimates, which we believe reflects elevated betting penetration post World Cup and the early success of Bragg’s proprietary content. The firm’s EBITDA margin expectation of 16 per cent in F23 is solidly above the 14 per cent achieved in F22, which we see as a key benefit of the company’s shift to content. We have increased our estimates modestly on the back of the quarter, and we raise our target price.”
* Barclays’ Raimo Lenschow reinstated coverage of Open Text Corp. (OTEX-Q, OTEX-T) with an “equal weight” rating and US$41 target. The average is US$44.50.
“The Micro Focus acquisition will require a long and complex process to improve the top line and FCF structure. While OTEX has a track record of solid acquisition integration, the difficult macro and no clear Micro Focus product to generate investor excitement will make this challenging, hence we reinstate at EW,” he said.
* Eight Capital’s Adhir Kadve raised his Playmaker Capital Corp. (PMKR-X) target to $1.10 from 90 cents with a “buy” rating, while Haywood Securities’ Gianlucca Tucci bumped his target to $1.20 from $1.10 with a “buy” rating. The average is $1.13.
“Playmaker reported a blowout Q4/F22, with revenue and adj. EBITDA handily surpassing consensus and our estimates,” said Mr. Kadve. “The strength was driven by seasonality and increased advertiser spending during the 2022 FIFA World Cup. While the increase in spend was temporary, we believe that the benefit to Playmaker will be longer lasting, as the company bolstered relationships with current customers and gained new customers, which we believe bodes well for future growth. With an uncertain macro backdrop impacting advertiser spending, Playmaker continues to show a level of resiliency due to its focus on the sports audience. The ongoing legalization of sports betting in the US and globally, continues to expand Playmaker’s TAM and with the Wedge acquisition providing key revenue growth and margin expansion opportunities, we continue to like Playmaker’s prospects through the balance of F23 and beyond.”
* CIBC World Markets’ Scott Fletcher raised his Well Health Technologies Corp. (WELL-T) target to $7 from $6.50 with an “outperformer” rating, while Canaccord Genuity’s Doug Tyaylor increased his target to $6.50 from $6 with a “buy” rating. The average is $7.92.
“Following WELL’s stronger-than-anticipated Q4 results and outlook, shares traded up 8 per cent Tuesday,” said Mr. Taylor. “The message was that the company would continue to reinvest in high-growth platforms including Circle and WISP, expected to contribute to an overall 17-20-per-cent top-line growth rate in 2023. This means more metered EBITDA expansion, seen up 10 per cent plus year-over-year, given increased investment. We continue to rate WELL a BUY and have increased our target ... we believe the company’s premium valuation on EBITDA is increasingly justified by its record of execution against expectations, its M&A optionality, and that its high-growth assets don’t yet fully contribute mature EBITDA margins.”