Inside the Market’s roundup of some of today’s key analyst actions
“It is advantaged by being a globally recognized brand, developed over decades,” he said. “It provides essential and high value services to the vast commercial real estate industry. Its businesses combined to generate mid-teens ROIC [return on invested capital], and because they are asset-light, generate free cash flow for reinvestment. In turn, its decentralized/partnership model has enabled it to repeatedly reinvest capital in diverse yet synergistic businesses across countries. The numbers, thus far, support this compounding-like characteristic: From spin off from FirstService in 2015 to 2022, Colliers’ Adj. EBITDA & EPS have compounded at 19 per cent and 17 per cent per year, respectively, essentially doubling from ‘15 to ‘20, with a target to double again by ‘25 from ‘20.”
In a research report released Wednesday, Mr. Shan initiated coverage of the Toronto-based professional services and investment management company with an “outperform” recommendation, believing recent weakness in its commercial real estate brokerage business is “clouding its long-term compounding potential, presenting an opportunity for long-term minded investors.”
“Paradoxically, its long-term growth profile feels more predictable than its short-term one,” he added. “We believe that the largely frozen CRE transaction market could linger due to cost of capital volatility, deteriorating credit availability and lack of price discovery. As such, its Capital Markets (’CM’) business, 20 per cent of 2022 Adj. EBITDA, will swing earnings quarter to quarter, and may get worse before it gets better. However, let’s not conflate CRE price weakness with volume weakness - we do not expect the lull to persist indefinitely and view the weakness as cyclical not structural. In the meantime, Colliers’ other businesses, notably, its highly profitable & scalable Investment Management business, which we believe is underappreciated by the market, and Outsourcing & Advisory (totaling almost 68 per cent of ‘23E Adj. EBITDA) along with acquisitions should offset the CM weakness.”
Recommending investors “do not wait for the CM cloud to fully clear,” he set a target of US$128 per share, touting its “strong track record with leading return metrics.” The average target on the Street is US$133.93, according to Refinitiv data.
“Colliers trades at 11 times our 2023 estimated Adj. EBITDA and 15 times our 2023E estimated Adj. EPS,” said Mr. Shan. “Colliers trades at 10.4 times ‘23 Consensus EBITDA and 14 times ‘23 Consensus EPS, which are largely in line with and slightly below historical trading average since spin off in 2015. We think Colliers should trade above its historical average because of 1) better mix – more recurring, 2) better acquisition opportunity set given wider scope of activities, 3) better longterm growth profile given the increased significance of its IM business, and 4) lower CM revenues.
“We believe that a 12-times multiple on more stabilized EBITDA is more reflective of Colliers’ business mix today, especially one that has compounded high teens earnings growth since 2015. The blended multiple is largely based on 9 times for the CM & leasing business, 12 times for O&A and 15 times for IM. Interestingly, we note that recently, TPG announced the acquisition of Angelo Gordon for $2.7B, an Alternative Asset Manager focused on credit and real estate investing with fee bearing capital similar in size to Colliers’ IM. Transaction metrics were not disclosed but we estimate that the multiple paid on EBITDA is comfortably north of the 15 times we apply to Colliers’ IM business. Our price target is based on a 12 times multiple on FTM Adj. EBITDA estimate (as at Q1/24).”
Scotia Capital Maher Yaghi reduced his forecast for Canada’s largest telecommunications companies in response to recent “sizable” moves to adjust their wireless pricing levels to compete with Freedom Mobile’s relaunch.
“Unlike price discounting to stimulate demand, recent reductions are offering more data for fewer dollars which, over time, could lead to dilution to ARPUs [average revenue per user],” he said. ”We review in this biweekly these trends and posit that, if sustained, we could begin to see ARPU degradation late this year and becoming more visible in 2024. As such, we have adjusted down our ARPU forecasts by 1-2 per cent for 2024 and updated our models and valuation decks appropriately.”
“We discussed in reports earlier this year a potential for elevation of competitive pressures from QBR’s entry in ON and the West. It did not take long post closing of the Freedom acquisition for prices to begin falling as RCI and BCE jockey to close the door on Freedom before it can gain any momentum in the marketplace. While the wireless market is accustomed to promotional periods to drum up demand, this time around the quick reductions in prices are more intense. Historically, companies were able to boost ARPUs even while providing more data through two slightly different strategies. 1) Offering more data for more dollars or 2) offering more data for the same dollars stimulating demand as phone usage increases. The problem with the recent price war is that we are seeing plan prices now offering more data for fewer dollars and this is why we see this environment as more risky to ARPUs going forward.”
Mr. Yaghi warned that these price reductions are likely to remain in place as long as Freedom keeps its lower rates, saying “what we are seeing is a proactive move by incumbents to collapse the pricing on the different brands in order to consolidate subscribers around specific banners.”
“Rogers’ management said it clearly in a recent conference that they are trying to focus on the Rogers brand,” he said. “We argue that if this is the stated goal then it will take many quarters in order to achieve this objective and hence this new pricing structure could likely be structural and not a short term promotional effort.”
“While a 1-2-per-cent ARPU reduction is not that large in the whole scheme of things, the impact on valuation for the sector is more related to risk levels perceived by the market. As we have been arguing since February, we continue to recommend investors to be cautious and maintain an underweight position in the Canadian telecom sector. In addition to wireless pricing, we see risks as well from the upcoming CRTC review into FTTH and HSIA later this year (see report for more details). In addition, Canada 10 year yields remain elevated. The combination of these 3 issues are keeping us guarded at this point in time.”
Given his lower 2024 outlook, Mr. Yaghi cut his targets for these companies:
- BCE Inc. (BCE-T, “sector perform”) to $63 from $64. The average on the Street is $65.21.
- Rogers Communications Inc. (RCI.B-T, “sector outperform”) to $72.75 from $75.75. Average: $73.45.
- Telus Corp. (T-T, “sector outperform”) to $29.50 from $31. Average: $31.13.
“We continue to recommend investors to be underweight the Canadian telecom sector until valuations become more appealing,” he concluded.
Constellation Software Inc.’s (CSU-T) move to spin-out sub-operating groups sets up the company to “replicate its past successes for the next 5-10 years in spite of having grown significantly,” according to RBC Dominion Securities’ Paul Treiber.
“Spin-outs improve the sustainability of Constellation’s ability to deploy capital at high rates and efficiently manage an increasing portfolio of businesses,” said the analyst.
In a research report released Wednesday, he said the Toronto-based company’s “de-centralization and ROIC-based performance incentives have been key drivers” thus far, emphasizing its returns rank in the 98th percentile of TSX-listed stocks and 99 per cent vs. S&P 500-listed stocks over the last 10 years.
“However, due to Constellation’s current size, the long-term incentive to mid-management from Constellation’s shares has diminished,” said Mr. Treiber. “Spinning out sub-operating groups addresses this challenge by directly aligning incentives for management with the performance of their business (i.e. the spin-out) ... With direct attribution of performance, Constellation’s long-term scalability is improved. Constellation has more than 800 subsidiaries across 141 vertical markets. Effectively managing these business units and incentivizing capital deployment are necessary for Constellation to continue to create shareholder value going forward. Each spin-out is akin to Constellation at the time of its IPO in 2006..
“Constellation and its spin-outs may create significant shareholder value assuming these entities deploy 100 per cent of FCF at historical hurdle rates. Assuming low-to-high 20-per-cent hurdle rates, our scenario analysis indicates that Constellation’s aggregate (including spin-outs) FCF/share may rise at a 30-35-per-cent CAGR over the next 5 years.”
Seeing the spin-outs improving the risk/reward proposition on its shares, Mr. Treiber raised his target to $3,200 from $3,100, maintaining an “outperform” rating, based on “better visibility to long-term growth.” The average on the Street is $3,072.10.
“We believe that Constellation could spin out 1-2 sub-operating groups per annum,” he said. “Shareholders that retain ownership of the spin-outs may see higher returns and lower portfolio volatility, given: 1) spin-outs are likely to compound capital faster than Constellation; 2) spin-outs may trade at a valuation premium to Constellation; and 3) the spin-outs listed on the TSX Venture Exchange may have lower correlation with the broader markets (i.e. beta). If shareholders sell the spin-outs, 1-2 spin-outs would equate to a 1-2-per-cent dividend-in-kind per annum.”
“Global eCom Direct is NVEI’s core growth driver, accounting for 72 per cent of total revenues pre-Paya (FY22) and 58 per cent post-Paya (RBC estimates) on a pro forma basis for FY23,” he said. “Given its exposures to high growth verticals such as social gaming, online retail, online marketplaces, and travel, as well as new geographic expansion opportunities in LATAM, and APAC, which are underrepresented today, we believe Global eCom Direct will grow revenues 36 per cent year-over-year (organic, CC, & excrypto), thus contributing 83 per cent of total revenue growth in FY23.”
In a research note released Wednesday, he called the Montreal-based company a “leading payment provider in high growth verticals” and believes its recent US$1.3-billion acquisition of U.S. competitor Paya Holdings Inc. “offers up multiple vectors for growth.”
“We believe NVEI stands out as a leader in payment processing for several high growth verticals, including online gaming, which increased 53 per cent year-over-year in 1Q/23,” said Mr. Perlin. “Given NVEI’s processing relationships with key online gaming operators in the U.S., including BetMGM/Entain, DraftKings, and Flutter/Fanduel, we believe NVEI stands to be a direct beneficiary as the online gaming industry continues to expand, with only 24 states + DC currently operational, and new markets open up internationally.”
“The Paya acquisition, which closed in mid-1Q23 and accounts for 23 per cent of FY23 estimated pro forma revenues, expands and diversifies Nuvei’s overall vertical mix into non-discretionary/non-cyclical areas such as healthcare, education, and government, while expanding Nuvei’s B2B offering and scaling into the ISV channel, all of which grew in the mid-to-high teens in 1Q/23 on a pro forma basis. The acquisition expands NVEI’s total addressable market by 9 per cent to $21-trillion.”
After modest reductions to his 2023 and 2024 revenue and earnings projections, Mr. Perlin trimmed his target for Nuvei to US$42 from US$50, which he said “is a discount to similar high-growth payment peers and biased to the upside, as more normalized growth rates emerge in 2H23, given easier comparisons in crypto and FX.” The average target on the Street is US$58.33.
“We are reiterating our Outperform rating, as we believe NVEI’s medium-term growth target of 20-per-cent-plus annual revenue growth is achievable and sustainable given: 1) its tethering to highgrowth ecommerce verticals (grew 37 per cent year-over-year in 1Q/23 on CC and ex-crypto), which on a pro forma basis, accounts for over 50 per cent of total revenues and 80 per cent of growth; 2) expanding internationally and gaining global scale, especially in LATAM, which we believe enables Nuvei to win with large, multinational enterprises; and 3) the recent Paya acquisition adds new growth and portfolio diversity opportunities in B2B, government, and ISV channels, which are largely non-discretionary and under-penetrated, and increases its scale in North America,” he concluded.
Pointing to their current cash flow yields of almost 20 per cent, National Bank Financial analyst Patrick Kenny recommends “value-based energy transition” investors accumulate positions in both Capital Power Corp. (CPX-T) and TransAlta Corp. (TA-T).
In a research report released Wednesday titled Alberta Power Market: Into the great wide open…, Mr. Kenny said “the path to fully decarbonizing the Alberta grid remains uncertain” as power prices continue to soar and his reserve margin forecast remaining “well below the proverbial 15-per-cent supply cushion required to provide resiliency and safety to the grid (avoiding brownouts).”
However, he thinks both companies are “very well positioned to benefit from both federal and provincial policies designed to support clean energy infrastructure investments with healthy risk/return profiles,” emphasizing electrification brings an “upward bias to long-term power prices.
“With the energy transition in flight, we note the push for cleaner electricity grids as power generation accounts for a significant portion of emissions in many regions, including Alberta,” said Mr. Kenny. “As such, we highlight the Alberta power sector as an area with robust clean energy growth opportunities, supported by industry and incentivized by government as the country/province progresses towards net-zero emissions targets. That said, we note differing views on the pace of transitioning Alberta’s electricity grid between the federal and provincial governments outlined through their contrasting plans.”
“Our reserve margin forecast does not yet take into account the federal government’s intent to banan the sale of new internal combustion engine (ICE) vehicles beginning in 2035, potentially underestimating demand growth from an accelerated adoption of electric vehicles – albeit well into the next decade. Overall, we highlight for every $5/MWh increase to our long-term Alberta spot power price assumption of $75/MWh, we calculate an approximately 10-per-cent valuation upside for both CPX and TA (all else equal).”
He maintained a target of $53 and “outperform” recommendation for Capital Power shares. The average on the Street is $51.85.
Mr. Kenny’s TransAlta target remains $14, below the $16.17 average, also with a “outperform” rating.
“Our reserve margin outlook suggests upside to our estimates and each company’s financial capacity to accelerate their business mix towards renewables,” he said.
Following Aya Gold & Silver Inc.’s (AYA-T) release of exploration results from its flagship Zgounder mine in Morocco on Tuesday, Eight Capital analyst Puneet Singh sees its stock oversold and reiterated its “top pick” designation.
He said the results are showing continuity and drilling is indicating larger, higher grade resource, leading him to conclude its shares now sit at a level that “has been a good place to accumulate” historically.
“Recall, Aya posted the second highest quarterly silver production (almost 475Koz) total ever at Zgounder in Q1/23 and is on-track to deliver on its expansion at the asset (will 4 times Ag production), slated for commissioning in 2024,” said Mr. Singh. “We reiterate that we see exploration and more specifically Boumadine as the key value driver for the stock over the NTM [next 12 months]. In the last batch of drilling Aya encountered a rich sulphide stockwork zone at depth, which is a new mineralization style at Boumadine. Recent drilling at depth and to the south could be indicative of a porphyry system (Aya is seeing an increase in temperature towards that area, possible heat source of porphyry). In our view, this could add significant bulk tonnage (porphyry mineralization typically associated with much larger widths vs. 3 metres seen from the epithermal system at the project to date; recent hole was over 129 metres) to Boumadine. We assign $4.30 per share value on our 205Moz AgEq resource and that does not factor in the new style of mineralization at depth. We expect additional drilling at depth to be a meaningful catalyst for the stock and expect results out soon.”
The analyst maintained a “buy” rating and $17 target. The average is currently $13.79.
In other analyst actions:
* In response to in-line first-quarter results, Desjardins Securities’ Gary Ho lowered his PowerBand Solutions Inc. (PBX-X) target to 2 cents from 3 cents, keeping a “hold” rating. He’s currently the lone analyst covering the Burlington, Ont.-based provider of cloud-based auction and financial software tools for automotive retailers.
“We remain cautious given there was no mention in the press release of a reestablishment of existing lending relationships to restart vehicle originations,” he said. “Cash was $11.6-million at 1Q, but we note a material $5-million jump in accounts payable and accrued liabilities. Shareholders’ equity declined to $4.7-million ($7.4-million at 4Q22); we reduced our target (based on book value).”