Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Jaeme Gloyn thinks “underlying strength” will continue to drive outperformance for Canadian Property and Casualty Insurance companies through a third-quarter earnings season season that he expects to be “solid.”
“While our P&C insurance coverage year-to-date share price performance is mixed, the sector continues to outperform the index,” he said. “Fairfax Financial Holdings Ltd. [FFH-T] leads the group at up 46 per cent, followed by Intact Financial Corp. [IFC-T] (up 1 per cent), Definity Financial Corp. [DFY-T] (flat) and Trisura Group Ltd. [TSU-T] (down 33 per cent), on average outperforming the TSX Financials Index (down 9 per cent year-to-date).”
“For our top pick FFH, we expect higher interest rates will continue to drive recurring interest and dividend income higher. We also expect strong underwriting profitability in a quarter when peers are more heavily impacted by catastrophes. While elevated catastrophe activity will impair headline results for IFC and DFY, we expect another quarter of strong top-line growth and underlying profitability (i.e., excluding catastrophes) that suggests the battle against inflation is shifting in favour of the insurers. Both will also benefit from favourable trends in non-underwriting income streams: i.e., i) steadily increasing net investment income, and ii) growing distribution income. Lastly, TSU prereleased what appears to be a clean quarter of growth and profitability that should set the stock on a valuation re-rate path towards U.S. specialty insurance peers.”
In a research report released Wednesday, Mr. Gloyn said the sector remains “well positioned” for the near term, pointing to “hard market condition and higher interest rates that support improved investment income (in particular for FFH).”
“We believe pricing trends will continue to outpace loss cost trends overall, especially for Personal Auto lines that management teams suggested in Q2-23 earnings calls were approaching an inflection point,” he added. “Moreover, we expect the elevated catastrophe activity in Personal Property lines this year to support a further hardening of conditions in that segment. In addition, we see continued strong momentum in U.S. specialty lines markets. Layering in potential M&A catalysts amplifies a strong set-up for P&C Insurance heading into 2024. On the other hand, increasing vehicle theft, elevated catastrophe activity and inflationary pressures could persist.”
From the investor perspective, he reiterated his view that “there’s something for everyone” ahead of earnings season.
“FFH remains the best value idea in our coverage,” he said. “FFH offers large-cap investors strong topline growth, underwriting profitability, and leverage to a higher interest rate environment that supports consistent mid-teen ROE for the foreseeable future. TSU offers small-cap investors a rapid growth outlook but also an attractive value play with upside to specialty insurance peer valuations as the company successfully recovers from an early 2023 misstep. We believe DFY shares offer good value to mid-cap investors as the company executes a long-term ROE expansion story with imminent M&A catalysts. IFC is the premium P&C insurer in Canada with a solid track record of growth, profitability, and M&A upside. However, IFC offers less valuation upside than its peers.
“In summary, while we encourage investors to own any one of these P&C insurers, our pecking order is FFH, TSU, DFY and IFC.”
Mr. Gloyn raised his target for shares of Fairfax Financial to $1,800 from $1,700, keeping an “outperform” rating. The average on the Street is $1,485.09, according to Refinitiv data.
“We believe FFH can deliver mid-teens ROE over the medium-term through a combination of consistently strong underwriting growth/profits and improving total investment return performance, particularly in a higher interest rate environment,” he said.
He maintained his targets and recommendations for the remainder of his coverage universe. They are:
* Trisura Group with a $58 target and “outperform” rating. Average: $52.17.
Analyst: “TSU takes second position in our P&C pecking order given a rapid growth outlook and valuation upside. In addition, we believe TSU will continue to produce solid and ‘clean’ quarters that put risks to the Q4-22 write-down and industry noise in the rear-view mirror. We view growth as de-risked given 1) persistent sector tailwinds (e.g., hard markets, high interest rate environment), 2) fee-based income drives 40 per cent of earnings, 3) lowrisk organic growth strategies (e.g., entry into U.S. surety/commercial lines and fronting admitted lines) benefiting from secular trends in U.S. MGA markets and growing Canadian distribution relationships, and 4) balance sheet capacity to execute organic growth.”
* Definity Financial with a $53 target and “outperform” rating. Average: $42.95.
Analyst: “DFY remains a land grab story with an ROE expansion kicker. We apply a target multiple of 2.1 times (unchanged) on our Q3-24 (was Q2-24) BVPS [book value per share] (plus approximately 1 times AOCI) to arrive at our $53 price target (unchanged). Our target multiple is above the current trading multiple of 1.6 times to reflect our view that i) the ROE expansion and growth story are tracking well on both organic and M&A fronts, ii) solid broker acquisitions that set the table for future organic and inorganic growth opportunities, iii) the Personal Auto business is at a positive inflection point, and iv) Personal Property and Commercial will maintain solid growth and profitability despite recently elevated catastrophe impacts.”
* Intact Financial with a $225 target and “outperform” rating. Average: $220.17.
Analyst: “IFC continues to merit a premium valuation as we expect the company will continue to produce double-digit NOIPS [net operating income per share] growth and roughly mid-teens OROE over the medium-term. Like DFY above, we believe Personal Auto has reached a positive inflection point. Persistent hard market conditions elsewhere in the business also increase the likelihood IFC will deliver earnings outperformance in the near term. For context, IFC delivered total company combined ratio of 95 per cent in 2018 and 2019 compared to 89 per cent in 2020 and 2021. We forecast 95 per cent for the full-year 2023, followed by 92 per cent through 2024, which we believe is reasonable given recent performance in hard market conditions. Separately, as Intact continues to successfully integrate RSA and the recent tuck-in of Direct Line’s commercial business, we believe the company can pursue further M&A (including large-scale M&A like Aviva Canada). That said, acquisition speculation of this magnitude could dampen near-term upside as investors await an update.”
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RBC Dominion Securities analyst Irene Nattel thinks Canadian Tire Corp. Ltd.’s (CTC.A-T) valuation “appears attractive,” however she expects investor sentiment to “remain tepid until visibility improves, and results of strategic process become more clear.”
She lowered her financial expectations for the retail ahead of the release of its third-quarter results on Nov. 9 and after Tuesday’s announcement that it has bought back a minority stake in its financial services division from Bank of Nova Scotia
“Purchase price of $895-million for 20 per cent of CTFS implies an enterprise value of $4.475-billion on a 100-per-cent basis or 10 times TTM [trailing 12-month] EBT $442-million,” she said. “Given prevailing valuations, in our view, the transaction likely includes a control premium. CTC stated intention to ‘evaluate strategic alternatives […] during 2024′ and prior management statements around not wanting to own 100 per cent of CTFS adds uncertainty during a period when the operating backdrop remains challenging, with elevated financing rates and consumer spending headwinds.”
For the quarter, Ms. Nattel is projecting earnings per share of $3.07, which is “flattish” year-over-year and at the lower end of the company’s forecast range of $2.95-$3.86. The current average projection on the Street is $3.49.
“Fine-tuning assumptions to reflect slowing in demand for discretionary items through September,” she said. “Key revisions include: i) lower distribution revenue at CTR also reflecting stated intention to adjust Xmas 2023 purchases due to slightly higher dealer inventory levels and ii) higher opex due to investment in cloud-based IT, supply chain and network development, partly offset by modest uptick in EBT from CTFS reflecting mid-single-digit industry GAAR growth. Maintaining underlying GM [gross margin] percentage stable, with expectation of promotional intensity on nonessentials offset by lower freight rates. Our Q3/23E assumptions include $80-million tailwind at the revenue, gross profit and EBT lines from previously disclosed accounting change for margin-sharing agreement.”
Seeing slowing consumer spending as a key headwind into 2024, Ms. Nattel cut her Street-high target to $205 from $208, keeping an “outperform” rating. The average is $178.60.
“Forecasting solid sales of essentials and value offerings, consistent with latest RBC Consumer Spending Tracker data indicating slower growth through September, slippage in discretionary goods and services, and expectation of lower real consumption in H2,” she noted.
“CTFS forecasts reflect a shallow recession with solid, albeit slowing GAAR growth and rising write-off rates. Forecasts also assume stable ECL sequentially, although rising household debt servicing ratios could cause management to review.”
Elsewhere, Canaccord Genuity’s Luke Hannan cut his target to $172 from $182 with a “buy” rating.
“Our overall takeaway from [Tuesday] morning’s press release is decidedly mixed,” said Mr. Hannan. “On the positive side, we can understand the logic behind exploring strategic alternatives for the business: one concern that investors continually bring up in our conversations on CTC is the health of the credit card book (and the related impact on earnings) in a weaker macro environment; a sale or some other partnership, structured appropriately, could address this, and is a course of action other North American retailers have undertaken in recent years to simplify their businesses. Removing this concern could eventually lead to multiple expansion. Having the freedom to expand the Triangle Rewards loyalty program as CTC sees fit makes strategic sense to us as well.”
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Toromont Industries Ltd.’s (TIH-T) “impressive execution” continued in the third quarter, according to National Bank analyst Maxim Sytchev, noting management was “a bit more cautious than usual” in its conference call but emphasizing structural tailwinds remain “unabated.”
“There will be lots of discussions around slowdown, backlog rolling over, etc.,” he said in a note titled Sentiment searching for direction.
“We want to impress upon investors that while of course backlog is important, the long-term directionality of population growth and resulting infra spending is more relevant. When overlaying backlog-to-revenue metric on t + 6 months share price of TIH, there is virtually NO relationship from 2012 to 2020; the inflection that shows a “correlation” during the pandemic is simply a coincidence of confluent dynamics happening at the same time. Why no correlation? Because equipment distribution is not a backlog-driven business (like construction). Yes, resi now is weak (function of much higher rates), but infra trends are robust and mining activity is generally healthy. It’s not often that TIH shares’ valuation converge with that of S&P 500 (historically, it’s higher). We therefore remain comfortable to be exposed to this well-executing name (with a net cash position to boot).”
After the bell on Monday, the Toronto-based industrial building construction company reported revenue of $1.174-billion for the quarter, below the estimates of both Mr. Sytchev ($1.225-billion) and the Street ($1.21-billion). However, it topped expectations for adjusted EBITDA with $230-million (versus $212-million and $221-million, respectively) and adjusted earnings per share with $1.71 (versus $1.44 and $1.59). The beat was attributed to better expense control as well as improved gross margin.
Mr. Sytchev said Toromont’s “consistent focus on core operations continues to impress,” emphasizing a “largely resilient” end-market demand and margin improvement with the expansion of its rental operations.
“Client demand for equipment remained strong for the most part, with weakness confined to residential construction on the back of higher financing costs and a broader economic slowdown,” he said. “That being said, accelerating demographic growth and the politically sensitive nature of developing housing suggest a strong level of long-term support for the sector. While improving equipment availability may allow certain clients to act with more discretion regarding the capex cadence, horizontal and vertical infrastructure investment is a structural tailwind financed in large part by the public sector, where spending patterns are largely non- or counter-cyclical.”
“TIH continues to invest in its rental fleet amid a gradual normalization of equipment supply. While this creates a short-term working capital drag, it adds valuable high margin (pure-play rental players such as United Rentals (NYSE: URI; Not Rated) and Ashtead (LSE: AHT; Not Rated, see EBIDA margins approaching 50 per cent) revenue to the sales mix. Management is confident in improving rental utilization rates in Quebec and the Maritimes, which should have a roughly proportional impact on segment margins. Moreover, the company has proven adept in managing inventory through the lifecycle, recording an additional $9.4-million gain on rental disposals (up $25.2-million year-to-date).”
While he moderated his revenue growth expectation for the fourth quarter, Mr. Sytchev raised his forward margin estimates given “the recent upward cadence.” Citing that increase and “stronger numbers,” he moved his target for Toromont shares to $129 from $128, reiterating an “outperform” rating. The average target on the Street is $126.11.
“Q4 is also usually the most profitable quarter for TIH,” he added. “Management expects activity levels to sustain in the product support and rentals segments, whereas New sales availability is improving (lowering pricing) which should change the sales mix we have been seeing for the past eight quarters (hence, the lift in Q4/23E margin expectations is less pronounced than history would imply). We deem our 2024 projections as conservative but would like to have greater visibility around some of the short-term items (ex. Stabilization in resi space).”
Elsewhere, believing its recent pullback brings a “compelling” entry point for investors, BMO Nesbitt Burns’ Devin Dodge upgraded Toromont to “outperform” from “market perform” with a $116 target, sliding from $120.
“In our view, investors are overly focused on equipment bookings and are underappreciating TIH’s growth prospects in product support and rental services,” said Mr. Dodge. “These lines of business account for the bulk of the company’s earnings and are derived from activity levels, not capex budgets. Meanwhile, the P/E multiple has moderated to sub-17 times (or 15 times after backing out surplus cash) that we believe represents an attractive entry point into one of the premier Canadian industrial franchises.”
Analysts making target changes include:
* RBC’s Sabahat Khan to $125 from $131, keeping an “outperform” recommendation.
“Toromont reported Q3 revenue modestly below consensus while EBIT was ahead of RBC/consensus estimates (directionally similar to trends we have noted at recent quarters with mixed revenue trends and EBIT outperformance),” said Mr. Khan. “We see this better-than-expected performance on profitability as a reflection of solid levels of customer activity driving Product Support growth as well as the company’s track record of strong operational execution. The company pointed to some degree of softness in residential construction equipment demand (likely reflective of the higher interest rate environment and broader consumer softness) while also highlighting that improved equipment availability may be reducing the urgency with which customers place orders/buy equipment (i.e., customers are starting to feel more certain about the prospect of obtaining equipment if/when they eventually need it). Despite these headwinds, the outlook for Toromont remains constructive, supported by an elevated equipment backlog ($1.2-billion, down 11 per cent year-over-year but still 4 times the $395-million level as of year-end 2019), tailwinds in mining and nonresidential construction (both of which the company noted continue to perform well), and continued growth in Product Support.”
* Canaccord Genuity’s Yuri Lynk to $123 from $127 with a “buy” rating.
“Toromont remains well-positioned to benefit from the continued expansion of its rental fleet, to grow high-margin product support sales on the back of the growing machine population in its territories, and to benefit from the adoption of CAT’s leading autonomous solutions and electrification roadmap,” he said. “Toromont trades at 16 times P/E (2024E) vs. Caterpillar, Finning, H&E Equipment, and Komatsu at an average of 9 times. We roll forward our valuation period and use 19 times H2/2024E-H1/2025E EPS to set our target price from 21 times P/E (2024E) previously. The balance sheet optionality associated with Toromont’s $160 million of net cash combined with its class-leading margin and execution profile, justify its premium valuation, in our view.”
* Scotia Capital’s Michael Doumet to $124 from $126 with a “sector outperform” rating.
“Naturally the recent margin expansion should partially normalize alongside lead times, equipment availability, and supply/demand. That said, we expect growth in rental/product support to backfill the margin normalization such that NTM EPS should be flattish.” said Mr. Doumet. “Management’s caution on demand for construction equipment (not rental/product support) does not come as a surprise (to us) as we think (i) LTM equipment sales reflect supply/deliveries catching-up with (pent-up) demand and (ii) the impact of higher interest rates is still filtering through asset prices. Mining remains firm.
“TIH shares are flat since mid-2021 as the trading multiple compressed from 25 times P/E to 16.5 times on our 2024E. While we appreciate the argument for a late-cycle discount (historical average of 20 times), we believe TIH can sustain EPS trends and deploy significant capital (i.e., ~$2 billion) – the latter can compress its P/E multiple to sub-14 times.”
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ATB Capital Markets analyst Chris Murray is expecting WSP Global Inc. (WSP-T) to deliver “strong” organic growth when it reports its third-quarter financial results on Nov. 8, pointing to increased contributions from its 2022 acquisitions of the Environment & Infrastructure business (E&I) of John Wood Group PLC and UK-based Capita PLC as well as “favourable” foreign exchange movements.
“We expect organic growth rates heading into 2024 to be a focus of Q3/23 results given ongoing macro pressures and the weak ABI [Architectural Billings Index] print for September,” he said. “We expect management to provide an update on M&A conditions given the more moderate deal flow to date in 2023, with the Wood transaction having been lapped in early Q4/23. We have made modest estimate revisions to account for seasonality in H2/23 and organic growth expectations in 2024 and 2025. While prevailing valuations keep us neutral on WSP, we would consider becoming more positive should potential market weakness widen our return to target.”
In a note released Wednesday, Mr. Murray did trim his quarterly expectations for the Montreal-based engineering firm, projecting adjusted earnings per share and EBITDA of $1.81 and $516.8-million, down from $1.86 and $526.6-million based largely on seasonality. While his full-year estimates also shrunk modestly, he raised his 2024 expectations to $7.44 and $2.114-billion from $7.16 and $2.067-billion and introduced 2025 projections of $8.41 and $2.2-billion.
“We forecast organic revenue growth of 6.0 per cent in Q3/23, a seasonally strong quarter. We expect strong organic growth in Q3/23 to be augmented by 14.8-per-cent M&A-driven growth, with FX providing a 4.1-per-cent tailwind,” he said. “We have moderately increased our organic growth expectations for 2024 and 2025. We expect WSP to deliver organic growth of 6.6 per cent and 5.5 per cent in 2024 and 2025, respectively (prior: 4.4 per cent and 4.0 per cent), with healthy organic growth anticipated in all core geographies on the back of elevated infrastructure spending.
“M&A has contributed mid-teens revenue growth since the Company completed its acquisition of the Wood assets, which was lapped on September 21, 2023. We will be looking for an update on the M&A environment with Q3/23 results, particularly given macro pressure and previous commentary around elevated multiples across the sector.”
While emphasizing the September reading from ABI, a closely tracked indicator of non-residential construction activity in the U.S., was the lowest since December 2020, “signalling softening demand,” Mr. Murray raised his target for WSP shares by $5 to $200, maintaining a “sector perform” recommendation. The average target is $206.50.
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Despite a muted outlook for the Canadian housing market, National Bank Financial analyst Jaeme Gloyn expects shares of First National Financial Corp. (FN-T) to “react favourably” to a third-quarter earnings beat and a “special dividend kicker.”
“A broad-based revenue beat drove a 26-per-cent EPS beat vs. the street and a 13-per-cent beat to our forecasts,” he said. “Originations also surprised significantly to the upside while securitization NIM [net interest margin] easily beat our estimates. Moreover, FN announced a $0.75 per share special dividend alongside a $0.05 per share (or 2-per-cent) increase in the annual common dividend. Including the special dividend, we forecast a payout ratio on after-tax Pre-FMV Income of 82 per cent in 2023.”
After the bell on Tuesday, the Toronto-based firm reported revenue of $273-million, or $254-million excluding gains on financial instruments, which “significantly” both Mr. Gloyn’s $225-million estimate and the Street’s projection of $219-million. Core earnings per share jumped 97 per cent year-over-year to $1.15, also topping the analyst’s expectation of $1.02 and the consensus forecast of 91 cents.
“Strong originations drove a material increase in placement fees and supported upside in mortgage servicing income,” said Mr. Gloyn. “Securitized net interest income increased 34 per cent year-over-year on 5 bps of NIM expansion given slower prepayment speeds and mix shift to higher-yield Alt-A securitized loans. Opex was well contained as i) brokerage expenses increased less than placement fees (FN eliminated broker incentives), ii) higher salaries & benefits expense reflects commercial underwriting commissions while headcount declined 7 per cent year-over-year, and iii) higher interest expenses reflect higher balance of mortgages accumulated for sale. As a result, Pre-FMV Income of $95-million outperformed our $75-million forecast.”
Emphasizing First National’s originations “surprise to the upside,” the analyst raised his target for its shares by $1 to $39, keeping a “sector perform” rating. The average target is $41.17.
“FN reported single-family residential mortgage originations and renewals of $8.3-billion, up 26 per cent year-over-year and 24 per cent above our $6.7-billion forecast,” said Mr. Gloyn. “Management attributes the upside to a more stable interest environment in Q2-23 that drove an increase in mortgage commitments. However, FN expects volumes to slow significantly in Q4 given the recent spike in interest rates. Commercial mortgage originations and renewals increased 30 per cent year-over-year to $3.3-billion and beat our $2.4-billion forecast by 37 per cent as demand for insured multi-unit mortgages remains robust. Management maintained its view that conventional commercial originations will decelerate, mitigated by a strong insured multi-unit market.”
Elsewhere, RBC’s Geoffrey Kwan raised his target to $42 from $40 with a “sector perform” recommendation.
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Pointing to “peak uranium” valuation and investor positioning, Eight Capital analyst Ralph Profiti expects Cameco Corp. (CCO-T) to continue to trade at the high-end of historical ranges after better-than-anticipated third-quarter results.
“We believe that Cameco remains well-positioned for improved financial performance driven by our forecasts of rising uranium prices, exposure to market-related contract terms (albeit limited), improved cost structure as Cigar Lake and McArthur River reach licensed production rates, and the benefits of vertical integration in the Uranium and Fuel Services businesses through the pending acquisition of a 49-per-cent stake in the Westinghouse Electric JV.” he said. “Increased interest from traditional resource investors, energy investors, clean energy investors, infrastructure investors and generalists, reinforces our view of peak-uranium P/NAV multiples of 1.6-1.8 times for Cameco reflective of uranium ‘bull markets.’”
Shares of the Saskatoon-based company surged 8.4 per cent on Tuesday, exceeding a 52-week high, after reporting quarterly earnings per share of 32 cents, topping both Mr. Profiti’s 10-cent estimate and the consensus forecast of 13 cents. The beat was driven by gains from foreign exchange and lower unit operation costs.
“Cameco is starting to see the benefits of a transitioning cost structure towards a greater reliance on contract book sales from producing mines (Q3/23: 3.0 million produced at $32.37 per pound) vs. purchased uranium (Q3/23: 0.8 million pounds purchased at $79.14/lb),” he said. “FY23 guidance updates are largely as expected with consolidated revenue guidance up 2.0 per cent to $2.43-2.58-billion (from $2.38-2.53-billion) driven by a 2.7-per-cent increase in average realized price guidance to $65.50/lb (from $63.80/lb), partly offset by higher unit operating cost guidance up 5.0 per cent to $52.50/lb (from $50/lb).”
Maintaining a “buy” rating for Cameco shares, Mr. Profiti raised his target to $65, above the $63.85 average, from $60.
Elsewhere, others making target changes include:
* Raymond James’ Brian MacArthur to $69 from $66 with an “outperform” rating.
“CCO provides investors with lower-risk exposure to the uranium market given its diversification of sources,” said Mr. MacArthur. “These sources are supported by a portfolio of long-term contracts that provide some downside protection in periods of depressed spot uranium prices, while maintaining optionality to higher uranium prices. In addition, CCO has multiple operations curtailed that could be brought back should uranium prices increase. Although the 2021 tax court decision applies only to the 2003, 2005, and 2006 tax years, we view it as a positive for CCO given we believe it could be relevant in determining the outcome for other years and reduces risk related to the CRA dispute.”
* Canaccord Genuity’s Katie Lachapelle to $65 from $60 with a “buy” rating.
“Despite a weak quarter, we remain fundamentally bullish on Cameco and the outlook for nuclear power and uranium prices. After mark-to-marking our model for FX and higher prices, our NAVPS and ntm [next 12-month] EBITDA as at October 1, 2024 have increased 8 per cent and 9 per cent, respectively,” she said.
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In other analyst actions:
* JP Morgan’s Jamie Baker raised his Air Canada (AC-T) target to $42 from $37, keeping an “overweight” rating. The average target is $29.57.
* Desjardins Securities’ Jonathan Egilo cut his Americas Gold and Silver Corp. (USA-T) target to 50 cents from 60 cents, keeping a “hold” rating. The average is $1.15.
* Scotia Capital’s Mario Saric lowered his Brookfield Asset Management Ltd. (BAM-N, BAM.A-T) target to US$36.50 from US$39 with a “sector outperform” rating, while TD Securities’ Cherilyn Radbourne reduced her target to US$42 from US$38 with an “action list buy” rating. The average is US$36.53.
“We maintain our SO rating and the positive thesis of our July 2023 initiation,” said Mr. Saric. “The main difference vs. July = a cheaper valuation that arguably reflects more modest near-term growth on lower BIP/BEP/BBU trading prices; our KPI forecast drops 4-5 per cent. BAM reports Q1 results next Monday. While near-term growth may stall, we still believe BAM can do double-digit FRE/sh, DEPS, FBC & dividend/sh growth through 2025, with investors getting a 4.5-per-cent going-in dividend yield with an expected 12-per-cent CAGR through 2025 (starting in 2024), positioning BAM as a top-6-per-cent dividend grower in Scotia’s Research Universe in 2024.”
* Ahead of its Nov. 9 quarterly release, CIBC’s John Zamparo increased his target for Canopy Growth Corp. (WEED-T) to 50 cents from 45 cents with an “underperformer” rating. The average is $1.10.
“We are adjusting our estimates for Canopy Growth to account for the divestiture of BioSteel operations. A significant reduction in WEED’s cash burn results in a higher price target (now $0.50 vs. $0.45 prior),” he said. “We maintain our Underperformer rating, a product of Canopy’s debt burden, ongoing negative FCF, and significant reliance on U.S. regulatory reform, in our view. Barring regulatory changes, we believe Canopy will require material equity issuance over the next few years to address its estimated $365-million net debt balance. Our revised estimates involve much lower revenues but materially better EBITDA.”
* Prior to its Nov. 10 earnings release, TD Securities’ Tim James cut his Exchange Income Corp. (EIF-T) target by $1 to $65 with a “buy” rating. The average is $66.50.
“The reduction is due to higher valuation-period net debt and shares outstanding, partially offset by higher valuation-period forecast EBITDA,” he said. “The increase to net debt and shares outstanding reflects the financing of the DryAir Manufacturing acquisition. The bias lower to our 2023 EBITDA and EPS forecasts primarily reflects updated currency, fuel, economic, and other minor assumptions, partially offset by one-quarter of contribution from DryAir Manufacturing. Our 2024 EBITDA forecast is higher primarily due to DryAir Manufacturing, while higher interest and shares outstanding negatively impact EPS.”
“We believe Exchange’s business diversification positions it better than lessdiversified peers to navigate economic conditions and that it represents a good investment for yield-focused investors based on its forecast FCF and management’s track record of maintaining a disciplined approach to investments at accretive valuations.”
* CIBC’s Bryce Adams reduced his First Quantum Minerals Ltd. (FM-T) target to $24.50 from $34 with a “neutral” rating. The average is $30.32.
“[Tuesday] morning, First Quantum provided a Panama update that acknowledged recent events but otherwise provides little direction on what comes next. Cobre Panama (46 per cent of our asset level NAV) continues to operate, and at this time we make no model changes, but lower our price target multiples,” said Mr. Adams. “This situation remains very fluid and unpredictable, in our view. We expect FM shares to remain under pressure until a popular consultation in mid-December, and depending on the result, this situation could extend through to national elections scheduled for May 2024. Despite the recent sell-off, with FM down more than 35 per cent this week, we maintain our Neutral recommendation until visibility on taxes, royalties and security over the asset are better understood.”
* Following an evaluation of the “uncertainties” related to the future of its cornerstone Cobre Panama stream, RBC Capital Markets’ Josh Wolfson lowered his Franco-Nevada Corp. (FNV-N, FNV-T) target to US$140 from US$155, keeping a “sector perform” rating. The average is US$166.28.
“Outsized negative risk to FNV is a legitimate but low possibility in our view, which could result in a prolonged larger overhang for FNV shares,” he said.
“Absent Cobre Panama, FNV’s precious metals exposure and its growth outlook would be less competitive vs. peers. Regardless of the outcome, changes in the perception of FNV’s asset risk profile, and potential longer-dated timelines towards a resolution of these uncertainties, risk multiple compression for shares.”
* TD Securities’ Menno Hulshof lowered his Imperial Oil Ltd. (IMO-T) target to $93 from $95 with a “buy” rating. The average is $85.83.
“IMO remains a very clean story,” he said. “We expect it to continue to return the majority of excess FCF to shareholders, with potential for a fourth $1.5-billion-plus SIB in 2024, in our view (vs. largest to date at $2.5-billion). It offers a best-in-class balance sheet, strong fiscal discipline (relatively flat upstream growth/capex profile through 2027) and strong capital returns, although its framework remains less defined than peers. It currently trades at a 15-per-cent strip 2024E FCF yield, below peers at 17 per cent. Our target price falls to $93.00/share on a revised NAV multiple.”
* Stifel’s Michael Dunn increased his target for International Petroleum Corp. (IPCO-T) to $18 from $15 with a “buy” rating, while BMO’s Michael Murphy raised his target to $19 from $17 with an “outperform” recommendation. The average is $16.91.
“IPCO’s 3Q disclosures saw a strong cash flow beat on sales volumes exceeding production by 20 per cent, the retirement of Mike Nicholson and appointment of William Lundin as CEO, 2023 capex guidance reduced 10 per cent, well outperformance (Ellerslie, France), news 2 times well workovers needed in Malaysia, a US$17-million asset sale, and approval to renew the NCIB,” said Mr. Dunn. “High oil prices are allowing IPCO to retain a strong net cash position that actually improved quarter-over-quarter despite heavy spending at Blackrod and share repurchases.”
“While buying shares of companies in the early stages of a major project buildout is typically not ideal timing, in our view the valuation of the shares looks very compelling.”
* Desjardins Securities’ Chris MacCulloch raised his target for Pine Cliff Energy Ltd. (PNE-T) to $1.90 from $1.75 with a “buy” rating, while Canaccord Genuity’s Mike Mueller to $1.75 from $1.65 with a “buy” rating. The average is $1.94.
“We are increasing our target on Pine Cliff ... reflecting positive estimate revisions stemming from the acquisition of Certus Oil and Gas Inc.; this was highly accretive, due in part to the reintroduction of financial leverage to the business model,” he said. “Beyond financial accretion, increased scale and an expanded Alberta Deep Basin drilling inventory, the transaction also significantly reduced the company’s sensitivity to natural gas prices while improving dividend sustainability.”
* Mr. MacCulloch also bumped his target for Topaz Energy Corp. (TPZ-T) to $28.50, above the $27.73 average, from $28, keeping a “buy” rating.
“We are increasing our target on Topaz ... reflecting positive estimate revisions following the release of preliminary 2024 guidance and the acquisition of royalty acreage and infrastructure at West Nipisi,” he said. “Even following back-to-back tuck-in acquisitions in recent quarters, we still believe the company is searching for accretive opportunities to expand the portfolio as industry M&A activity accelerates. We continue highlighting the stock as our top pick in the royalty space.”
* TD Securities’ Menno Hulshof initiated coverage of Strathcona Resources Ltd. (SCR-T) with a “hold” rating and $34 target. The average is $38.58.
* CIBC’s Nik Priebe cut his TMX Group Ltd. (X-T) target to $32, matching the average, from $34 with a “neutral” rating, while Barclays’ Benjamin Budish lowered his target to $31 from $32 with an “equal weight” rating.
“TMX reported what we interpret as a fairly clean, in-line quarter from an earnings standpoint,” said Mr. Priebe. “Much of the discussion and focus today has been around the buildout of a U.S. trading venue and sizing the scale of the upfront capital required and potential earnings upside. We feel inclined to reserve judgement until we obtain better clarity on the business case for this growth initiative and the scale of the upfront capex. In any event, we didn’t feel that the Q3 results or accompanying discussion on the buildout of an alternative trading system in the U.S. was a ‘thesis-changing’ development.”
David Leeder