Inside the Market’s roundup of some of today’s key analyst actions
While he sees early signs of a trough in the freight market as third-quarter data “looks less negative than Q2 on a year-over-year basis,” Scotia Capital analyst Konark Gupta warns near-term conditions remain “highly uncertain.”
“The underlying Q3 trends could be slightly better, given the noise from external factors such as labour strikes, rainfalls, hurricanes and wildfires,” he said. “While there is a glimmer of hope, we remain relatively cautious on the freight economy due to higher-for-longer interest rates and sticky inflation, which could maintain pressure on near-term demand. The industry is becoming less constructive on the upcoming peak season as restocking outlook is fading, which could imply that a potential year-over-year rebound is less likely before Q2/24 when comps start to look easier.”
In a research report released Wednesday, Mr. Gupta said he’s “comfortable” with the latest guidance from Canadian railway companies. However, he trimmed his estimates for Canadian National Railway Co. (CNR-T) while raising his third-quarter outlook for Canadian Pacific Kansas City Ltd. (CP-T).
“Overall traffic remained weak in Q3 and appears to be down modestly quarter-over-quarter, although the rate of year-over-year decline has improved by approximately 200 basis points from Q2,” he said. “While CNR’s Q3 traffic met our prior assumption, CP beat us by 200 bp, likely reflecting CNR’s relatively greater impact from weather events and CP’s greater skew to bulks as well as ongoing ramp-up in CPKC synergies. Similar to Q2, Q3 was quite eventful with the B.C. port strike and eastern Canada rainfalls in July, western Canada wildfires in August, and east coast hurricanes and labour strike at Big 3 automakers in September. We note Canadian rails have lesser exposure to autos than their U.S. counterparts (CNR has the least exposure). In addition, continued macro uncertainty maintained pressure on Q3 traffic. On the flip side, yields (revenue/RTM) could continue to decelerate as strong core pricing is offset by fuel surcharge, mix and accessorial fee headwinds along with reduced FX tailwind. From a margin perspective, operating ratios (OR) could continue to deteriorate year-over-year due to over-resourced networks ahead of potential traffic rebound and given new Canadian labour regulations (rest rules and sick days), fuel lag headwind, and operational challenges from the aforementioned external events.”
“We expect EPS consensus to further come down for CNR and CP in the coming weeks as estimates are updated for traffic and other inputs.”
Reducing his EPS projection for CNR’s third quarter by 7 per cent to $1.76 and his full-year estimate by 2 per cent to $7.27, Mr. Gupta lowered his target for its shares to $170 from $172, maintaining a “sector perform” recommendation. The average target on the Street is $164.08, according to Refinitiv data.
He maintained a “sector outperform” rating and $123 target for CP shares, exceeding the $119.38 average.
Mr. Gupta also made changes in his specialty freight coverage universe, lowering his Cargojet Inc. (CJT-T) estimates while maintaining his projections for Andlauer Healthcare Group Inc. (AND-T).
“Both AND and CJT are solid long-term secular growth stories and have been COVID-19 winners,” he said. “However, they are facing year-over-year headwinds this year from post-pandemic normalization in their respective end-markets while fuel price volatility is also adding some short-term noise. For AND, we expect the continuation of Q2 trends with tough comps in volumes, U.S. TL [truckload] pricing, COVID-19 vaccine revenues and fuel surcharges weighing on consolidated revenues and margins. However, fuel surcharges should improve sequentially, with a lag effect, in late Q3 and into Q4 following the recent rebound in fuel prices (immaterial impact on margin). Further, AND could become more active on the M&A front, driving incremental growth over and above healthy organic growth. For CJT, we have taken a more cautious stance on domestic segment outlook, considering the negative effects of higher-for-longer interest rates on consumer sentiment, which has resulted in reduced earnings expectations. We also expect a fuel lag headwind in Q3 for a transitory margin pressure, partially offset by cost optimization efforts. That said, CJT’s strategic alignment or long-term contracts with leading national and international customers such as Amazon, Canada Post/Purolator, DHL and UPS provide a solid base for strong long-term growth. The company has potential to further reduce capex, thereby accelerating FCF turnaround efforts and possibly introducing shareholder returns.”
His Cargojet target slid to $136 from $140 with a “sector outperform” recommendation. The average is $142.75.
His target for Andlauer target declined to $44 from $48, below the $52.70 average, with a “sector perform” rating.
“We continue to have a more favourable view on CP, MTL and CJT, reflecting growth, valuation and valuation, respectively, in addition to their recent underperformance,” he concluded.
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National Bank Financial analyst Adam Shine thinks Cineplex Inc.’s (CGX-T) third-quarter results are poised to “significantly” exceed the Street’s expectations.
“CGX disclosed on Sept. 11 that its July/August box office revs had hit $154-million (115 per cent of 2019 level), attendance was at 99 per cent of 2019, box office & concession revs up 121 per cent to 2019, and Adj. EBITDAaL [adjusted earnings before interest, taxes, depreciation, amortization and special losses] up 160 per cent to 2019 - all well above our prior estimates,” he said. “We may not get September box office results for another week or two, but we assume a low teen decline versus 2019 given It Chapter Two.”
Mr. Shine is now projecting quarterly box office revenue of $192-million, up 54 per cent year-over-year, 8 per cent from the same (pre-COVID) period in 2019 and rising from his previous forecast of $160-million. His total revenue estimate rose to $471-million from $424-million, above the Street’s expectation of $420-million and up 38.6 per cent year-over-year and 8 per cent from 2019. He’s now also expecting a quarterly record for EBITDAaL of $83.5-million, a jump of 309 per cent year-over-year and up from his previous $52.6-million projection.
The analyst also thinks his estimates for the company’s fourth quarter could prove to be “conservative,” expecting significant gains from the Oct. 13 release of Taylor Swift: The Eras Tour.
He did, however, raise his estimates for fiscal 2024 with his revenue projection rising $34-million to $1.774-billion, exceeding the $1.672-billion consensus. His EBITDA forecast gained $7-million to $434-million (versus $394-million), while his EBITDAL projection moved up $9-million to $248-million.
“As we reflect on CGX’s road to recovery, we note that 2019 Adj. EBITDAaL was $227-million ($242-million ex-items), while we see LTM [last 12 months] at Q3E of $195-million and 2023E at $209-million and that’s without full film slates during Q1 and Q4,” he said.
Maintaining an “outperform” recommendation for Cineplex shares, Mr. Shine increased his target to $14.50 from $13. The average on the Street is $12.88.
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Raymond James analyst Jeremy McCrea thinks Peyto Exploration & Development Corp. (PEY-T) $636-million acquisition of Repsol Canada sets the stage for higher multiple-year profitability.
Coming off research restriction with the close of a $201-million equity raise to help fund the deal, he upgraded the Calgary-based company to “outperform” from a “market perform” recommendation.
On Sept. 6, Calgary-based Peyto announced the acquisition, adding 455,000 net acres to its Deep Basin land position in the province as well as 23,000 barrels of oil equivalent per day production, mainly gas.
“As natural gas prices remain volatile, a pillar to Peyto’s success has been margin improving strategies, either through better market diversification, improving well results, and operating within a region with dominant control over infrastructure and egress,” he said. “Consequently, Peyto’s acquisition of Repsol’s Canadian assets for $636 million significantly aligns with this strategy, expanding the company’s Deep Basin acreage, which closely overlaps with Peyto’s existing land holdings. These Repsol assets, however, have essentially been untouched for the past several years, with only 14 wells put on production since 2018. Combined with Repsol’s facility utilization at only 35 per cent, there is plenty of back-filling synergy gains that can be expected as many of these new Tier 1 locations get drilled. Overall, Peyto is a better company today with overall production efficiency gains looking to improve by 16 per cent.”
He raised his target for Peyto shares to $15 from $13.50. The average is currently $16.42.
“Offering one of the highest yields in the sector (approximately 10 per cent), a disciplined growth plan over the next few years (10 per cent a year), and significant improvement in inventory and infrastructure capacity, there is a lot to like. As such, we raise our rating,” he said.
Mr. McCrea was one of several analysts to resume coverage on Wednesday. A group of others raised their target prices for Peyto shares, including:
* National Bank’s Travis Wood to $17 from $16 with an “outperform” recommendation.
“The strategic positioning and overlap of the acreage, compounded by the immediate ability to capture and leverage off existing infrastructure is a primary benefit in the short term and drives a materially improved cash flow and FCF profile through our forecast,” said National Bank analyst Travis Wood. “Current production on the acquired lands is approximately 23 mboe/d and is expected to average 33 mboe/d in 2024, providing support as the company grows towards its 160 mboe/d target by 2026.”
“We flag the well performance across the Repsol lands as an important gauge towards Peyto’s plans to improve capital efficiencies. Average well performance has meaningfully outperformed Peyto during periods of active development and in our view, will be a large part of the lower capital efficiency plans going forward. These higher impact wells should be easily absorbed given that the company’s pro forma net processing capacity of 1.4 bcf/d is effectively 50-per-cent unutilized (NBF estimate).”
* Stifel’s Michael Dunn to $17 from $16 with a “buy” rating.
“The $636-million Repsol acquisition high-grades and expands Peyto’s drilling inventory, expands its infrastructure, and provides ample synergy opportunities,” said Mr. Dunn. “While the deal expands Peyto’s leverage ratios, it addresses what was in our view the main pushback from investors: inventory depth and quality. With an attractive 10.5-per-cent dividend yield that looks sustainable down to below $2.00/mmbtu AECO unhedged, we expect the stock to see multiple expansion.”
* Scotia’s Cameron Bean to $23 from $21 with a “sector outperform” rating.
“We see the deal as a win for PEY and expect it to enhance the efficiencies of the company’s growth runway over the next several years,” he said. “We expect the company to comfortably deliver on its growth plan and pay its base dividend within cash flow down to US$2.55/mmBtu NYMEX (PEY sees its sustaining / flat production break-even at US$2.00/mmBtu), with rapid debt repayment and future dividend growth (2025 and beyond) at higher natural gas prices. Overall, we believe the deal improves PEY’s growth visibility and cements the company as a great pick for an improving natural gas market (with solid downside protection).”
* Canaccord Genuity’s Mike Mueller to $16.25 from $14 with a “buy” rating.
“While the acquisition marks somewhat of a step-change in the company given its history of growing largely through selective tuck-in acquisitions and the drill bit, we view the acquired assets as being complementary to PEY’s existing operations in the Greater Edson area, offering economies of scale as it grows production in the coming few years (from 123,000 boe/d on closing to more than 160,000 boe/d by year-end 2026 corporately) and better utilizes existing infrastructure in the region,” said Mr. Mueller.
* RBC’s Michael Harvey to $15 from $13 with a “sector perform” rating.
“Peyto’s acquisition of Repsol’s Canadian Deep Basin assets is strategically sound in our minds, and boosts high-quality drilling inventory amid the company’s core growth region,” said Mr. Harvey. “Importantly, the lands are only lightly developed (limited operated drilling has occurred here since 2019), which allows the company to both increase (more than 800 locations) - and high-grade - its inventory position.”
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Vancouver-based GoldMining Inc.’s (GLDG-A, GOLD-T) La Mina project in Columbia is displaying leverage to strong gold prices, according to H.C. Wainwright analyst Heiko Ihle.
“In short, we emphasize La Mina’s leverage to spot pricing as we continue to see prices stabilize near $1,900 per ounce,” he said. “This pricing is near historical highs and (in our view) should allow for profitable metal extraction at many projects such as La Mina. In turn, the asset maintains a post-tax NPV5 of $279.5-million when utilizing a $1,750/oz base case price, which increases by 58 per cent to $442.2-million when considering a gold price of $1,975/oz. Even though the PEA has recently allowed for meaningful value to surface, we also believe that the project should ultimately offer additional opportunities through its prospective land package, which hosts a suite of porphyry-style targets.”
In a research note released Wednesday, Mr. Ihle also emphasized the potential of its São Jorge project in the Tapajos region of Brazil, which he called “a significant gold district poised for development.”
“Notably, this trend is reported to have yielded approximately 30.0Moz of gold production over a period of 40 years,” he said. The area also has new assets, such as G Mining’s (GMIN-X; not rated) Tocantinzinho project, look to enter production in the near-term. We also emphasize the recent discovery of the Matilda copper-gold porphyry nearby and stress that 7.0Moz of gold across seven rock deposits have been defined in the region. In short, we highlight São Jorge’s geographical advantages .... as various major mining groups continue to buy into the region. In conclusion, and given São Jorge’s favorable location, existing resource base, and solid economics, we believe the project could offer strong potential in materializing value for GoldMining.”
Reiterating a “buy” rating for GoldMining shares, Mr. Ihle trimmed his target to US$4.50 from US$5.25 to reflect “the lower market value of GLDG’s various equity positions given a recent sell-off in the market.” The average is $3.63 (Canadian).
“Looking forward, we expect the firm to continue de-risking La Mina and simultaneously refining various areas of the project’s production profile,” he said. “In turn, GoldMining intends to pursue variability test work regarding La Mina’s metallurgy in order to optimize the process flowsheet, which could yield improvements in precious metal and copper recoveries. Additionally, the project could see a reduction in its strip ratio through the optimization of pit wall slopes, which currently sits at 5.81:1. Once again, we believe the primary value driver for La Mina should ultimately be its exploration upside as the firm remains well-capitalized to continue advancing the resource at site while simultaneously delineating additional targets.”
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While Theratechnologies Inc.’s (TH-T) third-quarter results were mixed with a revenue miss and EBITDA beat, National Bank Financial analyst Endri Leno thinks the report signals it has “started to find a footing.”
“This is particularly the case via the return to positive Adj. EBITDA after some 3-plus years,” he said. “The latter is expected to continue as 1) the lower Q3/f23 R&D expenses are expected to remain as such; and 2) some covenants on the Marathon loan are moving to Adj. EBITDA-based targets (from revenue-based prior). While fQ3 revs missed our estimate by 11 per cent, the revised f2023 revenue guidance is just 1 per cent lower at midpoint (US$83.5-million vs. US$84.5-million prior), implying a stronger fQ4 with revenues of US$25.1-million (up 18 per cent year-over-year, up 21 per cent quarter-over-quarter, and up 6 per cent vs. our estimate).”
Shares of the Montreal-based metabolic disorder drug company dropped 18.5 per cent on Tuesday following the premarket quarterly release, which saw sales of both of its products (EGRIFTA and Trogarzo) missed the Street’s forecast. Overall, revenue of US$20.9-million also fell short of Mr. Leno’s estimate (US$23.4-million), while adjusted EBITDA of US$2.2-million was higher than anticipated (US$1.2-million).
“Despite the subdued sales in fQ3 (up 0.2 per cent year-over-year overall), TH continues to see new prescription growth (although patient retention is tough), hence expectations of sales improvements in Q4/f23 and into f2024,” he said.
Mr. Leno said he’s “encouraged” by the company’s positive adjusted EBITDA, but he lowered his target for its shares to $5.50 from $7 to “reflect the risk-off market environment” with a “sector perform” rating. The average target is $6.83.
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Seeing it “possibly positioned to generate outsized growth,” Raymond James analyst Brad Sturges initiated coverage of NexLiving Communities Inc. (NXLV-X) with an “outperform” rating on Wednesday.
The Halifax-based company is an early stage Canadian multi-family rental real estate asset consolidator. It owns 30 properties, primarily in New Brunswick, which Mr. Sturges emphasized does not have rent control legislation in place.
“NexLiving has generated average quarterly SP-NOI [same-property net operating income] growth of 10 per cent year-over-year since 2Q22, driven by the lease-up of vacant suites recently acquired, and due to positive blended AMR leasing spreads achieved,” he said. “Given NexLiving’s exposure to non-rent controlled MFR markets, NexLiving is less reliant on suite turnover to realize higher AMRs [average monthly rents]. In 2023 year-to-date, NexLiving’s blended AMR increased around 6 per cent (suite turnover: approximately 10 per cent), which mainly reflected executed lease renewals (tenant retention ratio: 90 per cent), and is estimated to be generally in-line with the company’s large-cap Canadian MFR REIT peer range of mid-to-high single-digit AMR growth year-over-year.”
Seeing a discounted relative valuation to its peers based on low trading liquidity as well as higher financial leverage, Mr. Sturges set a target of $2.70. The average on the Street is $3.47.
“We believe NexLiving is an intriguing Canadian MFR real estate company (REOC) that is in its early-stages of growth that has the potential to offer outsized future growth,” said Mr. Sturges. “NexLiving’s shares may benefit from several potential positive catalysts, including: 1) a future reduction in financial leverage metrics to targeted levels; 2) increased operating size and scale of its Canadian MFR platform; 3) greater trading liquidity; and 4) realizing above-average AFFO/share growth year-over-year.”
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In other analyst actions:
* TD Securities’ Tim James cut his Street-high Cargojet Inc. (CJT-T) target to $170 from $175 with a “buy” rating. The average is $142.75.
* Canaccord Genuity’s Doug Taylor increased his target for Computer Modelling Group Ltd. (CMG-T) to $8.75 from $8.50 with a “buy” rating. The average on the Street is $9.13.
* RBC’s Pammi Bir cut his Northwest Healthcare Properties REIT (NWH.UN-T) target to $6, below the $7.29 average, from $8 with a “sector perform” rating.
“From our lens, NWH has taken some important steps forward on its path to repairing the balance sheet. We believe the 55-per-cent distribution cut was painful, but necessary,” said Mr. Bir. “Progress on non-core asset sales and interest received to date on segments of the portfolio are encouraging. Still, our earnings outlook took a sizeable haircut on higher interest costs. At 13 times 2024 estimated AFFO [adjusted funds from operations] (7.9-per-cent implied cap rate; 41 per cent below NAV), valuation seems reasonable in light of the de-leveraging work that lies ahead and a strategic review that’s in its early days.”
David Leeder