Inside the Market’s roundup of some of today’s key analyst actions
Citing an “expectation of improving operational performance, the upcoming step-change in shareholder returns, and attractive valuation,” Scotia Capital analyst Jason Bouvier upgraded Cenovus Energy Inc. (CVE-T) to “sector outperform” from “sector perform” on Wednesday.
“With both the upstream and downstream running at more normalized rates we believe Q3 will act as a good indicator of the true cash flow capability of CVE,” he said in a research report. “We believe strong execution in H2, coupled with robust oil prices will act as a catalyst for additional share price upside. On strip, we expect CVE to reach its $4-billion net debt target in Q1/24, which will result in 100 per cent of the company’s free cash flow being used for shareholder returns (compared to 50 per cent currently).”
Mr. Bouvier expects Cenovus’ Toledo and Superior refineries to be fully ramped-up in the second half of the year, which he thinks will lead improved downstream performance as seen by higher utilization and throughputs. He’s projecting downstream utilization to increase to 90 per cent from 67 per cent in the first half of the year.
He’s also expecting “steady” upstream growth, noting: “We model production growing from 780 mboe/d [thousand barrels of oil equivalent per day] in 2023 to 940 mboe/d by 2028 (4-per-cent CAGR [compound annual growth rate], leading the Cdn large cap space. The completion of the West White Rose project in 2026 will add 45 mbbl/d at peak production rates. Further, management has indicated that the Narrows Lake tie-back, debottlenecking at Foster Creek, and optimization at Sunrise could add 65-80 mbbl/d. This is in addition to modest growth from its conventional business.”
Seeing “torque to strong oil prices” and a “compelling” valuation, Mr. Bouvier raised his target for Cenovus shares to $30 from $28. The average target on the Street is $30.25, according to Refinitiv data.
“We estimate significant FCF at current commodity price levels backed by a strong balance sheet and a deep inventory of profitable optimization opportunities,” he concluded. “With several growth initiatives underway we expect total production to grow to 950 mboe/d over the next several years. Downstream throughput has increased with an acquisition and re-build of Superior. Over time we expect utilization and margin capture to improve, and believe there is potential for further optimization.”
Scotia Capital’s Ben Isaacson expects the market to “reward” Parkland Corp. (PKI-T) shares in the near-term after it raised its 2023 adjusted EBITDA guidance and said it now expects to reach its $2-billion adjusted EBITDA target by 2024 (one year earlier than expected).
After the bell on Tuesday, the Calgary-based company pointed to a “strong performance” in making the changes, leading several equity analysts on the Street to hike their financial projections and target prices for its shares.
“Specifically, PKI raised the mid-point of its ‘23 guide by $75-million to $1.8-billion to $1.85-billion, largely due to: (1) the acceleration of acquisition integration synergies; (2) favourable crack spread performance; and (3) organic growth opportunities,” said Mr. Isaacson. “We now expect PKI to exit ‘23 with run-rate EBITDA of approximately $1.95-billion. The increased guide should lead to a leverage ratio of 3 times by the end of ‘23 and to less than 3 times in ‘24.
“Run-rate FCF now improves to $5 per share going forward, based on $2-billion of EBITDA converting to $9.50 per share CFO (PKI’s guide). In our minds, run-rate FCF of $5 should provide investors with a decent argument for stock approaching $50, using a rule-of-thumb 10-per-cent FCF target yield.”
Keeping a “sector outperform” recommendation, Mr. Isaacson raised his target for Parkland shares to $45 from $42. The average target is $42.96.
“While Parkland continues to execute near flawlessly on its EBITDA growth targets and strategic objectives, we must acknowledge that investors have become less willing to pay historic multiples for the company’s earnings power and free cash flow generation. Investor uncertainty is increasing with respect to the sustainability of the business model,” he added. “Simply put, investors are concerned the transition from ICEs to EVs may not occur on a 1-for-1 basis, at least as it relates to Parkland’s economics. This has resulted in a moderation of the stock’s valuation multiple.”
Others making changes include:
* Raymond James’ Steve Hansen to $45 from $42 with an “outperform” rating.
“Coupled with positive implications to the company’s balance sheet & leverage targets, we continue to see attractive value in PKI shares,” he said.
* Canaccord Genuity’s Luke Hannan to $44 from $42 with a “buy” rating.
“In our view, the increased guidance is a testament to management’s ability to drive disciplined organic growth across multiple platforms, and speaks to the durability of the underlying business,” he said.
* RBC’s Luke Davis to $47 from $46 with an “outperform” rating.
“Combined with ongoing disposition efforts, we view the update positively with financial leverage rapidly declining. In our view, 2023 has been a pivotal year with strong operational execution at the forefront,” said Mr. Davis.
* CIBC’s Kevin Chiang to $48.50 from $44 with an “outperformer” rating.
“PKI benefits from a diverse revenue stream that helps create a more stable (highly rateable) earnings profile with significant earnings visibility as well. The company remains on pace to achieving its medium-term earnings and leverage targets as it prioritizes its FCF towards deleveraging. This also positions the company well to self-fund deals in the future when it does return to its M&A strategy,” said Mr. Chiang.
* BMO’s John Gibson to $46 from $43 with an “outperform” rating.
“We believe a large portion of the increased guidance in 2023 is inclusive of higher crack spreads on its Burnaby, BC refinery, although strong cost savings and synergies are also driving improved profitability across its Retail and Commercial operations,” said Mr. Gibson.
“PKI shares have been on a solid run of late (up more than 10 per cent since July), although the company continues to sit towards the lower end of its historical valuation range at 6.7 times 2023 EV/EBITDA (6.2 times 2024 numbers).”
* TD Securities’ Michael Van Aelst to $44 from $42 with a “buy” rating.
National Bank Financial analyst Cameron Doerksen thinks TFI International Inc. (TFII-T) is poised to benefit from a “sustained improvement” in less-than-truckload volumes.
“Like its LTL peers, TFII shares have been boosted by the shutdown of major U.S. LTL competitor, Yellow Corp.,” he said in a research note. “The key question is whether the volume pick-up and pricing improvements that most LTL carriers reported immediately following the failure of Yellow can be sustained. Recent mid-quarter updates from other U.S. LTL peers would suggest they can be. We also understand that the sequential volume improvements (up 13 per cent) as well as pricing strength highlighted on TFII’s Q2 earnings call in the immediate wake of the Yellow failure continued through August.
“We are positive on the long-term prospects for TFII as we see earnings growth tailwinds in the coming quarters driven by margin improvement in the U.S. LTL segment both from the improved market backdrop in the wake of the failure of major competitor Yellow Corporation as well as from the company’s margin enhancement initiatives. We also believe 2024 will offer a better freight backdrop as there is some evidence that the North American trucking market may be bottoming.”
Mr. Doerksen raised his forecast for TFII’s LTL segment for both the third and fourth quarters, seeing a 13-per-cent increase in volumes leading to an additional 3-4-per-cent increase in revenue. He’s also projecting a 3-per-cent rise in EBIT margin.
However, he did warn that investors may already be pricing in those gains and a “tough” market remains for the company’s other segments, predicting “soft” quarters ahead
“TFII shares are up approximately 14 per cent in the last month and up 36 per cent year-to-date versus S&P/TSX flattish over the last month and up 6 per cent year-to-date as the market looks to potential benefits accruing to all LTL carriers due to Yellow Corp’s ceasing of operations,” he said. “TFII will benefit from incremental volumes and firmer pricing in the LTL segment, but we believe much of this is already reflected in the stock.
“LTL represents approximately 45 per cent of TFII’s revenue and is the company’s single biggest segment. U.S. LTL, which is the main beneficiary of the Yellow failure, is 35 per cent of total company revenue. Therefore, about two-thirds of TFII’s total revenue is generated in the other three segments where in Q2 both revenue and earnings were down materially year-over-year. The broader trucking market, both in the U.S. and Canada, may now be in a bottoming phase, but we still expect a similarly challenging freight backdrop for most of the company’s operations for at least the next two quarters.”
With a “reasonable” relative valuation after having already “expanded significantly” thus far in 2023, Mr. Doerksen raised his target for TFII shares to $191 from $183, but he kept a “sector perform” recommendation based on a “modest” potential return. The average on the Street is $175.07.
Seeing few obstacles to ABC Technologies Holdings Inc. (ABCT-T) plan to go private, National Bank Financial analyst Maxim Sytchev moved his rating for its shares to “tender” from “sector perform” previously.
Before the bell on Tuesday, the Toronto-based manufacturer of automotive systems and components announced a definitive agreement with majority shareholders Alpha Holdings and Oaktree Capital Management to be taken private for $6.75 per share.
“The transaction represents a 12.5-per-cent premium over ABCT’s [Friday’s] closing price of $6.00, with an implied 5.0 times EV/EBITDA multiple (and 18.9 times P/E) on our last (pre-Plastikon) fiscal 2025 forecasts,” said Mr. Sytchev. “However, the privatization offer price is 32.5 per cent lower than the company’s Feb. 22, 2021 IPO price of $10.00 per share. Given that Alpha and Oaktree own in excess of 90 per cent (approximately 93.4 per cent) of ABCT’s outstanding shares, the transaction will not be subject to approval by minority shareholders and is expected to be passed at next month’s upcoming special shareholders meeting.”
The analyst said the company had been suffering from a “wrong structure, wrong time” and may benefit from the move.
“ABCT’s life as a public company was rather under the radar, a function of shareholding structure, leverage and macro headwinds,” he said. “Hopefully, under the private structure, the company can make inroads when it comes to margin improvements, de-leveraging, etc. With high PE ownership, we would be surprised to see a second (and more generous bid).”
Mr. Sytchev lifted his target for ABCT shares to $6.75 from $6 to align with the offer. The average on the Street is $5.88.
Desjardins Securities analyst Chris Li trimmed his earnings expectation for Empire Company Ltd.’s (EMP.A-T) first quarter of fiscal 2024, pointing to “ongoing tonnage pressures from trade-down, as evidenced by the relatively strong same-store sales by peers with greater exposure to discount.”
Ahead of the grocer’s Sept. 14 financial report, he’s now forecasting earnings per share of 72 cents, down 2 cents from his previous estimate and 3 cents lower than the Street. His same-store sales growth estimate of 2.0 per cent, excluding fuel, is also lower than consensus (2.5 per cent) and represents a 0.6-per-cent decline from the previous quarter.
“On the 4Q FY23 call in late June, management noted that there were early signs of SSSG [same-store sales growth] improvement driven by moderating inflation, with the momentum continuing in 1Q FY24 (albeit gradually),” said Mr. Li. “While we believe this to be the case, it was likely partly offset by the continuing shift to discount, as evidenced by the relatively strong SSSG by peers with greater exposure to discount (L up 6.1 per cent, MRU up 9.4 per cent and WMT Canada up 4.8 per cent).”
“Despite ongoing pressures from trade-down, we expect gross margin to improve by 60 basis points year-over-year (vs up 90 basis points year-over-year or up 58 basis points ex fuel in 4Q FY23), driven mainly by promotional optimization, own brands, sourcing efficiencies and lower transportation costs, and partly offset by higher promo penetration. This compares with a 20‒30 basis points year-over-year decline for MRU and L.”
Mr. Li maintained a “buy” recommendation and $41 target for Empire shares. The average target on the Street is $41.31.
“We believe EMP’s discounted valuation largely reflects industry challenges,” he said. “Given EMP’s asset mix, we believe moderation in inflation, improvement in macro conditions and growing e-commerce adoption are key to improving results and sentiment. We believe these will materialize, but patience is required.”
Echelon Capital Markets analyst Adam Gill initiated coverage of four energy stocks on Wednesday.
* Highwood Asset Management Ltd. (HAM-X) with a “buy” rating and $9 target. Mr. Gill is the lone analyst on the Street covering the Calgary-based growth-orientated oil and gas exploration and production company.
“Highwood has recently acquired new assets and has re-entered the E&P game in a big way. We believe the assets are high quality (capital-efficient development, lower opex vs. peers, and better price realizations given light oil),” he said. “This combination provides the Company with a great setup for not just showing strong growth over the coming quarters, but also delivering solid FCF.”
“For our thesis to play out, Highwood needs to deliver on two main elements: 1) growth, and 2) deleveraging. On the growth front, we believe confidence in the team’s ability to deliver will increase in the back end of 2023 as we start to see initial results of the capital program, proving that the very strong drilling results seen by the vendors on the latest two wells are consistent. On deleveraging, we see D/CF falling solidly below 1.0x in mid 2024. As FCF deployment moves from debt repayment to enriching shareholders, the stock will get re-rated and the yield will start to fall in line with peers.”
* Journey Energy Inc. (JOY-T) with a “buy” rating and $7.15 target. The average is $6.94.
“The most interesting and impactful part of Journey’s story, in our view, is its emerging power generation business,” he said. “The growth in this business has positive impacts to both cash flow growth and cash flow stability. We believe that as power makes a more meaningful contribution to revenues in 2024 and beyond, Journey will see a sustained lift in valuation.”
“We believe Journey is undergoing a partial transformation as it builds out its power generation portfolio. With the Gilby and Mazeppa plants up and running, we see a meaningful boost in cash flows and corresponding compression in valuation. While Journey at its core will still be an E&P company, we believe the risk reduction from a decoupled revenue stream in power will warrant some valuation premium for the stock.”
* ROK Resources Inc. (ROK-X) with a “buy” rating and 55-cent target. The average is 79 cents.
“ROK has multiple routes for value creation, both with conventional oil & gas development as well as an emerging opportunity in lithium brines,” he said. “The balance sheet is in solid shape following the sale of the Weyburn Unit interest in Q123 and once the Company delivers on the growth program, we believe that the stock will see a positive re-rate.”
“Overall, we see a solid re-rate opportunity in ROK’s stocks and multiple catalysts to drive the stock higher. Drilling success will firm up confidence in the forward outlook and the lithium opportunity provides another platform for the team to create value for shareholders. In addition, ROK is in solid financial shape, and we believe the financial position deserves better recognition in the valuation.”
* Saturn Oil & Gas Inc. (SOIL-T) with a “buy” rating and $5.65 target. The average is $5.80.
“Saturn has been a quickly growing oil producer, driven by acquisitions, growing from 233 Boe/d in Q121 to 27,000 MBoe/d today,” he said. “A large part of the financing for the acquisitions has come via senior term debt with a US family office that has a rapid payback period (post the Ridgeback deal in Q123, $202.9-million is due back in Q2-Q423 with an additional $202.8-million due in 2024, with $557.5-million outstanding at the end of Q223). We believe that as this debt is extinguished, the market will re-rate the stock higher as the Company’s risk profile improves.
“We see numerous positives in the Saturn story: 1) In the current strip environment and under our conservative capital assumptions, Saturn is in solid shape to address the senior term note payback and still have a very discounted valuation; 2) The Company has been executing well in its core plays, notably seeing an improvement in Oxbow drilling year-to-date; 3) There is strong potential to unlock additional Bakken acreage in SE Saskatchewan with non-fraced, multi-lateral wells. From a stock perspective, the valuation is extremely compelling with a 1.4 times 2024 estimated EV/DACF multiple and a 55-per-cent 2024 estimated FCF yield (diluted share count valuation) – by far the cheapest stock in the Canadian junior E&P universe. "
In other analyst actions:
* In response to Enbridge Inc.’s (ENB-T) US$9.4-billion acquistion of three U.S. utilties, Wells Fargo’s Praneeth Satish downgraded its shares to “equal weight” from “overweight” and cut his target to $50 from $58. Elsewhere, JP Morgan’s Jeremy Tonet lowered his target to $58 from $60 with a “buy” rating. The average on the Street is $56.07.
* JP Morgan’s John Royall increased his Alimentation Couche-Tard Inc. (ATD-T) target to $73 from $72 with an “overweight” rating. The average on the Street is $80.11.
* CIBC’s Stephanie Price hiked her target for Constellation Software Inc. (CSU-T) to $3,100, above the $3,082.86 average, from $3,000 with an “outperformer” rating.
* BMO’s Tamy Chen cut her Maple Leaf Foods Inc. (MFI-T) target to $33 from $34 with an “outperform” rating. The average is $37.20.
“After a deeper dive into a California agriculture law called Proposition 12, we modestly lowered our estimates to reflect potential near-term headwinds on pork economics,” she said. “But we remain Outperform. It is still early days in Prop 12 implementation and the pork spread is also subject to other supply/demand dynamics. Further, our expectation for operational improvements in the London poultry plant and Bacon Centre of Excellence is unchanged.”
* IA Capital Markets’ Sehaj Anand trimmed his Sigma Lithium Corp. (SGML-X) to $70 from $71 with a “buy” rating, while BMO’s Joel Jackson reduced his target to $48 from $50 with an “outperform” rating. The average is $66.30.
* Canaccord Genuity’s Jeremy Hoy raised his Skeena Resources Ltd. (SKE-T) target to $14.25 from $12.50 with a “speculative buy” rating. The average is $15.24.