Inside the Market’s roundup of some of today’s key analyst actions
Raymond James analyst Michael Shaw recommends investors “focus on small cap value in a rising rate environment” when navigating midstream and pipeline equities, which have moved sharply lower over the last two weeks.
“The group is clearly caught up in the downdraft of energy prices on recession fears and is finally capitulating to the gravity of the market after meaningfully outperforming for the first six months of 2022,” he said in a research report released Friday. “The group has outperformed the TSX by 800 bps this year as underlying volumes and growth outlooks improved. In our view, the same fundamentals that drove 1H22 outperformance have not changed. On the contrary: the volume outlook for the pipeline and midstream group has only improved over the course of 2022. Our top picks in the group are Keyera (Strong Buy) and Gibson (Outperform).
“Central Banks and governments have aggressively shifted to tame inflation, which, in our estimation will ultimately require tackling energy prices via either demand destruction or encouraging production, or both. Federal governments in both Canada and the US that were once hostile to the idea of growing North American production are now publicly calling on energy companies to increase spending and production. Our base expectation is that E&Ps remain committed to their existing, modest growth plans and will maintain current production levels even as energy prices work to curtail demand. As a result, we see limited risk in terms of volume and cash flow for the midstream and pipeline group, with a positive bias on volumes as the year progresses.”
Despite improving fundamentals, including “healthy” volumes, Mr. Shaw thinks the top risk for investors in the sector remains multiple compression, expecting reductions as interest rates continue to move higher.
“We estimate that Pipeline and Midstream EV/EBITDA multiples need to move 0.5 times to 1.5 times lower to offset the move higher in Canadian interest rates,” he said. “The move in small cap equities (KEY and GEI) over the last two weeks has nearly fully reflected the higher interest rates; however, we still see the possibility for continued compression among the large cap names (TRP and ENB) that have performed relatively better.”
Citing its current valuation, Mr. Shaw downgraded TC Energy Corp. (TRP-T) to “marker perform” from “outperform” with a $68 target, down from $73 and below the current average target on the Street of $72.25.
“TRP has been the best performing Canadian energy infrastructure equity year-to-date, up 12 per cent versus the group (which is down an average of 2 per cent) and versus the utilities (down 5 per cent),” he said. “The long-term outlook for TRP remains strong. TC Energy’s above average exposure to natural gas with the build out of North American LNG should enable the company to deploy significant capital for many years to come. Moreover, we consider Bruce Power to be one of the best energy transition assets in our coverage universe. We are lowering our rating to reflect the minimal upside to our updated target.”
Mr. Shaw also made these target adjustments:
- Enbridge Inc. (ENB-T, “market perform”) to $55 from $58.50. Average: $60.26.
- Gibson Energy Inc. (GEI-T, “outperform”) to $25 from $27. Average: $16.19.
- Keyera Corp. (KEY-T, “strong buy”) to $34 from $36.50. Average: $36.40.
- Pembina Pipeline Corp. (PPL-T, “market perform”) to $45 from $50. Average: $52.93.
“Our recommendation is to take advantage of the underperformance in the small cap by adding to positions in Keyera and Gibson,” he said. “Both Keyera’s and Gibson’s forward multiples have moved sharply lower in the last two weeks as they have underperformed the larger group by 500 to 700 bps. Both are trading sub 10 times on our updated 2023 EBITDA estimates - nearly one standard deviation below their 2017-2022 average. Larger cap pipeline equities are trading below the midpoint of their respective valuation ranges but face a higher risk of multiple compression if interest rates move higher.
“In no way do we see the underperformance in either KEY or GEI as a reflection of a worsening relative fundamental outlook. On the contrary, we expect Keyera to report a strong 2Q based on continued volume growth through its G&P facilities – led by a continued resurgence of volumes through G&P South – and a second quarter of above average marketing results.”
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Neighbourly Pharmacy Inc.’s (NBLY-T) “M&A machine continues to hum,” according to National Bank Financial analyst Zachary Evershed, who is expressing increased confidence in its ability to acquire at least 40 stores per year.
“COVID fatigue has translated into a significant uptick in the number of retirements, posing a benefit to the company as talks of succession planning stocks NBLY’s M&A pipeline and affords NBLY the chance to be more selective in choosing high-quality acquisitions,” he said.
In a research report released Friday reviewing its in-line fourth-quarter 2022 results, Mr. Evershed did lowered his store growth estimate for the remainder of the year to 15 locations, down from 24 and in line with management guidance. However, he raised his forecast moving forward to 40 locations annually, up from 32, and in line with past performance.
“This is supported by Neighbourly’s $160 million in dry powder and the abundance of opportunities in the pipeline,” he said. “Given the continued uptick in inbound calls related to succession planning as pandemic fatigue has prompted a higher than usual number of retirements, we expect NBLY can afford to be more selective, resulting in generally higher quality acquisitions. While the current macro and capital market environments remain choppy and of concern to investors, management reiterated that they foresee no need for equity to fund the acquisition pipeline given available.”
Before the bell on Thursday, the Toronto-based company reported revenue for the quarter of $112.3-million, up 34.9 per cent year-over-year and largely in-line with both Mr. Evershed’s $114.1-million projection and the consensus estimate of $111.7-million. Adjusted EBITDA of $11.3-million was a rise of 1.3 per cent year-over-year and also meeting the $11.2-million expectation from both the analyst and Street.
“As expected, staffing headwinds dragged on the quarter as Omicron-related absenteeism compounded existing COVID-related pharmacist fatigue,” said Mr. Evershed. “Management foresees tight labour availability over the next 12 months, likely resulting in continued relief pharmacist costs (albeit at lower levels) as the industry awaits two graduating classes of 1,500 pharmacists each to replenish supply. Even so, wage pressures remain relatively contained across the network on the pharmacy side (80 per cent of sales), though front shop operations (20 per cent of sales) are impacted by minimum wage hikes.”
After lowering his margin forecast “modestly” to account for staffing pressure and the cut to his near-term acquisition expectation, Mr. Evershed trimmed his target for Neighbourly shares by $1 to $27, maintaining a “sector perform” rating. The average target on the Street is $35.56.
“Though we value steady organic growth with M&A upside, given the tight return to target, we rate NBLY Sector Perform,” he said.
Elsewhere, other analysts making changes include:
* Desjardins Securities’ Chris Li to $26 from $35 with a “hold” rating.
“4Q financial results were in line, partly offset by lighter script growth as new script volumes remain 15 per cent below pre-pandemic levels with COVID-19 continuing to limit in-person doctor visits,” said Mr. Li. “We continue to view NBLY as a high-quality, well-managed and defensive company with compelling long-term growth through M&A in a highly fragmented industry. However, relative valuation and limited near-term catalysts will likely keep the stock range-bound in the near term.”
* Scotia Capital’s Patricia Baker to $37 from $41 with a “sector outperform” rating.
“With the company’s very strong defensive positioning and minimal exposure to discretionary spend, coupled with a solid outlook for growth we think now is a great entry point for long term focused value investors,” said Ms. Baker. “We see NBLY well positioned to execute on its M&A strategy, drive robust growth and demonstrate ongoing operating leverage. We reiterate our Sector Outperform rating and do anticipate NBLY shares driving a significant outperformance in the back half and into 2023.”
* BMO’s Peter Sklar to $25 from $33 with a “market perform” rating.
“We continue to find Neighbourly’s pharmacy roll-up story a compelling investment thesis, as there is a significant valuation arbitrage opportunity,” he said.
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Seeing Medexus Pharmaceuticals Inc. (MDP-T) “now in a firmly EBITDA positive position,” Canaccord Genuity analyst Tania Armstrong-Whitworth raised her rating for its shares to “speculative buy” from “hold” previously.
On Wednesday after the bell, the Toronto-based company reported revenue of $20.3-million, up 15 per cent year-over-year and exceeding the estimates of both the analyst ($19.1-million) and the Street ($18.2-million). Adjusted EBITDA improved to $1.1-million from a loss of $1.6-million during the same period a year ago and also beating forecasts (losses of $0.4-million and $0.5-million, respectively).”
Calling the results “healthy” and expecting gross margin expansion from current levels as it modernizes the manufacturing process for its IXINITY drug, which is used for the treatment and control of bleeding episodes, Ms. Armstrong-Whitworth maintained a $3.25 target for Medexus shares. The current average is $6.50.
“With the stock having now declined materially below this level, we are moving from a HOLD to a SPEC BUY rating,” she said. “The SPEC condition is based on the fact that almost all of the potential upside to our price target hinges on the approval of treosulfan in the U.S., which in our opinion remains a question mark.”
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While the fourth-quarter results from Evertz Technologies Ltd. (ET-T) were stronger than expected, Canaccord Genuity analyst Robert Young is taking a “conservative view of estimates,” citing “market commentary around potential recessionary headwinds.”
After the bell on Thursday, the Burlington, Ont.-based provider of Software Defined Video Network technology reported revenue of $116.1-million, rising 24.4 per cent year-over-year and above the estimates of both the analyst ($105.9-million) and the Street ($104.7-million) as both its North American and International businesses saw growth (24 per cent nd 30 per cent year-over-year). Adjusted EBITDA of $29-million also topped estimates ($21.9-million and $22-million, respectively) due to a higher top line and strong gross margins.
“Evertz reported a beat across the board with 24.4-per-cent year-over-year top-line growth and strong gross margins despite supply chain challenges,” said Mr. Young. “Management noted that the order pipeline is robust, and demand remains strong in general, although it continues to see supply chain issues. We expect OpEx to grow in the near term with resumption of travel and trade shows, wage inflation and curtailed government subsidies.”
After narrow trims to his full-year earnings estimates due to wage inflation and travel costs, Mr. Young cut his target for Evertz shares to $16.50 from $17.25, maintaining a “buy” rating. The average is $16.25.
“On balance, we continue to rate Evertz a BUY given an improving demand environment, strong competitive position and robust balance sheet and a 5.3-per-cent annualized dividend yield (ignoring the $1 special dividend declared in September) at current levels,” he said.
Elsewhere, BMO Nesbitt Burns analyst Thanos Moschopoulos lowered his target to $16 from $18.50 with an “outperform” rating.
“Results were significantly ahead of consensus; however, shipments for the first month of Q1/23 were light,” he said. “While this might due to lumpiness, we believe component shortages might also be having a more significant revenue impact than we’d previously modeled, prompting us to trim our forecasts (which were above consensus). We believe that Evertz’s valuation remains attractive given its dividend yield, history of special dividends, and our forecasts for longer-term earnings growth.”
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Believing Storagevault Canada Inc. (SVI-T) deserves a premium valuation due to “its dominance in a difficult-to-aggregate asset class, its operating platform and its sector-leading growth both relative to U.S. self storage REITs and the Canadian REIT market,” RBC Dominion Securities’ Jimmy Shan initiated coverage with an “outperform” rating on Friday.
“SVI is the largest self storage owner/operator in Canada and the top performing real estate stock in the last 7 years,” he said. “Going forward, we believe that SVI’s business model can compound earnings growth at a double digit pace given the long term proven outperformance of the sector, its dominance and operating expertise and its ability to consolidate and drive margin on acquisitions.”
Calling it “a dominant, strong operator,” Mr. Shan set an $8 target, exceeding the average on the Street of $7.86.
“We view SVI as a sophisticated operator in a largely unsophisticated industry,” he added. “This is due to its scale advantage and the fact that the executive team has been in the business for 25 years. Revenue management and customer acquisition are key success factors in the business. SVI adopts U.S.-style dynamic pricing strategies to optimize for revenue, unlike many of its local mom-pop operators. There is generally low price sensitivity once a customer is acquired due to switching cost/time. Optimizing for the ‘right’ level of rent increases after the ‘right’ amount of stay (average length of stay in SVI portfolio is approximately 17 months) can materially impact revenue growth even if the market or ‘street’ rate is not growing. This is a differentiating factor from other real estate as SVI can take advantage of this price inelasticity and generate revenue growth even in down markets.”
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Scotia Capital analyst Adam Buckham warns LifeSpeak Inc.’s (LSPK-T) ability to regain the confidence of investors “will take time.”
“Although shares have rebounded to a degree from Q1′s floor (up 71 per cent post Q1 decline, down 80 per cent year-to-date), it’s clear that many questions remain around the near-term trajectory for LSPK,” he said in a research note released Friday. “In our conversations with investors, these questions have generally encompassed three themes: (1) Q1′s contract issue and its implications for product demand, (2) organic growth trends for the base business, and (3) normalized EBITDA/FCF. ... We’d note that a great deal of LSPK’s near-term financial trajectory remains tied with its related contract issue, which at its peak provided the company with $9-million of ARR. This was the driver of Q1′s miss, along with revisions to estimates. We do not expect to gain clarity on this until late summer (August 31 renewal).”
Maintaining a “sector outperform” rating, he cut his target for the Toronto-based wellness software company’s shares to $4 from $7. The average is currently $3.46.
“Our updated valuation is based on a 4-times multiple on our 2023 sales estimate, which is in-line with the mean of our healthcare technology and Canadian software group (4 times and 3.5 times 2022 & 2023),” said Mr. Buckham. “While an in-line multiple may seem like a stretch given current headwinds, we would argue that even under our base case scenario (does not include contract renewal), the company should be able to maintain (1) solid growth (excl. contract 48-per-cent organic in ARR in 2022), (2) robust gross margins (88-per-cent expected), and (3) positive and growing Adj. EBITDA. Thus, while the current situation will likely remain an overhang for shares, we believe that LSPK’s core qualities will inevitably shine through.”
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In other analyst actions:
* Stifel analyst Cody Kwong initiated coverage of Lucero Energy Corp. (LOU-X) with a “buy” rating and target of $1.30 per share, which is 6 cents below the average on the Street.
“Lucero Energy was formed through the recapitalization of PetroShale Inc. in January 2022, after which the company has positioned itself as a focused pure play asset (more than 10,500 barrels of oil equivalent per day, 85-per-cent light oil & liquids) within the prolific Bakken/Three Forks in North Dakota,” he said. “The recapitalization event also brought a timely capital injection and a new management team to take advantage of today’s volatile commodity/macroeconomic markets, and we believe this could yield compelling and accretive acquisition opportunities. Based on this new executive team’s track record of adding value through an “acquire and exploit” strategy at TORC Oil & Gas, Result Energy, and Tristar Oil & Gas, we are excited about the value-added potential of this early stage aggregator.”
* After it push back his first gold forecast for its Premier gold project to late 2023 at the earliest, Desjardins Securities analyst Jonathan Egilo cut his target for Ascot Resources Ltd. (AOT-T) shares to $1.15 from $1.50, maintaining a “buy” rating. Elsewhere, Stifel’s Ian Parkinson cut his target to $1.60 from $1.90 with a “buy” rating, while BMO’s Brian Quast moved his target to $1.25 from $1.75 with an “outperform” rating. The average is $1.29.
“We believe the near 30-per-cent discount to peers is too steep considering AOT is a standout in the developer peer group (permitted, prime jurisdiction, construction already advanced),” Mr. Egilo said.
* CIBC World Markets’ Todd Coupland lowered his target for BlackBerry Ltd. (BB-N, BB-T) to US$5 from US$8, keeping an “underperformer” rating. The average is US$6.70.
* CIBC World Markets’ Nik Priebe cut his Onex Corp. (ONEX-T) target to $75 from $90, below the $104.40 average, with a “neutral” recommendation.
David Leeder