Inside the Market’s roundup of some of today’s key analyst actions
Citing the financial benefits of elevated power prices in France and seeing a “better entry point” for investors, iA Capital Markets analyst Naji Baydoun raised his recommendation for Boralex Inc. (BLX-T) to “buy” from “hold” on Friday.
“So far this year, BLX’s financial results have benefited from exposure to rising power prices in France, estimated at $15-16-million per quarter of incremental revenues in H1/22 when average power prices for both quarters were €220-230/MWh [megawatt hour],” he said. “With (1) prices averaging more than €400/MWh so far in Q3/22, and (2) forward pricing near €1,000/MWh in Q4/22 and in the €300-600/MWh range for 2023-24, we see significant upside potential to near-term financial forecasts for BLX.”
In a research report released before the bell, Mr. Baydoun raised his revenue and earnings forecast for the Kingsey Falls, Que.-based company for the fiscal 2022 through 2026. His earnings per share projections are now $1.38, $1.48, $1.41, $1.56, respectively, up from $1.15, $1.04, $1.20, $1.24 and $1.35, representing compound annual growth of 62.0 per cent (versus 57.3 per cent previously).
“Although (1) we don’t expect BLX to fully capture market prices, and (2) see the proposed temporary EU price cap of €180/MWh on revenues as limiting some of the upside potential, we expect the Company to benefit significantly from current power price trends in France,” he said. “BLX can benefit from higher power prices in several ways, including (1) new projects under-construction (i.e., capitalizing on the French government’s measure to allow new renewable facilities to sell power on the spot market up to 18 months before locking in their contracted prices), (2) existing merchant assets (with direct exposure to spot market prices), (3) operating assets with contract structures that provide exposure to higher spot prices (well above BLX’s contracted prices), and (4) assets that are either coming off contract or whose contracts are being terminated early in order to take advantage of higher merchant prices. So far in 2022, management has already executed on several optimization initiatives to capitalize on elevated power prices in France (e.g., early termination of contracts on 58MW of capacity). We expect additional optimization initiatives to be concluded through the end of 2022, and note that BLX has 405MW of capacity that is expected to be coming off contract through 2026 (16 per cent of installed capacity and 13 per cent of production), which should provide additional portfolio optionality (e.g., merchant exposure, repowerings).”
With Boralex shares down almost 15 per cent from their 52-week high in late August and down 2 per cent from his previous downgrade in mid-June, Mr. Baydoun now sees them trading at a more “attractive” relative valuation.
“We also note that the Company’s excess cash position could potentially support incremental upside (not embedded in estimates/valuation at this time); by our estimate, if BLX were to deploy $300-million of equity capital at its target returns (into a mix of organic growth and M&A opportunities), this could translate into 10-per-cent-plus FCF/share accretion compared to our current long-term forecasts,” he said.
Mr. Baydoun raised his target for Boralex shares to $48 from $45. The average target on the Street is $51.38, according to Refinitiv data.
“Overall, we continue to like BLX’s (1) highly contracted operations (12-year weighted average contract term), (2) solid FCF/share growth (6-8 per cent per year, CAGR 2021-26), (3) potential upside from the Company’s development pipeline (more than 3.5GW of prospects), (4) stable dividend (2.0-per-cent yield, 30-50-per-cent long-term FCF payout), and (5) potential upside from M&A (excluded from estimates/valuation),” he concluded. “We have increased our financial forecasts to reflect potential upside from higher near-term power prices in France, which translates into a higher valuation and price target. Given the more compelling upside potential to our revised price target, we are upgrading BLX to Buy (from Hold). Furthermore, some of the measures being pursued to increase power supply in France could support an accelerated build-out of new capacity in the country, which supports the overall growth outlook for BLX (e.g., ability to increase capacity by up to 40 per cent for select project.”
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In a separate note, Mr. Baydoun downgraded Northland Power Inc. (NPI-T) in response to the European Commission’s proposal of a temporary cap of €180 on realized market revenues per megawatt hour of electricity produced, seeing it taking “the edge of some near-term upside.”
“Although power prices in Europe have declined from their recent record levels, spot prices remain elevated due to a mix of demand and supply shock,” the analyst said. “Looking at forward pricing for H2/22 and 2023, following a rollercoaster ride that took expectations closer to €1,000/MWh in Germany and the Netherlands, prices have now come back down closer to €400-500/MWh. When looking at current forward expectations for 2024-25, forward pricing continues to indicate the potential for an improving, albeit historically elevated, power price environment.”
Mr. Baydoun said the the EC proposal, which would take effect on Dec. 1 and run through at least March 31, 2023, would “temporarily remove some of the upside associated with higher power prices for NPI over the near term as the spread between existing contracted prices and merchant prices would be limited.”
Though he trimmed his financial forecasts for 2023, he continues to see “healthy support for future growth.”
“Dynamic power price situation in Europe could still lead to higher market capture pricing and stronger financial performance for NPI in H2/22 and beyond (not currently reflected in estimates/valuation post-2023),” he said. “Furthermore, overall higher market prices relative to historical figures would still provide substantial support to NPI’s ongoing project development activities in Europe, particularly the 1.5GW Nordsee cluster of projects in Germany (49-per-cent NPI ownership). Higher market prices and volatile prices are likely to enhance NPI’s ability to (1) secure commercial offtake agreements (de-risking and helping finance projects), and (2) improve economics/returns on invested capital.”
Moving Northland to a “buy” recommendation from “strong buy” previously, he cut his target to $49 from $51, which is the current average on the Street.
“Overall, we view NPI as the best investment vehicle for investors to gain exposure to the offshore wind investment theme. NPI offers investors an attractive mix of (1) stable cash flows from contracted power assets (2.8GW net in operation, 10-year weighted average contract term), (2) strong potential long-term FCF/share growth (primarily driven by offshore wind projects), (3) longer-term potential upside from organic development activity and accretive M&A, and (4) an attractive dividend profile (3-per-cent yield, 50-70-per-cent long-term FCF payout),” he said. “The proposed level of the revenue cap in the EU would limit the near-term upside in NPI’s financial performance, and thus the associated upside in the shares. As such, we are revising our estimates for 2023, which leads to our revised price target of $49.00 (from $51.00); with more limited upside to our new price target, we are revising NPI to Buy (from Strong Buy). However, we continue to see several catalysts that could support NPI’s shares, particularly (1) the upcoming financing and potential sell-down of Hai Long (following recent corporate PPAs), and (2) further de-risking/progress on development activities (high power prices are still supportive of project development and re-contracting initiatives in Euro.”
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Heading into third-quarter earnings season for North American railroad companies, RBC Dominion Securities analyst Walter Spracklin expressed a preference for Canadian stocks over their U.S. peers, seeing an enticing proposition for investors.
“The valuation gap between the Canadian and U.S. rails widened further during the quarter, reflecting solid operating performance at CN and CP when they reported their Q2 results; contrasted with continued service issues as well as labour negotiations at the U.S. rails,” he said in a report released Friday. “While CP’s valuation is elevated versus the group on consensus 2024, we highlight that the shares trade in line to only slightly above the group average on consensus 2025 when we expect merger synergies from the KCS acquisition to be realized.
“Our view is that the shares should trade at a meaningful premium to the group on 2025, and we continue to see an attractive investment opportunity at today’s levels. On the other hand, the U.S. rails are trading toward the bottom of their relative valuations ... Looking at the group as a whole, the rails trade above their historical premium versus the index (up 9.1 per cent vs. 1.5 per cent) in our view driven by tight capacity conditions that we expect to support volumes relative to other transports in the event of a recession.”
Mr. Spracklin recommended shares of Canadian Pacific Railway Ltd. (CP-T), taking a “highly positive view” on its combination with Kansas City Southern and calling the merits of the deal “extensive.”
“We view the network advantage as the most compelling factor, and also view positively the increased diversification on a business and geographic basis. Finally, we view the $1-billion in announced synergies as achievable, and as representing meaningful upside to consensus expectations,” he said.
He maintained an “outperform” rating and $115 target for CP shares. The current average is $107.80.
“Our Q3 estimate is slightly lower into the quarter on volume driven by the Elkview Plant outage; partly offset by CAD depreciation and lower fuel costs,” said the analyst. “Our Q3 estimate therefore decreases to $1.04 (from $1.07) but remains above consensus $1.01. We expect management to reiterate guidance for double-digit H2 RTM [revenue ton mile] growth, which we note implies Q4 volume growth of more than 13 per cent and compares to our Q4 RTM growth estimate of 15 per cent. Our 2022 estimate remains unchanged at $3.84 (despite our Q3 estimate moving lower) and above consensus $3.74 driven by our view that solid Q3 Grain exit trends will continue during the remainder of the year. Our 2023 and 2024 estimates remain unchanged at $4.68 (cons. $4.58) and $5.54 (cons. $5.26), respectively, both above consensus driven by our view that merger synergies communicated by CP management are conservative and that they will be realized more quickly than is being priced into street estimates. Target multiple decreases to 18.5 times, from 20.0 times, but our price target remains unchanged.”
Maintaining a “sector perform” rating for Canadian National Railway Co. (CNR-T) shares, Mr. Sparcklin cut his target to $161 from $163. The average is $161.42.
“Our Q3 estimate remains unchanged into the quarter as lower volume versus our expectations is likely offset by higher yield, CAD depreciation and lower fuel costs,” he said. “We spoke with management this week who noted that Grain is being executed on nicely, and we expect this momentum to carry into Q4 and drive a solid finish to the year. Accordingly, our Q3 EPS estimate remains at $2.01 above consensus $1.98. Our 2022 estimate also remains unchanged at $7.32 (cons. $7.25), and represents EPS growth of 23 per cent, above the high-end of management’s guidance for EPS growth of 15 per cent to +20 per cent. Our unchanged 2023 estimate of $8.15 and our new 2024 estimate of $8.95 are both ahead of consensus $8.00 and $8.69, respectively. We note that we could see management revisit 2022 guidance for EPS growth of 15 to 20 per cent during the quarter. Target multiple decreases to 18 times, from 20 times, and price target decreases.”
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A pair of equity analysts on the Street raised their targets for shares of Intact Financial Corp. (IFC-T) following its Investor Day event on Thursday.
Calling the meeting “upbeat,” BMO Nesbitt Burns’ Tom MacKinnon increased his 2023 operating earnings per share estimate by 4 per cent to reflect higher acquisition synergy and accretion objectives from its 2021 acquisition of RSA Insurance Group PLC.
“IFC upped its ultimate (i.e., 36 months post RSA close in June 2021) operating EPS accretion guidance to 20 per cent from ‘upper teens,’ and its pre-tax synergy guide to $350-million from $250-million,” he said. “Increased estimates now reflect risk selection/pricing/loss ratio improvements, and given IFC’s successful track record with previous acquisitions, we expect even these elevated targets could be surpassed.
“Largely a combined ratio improvement story, IFC looks to leverage its competitive advantages (claims expertise, leveraging data and AI for pricing and risk selection) to optimize underwriting performance, expand broker distribution in commercial lines and direct distribution in personal lines, and enhance digital and technical capabilities to improve the UK&I combined ratio for commercial lines (from 95 per cent in 2021, to low 90s NTM, to 90 per cent by 2025) and personal lines (from 98 per cent in 2021, to high 90s NTM, to 95 per cent by 2025). Given success with OneBeacon, we expect management to deliver.”
Also calling its top-line growth targets in Canada “aggressive,” Mr. MacKinnon bumped his target to $230 from $220, reiterating an “outperform” rating. The average is $214.14.
“The clear roadmap for strengthening its outperformance in Canada, improving bottom line in UK&I, and capitalizing on opportunities in specialty lines, gives us greater confidence in IFC’s ability to continue to achieve its reiterated 10% operating EPS growth objective annually, over time,” he concluded. “With attractive defensive characteristics, strong fundamentals, and a management team that continues to deliver, we remain Outperform.”
Elsewhere,, Scotia Capital’s Phil Hardie raised his target to $215 from $210 with a “sector outperform” rating.
“The event and presentations were very well executed, and likely provided investors with enhanced insights into Intact’s corporate and growth strategy, delivering a number of new or updated mid- to long-term ambitions,” he said. “These included (1) increased aspirations for expanding its global specialty platform, (2) mid-term profitability targets for its UK&I platform, and (3) updated synergy targets for the RSA transaction.
“More importantly, we believe the presentations collectively addressed a key investor quandary: given its strong track record and historical performance, what levers are available and what is the game plan for IFC to outperform in the future as the industry and operating environment continue to evolve? We came away from the event with a clear answer to this question, and are increasingly confident with respect to its mid- to long-term growth prospects and profitability outlook.”
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In other analyst actions:
* Jefferies’ Suji Jeong raised his Bellus Health Inc. (BLU-Q, BLU-T) target to US$21 from US$14 with a “buy” rating. The average on the Street is US$18.63.
* RBC’s Douglas Miehm lowered his target for Dialogue Health Technologies Inc. (CARE-T) to $5 from $6, below the $6.06 average, with a “sector perform” rating.
“We are revising our outlook for Dialogue as we incorporate the company’s Q3/22 guidance. The company seems to have a good handle on the margins in the current inflationary environment; however, the ARR additions year-to-date have been below our expectations due to a) lower-than-expected performance at Tictrac, and b) timing issues related to large enterprise customers. Although we find the stock attractive at the current valuation, we remain on the sidelines to monitor the execution and ARR adds over the next few quarters,” said Mr. Miehm.
* BMO’s Peter Sklar cut his Neighbourly Pharmacy Inc. (NBLY-T) target to $20 from $22.50, below the $30.80 average, with a “market perform” rating.
“Overall, Neighbourly’s stock has recently been weak due to a number of factors: underwhelming prescription growth rate vs. peers, a higher index of clinic pharmacies with traffic and sales still under pressure, ongoing pharmacist shortages, and a change of CFO,” he said. “Although the stock has declined to about $20 and implies an EV/EBITDA multiple of about 12 times our FY2024E EBITDA (first full year including Rubicon), more seasoned Canadian consumer stocks are valued at lower multiples.
* RBC’s Brad Heffern trimmed his Tricon Residential Inc. (TCN-N, TCN-T) to US$12 from US$13, maintaining an “outperform” rating. The average on the Street is US$14.53.
“We are updating our residential estimates based on recent conference updates and market data through August,” he said. “Our estimates are flat on average, with greater-than-expected year-to-date rent growth being offset by higher rates and costs of capital. Our price targets are down 6 per cent on average on a combination of lower NAV/multiple assumptions and higher costs of capital flowing through our DCFs.”
* In response to Thursday’s announcement it has secured two separate long-term co-manufacturing agreements, Canaccord Genuity’s Luke Hannan raised his target for Waterloo Brewing Ltd. (WBR-T) shares to $5.50 from $5.25 with a “buy” rating. The average is $5.88.
“In our view, the announcement highlights the strategic value of WBR’s contract manufacturing business, particularly given its proximity to key North American markets,” he said. “As beverage alcohol companies shift internal resources away from production and towards innovation, we continue to believe WBR remains the contract manufacturer of choice due to its overall quality of service and speed to market, which are increasingly important for beverage alcohol companies looking to stay on trend, particularly in the RTD space.”
“WBR’s owner-brand outperformance, coupled with volume growth in its margin-accretive contract manufacturing business, leaves it well positioned to generate ample free cash flow in the coming quarters.”
David Leeder