Inside the Market’s roundup of some of today’s key analyst actions
Telus International (Cda) Inc.’s (TIXT-T) cut in forward guidance released after markets closed Thursday has prompted some swift price target cuts on Telus Corp. (T-T)
National Bank of Canada cut its price target on Telus Corp. to C$28 from C$30; Desjardins Securities cut its target to C$27.50 from C$29.00; UBS cut its target price to C$27 from C$28; and TD Securities cut its target price to C$30 from C$31.
Following these price target cuts, the average analyst target on Telus Corp. shares is now $29.93, down from C$30.83 a month ago, according to Refinitiv Eikon data.
Telus is the controlling shareholder of Telus International, so the woes at TIXT feed through to Telus Corp.
Telus International reduced the mid-range of its revenue and adjusted EBITDA guidance by 10% and 18%, respectively. Revenue is now 9% lower than the prior consensus and adjusted EBITDA is 17% lower.
Telus International said the updated guidance reflects business weakness at some large tech clients, elongated decision-making and lower sales conversions as customers reassess their cost structures.
Telus Corp. also updated its full-year guidance to reflect weakness at TIXT, reducing the revenue and adjusted EBTIDA mid-points by about 2%. The guidance update also lengthens the time it takes for the company to pay off debt.
“Our 2023 [Telus International] estimates were already below guidance, but the magnitude of the adjustment was much larger than we anticipated. We believe T’s capital allocation track record will be affected (at least in the medium term), which could potentially affect the company’s multiple premium vs peers,” commented Desjardins Securities analyst Jerome Dubreuil.
“We expect a negative reaction but maintain our Buy–Average Risk rating at this point,” the Desjardins analyst added.
So far, that prediction of a negative reaction appears correct. Telus International shares are down 28% in morning trade Friday; Telus Corp shares are down 4%.
Canaccord Genuity analyst Aravinda Galappatthige slashed his price target on Telus International’s U.S. shares (TIXT-N) all the way to US$21 from US$28.
He was clearly taken by surprise.
“While we did anticipate a cut to guidance, given what we are seeing in the broader space, particularly with peers like EPAM systems, Endava, Concentrix, etc; this revision was greater than we expected,” Mr. Galappatthige said in a note to clients. “As we followed the comp revisions, we were starting to feel that a cut from the original 10-12% to ~5-7% was more likely. This is 4-5% lower than even those expectations.”
“On the call management noted that while a part of the lowered demand may simply be delays (including for some WillowTree related projects), another component may well extend beyond just a ‘delay’. Importantly, the CEO also noted that pricing sensitivity from clients are now particularly elevated. All this not just introduces some risk to the new guidance, but also moderates the expectation that some of this business could spillover to 2024. As a result, in addition to cutting our forecasts to reflect the new guide, we have also sharply moderated 2024 estimates. On the positive side, it does appear that TI is likely to recover its margins quite quickly owing to its rationalization program; in fact, the CFO guided to 23% by Q4/23. However, the softer top-line still results in a $131M downward revision to EBITDA in 2023 and nearly $100M in 2024,” the Canaccord analyst said.
Even though he expected Telus International stock to come under pressure Friday, he is maintaining a “buy” recommendation because of what he sees as attractive valuations and a positive longer-term growth trajectory.
Elsewhere, RBC cut its target price on Telus International to US$19 from US$24 and National Bank cut its price target on Telus International to US$17 from US$35.
The average analyst price target on Telus International shares is now US$20.73, far below the average target of US$26.08 a month ago.
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Raymond James analyst Farooq Hamed downgraded First Quantum Minerals Ltd. (FM-T) to “market perform” from “outperform,” citing valuation concerns. He is maintaining a price target of C$32.
Mr. Hamed said the downgrade came after Raymond James updated its modelling for First Quantum with actual commodity pricing from the second quarter. It also updated its operating assumptions for the company.
“While we continue to believe FM is a higher-quality option in the copper producer sector, the stock price has run past our net asset value and EBITDA based valuation where we apply a blend of a 1x NAV and 7x EV/EBITDA multiples, which are towards the higher end of our valuation ranges for the sector, using a copper price in-line with current spot levels,” Mr. Hamed said in a note to clients.
The analyst’s new assumptions call for First Quantum to report second quarter earnings of $0.20/sh and EBITDA of about $700mln, which compares with the current consensus of $0.22/sh and $710mln, respectively.
He anticipates operating performance will improve as the year wears on.
“We expect operating performance to improve in second half of this year, particularly at Cobre Panama and Sentinel and for FM to achieve fiscal year operating guidance albeit at the low end of the production guidance range and high end of cash cost guidance,” he said.
Separately, JP Morgan cut its price target on First Quantum to C$28 from C$29.
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Similarly, Raymond James’ Mr. Hamed downgraded Ero Copper Corp. (ERO-T) to “market perform” from “outperform” citing valuations concerns. His price target on Ero remains at C$28.
“The stock price has run past our NAV and EBITDA based valuation where we apply a blend of a 1x NAV and 6x EV/EBITDA multiples, which are towards the higher end of our valuation ranges for the sector, using a copper price in-line with current spot levels,” Mr. Hamed said.
He is expecting 2Q23 earnings of $0.19/sh and EBITDA of about $48mln versus consensus of $0.26/sh and $54mln, respectively.
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UBS raised its target price on Microsoft Corp (MSFT-Q) to US$400 from US$345 and upgraded its rating to “buy” from “neutral”. It linked the action to stabilization at Microsoft’s cloud operations and upcoming catalysts in the artificial intelligence arena.
“With the steep Azure growth deceleration now poised to moderate, AI catalysts ahead and recent stock underperformance, a more positive stance seems warranted,” said UBS analyst Karl Keirstead.
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Several analysts raised their price targets on Corus Entertainment Inc (CJR-B-T) in the wake of the media company’s deal to divest its Toon Boom Animation unit to Integrated Media Company for about $142 million.
CIBC raised its target price to C$2.00 from C$1.75; RBC raised its target price to C$3 from C$2.50; BMO raised its target price to C$2.15 from C$1.75; Cormark Securities raised its target to C$1.80 from C$1.40; and TD Securities raised its target price to a Street high C$5 from C$3.75.
BMO analyst Tim Casey called it a positive development for Corus, but that there is “limited visibility in the outlook” given the continued weak advertising market and the ongoing writers and actors strikes in Hollywood.
CIBC analyst Scott Fletcher is maintaining a “neutral” rating on Corus shares but said the sale will be welcomed by investors.
“This is clearly a positive development for Corus’ balance sheet, as declining Last Twelve Months EBITDA over the last seven quarters has pushed leverage up to 3.85x without a clear path to deleveraging while advertising markets remain weak,” Mr. Fletcher said in a note to clients. “$142 million in net proceeds from the sale represents more than half of Corus’ market cap of $267 million as of market close yesterday and the stock has predictably reacted favourably to the news. The deal should help Corus reduce leverage by approximately 0.30 turns. A Toon Boom sale was not widely expected,” Mr. Fletcher said.
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CIBC, in a preview of second-quarter results in the precious metals sector, revised its forecasts for the price of gold and silver higher, resulting in several price target hikes on equities it covers.
There were two ratings upgrades as well: Equinox Gold Corp (EQX-T) was raised to “neutral” from “underperformer” (with the price target rising to a C$7.20 from C$5.40) and B2Gold Corp (BTO-T) to “outperformer” (with the price target going to US$4.80 from US$4.50).
“Given the strong H1/23 performance from precious metals, we are revising our gold and silver price forecasts for 2023 higher to $1,960/oz and $24.00/oz from $1,800/oz and $23.50/oz,” CIBC analysts said in a note. “Our longer-term prices have also been revised upwards, fairly in line with consensus.”
“We expect the uncertain macroeconomic situation to benefit gold in the near term, and we believe that a higher longer-term price is warranted given costs of extraction and lower-grade nature of deposits. At these elevated gold prices and with production H2/23-weighted in most cases, the back-half of the year could provide some degree of margin expansion .... On the equities front, we expect Q2 will have more misses than wins on the back of weather-related events, labour disruptions and the back-half weighted nature of production profiles. Our focus for the quarter will be on commentary provided on company outlooks as well as any potential indication of revision on the production, costs or capex front. While investors may shy away from the sector as we head into earnings, the aftermath of Q2 earnings may provide an opportunity for bargain-hunters into the traditional fall rally.”
CIBC’s top picks in the sector are Agnico Eagle, Lundin Gold, Pan American Silver, SSR Mining and Franco-Nevada.
CIBC raised its target price on Lundin Gold Inc. (LUG-T) to C$22.00 from C$21.00. It wasn’t alone in jacking up targets on Lundin: BMO raised its target price to C$11 from C$10.50; Haywood Securities raised its target price to C$12 from C$11.5; TD Securities downgraded its rating to “hold” from “buy” but raised its target price to C$12.50 from C$11.50.
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In other analyst actions:
Gibson Energy Inc (GEI-T): JP Morgan raises target price to C$27 from C$26 and upgrades rating to “overweight” from “neutral”
Precision Drilling Corp (PD-T): CIBC cuts target price to C$95.00 from C$135.00; BMO cuts target price to C$100 from C$125; CIBC cuts target price to C$95.00 from C$135.00
Secure Energy Services Inc (SES-T): CIBC cuts target price to C$7.50 from C$8.00
Alcoa Corp (AA-N): JP Morgan cuts target price to US$36 from US$54 and downgrades rating to “neutral” from “overweight”
AT&T Inc (T-N): JP Morgan cuts target price to US$17 from US$22 and downgrades rating to “neutral” from “overweight”
BlackRock Inc (BLK-N): Citigroup raises price target to US$815 from US$750
Netflix Inc (NFLX-Q): Credit Suisse raises target price to US$370 from US$331
Nvidia Corp (NVDA-Q): Truist Securities raises target price to US$545 from US$470
Darcy Keith