Inside the Market’s roundup of some of today’s key analyst actions
The 9% year-to-date pullback in shares of Rogers Communications Inc.’s (RCI-B-T), and its current valuation, represent “an attractive and timely entry point,” said RBC analyst Drew McReynolds in upgrading shares of the Canadian telecom this morning.
His rating was bumped up to “outperform” from “sector perform” though his price target is unchanged at C$72.
Roger’s stock decline this year is more than the 5% decline for the Canadian telecom group overall, and compares with a 9% rise in the S&P/TSX Composite Index. From a valuation standpoint, Rogers has a blended EV/EBITDA multiple of 7.7x versus 8.2x for BCE and 8.5x for TELUS, he said.
In a note to clients, the RBC analyst provided a list of reasons for the upgrade: “(i) Closer proximity to realizing the bulk of the >$1B in Shaw operating cost synergies through H1/25 driving an attractive +11% adjusted EBITDA CAGR (The compound annual growth rate) (2023E-2025E); (ii) what is likely to be a steady de-risking of the stock as visibility on Shaw integration synergies increases, the competitive landscape post-Rogers-Shaw-Quebecor transactions finds a new equilibrium, leverage declines and management’s track record of improved execution lengthens; (iii) option value on non-core and/ or non-telecom asset sales/crystallizations; (iv) what we believe are recalibrated expectations for wireless Average Revenue Per User (stable to modest pressure), a tougher cable environment for Internet (telco fiber competition) and television (cord-cutting/cord-shaving), and elevated capex (>$4B annually, 19%-20% capex intensity); and (v) our less cautious view on the Canadian telecom sector.”
Broadly, RBC now has a less cautious view on the Canadian telecom sector.
“While the sector is not out of the woods by any stretch re: competition, regulation, economic and/or interest rate headwinds: (i) we are more confident given recent pricing changes in the ability for the Big 3 to manage step-ups in wireless competitive intensity driven by Quebecor-Freedom (and eventually Cogeco); (ii) we expect pending new MVNO (mobile virtual network operator) and TPIA (Third Party Internet Access) frameworks, while directionally negative for the Big 3, to strike a “good enough” balance between facilities-based operators and resellers; and (iii) while we will leave the macro outlook to smarter minds, we believe the stocks at current valuations can begin to work again driven by NAV growth in soft landing (or no landing) and/or in near-peak (or peak) interest rate scenarios,” Mr. McReynolds said.
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Laurentian Bank of Canada’s (LB-T) decision to not proceed with a sale of the company didn’t come as much of a surprise to the Street, but some analysts have dropped their price targets now that the path forward is more clear.
Among them: CIBC cut its target price to C$37 from C$54 while downgrading its rating to “neutral” from “outperformer” - which reverts back to where its target and rating stood prior to Laurentian Bank’s strategic review. RBC downgraded its rating to “underperform” and cut its price target to C$33 from C$39. Desjardins Securities cut its target to $35 from $39 while reiterating a “hold” rating. Barclays cut its target price to C$32 from C$42.
As of the close Wednesday, the stock had already fallen 26% from its recent high, as the market began pricing in little chance of a sale. Then on Thursday, when the decision was announced, shares dropped a further 12.4%, with shares closing at C$31.40.
“This caps off a sale process/strategic review that the market first learned about from an article in the Globe & Mail after market close on July 11, 2023,” commented Scotia analyst Meny Grauman. “We view this announcement as neutral because over the past few weeks it has largely become the consensus view, and is now almost fully reflected in the shares current valuation.” He maintained a C$38 price target on the stock with a “sector perform” rating.
RBC analyst Darko Mihelic is particularly cautious on Laurentian Bank given that a buyer was not found, warning that some of the bank’s medium-term financial targets may not be met.
“In particular, LB has been focusing on reducing expenses to improve its efficiency ratio to meet a medium-term target of below 65%, while we estimate 67.4% in 2024 and 66.6% in 2025 as we are unsure if LB will be able to deliver enough revenue growth compared to our expense estimates. Perhaps more aggressive measures (i.e., a restructuring charge) may be needed to right-size the expense base,” Mr. Mihelic said in a note.
He said that while it is possible that another financial institution may look again to acquire Laurentian Bank in the future, “we think the probability of such an event over the course of the next 18 to 24 months is very low.”
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Empire Company (EMP-A-T) is seeing some modest price target hikes in the wake of well received earnings on Thursday.
CIBC raised its target price to C$44 from C$43 while National Bank of Canada raised its target price to C$44 from C$42. Scotiabank raised its price target to C$43 from $42.50 and TD Securities raised its target price to C$43 from C$42.
Empire reported adjusted EPS of 78 cents, 4 cents above the Street consensus. Its shares rose 2.8% on Thursday following the results.
“Looking ahead, while we expect a moderation in the rate of gross margin expansion, we are getting signs of improvement in traffic/basket at the full-service banners,” commented Scotiabank analyst George Doumet. “When coupled with company specific initiatives underway (focus on stores, digital and data and efficiency/cost control), we believe EMP is positioned to deliver on its 8-11% EPS compounded annual growth rate.”
“In the nearer term, (given its discounted valuation) we believe EMP is best positioned to benefit from (quickly) decelerating food inflation (and ideally, a more moderate recession environment)- and expect sentiment to likely improve ahead of earnings,” said the Scotia analyst, who rates the stock “outperform”.
BMO analyst Tamy Chen is staying cautious on Empire for now, reiterating his “market perform” rating and C$39 price target.
“A surprise positive out of the conference call was EMP indicating that basket size in its conventional banners have now recovered back up to year-ago levels. The set-up for same store sales over the next two quarters appear positive. Despite the strength in EMP’s same store sales so far, we do not yet see enough consistent macro-level economic data to suggest a clear turning point in the Canadian consumer’s behaviour from trade-down to trade-up,” the BMO analyst said.
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Some price targets were raised on Transat AT Inc. (TRZ-T) following fiscal third quarter results that beat Street expectations despite the recent rebound in fuel prices.
CIBC raised its target price to C$4.25 from C$3.75 and National Bank of Canada raised its target price to C$4 from C$3.75.
Transat expects the positive momentum to continue in this summer’s quarter and upcoming winter season, more than offsetting the headwind of higher fuel prices. Forward bookings continue to beat records.
Still, Scotia analyst Konark Gupta believes investors will be better off with Air Canada (AC-T) stock, which has underperformed lately due to what he called “overblown concerns” about customer demand and passenger yields beyond this summer.
He has a “sector outperform” rating on Air Canada but is keeping a “sector underperform” rating on Transat, primarily because of high debt levels. His unchanged C$3.50 price target on Transat suggests the stock may fall from here.
“Our improved EBITDA outlook and Mexico land sale proceeds are offset by higher-than-expected debt,” he said of Transat. “The stock’s rich EV/EBITDAR valuation of 6.2x on estimated fiscal 2024 vs. AC’s 2.8x supports our sector underperform rating. We also continue to see potential for equity dilution. Moreover, TRZ’s business model is relatively more sensitive to external factors such as GDP, fuel and FX, so we prefer to wait for significant deleveraging.”
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At least a couple of analysts have tweaked their price targets on Canopy Growth Corp (WEED-T) following the weed company’s announcement this week that it will end funding of its BioSteel unit.
Despite efforts to rein in costs at BioSteel, it remained a drag on achieving profitability and the company is divesting it. A charge against earnings of between C$15 million to $20 million is expected in fiscal year 2024. BioSteel has filed for protection against its creditors.
TD Cowen raised its target price to C$1.8 from C$0.7 while BofA Global Research increased its price objective to C$0.65 from C$0.56
BofA analyst Lisa Lewandowski is maintaining an “underperform” rating on Canopy shares.
“While we understand management’s moves to simplify its business and reduce cash burn to transform to a simplified, asset-light operating model and focus on its core cannabis operations, we continue to believe that Canopy is a “show me” story given tough Canadian industry conditions (discounting, illicit trade), slow-moving U.S. regulatory changes, and its struggle to grow sales since FY21,” she said in a note to clients.
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In other analyst actions:
Stelco Holdings Inc (STLC-T): Credit Suisse cuts rating to “neutral” from “outperform” and cuts target price to C$42 from C$50.55. It cited valuation and lower expectations for steel prices amid weak U.S. demand.
Guru Organic Energy Corp (GURU-T): CIBC cuts target price to C$2.75 from C$3; Stifel cuts target price to C$3.5 from C$3.75. “We believe profitability could serve as a material positive catalyst, but we do not expect this through F2025, and we estimate it could require sales 60% above the current level,” said CIBC analysts.