Inside the Market’s roundup of some of today’s key analyst actions
Raymond James analyst Brad Sturges is “moving to the sidelines” on Allied Properties Real Estate Investment Trust (AP.UN-T) until signs of stabilizing office fundamentals emerge, lowering his recommendation to “market perform” from “outperform” previously.
“While we believe that Allied’s Canadian office portfolio can benefit from a flight-to-quality by prospective office users seeking to high-grade their respective office footprints, we have reduced our estimates to reflect negative 2024 and 2025 estimated AFFO [adjusted funds from operations] unit growth year-over-year given the near-term headwinds for Canadian office assets,” he said in a research note. “Taking a longer view, Allied’s Canadian office portfolio is underpinned by underlying urban land value that offers future development intensification potential and/or alternative use optionality.”
The Toronto-based REIT plummeted 8.9 per cent on Thursday to its lowest point since November of 2009 levels after its management revealed an earnings expectation for this year of flat to down 5 per cent. It also reported a sizeable $510-million writedown on its property portfolio.
“As part of its 4Q23 earnings release, Allied stated while it strives for stable operating results, the REIT informally suggests that there could be up to a negative 5-per-cent contraction in the REIT’s 2024E SP-NOI, FFO per unit and AFFO per unit year-over-year,” said Mr. Sturges. “Allied expects that 1H24 could remain relatively more challenging, with no forecasted recovery in its economic average occupancy rate in the next couple of quarters before potentially recovering in the back half of the year. At December 31, Allied’s average occupied occupancy rate was 86.4 per cent, down 40 basis points quarter-over-quarter and 320 bps from 89.6 per cent a year ago.”
The analyst also called Allied’s exposure to joint venture partner Westbank Corp., which is facing litigation for unpaid bills on several projects, “a near-term investment risk.”
“Allied had outstanding credit facilities and development loans at Dec-31 that totaled $500-million (or $3.58/unit),” he said. “In 4Q23, Allied amended its loan agreement with Westbank for its KING Toronto JV, by adding another $40-million credit facility (rate: prime + 8 per cent) and extended the maturity date to Dec 2026. Allied also extended its 400 West Georgia (occupancy: 82 per cent) credit facility (rate: prime + 3 per cent) in 4Q23 to Aug-24.”
While he sees its balance sheet in “a good position to fund its ongoing development and upgrade capital commitments,” Mr. Sturges cut his adjusted funds from operations per unit projections for 2024 to $2.02 from $2.16 and 2025 to $1.91 from $2.09.
That led him to reduce his target for Allied units to $20 from $23. The average target on the Street is $21.30, according to Refinitiv data.
Elsewhere, other analysts making target changes include:
* National Bank’s Matt Kornack to $20 from $22 with an “outperform” rating.
“Beyond a more sober outlook on earnings and organic growth in 2024, which isn’t overly surprising in the context of weaker office fundamentals, Q4 was weaker than expected on NOI [net operating income] contribution from development and revenue-enhancing capex initiatives relative to the amount transferred and spent,” said Mr. Kornack. “This combined with the cash special distribution impacted our NAV [net asset value] negatively. On earnings our 2024 figures come down but 2025 stays largely consistent on timing of the NOI contributions on development relative to decapitalization of interest. Cash FFO/unit figures remain heavily impacted by capitalized costs and paid-in-kind interest income, making it difficult to forecast the next two years with much certainty, never mind adjusting for occupancy trajectories at the core portfolio. All this being said, we continue to like the quality and footprint of the portfolio offering relative to valuation but expect a growing desire for management to prove this value through monetization of select assets while also improving balance sheet metrics.”
* Desjardins Securities’ Lorne Kalmar to $19.50 from $20 with a “hold” rating.
“While 4Q results were in line, our revised forecast largely reflects the quarter-over-quarter downtick in occupancy, management’s commentary for 2024 and the current state of Canada’s office market,” he said. “Given the limited visibility on a rebound in office fundamentals, the lack of transaction volumes and the negative sentiment toward the sector, we believe the REIT’s valuation will likely remain rangebound until there is more evidence of a sustained recovery.”
* Scotia’s Mario Saric to $22.25 from $24.25 with a “sector outperform” rating.
“In addition to going through REIT earnings, bottom-line, our challenge is that we see a very good portfolio (very good = both the physical office layout and location but also immense residential value at a time when Canada has a dire housing shortage) trading at an implied $300 per square foot and 9.4 times 2025 estimated AFFO and it is rare to see such quality (a portfolio that we think would be in demand by opportunistic institutional capital with longer-term mandates) at such a high distribution yield,” said Mr. Saric. “AP trades at the lowest P/24E AFFO in our universe! While economic occupancy may take until 2H/24 to recover, we think the unit price reacts on news of large leasing deals being done, rather than commencement of cash rent (i.e., maybe 3 months instead of 6).”
* RBC’s Pammi Bir to $20 from $21 with an “outperform” rating.
“AP closed out the year with an in-line Q4, yet its 2024 outlook left us with a sour taste. Indeed, a recovery in occupancy will likely take longer, particularly with extended leasing timelines and a choppy economic view. Still, we believe AP remains well-positioned to navigate rough waters, underpinned by its superior quality assets and healthy balance sheet. Coupled with valuation near trough levels, we see the recent pullback as a decent entry for longer-term investors,” said Mr. Bir.
* TD Securities’ Jonathan Kelcher to $23 from $24 with a “buy” rating.
=====
After Thursday’s release of fourth-quarter 2023 results and 2024 guidance that were slightly ahead of his expectations with “minimal surprises,” RBC Dominion Securities analyst Drew McReynolds is expecting “a year of continued execution, integration and investment” from Rogers Communications Inc. (RCI.B-T), driving further upside in its shares.
“With an eye on our 2025 estimated NAV [net asset value] of $72 per share post the Shaw integration, we believe current levels continue to represent an attractive and timely entry point into the stock, reflecting: (i) the realization of $1-billion in run-rate Shaw operating cost synergies exiting 2024 driving an attractive 9-per-cent adjusted EBITDA CAGR [compound annual growth rate] (2023–25); (ii) what is likely to be a steady de-risking of the stock as the Shaw integration winds down, 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; and (iv) what we believe are reasonable expectations for wireless ARPU [average revenue per user] (stable), a sustained tougher cable environment for Internet (telco fibre competition), structural pressure for television (cord-cutting/cord-shaving), and elevated capex ($4-billion annually, 18-19-per-cent capex intensity),” said Mr. McReynolds in a research note.
Rogers shares finished 0.7 per cent higher on Thursday following the premarket release of its results, which was highlighted by profit falling 35 per cent year-over-year due to costs related to its $20-billion takeover of Shaw Communications Inc. while revenue jumped 28 per cent. Adjusted earnings per share of $1.19 exceeded the Street’s expectation by 7 cents.
Mr. McReynolds saw the company’s guidance, which centres on reaching $1-billion in run-rate Shaw costs synergies by the end of the fiscal year, falling largely in line with expectations and now sees the its focus beginning to change.
“With substantial progress on the Shaw integration and balance sheet de-levering against the backdrop of improved wireless execution, we expect the focus to begin to shift to returning to positive underlying cable revenue and EBITDA growth (versus underlying cable revenue declines of down 3 per cent year-over-year in Q3/23 and Q4/23 and our current forecast of 1-2-per-cent underlying cable revenue and EBITDA growth beginning in 2025),” he said. “Assuming ongoing competitive and promotional pressure from telco peers within expanding fibre footprints, management highlighted multiple levers to return to growth including footprint expansion (rural edge-outs, tactical out-of-footprint expansion leveraging TPIA and fixed wireless, government-subsidized rural broadband projects etc.), improved base management, execution and customer experience, better leveraging of Rogers’ more expansive wireless distribution network, new service offerings, DOCSIS 4.0 deployment beginning in H2/24, greater bundling traction and SMB/enterprise penetration gains.”
After increased his 2024 and 2025 adjusted EPS estimates to $5.67 and $6.13, respectively, from $5.54 and $6.08, Mr. McReynolds raised his target for Rogers shares to $73 from $72, maintaining an “outperform” recommendation. The average on the Street is $75.43.
Other changes include:
* Desjardins Securities’ Jerome Dubreuil to $79 from $77 with a “buy” rating.
“The path to deleveraging is getting clearer every quarter, with additional asset sales scheduled for later this year. This could provide RCI with additional support from market participants that are less comfortable with leverage. Although the macro environment remains uncertain, we expect steady improvement in the balance sheet in almost every economic scenario given how important connectivity has become in our daily lives,” he said.
* Scotia’s Maher Yaghi to $75.50 from $74.50 with a “sector outperform” rating.
“Rogers is entering 2024 with strong momentum,” he said. “Capitalizing on sizable merger related synergy cost reductions, the company is redeploying some of those savings into revenue generating investments such as stronger networks and customer service. In addition, consolidation of the different wireless banners is resulting in improved margins. As we have seen in the U.S., customers want choice when it comes to broadband and FWA, which Rogers is expected to launch more broadly in Canada; should be able to generate incremental subscriber loading and revenue opportunity. We have slightly tweaked our estimates resulting in an incremental increase to our target price. We believe the strong execution coupled with deleveraging of the balance sheet in 2024 should provide upside to the shares.”
* TD Securities’ Vince Valentini to $88 from $84 with an “action list buy” rating.
* Canaccord Genuity’s Aravinda Galappatthige to $74 from $72.50 with a “buy” rating.
* CIBC’s Stephanie Price to $80 from $78 with an “outperformer” rating.
=====
Calling a raise to its deployment guidance “eye-opening,” National Bank Financial analyst Zachary Evershed said DRI Healthcare Trust (DHT.UN-T) is “launching 2024 with positive headlines.”
On Thursday, the Toronto-based company, which provides financing to life sciences companies, announced the acquisition of an expanded interest in certain royalty payments based on net sales of Omidria, a novel ophthalmic product for use in cataract and lens replacement surgery, in the U.S. from Omeros Corp. (OMER-Q) for $115-million upfront
“With the uptick in expected royalties on Omidria, we believe it will now account for 30 per cent of DHT’s portfolio,” said Mr. Evershed. “The level of concentration this would have created if the initial Omidria I transaction in 2022 included the same uncapped terms as Omidria II is likely a contributing reason why this follow-on royalty purchase is only coming to fruition now, as the portfolio has grown enough to support it.”
DRI has now raising its deployment target for the five years ending 2025 to over $1.25-billion, up from $850-900 million.
“Management notes it continues to see significant opportunities in the market, evidenced by its $3.0-billion-plus pipeline in potential transactions,” said the analyst. “Including the follow-on for Omidria, DHT has thus far deployed $881-million with potential milestones up to $106-million, for total potential deployment of up to $987-million in two dozen transactions since its IPO in 2021.
“We estimate that DRI retains $285-million of dry powder while pro forma Net debt/EBITDA at 2.9 times remains below management’s comfort zone of 3.0-3.2 times. We see FCF of $85-90 million annually knocking 0.6 times off leverage annually, more than sufficient to fund the incremental deployments required to hit new guidance. The company is also increasing its long-term royalty income CAGR guidance (2022 through 2030) to mid- to high-single digits, up from the prior guidance of low-single digits. This measure excludes any new potential acquisition; in our base model, which also excludes unannounced incremental royalties, we calculate a 5-per-cent royalty income CAGR, at the low end of guidance.”
Citing “growth tailwinds supported by the asset-light, defensive nature of the royalty business model,” Mr. Evershed reiterated his “outperform” recommendation for DRI units, raising his target to $22 from $18.50. The average is $20.20.
Elsewhere, Raymond James’ Rahul Sarugaser reiterated DRI as his “2024 Top Pick” and increased his target to $22 from $21 with an “outperform” recommendation.
“The expansion of the Omidria royalty agreement should provide DRI and its shareholders large, immediate, and highly predictable cash-flows for the better part of the next decade, with potential upside associated with sales outperformance by Rayner (we model modest 4-per-cent year-over-year growth to 2031),” he said. “While this deal doesn’t fall into our ‘holy smokes’ category (more than 18-per-cent IRR), we believe the terms are attractive (12-per-cent IRR) and increases DRI’s cash flow yield by 20 per cent, which should prove a powerful tool for ensuring a strong, flexible balance sheet, positioning DRI well for organic (non-dilutive) growth.”
Other changes include:
* Scotia’s George Farmer to US$24 from US$22 with a “sector outperform” rating.
“We believe the company’s royalty acquisition model provides a clever and risk-diversified way to gain exposure the biotechnology drug market,” said Mr. Farmer. “Our NPV of free cash flows based on the current portfolio suggest that units trade at a discount to fair value.”
* Stifel’s Justin Keywood to $21 from $20 with a “buy” rating.
“The portfolio duration is currently in solid shape, in our view, with an expected total income CAGR in the high teens through 2025 and mid-to-high single digits through 2030. As we model DRI, we see a valuation re-rating opportunity towards Royalty Pharma’s multiple, and identify a potential multi-year value creation scenario building,” said Mr. Keywood.
* CIBC’s Scott Fletcher to $19 from $18 with an “outperformer” rating.
=====
While acknowledging Open Text Corp.’s (OTEX-Q, OTEX-T) second-quarter 2024 results had some “food for bears,” including a billings miss and EBITDA margin tightening, Citi analyst Steven Enders viewed the release as “solid” and “encouraging.”
After the bell on Thursday, the Waterloo, Ont.-based enterprise information management software reported revenue of US$1.535-billion, up 71 per cent year-over-year and above the Street’s expectation of US$1.503-billion driven by a 58-per-cent rise in annual recurring revenues and gains in its License business. Earnings per share of US$1.24 was 4 US cents above the consensus forecast.
“The Bulls will point to large deal strength, strong cloud bookings & raised full-year cloud bookings guide, and healthy MFGP performance with line-of-sight to improving organic growth and cash generation,” said Mr. Enders.
“The Bears will point to FY EBITDA guide down and growth downticks for Pro Services and License, lack of Cloud rev bump up despite the strong bookings, along with continued SMB impacts.”
With the results and largely unchanged full-year guidance, he raised his revenue and earnings forecast for fiscal 2024 and 2025, leading him to increase his target for Open Text shares to US$44 from US$38 with a “neutral” rating. The average is US$50.58.
“We see OpenText’s recently closed acquisition of Micro Focus likely remaining an overhang on the stock until OpenText is able to make changes to Micro Focus’ operations and executing the Open Text playbook to drive better renewals and leverage,” he concluded. “Yet, we believe the acquisition and Micro Focus’ declining revenue base will likely remain a point of focus until the acquisition closes in CY23 and distract from OpenText’s cloud and MSP investments until Micro Focus potentially returns to growth in CY24 from OpenText investments. While we believe the acquisition could ultimately prove successful, we see a challenging narrative until OpenText’s strategy can begin to take shape which we expect will take more than a year to play out.”
Elsewhere, others making changes include:
* BMO’s Thanos Moschopoulos to US$50 from US$48 with an “outperform” rating.
“We remain Outperform on OTEX following Q2/24 results, which were a beat on the quarter, while Q3/24 EBITDA guidance was well below consensus, and the top end of FY2024 margin guidance was reduced,” said Mr. Thanos Moschopoulos. “Cloud bookings were strong, as was cash flow, and MCRO revenue was above our model. We’ve reduced our FY24/25 EBITDA estimates; however, our revised FY2025 EBITDA is now roughly consistent with prior consensus. We view the stock’s valuation as compelling based on our view that OTEX will be successful in returning to consolidated year-over-year organic growth.”
* TD Securities’ Daniel Chan to US$54 from US$53 with a “buy” rating.
=====
Ahead of earnings season for Canadian Industrial and Energy Services companies, BMO Nesbitt Burns analyst John Gibson sees several “attractive features,” pointing to stable levels of free cash flow, improving balance sheets and rising capital returns.
“For investors seeking exposure to energy markets, we view the energy service land as the place to be,” he said in a research report titled En Vogue, and For Good Reason. “While predicting rig counts is a bit of a mug’s game, we believe North American activity levels have likely bottomed. At the same time, the drawdown in drilled-but-uncompleted wells, combined with more intense drilling/completion techniques, continues to drive US production to new records. Overall, we don’t believe these trends can continue to persist without an eventual pickup in drilling activity (although timing remains uncertain). In the meantime, however, resilient pricing levels combined with rising production is benefitting our coverage group as financial results have remained solid despite ebbs and flows in activity levels.
“Overall, we expect Q4/23 results to be relatively uneventful. U.S. rig counts continued to decline during the quarter, while post-Christmas activity levels were also softer in Canada. As such, we expect outlooks around 1H/24 activity levels will be the focus.”
With updates to his forecast, including an increase to his rig count for 2024 and 2025 on both sides of the border, Mr. Gibson made these target changes to stocks in his coverage universe:
- Badger Infrastructure Solutions Ltd. (BDGI-T, “market perform”) to $49 from $41. The average on the Street is $44.89.
- Black Diamond Group Ltd. (BDI-T, “outperform”) to $11 from $10. Average: $10.75.
- CES Energy Solutions Corp. (CES-T, “outperform”) to $5.50 from $5. Average: $5.12.
- Enerflex Ltd. (EFX-T, “market perform”) to $8 from $6. Average: $10.53.
- Mullen Group Ltd. (MTL-T, “market perform”) to $16 from $15. Average: $17.78.
- Parkland Corp. (PKI-T, “outperform”) to $57 from $54. Average: $52.31.
- Secure Energy Services Inc. (SES-T, “outperform”) to $13 from $12.50. Average: $11.25.
- Source Energy Services Ltd. (SHLE-T, “outperform”) to $12 from $9. Average: $9.50.
- STEP Energy Services Inc. (STEP-T, “outperform”) to $7.50 from $6.50. Average: $6.72.
“Our top picks focus on a combination of production-oriented businesses, strong Canadian exposure and minimal balance sheet risk and include: 1) Parkland; 2) Pason Systems; 3) Secure Energy Services; 4) CES Energy Solutions; and 5) Trican,” he said.
=====
In other analyst actions:
* TD Securities’ Vince Valentini downgraded BCE Inc. (BCE-T) to “hold” from “buy” with a $55 target, down from $57. The average is $57.30.
* Seeing “good stuff brewing” following Brookfield Infrastructure Partners LP’s (BIP-N, BIP.UN-T) in-line results for its fourth quarter of fiscal 2023, Raymond James’ Frederic Bastien raised his target to US$44 from US$40 with a “strong buy” rating. Other changes include: National Bank’s Patrick Kenny to US$33 from US$32 with a “sector perform” rating and TD Securities’ Cherilyn Radbourne to US$46 from US$45. The average is US$37.05.
“We reaffirm our Strong Buy rating on Brookfield Infrastructure as we expect the easing interest rate environment to revive investor interest in yield and growth-oriented companies,” said Mr. Bastien. “BIP stands out from the pack because of its scale, global footprint, financial strength, and track record. We believe these advantages will help management arbitrage varying economic circumstances to buy and sell assets for attractive valuations, compounding shareholder return in the process.”
* In response to Thursday’s earnings release that propelled its shares higher by 7.9 per cent , Barclays’ Adrienne Yih raised her Canada Goose Holdings Inc. (GOOS-N, GOOS-T) target to US$13 from US$11 with an “equal-weight” rating, while Evercore ISI’s Michael Binetti bumped his target to US$12 from US$11 with an “in line” recommendation. The average is US$12.67.
“Adj. EPS of $1.37 matched consensus due to a GM [gross margins] beat offset by slightly lower sales and SGA deleverage. Management tightened their guide for for the full year, while also citing a continuation of headwinds in the wholesale channel and within the EMEA and NA regions,” said Ms. Yih.
* Ahead of its Feb. 8 earnings release, Stifel’s Daryl Young hiked his Colliers International Group Inc. (CIGI-Q, CIGI-T) target to US$145 from US$130 with a “buy” rating. The average is US$133.33.
“Q4 is historically CIGI’s seasonally strongest quarter reflecting the timing of lease/sale transactions before yearend,” he said. “However, we expect this year will be more tempered, with U.S. capital markets activity remaining heavily depressed (Q4/23 U.S. investment volumes declined 41 per cent year-over-year). We think that investors are already anticipating a relatively weak Q4, and expect 2024 guidance to be the focus (specifically updates on capital markets pipelines, IM fundraising and margins). In our view, 2024 will remain a transition year with potentially sluggish activity across H1, and headline risks related to office and U.S. regional banks. However, we think that a floor is forming in the market, and see optimism building across the year given: 1) lapping peak rate concerns, 2) credit/capital markets slowly reopening, 3) recession fears are abating, and 4) near-record levels of CRE dry powder still need to be deployed.”
* After receiving approval from the U.S. Food and Drug Administration to initiate a Phase 3 development program for its lead drug candidate for the treatment of osteoarthritis, Raymond James’ Rahul Sarugaser raised his target for Victoria-based Eupraxia Pharmaceuticals Inc. (EPRX-T) to $19 from $18 with a “strong buy” rating. The average is $17.
“With this FDA nod, and recruitment commencing in 3Q24, EPRX is now, assuredly, a late-stage clinical development company,” he said.
“We expect PROMENADE 1 to replicate EPRX’s very strong Ph2 data, which should, on its own, be sufficient for FDA approval (est. 2027). The PROMENADE 1 study (740 patients) is effectively an expansion of EPRX’s 318-patient Ph2 study, which showed strong pain and function responses through 24 weeks and, crucially, a pristine safety profile. The golden goose, however, is PROMENADE 2, in our view. By clearly demonstrating that EP-104IAR can be used for repeat dosing (24 weeks after first dose), the drug could be used to treat chronic disease (at least until surgical knee replacement is required), elevating EP-104IAR to potential blockbuster (more than $1-billion) status.”
* CIBC’s Krista Friesen increased her Linamar Corp. (LNR-T) target to $93 from $90, exceeding the $81.80 average, with an “outperformer” rating.
“We have updated our model to reflect the closing of the Bourgault Industries acquisition. We continue to view the acquisition positively, and in line with LNR’s strategy of building out a diversified manufacturing business. We expect more details on the acquisition and integration plan when LNR reports earnings on March 6,” she said.
* Following a fourth-quarter earnings beat, Raymond James’ Steven Hansen raised his Methanex Corp. (MEOH-Q, MX-T) target to US$67 from US$60 with an “outperform” rating. The average is US$54.18.
“We are increasing our target price on Methanex Corp... and reiterating our Outperform rating based upon: 1) our increasingly constructive view of global methanol fundamentals; 2) confirmation of G3′s imminent ramp-up to full rates (removing a sizeable risk factor); and 3) commensurate prospects for robust FCF generation & buybacks through our forecast horizon.
* Desjardins Securities’ Doug Young bumped his Power Corporation of Canada (POW-T) target by $1 to $40 with a “buy” rating. The average is $41.
“We believe POW has ways to surface value in the future. It also offers an attractive dividend yield (5.4 per cent) and discount to NAV (28.3 per cent),” he said.
* Canaccord Genuity’s Robert Young raised his Real Matters Inc. (REAL-T) target to $6.50 from $5.25 with a “hold” rating. Other changes include: ATB Capital Markets’ Martin Toner to $10 from $9 with an “outperform” rating, BMO’s Thanos Moschopoulos to $7 from $5.50 with a “market perform” rating. and TD Securities’ Daniel Chan to $7 from $6 also with a “hold” rating. The average is $7.36.
“Real Matters’ FQ1 results missed revenue expectations while EBITDA was relatively in line, albeit in loss territory again,” said Mr. Young. “Management continues to execute well though a difficult mortgage origination market which hovers at historic volume lows. A focus on dimensions of the business management can control – market share, wallet share, net revenue margins and operational efficiency – and has been advancing in each of these areas. We expect seasonality and uncertain timing on rate cuts to remain a headwind in FQ2 ahead of the spring market. Real Matters remains confident on the margin leverage potential as volumes return, noting that both US Appraisal and US Title have significant idle capacity ready for any recovery in volume. We have made upward revisions to our forecasts, reflecting a softer Q2 than we had expected, followed by a sharper rebound in 2025.”
* RBC’s Irene Nattel lowered her Saputo Inc. (SAP-T) target to $36 from $40, keeping an “outperform” rating. The average is $33.65.
“Commodity and operating backdrops still flashing red, most notably U.S. market factors, contract pricing on exports out of Australia, and a transient inventory depletion program in the UK,” she said. “Nonetheless, Saputo continues to make progress on its strategic plan, with benefits of capital spend through F24 beginning to accrue in F25. Reducing F25E/F26E EPS by 14 per cent to reflect diminished visibility on elements outside their control. Having said that, we remain constructive on the longer-term outlook with normalizing commodity backdrop an important caveat.”
David Leeder