Inside the Market’s roundup of some of today’s key analyst actions
While he expects macroeconomic pressures will continue to weigh on Empire Company Ltd.’s (EMP.A-T) results in the near term and “keep the stock range-bound,” Desjardins Securities analyst Chris Li predicts its current fiscal 2025 will “be the inflection point for earnings growth, supported by a gradual improvement in market conditions and consumer behaviour, ongoing benefits from cost reductions and margin management, and improving profitability at Voilà.”
“EMP is inexpensive (11.5 times forward P/E vs its 14 times average and 16–17 times for MRU and L), supported by a relatively attractive FCF yield (8 per cent/9 per cent on FY25/26),” he added.
On Thursday, shares of the Stellarton, N.S.-based grocer rose 5.4 per cent following the release of largely in-line fourth-quarter 2024 results, which Mr. Li said reflected “consumer trade-down to discount, partly offset by good margin and SG&A control.” However, investors applauded its decision to end its exclusive partnership with technology provider Ocado Group PLC and delay the opening of its fourth distribution centre, in Vancouver.
“Following two years of no EPS growth, EMP expects EPS growth to revert to its long-term 8–11-per-cent target this year (FY25),” the analyst said.
“While there are risks, we believe this is achievable and a key catalyst. Our 8-per-cent forecast assumes: (1) SSSG [same-store sales growth] of 1.8 per cent vs 2.1 per cent in FY24 with moderating food inflation (from 5 per cent in FY24 to 2 per cent in FY25), partly mitigated by better tonnage as macroeconomic conditions improve. While it is still very early, EMP noted that sales trends are improving across all banners and regions. (2) Gross margin rising 20 basis points (following a strong increase of 70bps in FY24), driven by a combination of factors (space productivity, shrink, supply chain, business unit mix, etc), partly offset by higher promo penetration. (3) Adjusted SG&A expense rate up slightly vs FY24 with cost inflation and growth investments, partly offset by cost-reduction initiatives. (4) Voilà losses remain largely stable vs FY24. (5) Share buybacks (approximately 4 per cent).”
After minor adjustments to his forecast for its current fiscal year, Mr. Li bumped his target for Empire shares to $40 from $38, maintaining a “buy” recommendation The average target on the Street is $38.14, according to LSEG data.
Elsewhere, other analysts making target adjustments include:
* National Bank’s Vishal Shreedhar to $41 from $40 with a “sector perform” rating.
“Looking forward, we believe that EMP has opportunity related to ongoing improvement initiatives and inexpensive valuation,” he said. “That said, it has structural deficiencies versus peers including an elevated mix of lower growth conventional stores and less pharmacy exposure. We consider the value gap versus peers to be noteworthy; however, we believe it will persist until EMP delivers comparable/sustainable growth versus peers.”
* RBC’s Irene Nattel to $41 from $42 with a “sector perform” rating.
“EMP’s Q4/F24 results were in-line with expectations/consensus as consumer value-seeking behaviour continues to be a headwind relative to its largely full-service network. In our view, normalizing inflation and consumer backdrop, cost control and ongoing share buyback should help underpin modest near-term earnings recovery toward the stated long-term aspiration 8-11 per cent, and stabilize valuation. Nonetheless, we reiterate our view that Empire’s relative positioning is likely to sustain valuation discount to peers,” said Ms. Nattel.
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While Aurora Cannabis Inc.’s (ACB-T) fourth-quarter 2024 financial results fell short of both revenue and earnings expectations, ATB Capital Markets analyst Frederico Gomes emphasized it’s seeing momentum internationally, particularly in Australia.
Shares of the Edmonton-based company slipped 2.5 per cent on Thursday following the premarket release that included revenue rising 4.6 per cent quarter-over-quarter and 5.3-per-cent year-over-year to $67.4-million, falling short of both Mr. Gomes’s $69.1-million estimate and the consensus projection of $69.5-million. That led to an adjusted EBITDA miss of $1.9-million, which was well below the Street’s forecast of $6.1-million.
“Adj. EBITDA of $1.9-million fell from $4.3-million last quarter, with the sequential decline mostly driven by i) the revenue miss and ii) adj. SG&A of $31.6-million (which excludes business transformation costs, non-recurring costs and out-of-period adjustments totalling $8.6-milion) coming in above management’s $30-million target due to incremental costs associated with the integration of MedReleaf Australia,” he said. “While this is the sixth consecutive quarter of positive adj. EBITDA reported by ACB, we note that the adj. EBITDA number remains noisy; removing the impact of adjustments related to business restructuring and other deemed as non-recurring, we estimate that EBITDA would have been a loss of $10.50-milllion.
“Management reiterated guidance to positive FCF by the end of calendar 2024, to be driven by i) growth in Australia and Europe, ii) operating expense rationalization (expecting adj. SG&A to fall back within the $30-million quarterly target) and margin stabilization and iii) working capital management and capex of 2 million per quarter. For Q1/FY25, management guided to i) quarter-over-quarter revenue growth in mid to high teens, driven by positive seasonality in Bevo farms revenue and strength in European markets, ii) Q1/FY25 adj. EBITDA to be higher sequentially, iii) Operating cash flows to improve sequentially in Q1/FY25.”
Mr. Gomes did note Aurora continues to possess “one of the strongest balance sheets in the industry” with $127-million in pro-forma net cash.
“However, given the lack of near-term sales growth drivers and catalysts, and prospect of continued cash burn until the guidance is reached (which might still be several quarters away), we maintain our neutral stance on the stock,” he added.
After lowering his consumer cannabis growth and margin estimates given recent weakness, and raised our international medical growth and estimates to account for momentum in Australia, Mr. Gomes cut his target for Aurora shares to $11 from $12.50, keeping a “sector perform” recommendation. The average is $7.74.
“For Q1/FY25, management guided to (i) quarter-over-quarter revenue growth in mid to high teens, driven by seasonality in Bevo and strength in European markets, (ii) adj. EBITDA to be higher sequentially, and (iii) operating cash flows to improve sequentially,” he said. “Management also re-iterated guidance for positive FCF by the end of calendar 2024. We view the guidance and international performance constructively, while continuing to like ACB’s balance sheet ($127.1-million in pro-forma net cash); however, we are wary of ACB’s cash burn ($26.8-million burned this quarter) while robust international growth remains priced into our valuation.”
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Desjardins Securities analyst Brent Stadler thinks Boralex Inc. (BLX-T) is poised to be the biggest beneficiary of Canada’s Bill C-59, which legislates a 30-per-cent refundable input tax credit on wind, solar and storage.
“The ITC improves the competitiveness of renewables in Canada and helps to level the playing field vs the U.S.,” said Mr. Stadler in a research note released following the implementation of the law earlier this week.
“Given the timing of bids/contract awards on BLX’s 200MW (100MW net) Apuiat and 1,200MW Des Neiges Sud (400MW net) wind projects in Québec, and 300MW Hagersville storage project in Ontario, BLX underwrote its bids without consideration of the 30-per-cent ITC. Given these projects qualify for the 30-per-cent ITC and assuming 85 per cent of the project capex qualifies (likely conservative), we estimate a $465-million benefit to BLX. We model the cash being received 12–18 months following project COD and expect that it will all be received by 2029. Discounting this back to the present results in $3.00 of unrisked NAV. Applying a modest 30-per-cent risking (consistent with project risking), we have increased our risk-adjusted NAV and target by $2. We continue to expect that these projects will achieve returns at the upper end of BLX’s targeted 10–15-per-cent range.”
Mr. Stadler thinks Billl C-59 also benefits the company’s peers, noting: “BEP, BLX, CPX, INE and NPI should benefit from the Canadian ITC, as it should increase the competitiveness of renewables.”
For Montreal-based Boralex, the analyst continues to see optionality to fund its growth pipeline, pointing to “its disciplined balance sheet and significant retained FCF.”
“The finalization of these ITCs provides further clarity, and we expect that the equity for these projects can be initially financed through a bridge loan, which will be paid off with the ITCs. We do not see a need for external equity as BLX builds out its 1.5GW contracted pipeline,” he said.
Reiterating his “top pick” recommendation for its shares, Mr. Stadler bumped his target to $46 from $44. The average on the Street is $40.10.
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CIBC World Markets analyst Stephanie Price warns uncertainty lingers in the Canadian software industry for the remainder of 2024.
“Our 12th Annual Technology & Innovation Conference in May highlighted that the demand environment remains uncertain as enterprises add more scrutiny to the budgeting process and reduce discretionary IT spending,” she said. “At the end of 2023, there were expectations that the environment would start to improve in H2/24, but as we approach the midway point of the year the environment remains uncertain. In this note, we take a deeper look at valuation for the names we cover in light of the current environment. We continue to favour our defensive technology names CSU and DSGX, which we believe also stand to benefit from M&A upside in a weaker valuation environment.”
In a research report released Friday, Ms. Price downgraded a pair of stocks in her coverage universe after “revising revenue growth expectations for each, amid a challenging environment.” They are:
* CGI Inc. (GIB.A-T) to “neutral” from “outperformer” with a $151 target, down from $165. The average on the Street is $159.15.
“CGI has been facing a difficult demand environment, translating to slowing revenue growth over the last year,” she said. “We calculate year-over-year organic revenue growth of 5 per cent over the LTM [last 12 months] ended Q2/F24 vs. 8 per cent over the LTM ended Q2/F23. CGI’s organic revenue growth has tracked roughly in line with peers, excluding outperformance at government contractor CACI. While CGI does not give guidance, close peer Accenture is guiding to F2024 revenue growth of 1.5–2.5 per cent year-over-yea (implying negative 1.5-per-cent to negative 0.5-per-cent organic growth) and peers Capgemini and Atos expect similar growth. With the Street expecting 2.5-per-cent year-over-year revenue growth at CGI in F2024, above the peer average of 1 per cent, we see potential downside to Street estimates. Amid a challenging demand environment we are revising our F2024 and F2025 year-over-year revenue growth expectations down to 1.5 per cent and 3.0 per cent, respectively, from 3 per cent and 5 per cent.
“CGI continues to see strength in managed services bookings as clients pursue cost savings, although these bookings take longer to translate to revenue. More cautious spending on consulting work has impacted bookings, as well as overall slower decision-making and new project start-ups. In FQ1, CGI’s book-to-bill (1.00 times) fell below its long-term average of 1.08 times, but remains higher on a TTM [trailing 12-month] basis (1.13 times). Given weaker FQ2 bookings paired with management’s commentary and peers’ outlooks, we view an H2 demand recovery as uncertain. We expect CGI’s revenue growth will remain in the flat to low-single-digit range in the medium term, below the high-single-digit growth rates seen in recent years.”
* Kinaxis Inc. (KXS-T) to “neutral” from “outperformer” with a $154 target, down from $180. The average is $193.84.
“While Kinaxis maintained annual subscription growth guidance of 17–19-per-cent, Q1 SaaS growth came in below the guide, at 16 per cent year-over-year, and first quarter ARR growth of 15 per cent came in even lower,” she said. “Consensus revenue estimates were relatively unchanged post Q1, and the Street is modelling F24 subscription growth of 17.6 per cent. We consider ARR growth a leading indicator for subscription growth; heading into 2024 we had flagged the potential for weaker 2024 SaaS growth due to weak ARR growth in Q3/23. This thesis played out when management provided 2024 guidance which called for 17-19-per-cent year-over-year subscription growth, vs. consensus of 24 per cent. With ARR growth rates staying flat or declining for five sequential quarters, we see further risk to forward SaaS estimates.”
She also cut his Open Text Corp. (OTEX-Q, OTEX-T) target to US$36 from US$38.50, below the US$42.92 average, with a “neutral” rating.
“Despite being similarly impacted by a more cautious spending environment, we maintain our Outperformer ratings on DCBO and TIXT as we believe the majority of downside risk for both of these names is priced in,” added Ms. Price.
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In other analyst actions:
* Wells Fargo’s Roger Read reduced his Canadian Natural Resources Ltd. (CNQ-T) target to $52, below the $55.36 average, from $56 with an “equalweight” rating.
* Morgan Stanley’s Ioannis Masvoulas raised his targets for First Quantum Minerals Ltd. (FM-T, “overweight”) to $20.30 from $19.80 and Lundin Mining Corp. (LUN-T, “overweight”) to $20.70 from $20. The averages are $19.53 and $18, respectively.
* BMO’s Ben Pham raised his Innergex Renewable Energy Inc. (INE-T) target to $11 from $9 with an “outperform” rating. The average is $11.68.
“INE’s minority sale of its Texas renewable fleet for US$188-million strengthens its balance sheet and unlocks value but the implied 9 times EV/EBITDA sale valuation was underwhelming in our opinion,” he said. “While we view the transaction as neutral (no expected change in FCF/sh), our target price goes to $11 vs. $9, reflecting the recent decline in 10-year Government of Canada bond yields and improved renewables sentiment of late (target valuation to 10.5 times EBITDA vs. 10 times).”
David Leeder