Inside the Market’s roundup of some of today’s key analyst actions
While the yield environment “remains challenged,” Desjardins Securities analyst Benoit Poirier thinks Transat AT Inc.’s (TRZ-T) voluntary debt paydown is “a positive sign for the story” following the release of its second-quarter financial report.
“Overall, we view the results as neutral as TRZ had pre-released its guidance cut and made statements on the difficult summer environment back in May,” he said. “That said, we have reduced our 3Q estimates as management stated that load factors are currently trending 2 per cent lower year-over-year while yields are 8 per cent lower year-over-year (offsetting the 11-per-cent year-over-year growth in capacity). Moreover, the strained Canadian consumer and aggressive pricing from competitors have created market-specific headwinds for TRZ (adds to the GTF engine issue).”
Shares of the Montreal-based airline and tour operator slipped almost 4 per cent on Thursday after it reported an adjusted earnings per share loss of $1.02, rising from a loss of 21 cents during the same period a year ago and missing Mr. Poirier’s estimate of a 63-cent loss as an aircraft engine recall grounded part of its fleet and drove costs higher.
“In the quarter, TRZ made early repayment of $36-million of subordinated high-interest debt (BA rate + 9.75 per cent) which was due on April 2025,” he said. “Management stated that this should save $5-million in interest annually (we have adjusted our model). Additionally, TRZ renegotiated its LEEFF government secured facility ($41-million), as well as its revolving facility ($50-million), extending its maturities to February 2026 from April 2025. TRZ now has no debt maturity before 2026, which we view as positive as it could enable further deleveraging and better negotiation terms at a future date. However, with net debt to TTM trailing 12-month] EBITDA (including lease liabilities) still sitting at 6.1x, risk remains for equity holders.
“Management outlines clear plan for the implementation of the Porter JV. The first phase, which launched this week, aligns TRZ’s European and Porter’s North American schedules, pricing and commercial offering. Phase two, to come in the fall, will focus on the US routes common to both airlines (eg Florida). Phase three in 2025 will concentrate on southern destinations, where TRZ will act as the tour operator for Porter. Overall, management expects that by the end of 2025, both networks should be in line with the eventual goal of offering loyalty points cross-usage once TRZ launches its new program next year”
Mr. Poirier reduced his adjusted earnings per share projections for both 2024 and 2025, but he maintained a “hold” rating and $3 target for Transat shares. The average is $2.79.
“We do not see any reason to buy the stock at this point and prefer to remain on the sidelines while awaiting additional deleveraging as well as the execution of the strategic plan,” he said.
Elsewhere, analysts making target adjustments include:
* Scotia’s Konark Gupta to $2.25 from $2.50 with a “sector underperform” rating.
“TRZ reported a miss vs. Street but FQ2 results were better than we had feared as leisure demand is holding up well while yields are softening amid some transient issues,” said Mr. Gupta. “Management once again reduced capacity outlook in light of ongoing headwinds, but we view it as a prudent step to support yields and margins. We have made mixed changes to our estimates, including a reduction in 2H/F24E EBITDA, an improvement in F2025E/F2026E EBITDA, and an increase in net debt forecasts, reflecting TRZ’s revised capacity guidance and updated fleet plans (more new aircraft this summer). Our target has been slightly reduced to $2.25 (was $2.50) as a result.”
* TD Cowen’s Tim James to $3 from $3.75 with a “hold” rating.
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Touting its “attractive” margin and free cash flow profile, RBC Dominion Securities analyst Drew McReynolds sees “an improving outlook” for Transcontinental Inc. (TCL.A-T) after it exceeded expectations for adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for a third consecutive quarter.
“Although cyclical headwinds continue to negatively impact both packaging and printing volumes, we expect ongoing cost efficiencies and an easing in destocking pressures to translate to renewed EBITDA growth in F2024,” he said. “In addition, we see a strengthening FCF outlook bolstered by EBITDA growth, declining capex and further working capital improvements. With the stock trading at 4.9 times FTM [forward 12-month] EV/EBITDA versus an average of 7.3 times for packaging peers, we continue to see value in the name given management’s track record of solid execution, approximately $2.25 per share in normalized FCF and each 0.5 times increase in multiple equating to $3 per share.”
After the bell on Wednesday, the Montreal-based printer, packager and publisher reported revenue of $683-million for its second quarter, missing the consensus forecast of $723-million. However, adjusted EBITDA and earnings per share of $110-million and 52 cents, respectively, both came in higher than anticipated ($104-million and 44 cents).
“Management modestly raised its outlook for F2024 with the expectation of stable year-over-year adjusted EBITDA within Retail Services and Printing (versus a year-over-year decline previously) now translating to year-over-year consolidated adjusted EBITDA growth,” said Mr. McReynolds. “While the outlook factors in year-to-date performance, management continues to expect a stronger H2/24 driven by: (i) easier year-over-year comps for book printing and packaging volumes; (ii) improving packaging demand across most end markets (with the exception of medical, which is expected to remain soft for several quarters due to overstocking) in part due to strategic investments and new/expanded customer relationships, underpinning 2-per-cent H2/24 top-line growth within Packaging; (iii) continued growth in raddar and ISM with legacy printing (newspaper, magazine, books) now accounting for only 1/3 of the Retail Services and Printing segment; and (iv) further progress on cost efficiencies with $30-million in run-rate cost savings expected by the end of F2024 (versus a two-year target of $40-million) alongside a continued focus on product mix optimization with management reiterating confidence in returning to 16-per-cent adjusted EBITDA margins longer-term within Packaging.”
Keeping an “outperform” rating for Transcontinental shares, Mr. McReynolds bumped his target to $22 from $21. The average target on the Street is $20.
Other analysts making changes include:
* CIBC’s Hamir Patel to $18 from $17 with an “outperformer” rating.
* National Bank’s Adam Shine to $21 from $18.50 with an “outperform” rating.
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Free cash flow generation is likely to be the focus of attention during AtkinsRéalis’ (ATRL-T) Investor Day event on June 13, according to National Bank Financial analyst Maxim Sytchev, who warned “hopes of a stronger and more consistent FCF trajectory are still just that, hopes, for now.”
“Until recently, ATRL earnings have been extremely volatile which, among other factors, understandably restrained the multiple investors were willing to pay for the shares,” he said in a report released Friday. “Since 2021, however, core earnings (adjusted EPS ex. Capital contributions) have remained in positive territory and have grown steadily to an expected $2.28 over the next four quarters and stepping up to $2.54 in 2025. Shares have continued to rally, advancing an additional 27 per cent year-to-date, which has helped narrow ATRL’s valuation gap to peers. That said, there is still a significant chasm to both global and Canadian peers, and further multiple expansion will be contingent on the full runoff of legacy LSTK work, a monetization of the low-margin Linxon business, continued capitalization on opportunities in the nuclear space, and a broad-based improvement in margins (especially in Canada, which lags other regions by several hundred bps due to a mix of smaller and less profitable projects).”
Mr. Sytchev thinks a noticeable improvement in both free cash flow and generation is “key” to calming investor concern about the Montreal-based company, formerly known as SNC-Lavalin.
“On a forward basis (and we sound like a broken record here), FCF needs to be commensurate with core EBITDA of $859-million for 2025 (our anchor for valuation is on blended 2024/2025 numbers),” he said. “Still some working capital drag from LSTK, underperformance of Linxon (hopefully sold or wound down soon), and lesser FCF conversion from O&M still lead us to believe that $350-$400-million should be doable over the coming two to three years. With most engineering companies trading at a 3-3.5-per-cent FCF yield, that points to an $11.5-billlion market cap or somewhere in the $65.00 per share range, inclusive of 407 (and in line with our NAV). The operative word, here, again, is FCF realization.”
The analyst expects management to emphasized Engineering margins and its Nuclear growth prospects are important levers to increased free cash flow.
“In 2021, we calculated the EBITDA margin delta vs. WSP/STN [WSP Global and Stantec] stood in the 200 basis points range (when properly allocating corporate costs); now it’s closer to 500 bps as both Canadian peers have seen significant margin expansion,” he said. “While relative margin is of course one part of the story, so far we have not witnessed operating leverage from superior organic momentum at Atkins. This needs to change. Nuclear (20 per cent of NAV) is seeing a sentiment renaissance now and more studies around SMR and new builds are being contemplated. Approval processes can, however, be arduous and will likely take more time to come to fruition than some are hoping for (backlog in this division, however, now stands at $1.8-billion, the highest since 2017 at $1.4-billion); that being said, we don’t expect this business to grow by a factor of 4 times.
“All in, one could say that the ‘easy’ recovery is behind us as the LSTK run-down and portfolio slimming were the obvious choices. The reality, of course, is more complex as there is nothing “easy” when it comes to winding down a construction business that has been a core of an ‘A to Z’ market approach to project securement (hence we suspect a different go-to-market strategy for the engineering business in Canada for Atkins now vs. history).”
Mr. Sytchev reiterated his “outperform” recommendation and $61 target for shares of AtkinsRéalis. The average on the Street is $62.45.
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In other analyst actions:
* Canaccord Genuity’s Matt Bottomley upgraded Planet 13 Holdings Inc. (PLTH-CN) to “buy” from “hold” while lowering his target to $1.20 from $1.40. The average is $1.60.
“Although PLTH’s home market of Nevada continues to face pricing pressures that have weighed on the company’s ability to produce organic growth as of late, we note that its Las Vegas superstore continues to be one of the highest grossing retail locations in the country, and a number of recent operational and strategic endeavors have positioned the company for a much more attractive back half to 2024, in our view,” he said.
* Wells Fargo’s Christian Wetherbee initiated coverage of Canadian National Railway Co. (CNI-N, CNR-T) with an “equal weight” rating and US$130 target. The average is US$138.22.
* Raymond James’ Craig Stanley initiated coverage of Torex Gold Resources Inc. (TXG-T) with an “outperform” recommendation and $27 target. The average on the Street is $27.61.
* HSBC’s Erwan Rambourg upgraded Lululemon Athletica Inc. (LULU-Q) to “buy” from “hold” and increased his target to US$425 from US$405, while Bernstein’s Aneesha Sherman raised her target to US$382 from US$376 with a “market perform” rating. The average on the Street is US$404.89.
* BMO’s Stephen MacLeod increased his target for FirstService Corp. (FSV-Q, FSV-T) to US$196 from US$193 with an “outperform” recommendation. The average is US$183.17.
“FirstService announced its first commercial roofing services tuck-in acquisitions (established through Dec/23 acquisition of RCA),” he said. Combined, Crowther Roofing and Hamilton Roofing generate more than $150-million in annual revenues and provide FirstService with a significant new presence in Florida, one of the largest roofing markets in North America; we estimate 3-per-cent pro forma EBITDA accretion. These tuck-in acquisitions align with the company’s strategy to build out RCA’s geographic footprint over time. EBITDA estimates and target price increased.”
* CIBC’s Kevin Chiang raised his GFL Environmental Inc. (GFL-T) target to $62 from $59, exceeding the $53.27 average, with an “outperformer” rating.
* CIBC’s Anita Soni reduced her target for Iamgold Corp. (IAG-N, IMG-T) to US$4.80 from US$5 with a “neutral” rating. The average is $4.67.
* Cormark Securities’ David Ocampo raised his 5N Plus Inc. (VNP-T) target by $1 to $7.50, above the $6.69 average, with a “buy” rating.
David Leeder