Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Lorne Kalmar thinks Canadian retail real estate investment trusts are “well‐positioned to withstand any turbulence should a recession materialize, and continue to generate solid and steady earnings growth on the back of favourable supply/demand dynamics.”
In a research report released Friday titled Everybody loves a comeback, he said the the retail sector is entering 2023 “in the best position it has been in for years” with brick-and-mortar retail having “passed the ultimate test and cemented itself as an integral component of the future” by surviving the pandemic.
“Following a decade of headlines on closures and bankruptcies, the Canadian retail tenant base is arguably the strongest it has been in recent memory. We are seeing retailers expanding, new store concepts being introduced, international retailers entering the Canadian market and online retailers adding physical locations,” said Mr. Kalmar. “Nationally, absorption is meaningfully outpacing new supply, which remains relatively modest, and vacancy has declined to the low single digits. The retail REITs are reporting occupancies at, or ahead of, pre-pandemic levels, improving leasing velocity and accelerating rent growth. As we emerge from the pandemic, it has become apparent that e-commerce and brick-and-mortar retail are not mutually exclusive but rather two sides of the omnichannel coin—one offers experience while the other offers convenience. E-commerce penetration is declining and shoppers are returning to physical stores.
“Even as we look down the barrel of a potential recession, retail REITs have emerged as a safe haven within the real estate sector, owing to their resilient tenant mixes and defensive portfolios located in densely populated nodes within Canada’s largest markets.”
Mr. Kalmar initiated coverage of four REITs and assumed coverage of three others, touting a range of sector catalysts, including a growing demand for retail space, resumption of pre-pandemic shopping patterns and the “stabilization of transaction market to facilitate capital recycling.”
He initiated coverage of three REITs with “buy” recommendations. They are:
* First Capital REIT (FCR.UN-T) with a $19 target. The average target on the Street is $19.28, according to Refinitiv data.
“In our view, FCR owns the highest-quality retail portfolio in the Canadian REIT space,” said Mr. Kalmar. “The portfolio is heavily concentrated in some of Canada’s most densely populated nodes and boasts an average population density of 300,000 people living within a 5km radius of its properties. FCR also offers investors access to an urban-oriented development pipeline heavily focused on multi-family projects. While we believe ongoing debt reduction and capital recycling initiatives could impact near-term earnings growth, dispositions are targeted for lower-yielding assets, which should limit earnings dilution. We also expect near-term occupancy challenges to weigh on earnings. While we like the name and see good long-term upside potential, we do not see any meaningful near-term catalysts that would drive material outperformance vs its peers, outside of a takeout. However, on a valuation basis, we believe the REIT screens well, both relative to its peers and on a historical basis.”
* Primaris REIT (PMZ.UN-T) with a $17.50 target. Average: $17.25.
Analyst: “PMZ is the lone public vehicle in Canada focused on owning and managing enclosed shopping centres and represents the only way to play the recovery of the Canadian mall sector. With a conservative financial profile, we believe PMZ is well-positioned to grow its portfolio through acquisitions while surfacing value from excess land at its properties through developments or dispositions. Since its spin-out from H&R REIT (HR.UN, TSX, not rated) at the beginning of 2022, PMZ has generated a total return of 11.9 per cent vs negative 12.7 per cent for the S&P/TSX Capped REIT Index. Despite its strong performance, we still see significant upside potential at current levels on the back of several catalysts, including improving mall fundamentals, acquisitions and capital recycling, as well as enhanced investor outreach. That said, we believe the REIT’s unit price could be more susceptible to negative economic news due to investor perception of the broader enclosed mall asset class.”
* RioCan REIT (REI.UN-T) with a $25 target. Average: $25.
Analyst: “REI owns what we view as defensive retail assets predominantly located in Canada’s largest markets. It also offers investors value and earnings upside through its robust development pipeline, which includes significant exposure to multi-residential projects. We believe the REIT’s management team is gaining a reputation for transparency and execution, and we like the formal introduction of near- and long-term targets. In our view, the current valuation represents a compelling entry point for what we view as a core REIT holding with peer-leading earnings growth.”
Mr. Kalmar gave SmartCentres REIT (SRU.UN-T) a “hold” rating and $29.50 target, below the $30.44 average.
“SRU offers investors access to what is effectively a pure-play, open-air retail portfolio in the Canadian REIT space. Including shadow anchors, 70 per cent of its centres are anchored by Walmart,” he said. “Virtually all other properties are anchored by a national grocer, Canadian Tire or home improvement retailer or, in many cases, a combination of the two. In our view, the REIT’s development pipeline, while exceptionally robust, adds a layer of complexity to the story, including around project funding, particularly given SRU’s elevated payout ratio. Moreover, the REIT has a complicated governance structure—namely, its relationship with Mitchell Goldhar and The Penguin Group. This gives rise to potential conflicts of interest, something investors are increasingly cautious of in light of the enhanced focus on ESG. While we like the REIT’s open-air centre retail portfolio, its strong tenant mix with a focus on essential retailers, as well as its expansive development pipeline, we believe SRU is fairly valued in the context of the current macro environment, its governance structure and its comparatively limited organic growth profile.”
The analyst upgraded two REITs to “buy” from “hold” recommendations after assuming coverage from colleague Kyle Stanley. They are:
* Choice Properties REIT (CHP.UN-T) with a $16 target, up from $15.50. Average: $15.69.
Analyst: “We view CHP as a beacon of stability within the Canadian REIT sector from which investors can expect consistent low- to mid-single-digit earnings growth on top of the current 5.3-per-cent distribution yield. In an increasingly uncertain environment, we believe CHP’s portfolio is very well-insulated from an economic slowdown owing to its large size, asset composition and tenant mix. In our view, the introduction of formal FFOPU [funds from operations per unit] guidance and the first annual distribution increase since 2017 underscore management’s confidence in the underlying business. We also like the REIT’s measured approach to development and we see meaningful growth opportunities in its retail, industrial and residential portfolios, although the latter is more of a medium- to longer-term catalyst. We believe the REIT’s current valuation is attractive in the context of strengthening market fundamentals in its two core asset classes. We also see its target of 8–10-per-cent annual total returns as very achievable. CHP has generated a 10.2-per-cent annualized total return since its IPO and an 11.3-per-cent annualized total return since the acquisition of Canadian REIT (CREIT) in 2018.”
* Crombie REIT (CRR.UN-T) with an $18 target (unchanged). Average: $18.04.
Analyst: “We view CHP as a beacon of stability within the Canadian REIT sector from which investors can expect consistent low- to mid-single-digit earnings growth on top of the current 5.3-per-cent distribution yield. In an increasingly uncertain environment, we believe CHP’s portfolio is very well-insulated from an economic slowdown owing to its large size, asset composition and tenant mix. In our view, the introduction of formal FFOPU guidance and the first annual distribution increase since 2017 underscore management’s confidence in the underlying business. We also like the REIT’s measured approach to development and we see meaningful growth opportunities in its retail, industrial and residential portfolios, although the latter is more of a medium- to longer-term catalyst. We believe the REIT’s current valuation is attractive in the context of strengthening market fundamentals in its two core asset classes. We also see its target of 8–10-per-cent annual total returns as very achievable. CHP has generated a 10.2-per-cent annualized total return since its IPO and an 11.3-per-cent annualized total return since the acquisition of Canadian REIT (CREIT) in 2018.”
Mr. Kalmar maintained the firm’s “hold” recommendation and $17 target for CT REIT (CRT.UN-T). The average is $17.33.
“CRT is effectively a triple-net-lease REIT which should continue to deliver consistent, albeit modest, FFOPU growth through 2024,” he said. “The REIT’s development pipeline is primarily focused on the intensification of existing stores. The successful execution of the 3-million-square-feet Canada Square development (joint venture with Oxford) is a longer-term catalyst, in our view. Canadian Tire holds a 69-per-cent effective interest in the REIT, which somewhat limits trading liquidity and allows the retailer to exert significant influence. CTC also accounts for 91 per cent of base rents and drives the majority of the REIT’s acquisition and development activity. While we believe CRT is well-positioned to withstand an economic downturn, given its relatively modest near-term earnings growth profile, limited trading liquidity and current valuation, we are maintaining our Hold rating.”
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Touting its “strong and growing” market and “improving” financial health, National Bank Financial analyst Endri Leno assumed coverage of CES Energy Solutions Corp. (CEU-T) with an “outperform” recommendation.
“Our investment thesis is based on expectations that, as the current growth cycle matures, CEU will be in a favourable position to return capital to shareholders via 1) cash flows from operations (we est. $288-million to 2024 year-end pre-WC); and 2) harvesting of cash from working capital (est. $45-million to 2024YE),” he said. “While we are not taking a specific position on how CES might choose to return capital, we note that the current dividend and yield are near the upper range of the last 6-7 years whereas 2022 buybacks were below those of the preceding four years.”
Mr. Leno said the Calgary-based company has expanded from its initial presence in the Western Canadian Sedimentary Basin “via both acquisitions and, particularly of late, organically.” With this expansion, he now sees it set to reward shareholders.
“We estimate that the company had 22-per-cent market share in North American drilling fluids in 2022 (36 per cent in Canada & 18 per cent in U.S.) up significantly from an estimated 8 per cent in 2010,” he said. “Similarly, CEU’s global drilling fluid market share has grown from 3 per cent in 2015 to 8 per cent in 2022, while its production chemicals global market share has grown from 3 per cent in 2015 to 5 per cent in 2022 (note that the market grew an estimated 50 per cent year-over-year in 2022 and CEU had 6-per-cent market share in 2021). We expect CEU to continue gaining market share due to its 1) industry leading infrastructure; 2) patented products; 3) nimbleness, reliability and responsiveness to customer needs and changing conditions at the rig; 4) increasing exposure to larger operators; and 5) particularly of late, reduced competition.”
“We view CEU’s balance sheet as countercyclical in that the company invests a significant amount of working capital (financed with debt) during periods of high growth that is subsequently harvested (and debt reduces) when growth normalizes. As oil and gas activity recovered following the initial pandemic impact, CEU’s net debt and leverage increased to accommodate the growth but, as industry activity stabilizes, have both crested in Q3/22 (at $560-million est.) and Q1/21 (at 4 times est.), respectively. We expect both net debt and leverage (net debt to TTM [trailing 12 months] Adj. EBITDA) to continue decreasing into 2024YE to $130-million (from $551-million in Q4/22) and to 0.4 times (from 2.1 times in Q4/22), respectively. Also, note that even on a total (current) debt basis CEU’s leverage (total debt to TTM Adj. EBITDA) will tick down to 1.6 times at 2024YE (from 2.1 times at 2022Y).”
Seeing its valuation as attractive versus the historical spread with peers, Mr. Leno set a target of $4.50 per share.
“Trading at just 3.9 times 2024 estimated EV/EBITDA and 4.7 times 2024 estimated P/CF [price-to-cash flow], CEU is in our view unjustifiably cheap at a 46-per-cent current discount (versus 31-per-cent historical discount) to its peers that trade at 7.2 times 2024 estimated EV/EBITDA and 13.0 times 2024 P/CF,” he said. “We use the historical discount rate as guide for our $4.50 CEU target price, which implies 2024 estimated EV/EBITDA of 5.5 times and 8 times 2024 estimated P/CF).”
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Seeing “the Covid-19 era supply chain, logistics, and inflationary challenges now largely behind us,” Stifel analyst Alex Terentiew sees view 2023 as the first real opportunity for Victoria Gold Corp.’s (VGCX-T) Eagle mine to “impress investors with its potential.”
“Several factors combine to underpin what we forecast to be an attractive 180+ kozpa operation with a 14+ year mine life, including: its attractive jurisdiction; a management team with region-specific experience; expectations that have been reset by an updated 2023 technical report with higher stacking rates; realistic and achievable operating costs; as well as revised and enhanced preventative maintenance, spare management, and labour retention practices learned from tough past lessons,” he said. “Additionally, we expect a steadily improving net cash balance will put the company in a good position to manage its financing obligations.”
Believing the technical report released earlier in March signals “valuation upside,” Mr. Terentiew initiated coverage of the Toronto-based miner with a “buy” recommendation on Friday.
“The March 2023 technical report, in our view, outlined a robust mining operation, with higher stacking rates and realistic operating costs supporting attractive economics,” he said. “With operating costs benchmarked to actual, recent costs, we forecast a 14-year mine life, 166-217 kozpa operation at a conservatively high AISC of $1,256 per ounce, with room for improvement. While we acknowledge that the mine has experienced some challenges since start-up during the Covid pandemic, we believe experience gained, revised engineering best practices, and minor operational changes augur well for more reliable and profitable performance.”
“We see the balance sheet improving steadily over the course of 2023. Net debt increased by approximately $50-million over the course of 2022, as gold in leach pad inventory rose by $44-million and capital expenditures were higher due to some one-time infrastructure spending. However, we anticipate gold in inventory to remain stable and operating performance to be improved in 2023. This should increase net cash by $44-million over the year and contribute an additional $93-million in 2024.”
He set a target of $14 per share. The current average is $15.81.
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Following Thursday’s release of fourth-quarter results that “sharply” exceeded his expectations, Canaccord Genuity analyst Aravinda Galappatthige has “robust” expectations for Boat Rocker Media Inc. (BRMI-T) in fiscal 2023.
“In our view, a decent performance in the current year, considering the softened macro backdrop, could drive an upwards re-rating for the stock,” he said. “The company is targeting ‘modest’ adj. EBITDA growth in F2023. Note that adj. EBITDA rose 14 per cent year-over-year in F2022 to $36.2-million, albeit well below the original guide of $40-50-million. Management’s outlook is supported by the expected delivery of the remaining episodes of the seven premium scripted series that were in production during 2022 as well as the expectation of higher distribution revenues (which carry higher margins) led by Boat Rocker’s expanding library and its ability to secure international distribution rights on key premium shows. We have kept our F2023 adj. EBITDA estimate just below last year to reflect the more cautious approach by streamers with respect to programme budget growth as well as uncertainty related to the Writers Guild strike. A more favourable outcome with respect to the guild strike could suggest upside to current estimates.”
Seeing the Toronto-based company as a ”deeply undervalued name, considering its diversified operations and solid balance sheet,” Mr. Galappatthige trimmed his target for its shares to $5 from $5.50, keeping a ”buy” rating. The average is $5.48.
Elsewhere, TD Securities’ Vince Valentini cut his target to $4 from $5.50 with a “buy” rating.
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Decent a difficult consumer environment, National Bank Financial analyst Vishal Shreedhar expects encouraging first-quarter results from MTY Food Group Inc. (MTY-T), seeing a “good” backdrop in Canada and “mixed trends” south of the border.
“We model solid trends in Canada and the U.S. supported by acquisitions and cycling restrictions in Canada year-over-year, in addition to inflation and adequate consumer health (during the quarter),” he said in a research note released Friday. “Investors will focus on outlook commentary and the consumer backdrop given ongoing macroeconomic concerns.”
Ahead of the April 12 quarterly release, Mr. Shreedhar is projecting adjusted earnings before interest, taxes, depreciation and amortization of $56.7-million, above the Street’s forecast of $54.6-million and up 59.1 per cent from fiscal 2022 ($35.6-million) with acquisitions (BBQ and Wetzel’s Pretzels) adding $16-million on a year-over-year basis. Revenue is expected to jump from $141-million to $283-million, also ahead of the consensus ($231-million).
“Government data indicates that U.S. and Canada real restaurant growth continues to outpace real food store growth, albeit with a narrowing gap,” said Mr. Shreedhar. “We note that U.S. data (up to Dec. 2022) indicates that restaurant spending, as a share of wallet, peaked during mid-2022 (55-per-cent-plus between Mar. 2022 to Oct. 2022) and has declined since Nov. 2022. Restaurants Canada data indicates an increasing percentage of Canadians intend to reduce restaurant spending (data up to Feb. 2023).”
The analyst said preserving the company’s store network is important moving forward, noting peer commentary “suggests a volatile operating backdrop.”
“Recall, last quarter MTY opened 60 new stores; however, store closures of 178 were higher than expected,” he said. “We understand that preserving network integrity and reducing store closures is a priority for management. We expect the market to be focused on MTY’s store footprint over the near term as investors seek reassurance that organic network losses have stabilized.”
“Our analysis of peer commentary from various North American restaurants indicates the following themes: (a) Persistent inflationary pressures; (b) Trade-down and focus on value; and (c) Higher check and lower traffic.”
After trims to his fiscal 2023 and 2024 revenue and earnings estimates to reflect the industry turmoil, Mr. Shreedhar lowered his target for MTY shares to $72 from $73, keeping an “outperform” recommendation. The average on the Street is $72.14.
“Despite near-term headwinds, we remain constructive on MTY given good valuation, operational progress, and supportive capital allocation outcomes such as share repurchases and/or acquisitions (although we expect this to be limited in the near-term),” he said. “That said, we also acknowledge heightened risk related to inflation, supply chain, labour, and general macro-economic conditions.”
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In other analysts actions:
* TD Securities’ Daniel Chan upgraded BlackBerry Ltd. (BB-N, BB-T) to “hold” from “reduce” and raised his target to US$4 from US$3.75. The average target on the Street is US$4.77.
* After a “strong finish to [a] record year” and calling its 2023 outlook “robust,” TD Cowen’s Daryl Young raised his target for shares of Geodrill Ltd. (GEO-T) to $4.75 from $4.50, which is the current average on the Street. He reiterated a “buy recommendation.
“Results significantly exceeded our estimates as we had forecast a greater impact from the delayed rainy season than what materialized,” Mr. Young said. “Recall, the rainy season in West Africa traditionally lands in the middle of Q3 but arrived very late this year and extended into early Q4. However, GEO was able to make up for the lost productivity in the back half of Q4 with November representing a record month.”
“In our view, Geodrill is a high-quality driller doing a good job growing its geographic footprint, expanding its service offering, and winning new senior/intermediate mining customers. We believe GEO is well-positioned to capitalize on the resurgence in drilling activity, with gold at constructive prices for exploration, and with seniors/intermediates relatively well-capitalized.”
* Scotia Capital’s Eric Winmill resumed coverage of Dundee Precious Metals Inc. (DPM-T) with a “sector outperform” rating and $12 target. The average is $11.81.
“Dundee Precious Metals is a Canadian-based intermediate diversified producer with operations in Bulgaria (Chelopech underground copper-gold mine and the high-grade Ada Tepe open-pit gold mine), and in Namibia (Tsumeb copper smelter that is used for processing of Chelopech’s copper-gold concentrates and high-margin, third-party complex concentrates),” he said. “In addition, Dundee owns two high-quality pre-development/exploration-stage projects: (1) the Loma Larga project in Ecuador, a copper-gold underground project containing 2.2-million-ounces of gold, and (2) the Timok and Čoka Rakita gold/copper projects in Serbia. In 2023, Dundee forecasts production of 265-310koz Au and production of 230-265koz Au in 2024E. Our SO rating is based on Dundee’s solid operating track record, strong free cash flow generation (with a 2023 estimated spot FCF yield of 17 per cent and dividend yield of 2.1 per cent), and balance sheet strength (cash of $433-million and no debt at year-end 2022) which we believe affords the company a unique opportunity to capitalize on its portfolio of organic growth and development projects.”
* Credit Suisse’s Andrew Kuske raised his Capital Power Corp. (CPX-T) target to $54 from $53.50 with an “outperform” rating. The average on the Street is $51.38.
“On March 1, Capital Power Corporation’s (CPX) reported results with a mixed impact on EPS and EBITDA versus expectations (ours and the Street),” he said. “To us, CPX is at the epicenter of several increasingly important themes that include: (a) renewable power capacity growth across many North American markets; (b) the transitional and option value associated with selected natural gas fired generation assets; and, (c) carbon capture related themes ... CPX continues to combine renewable development growth with selected asset acquisitions (largely natural gas facilities) to help deliver continued dividend growth from a relatively high level of contracted cash flows. Given CPX’s core business activities, many themes from the recent Canadian budget apply favourably to the underlying business”
* BMO’s Jackie Przybylowski raised her Street-high target for Hudbay Minerals Inc. (HBM-T) target to $15 from $14 with an “outperform” rating. The average is $9.45.
* TD Cowen’s Jeffrey Osborne lowered his target for Toronto-based Li-Cycle Holdings Corp. (LICY-N) to US$8, below the US$8.29 average, from US$10 with an “outperform” rating.
* Canaccord Genuity’s John Bereznicki trimmed his Loop Energy Inc. (LPEN-T) target to $1.25 from $1.40, reiterating a “hold” rating. The average is now $1.68.
“Loop believes it is funded through 2023, but given current fundamental headwinds and limited capital availability, the company does not believe it can scale up as quickly as it had planned,” he said “Management is now guiding for 2023 unit sales and revenue to be in line with (or slightly ahead of) 2022 levels and is exploring strategic alternatives. We are substantially lowering our revenue estimates to reflect the company’s reduced guidance and adjusting our cash burn expectations to incorporate its Q4/22 results. We view Loop’s revised outlook and limited capital availability as reflective of a very challenging macro environment. While Loop enjoys a strong technology platform, we believe the company faces significant uncertainty, with any funding options likely to be costly.”
* Canaccord Genuity’s Matt Bottomley reduced his target for Verano Holdings Corp. (VRNO-CN) to $13.50 from $15 with a “buy” rating, while Echelon Partners’ Andrew Semple lowered his target to $14 from $17 with a “buy” rating. The average is $15.13.
“We are reiterating our BUY recommendation and are lowering our PT ... for VRNO following the release of its Q4/22 financial results that, although were slightly lower on a sequential basis, were generally in line with our expectations and management’s previously issued outlook,” Mr. Bottomley said. “Most notably, the company continues to hold on to one of the higher margin/cash flow profiles in an industry that is still challenged by ongoing inflationary/pricing headwinds.”