Inside the Market’s roundup of some of today’s key analyst actions
After another quarter of “big” losses, there are “too many moving parts to have any confidence” in Aecon Group Inc. (ARE-T), according to the National Bank Financial analyst Maxim Sytchev, who believes “nagging fixed price portfolio losses keep the outlook murky.”
Shares of the Toronto-based construction company plummeted 12.1 per cent on following the late Wednesday release of weaker-than-anticipated third-quarter results. Revenue fell 6 per cent year-over-year to $1.24-billion, meeting Mr. Sytchev’s $1.237-billion estimate but missing the Street’s expectation of $1.285-billion. Consolidated adjusted EBITDA of $32-million was “materially” below both the analyst’s $74-million projection and the Street’s forecast of $81.7-million due largely to project writedowns. That led to adjusted earnings per share of a loss of 3 cents, adjusting for the gain on sale of its 49.9-per-cent interest in the Bermuda International Airport concessionaire and the non-cash remeasurement gain of the existing 50-per-cent stake, which also fell short of estimates (48 cents and 46 cents, respectively).
In a research note titled Hard to gauge the depth of internal issues, Mr. Sytchev summarized the conference call with Aecon’s management that followed the earnings release as “trying to put a positive spin on an uncomfortable situation.”
“While ARE continues to chip away at the problematic portfolio and has reached some settlements on three of the projects, the $528-million backlog remains substantial,” he said. “Since the last of the projects is not expected to be completed until 2025, there remains significant risk of further incremental write-downs. While management suggested that working capital commitments for the four projects is likely to inflect, the inherent uncertainty of closing out such large and complex projects (and associated legal processes) suggests little visibility on this front.”
“Management noted that pro-forma leverage stands at 1.2 times net debt to EBITDA following the Oaktree transaction, which is below management’s target of 2.0 times to 3.0 times. That being said, recent asset monetization initiatives have traded off balance sheet relief for long-term cash generation. We continue to expect negative FCF for the remainder of the year and in 2024 which, combined with management’s commitment to maintaining the 8-per-cent dividend, suggests leverage will continue to tick up for the foreseeable future. As such, optionality in capital deployment is likely to remain constrained.”
Mr. Sytchev also warned the company’s balance sheet is “not out of the woods” after Monday’s announcement of a $150-million strategic investment from Oaktree Capital Management LP, which acquires a 27.5-per-cent stake in subsidiary Aecon Utilities Group Inc. He said he does not see positive free cash flow generation coming “any time soon.”
“In our Oaktree/utilities note (A win for Utilities business; more nuance needed at the consolidated level), we stated that we remain leery of further write-downs as the losses continue to accumulate,” he said. “Despite the recent asset monetization, leverage at an estimated 1.3 times net debt to EBITDA will get worse, in our view. With a lack of wrap-up dates on some of the key problematic projects, visibility around profitability/FCF generation remains difficult if not impossible to analyze when using Fluor, McDermott, KBR, Carillion, SNC precedents (i.e., bad projects rarely get better). As a result, we continue to observe from the sidelines.”
Maintaining a “sector perform” recommendation for Aecon shares, Mr. Sytchev lowered his target by $1 to $11 after citing his estimates for the remainder of 2023 as well as 2024. The average target on the Street is $13.65.
Elsewhere, others making target changes include:
* ATB Capital Markets’ Chris Murray to $15.25 from $16.25 with an “outperform” rating.
“Results were much weaker than expected, with a significant profit miss reflecting $91.1-million in losses tied to two legacy projects,” said Mr. Murray. “Performance was stronger in Concessions as activity levels at the Bermuda Airport reflect normalizing travel patterns. While ongoing challenges at legacy projects will likely limit earnings visibility and weigh on sentiment for the next several quarters, underlying performance (ex. legacy projects) remains very strong, and the demand environment firm, keeping us constructive on the longer-term outlook.”
* TD Securities’ Michael Tupholme to $10.50 from $11.50 with a “hold” rating.
“Although we are inclined to believe that losses related to Aecon’s four large fixedprice legacy projects will be less significant going forward, we continue to have concerns around the potential risks associated with these projects, and we remain of the view that upside in ARE’s stock price will be limited until evidence of improved financial performance on these projects is observed,” said Mr. Tupholme.
* RBC’s Sabahat Khan to $10 from $12 with a “sector perform” rating.
“The results shortfall reflected sizable losses recognized in Q3 associated with the 4 legacy fixed price projects that Aecon had previously called out. Given the potential for further losses associated with these projects, we continue to maintain a cautious view on Aecon shares,” said Mr. Khan.
* BMO’s Devin Dodge to $14.50 from $14 with an “outperform” recommendation.
“While the headlines from Aecon’s Q3/23 results suggest more challenges on its legacy fixed-price projects, we believe there are positive takeaways coming out of the quarter,” said Mr. Dodge. “Claims settlements continued to materialize which supported significantly improved cash flow performance while the operating losses recognized do not reflect upward revisions on projected costs to complete. Going forward, the legacy projects are expected to be a margin drag through completion but should be closer to neutral on a cash flow basis.”
* CIBC’s Jacob Bout to $12.50 from $13 with a “neutral” rating.
“We see Oaktree as a credible partner for ARE, helping the company to accelerate growth in its utilities platform in the U.S. We also continue to see value in ARE’s longer-term strategy with its exposure to nuclear, utilities and infrastructure. However, we would like to see the company work down more of the legacy fixed-price backlog to mitigate potential losses,” said Mr. Bout.
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After “strong” third-quarter operational and financial results, RBC Dominion Securities analyst Tom Callaghan thinks FirstService Corp.’s (FSV-N, FSV-T) business “continues to perform well, and the long-term opportunity remains attractive.”
“Though Q4 will roll up against a tougher set of growth comps, underlying momentum across both divisions continues,” he said in a note released Friday.
Before the bell on Thursday, the Toronto-based residential properties manager and commercial property services provider reported revenue of USUS$1.12-billion, up 16 per cent year-over-year and exceeding the Street’s expectation by 4 per cent (US$1.07-billion). Adjusted earnings per share jumped 7 per cent to US$1.25, in line with analysts’ forecasts and driven by better-than-anticipated organic growth from both its FirstService Residential (FSR) and FirstService Brands (FSB) divisions.
“Residential momentum continues,” said Mr. Callaghan. “Organic growth of 9 per cent (12-per-cent total growth) was driven by new contract wins, as well as incremental service offerings to existing customers. The company noted a continued easing in labour markets (a headwind through the pandemic), which along with continued pricing gains on renewals (circa 3 per cent vs. 1-2 per cent historically) should support organic growth in the mid-to-high single digit range.”
Emphasizing the company’s outlook is “intact,” the analyst now expects revenue growth of 16 per cent in 2023 and 6 per cent in 2024, rising from his previous projections of 14 per cent and 7 per cent.
“This outlook reflects significant named-storm related activity in 1H/23, with negligible contributions in 2024, along with inorganic growth of 5 per cent in 2023E and an estimated 3 per cent in 2024,” said Mr. Callaghan. “FirstService will provide its 2024 outlook with Q4/23 results next February.”
Maintaining an “outperform” recommendation for its shares, he raised his target to US$178 from US$173. The average is US$158.84.
Elsewhere, others making changes include:
* Scotia Capital’s Michael Doumet to US$155 from US$161 with a “sector outperform” rating.
“For 4Q23, FSV expects flattish EBITDA (no change from consensus) – and for 2023 overall, sales growth “in the mid-teens” (‘in the low teens’ previously) with EBITDA growth in line with sales growth,” said Mr. Doumet. “For 2024, management commentary suggests a slowing FSR revenue growth trends (although above historical average) and tougher comps in FSB, in part due a lower storm-related backlog (so far). While the macro is slowing (and pricing gains are moderating), FSV continues to show that it is able to outgrow the markets it operates in through market share gains and tuck-in M&A (its M&A pipeline remains reasonably active). Net–net, our 2024E EBITDA is unchanged. We introduced our 2025E, rolled forward our valuation, and trimmed our valuation multiple, the latter on the basis of higher 10y rates and the implications for high-multiple stocks.”
* BMO’s Stephen MacLeod to US$174 from US$177 with an “outperform” rating.
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Desjardins Securities analyst Chris MacCulloch said he was “initially a little taken aback by the negative response” from investors toward Whitecap Resources Inc.’s (WCP-T) third-quarter results and 2024 guidance.
The company’s shares dropped 4.7 per cent on Thursday, underperforming his Canadian mid-cap oil-weighted peers despite reporting largely in-line results, including cash flow beat, and a budget for next year that also met production and financial expectations.
“The frosty reception appears to have been primarily driven by the 2024 capital budget release, which included upwards of $250-million of incremental spending relative to 2023 levels (at the top end of the range), partially a function of planned infrastructure investments as WCP continues laying the foundation for future expansions to productive capacity in both the Montney and Duvernay,” Mr. MacCulloch said.
“Regardless, we do not expect asset development to remain the sole focus of the story heading into 2024. With the company having now taken the better part of 18 months to fully digest last year’s strategically transformative acquisition of XTO Energy Canada, we expect WCP to resume looking for opportunities to build additional corporate scale while expanding its footprint in both the Alberta Montney and Kaybob Duvernay plays—potentially via strategic partnerships—but if necessary, through accretive M&A. With respect to the latter, we expect a strong emphasis on packages that include operated facilities given the company’s preference for owning and operating infrastructure, which could provide operational synergies and an opportunity to taper future infrastructure spending. Meanwhile, balance sheet support for planned organic growth and potential M&A opportunities alike remains solid, with net debt now tracking below the $1.3-billion corporate target and continuing to moderate.”
Seeing Whitecap “laying the foundation for Montney and Duvernay growth,” he updated his projections to account for the quarterly results, raising his capital expenditure assumptions as well as “modestly” reducing his production estimates.
“We retain our constructive outlook for WCP given its strong balance sheet and Montney/Duvernay drilling inventory depth,” he said.
Keeping a “buy” recommendation, he trimmed his target to $13.50 from $14. The average is $14.33.
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Following “extremely constructive” investor meetings with 5N Plus Inc.’s (VNP-T) executive team, including CEO Gervais Jacques, Raymond James analyst Michael Glen raised his recommendation for the Montreal-based producer of specialty semiconductors and performance materials to “strong buy” from “outperform” previously.
“In speaking with investors, our understanding is that recent share price pressure relates predominantly to general weakness in solar stocks as a group, and 5N Plus being lumped into this trade,” he said. “We believe this is a short-sighted view of the company and efforts made by management to change the growth profile and product mix of the company.”
In justifying his bullish stance, Mr. Glen pointed to several factors, including its relationship with First Solar Inc. (FSLR-Q), which has seen “massive” volume growth, as well as “a rather large opportunity” for internal margin expansion growth.
“During our marketing, management strongly reiterated guidance for $35-40-million of EBITDA in 2023, and $45-50-million EBITDA in 2024,” said the analyst. “VNP will provide 2025 EBITDA guidance in early 2024 where management has a positive early read given FSLR and AZUR.
“Regarding cyclicality, if we assess the company’s three largest businesses: First Solar, AZUR, and Bismuth, these would represent approximately 85 per cent of our 2024 estimated revenue. We believe these businesses will hold up extremely well in a recessionary environment and see very limited recession risk surrounding 5N Plus stock.”
Also anticipating “strength in results will lead to further deleverage,” Mr. Glen maintained a $5 target for its shares. The average is $4.85.
“The stock current trades at approximately 5.6 times 2024 estimated EBITDA,” he said. “This is for a company that will organically grow its EBITDA by 60-per-cent-plus over the course of 2022-2024. And all indications from our recent management meetings is that the 2024+ outlook remains solid.”
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In other analyst actions:
* Scotia Capital’s Ovais Habib raised his target for Alamos Gold Inc. (AGI-N/AGI-T, “sector outperform”) to US$15 from US$14 and lowered his target for OceanaGold Corp. (OGC-T, “sector outperform”) to $4 from $4.25. The averages are US$14.21 and $4.19, respectively.
* RBC’s Pammi Bir cut his Allied Properties REIT (AP.UN-T) target to $21, below the $23.32 average on the Street, from $27 with an “outperform” rating, while CIBC’s Sumayya Syed lowered her target to $19.50 from $21 with a “neutral” rating.
“Post an in line Q3 print, the overall tone from results leans positive, particularly with management emphasizing its commitment to the distribution program,” said Mr. Bir. “Guidance calling for occupancy gains is also encouraging, though we think investors are taking a show me approach. We curbed our price target as sector valuations have dialled back amid higher rates. Still, with a stronger balance sheet, moderate growth, and trough AFFO multiple, we see a good margin for error.”
* TD Securities’ Linda Ezergailis cut her Atco Ltd. (ACO.X-T) target to $48 from $50 with a “buy” rating. Others making changes include: BMO’s Ben Pham to $48 from $50 with a “market perform” rating and CIBC’s Mark Jarvi to $48 from $47 with an “outperformer” rating. The average is $45.86.
“Third-quarter results were above our estimates, as weaker performance in CU was mostly offset by stronger-than-expected performance in Structures & Logistics and Neltume Ports. Structures & Logistics continued to benefit from stronger workforce housing and space rental activity, as well as incremental earnings from the acquired Triple M business, while results from Neltume Ports were lifted by incremental contribution from increased ownership of assets and favourable exchange rates,” she said.
“We continue to believe ATCO’s long-term growth prospects are positive, largely driven by its Structures & Logistics business, a 40-per-cent interest in Neltume Ports, and a majority interest in Canadian Utilities. Through ATCO, investors can invest in CU at a slight discount and have leverage to the faster-growing Structures & Logistics business, and in Neltume Ports, in our view.”
* Ahead of the Nov. 10 release of its quarterly results, Desjardins Securities analyst Gary Ho lowered his Boyd Group Services Inc. (BYD-T) to $270 from $280 with a “hold” rating. The average is $280.15.
“We trimmed our SSSG [same-store sales growth] for 3Q and 4Q given tough comps and introduced our 2025 estimates,” he said. “An update on the impact from the extended UAW strike will be topical. We expect a small 2.1-per-cent dividend increase to be announced alongside results. Our target declines ... on slightly lower estimates and valuation (reflecting peers’ multiple compression), partially offset by rolling our valuation forward one quarter and higher FX.”
* Stephens’ Justin Long trimmed his Canadian Pacific Kansas City Ltd. (CP-N, CP-T) target to US$78 from US$79, keeping an “equal-weight” recommendation. The average is US$88.64.
* National Bank’s Patrick Kenny bumped his Canadian Utilities Ltd. (CU-T) target to $33 from $32 with a “sector perform” rating. Other changes include: BMO’s Ben Pham to $35 from $37 with a “market perform” rating, TD Securities’ Linda Ezergailis to $35 from $37 with a “buy” rating and CIBC’s Mark Jarvi to $35 from $34 with a “neutral” rating. The average is $36.19.
“CU’s reported normalized EPS was below our estimate as our modelled impacts from COS rebasing on the Electricity Distribution segment were partially offset by timing of expenses,” said Ms. Ezergailis. “Our estimates also incorporated a heavier assumption on corporate costs and forecasted weaker performance from the utility operations in Australia. Compared with Q3/22, CU’s distribution utilities were impacted from operating in a COS rebasing year, while utility operations in Australia did not enjoy the same level of benefit from higher inflation levels. Partially offsetting weaker results were rate base growth and new cost efficiencies.”
* Canaccord Genuity’s Robert Young raised his Celestica Inc. (CLS-N, CLS-T) target to US$29, matching the average, from US$24 with a “buy” rating, while BMO’s Thanos Moschopoulos bumped his target to US$27 from US$22 with an “outperform” recommendation.
“While the stock’s selloff suggests that the market was looking for a bigger beat and/or a better Q4/23 guide, we believe the fact that CLS raised FY2024 EPS guidance this early, despite an uncertain macro backdrop, speaks to its demand visibility heading into next year,” said Mr. Moschopoulos. “We see further room for multiple expansion relative to peers given CLS’s strong execution in recent years (specifically, with respect to margin improvement and market share gains).”
* RBC’s Jimmy Shan lowered his StorageVault Canada Inc. (SVI-T) target to $6, above the $5.81 average, from $6.50 with an “outperform” rating, while National Bank’s Matt Kornack bumped his target to $5 from $4.75 with a “sector perform” rating.
“SPNOI [same-property net operating income] growth momentum reversed course this quarter, coming in at 4.7 per cent compared to prior quarters this year of 6.3 per cent in Q1 and 2.2 per cent in Q2, each stacking up against prior year double-digit SPNOI growth measures,” said Mr. Kornack. “As COVID-use demand began waning in Q2 of last year, we expect a return to a more normal growth profile going forward as SVI laps periods of softer occupancy. We anticipate that with organic operations finding a foothold, SVI will continue focusing its efforts on prioritizing rate increases to drive growth. Year-to-date SPNOI growth now rests at 4.3 per cent, putting it on track to meet at least the lower end of its typical 4-6-per-cent range. SVI reiterated its acquisition target of $70-100-million for 2023, having closed $32-millionso far for the year. The slower acquisition pace has allowed SVI to allocate retained cash flows to buybacks ($11.5-million during Q3) and facility upgrades to maintain a competitive positioning.”
* After attending a tour of its Kiena mine in Vald’Or, Que., and Eagle mine in Wawa, Ont., National Bank’s Don DeMarco trimmed his target for Wesdome Gold Mines Ltd. (WDO-T) to $10.25 from $11, keeping an “outperform” rating. Elsewhere, Desjardins Securities’ John Sclodnick lowered his target to $8 from $8.25 with a “hold” rating. The average target is $9.66.
“Little was provided by way of new material information or mine plan updates, yet building on the refreshed perspective we updated our model. We estimate a modest FCF inflection point next year with $7-million, $70-million and $130-million in each of 2024, 2025 and 2026, respectively, subject to confirmation with two-year guidance pending in Jan. 2023,” said Mr. DeMarco. “Our NAV eased slightly as we adjusted costs and capex in some cases providing a buffer above the rough company narrative on the tour.”
“Overall, we ascribe a neutral bias to the mine tour with our thesis unchanged and focused on exploration upside at Eagle and Kiena, outlook for FCF harvesting after Kiena ramped up, spare mill capacity at both mills meaning exploration can deliver immediate returns, production growth, FX tailwinds with an all-Canadian portfolio, tempered by operational challenges, nearterm cash burn, labour pressures and deleveraging.”
* RBC’s Paul Quinn lowered his West Fraser Timber Co. Ltd. (WFG-N, WFG-T) target to US$95 from US$100. The average is US$95.72 with an “outperform” rating.
“We continue to like West Fraser’s low-cost focus and strong balance sheet (i.e., a significant net cash position) in a demand environment that is seeing affordability headwinds, and reiterate our Outperform rating,” said Mr. Quinn.
* BMO’s Stephen MacLeod lowered his Winpak Ltd. (WPK-T) target to $46 from $47 with a “market perform” rating. The average is $51.75.
“Revenue was in line and down year-over-year on lower volumes (down 6.0 per cent vs. negative 5.5-per-cent forecast), while EBITDA margins were below forecast (lower GM, higher SG&A),” he said. “The near-term volume outlook is mixed, with consumer demand headwinds weighing on Q4 (volumes up 0-2 per cent) and likely H1/24E. Longer-term volume outlook remains constructive (new capacity additions). Resin prices have declined (approximately 71 per cent revenues indexed, 90- to 120-day lag), leading to a stable margin outlook for the Q4 and 2024.”