Inside the Market’s roundup of some of today’s key analyst actions
Seeing its three-year transformation program starting to “take shape,” National Bank Financial analyst Adam Shine raised his rating for Cogeco Communications Inc. (CCA-T) to “outperform” from “sector perform” with high expectations for the Oct. 31 release of its fiscal 2025 guidance as well as a dividend increase.
“On May 29, CCA outlined its new organizational structure with an effort to drive rev/cost initiatives,” he said. “We expect some savings in fiscal 2025 with more to come in Years 2 & 3 given reinvestment in digitization/analytics. It remains to be seen how early efforts in wireless will impact forward results (EBITDA down 1 per cent & FCF down 10 per cent in fiscal 2024), but f2025 consensus for flat revs and a 0.5-per-cent rise in EBITDA needs to be improved upon by new CEO. Subject to BEAD involvement (could prove less than expected), we look for FCF to strengthen after three years of declines for network expansion efforts, with leverage starting to come down again after two years of increases. We’ll see if U.S. asset sales occur.”
For the quarter, Mr. Shine is currently projecting revenue of $754.6-million, rising 1.5 per cent year-over-year and above the consensus projection of $750.4-million with Cable Services gains on both sides of the border. He’s forecasting earnings before interest, taxes, depreciation and amortization (EBITDA) of $361.2-million, up 2.8 per cent and also above the Street’s expectation of $359.8-million, while he sees fully diluted earnings per share of $1.82, a drop of 6.5 per cent but also topping his peers ($1.81).
“4Q outlook ex-FX called for stable revenues and low single digit growth in EBITDA,” he said. “We have FX up 2.7 per cent and sit higher than Street on U.S. revenues and just above on EBITDA. Restructuring costs were said to be less than those in 3Q. FCF could beat as capex has been trending lower, while we’ll see if a profit beat occurs after 3Q upside on efficiencies and corporate cost timing.”
After adjusting his valuation, Mr. Shine hiked his target for Cogeco Communications shares to $80 from $64. The average on the Street is $71.15, according to LSEG data.
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CIBC World Markets analyst Paul Holden made a pair of rating changes to Canadian banks on Friday.
He raised Bank of Nova Scotia (BNS-T) to “outperformer” from “neutral” and increased his Street-high target to $82 from $78. The average target is $70.34.
“Our BNS upgrade is primarily premised on potential upside to consensus EPS, early indications of execution against its strategic plan, and a discounted valuation multiple,” he said.
“BNS could post the highest, or among the highest, EPS CAGRs through F2026 premised on its differentiated rate exposure (NII benefits from rate cuts) and tailwind from declining PCLs. F2026 consensus EPS implies a two-year CAGR of 11 per cent, tied for highest with BMO. We also see potential upside to consensus EPS based on NIM expansion from funding mix improvement, realization of expense efficiencies and lower PCLs (all part of the strategic plan). Early evidence of execution against plan supports an argument for including some of the intended earnings benefits in our forecasts. Other points that support a buy BNS argument include improving economic conditions in LATAM and potential upside from its share of earnings in KEY.”
Conversely, he downgraded National Bank of Canada (NA-T) to “neutral” from “outperformer” with a $135 target, exceeding the $127.38 average.
“Our downgrade of NA is premised on relative valuation and less emphasis on the need to play defense within banks, both of which support the argument for switch trades from higher multiple bank stocks to lower multiple bank stocks,” said Mr. Holden.
He added: “We also like TD for a switch trade. TD is trading at a 7-per-cent discount to the group average P/E (NTM [next 12-month] consensus) vs. a historical premium of 5 per cent. We expect the discount to narrow when an AML global settlement is reached, which is expected by end of 2024. Despite the AML costs, TD is still a top three Canadian bank for ROE, organic capital generation and has a strong deposit franchise. TD has been posting solid fundamental results, and we think concerns over future earnings growth have been exaggerated. We also believe the CEO succession signals a global AML settlement is close.”
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Believing its “best-in-class EBITDA growth should drive outperformance,” TD Cowen analyst Vince Valentini named Rogers Communications Inc. (RCI.B-T) to the firm’s “Canada Best Ideas” list on Friday.
“RCI.B maintains best-in-class wireless operational execution, and industry- leading 2024 EBITDA growth,” he said in a research note. “RCI.B has a clear path to debt reduction through FCF generation and asset sales. However, RCI.B trades at a discount of 14 per cent/18 per cent on FY24E/FY25 estimate EBITDA relative to BCE/T [BCE Inc.]. Additional debt leverage will provide torque for RCI.B as telco sentiment keeps improving.”
Mr. Valentini emphasized Rogers’ strength and outsize exposure in the Wireless industry, which he thinks “remains healthy.”
“Industry ARPU [average revenue per user] trends have been weak LTM [last 12 months], but price discipline has improved in the past two months,” he said. “Volume growth is robust (only 92-93-per-cent penetration, versus 120 per cent in U.S.) and both opex and capex are declining. Rogers is the leader in this wireless industry on market share, spectrum holdings, sub adds (led the group on net adds in 11 of the last 12 quarters - annual adds shown in following pages), ARPU growth, EBITDA growth, and EBITDA margins. We expect Rogers to continue to lead incumbent peers on sub adds and ARPU growth in Q3/24.”
“Despite sluggish cable revenue growth, wireless leadership and big opex reduction in cable are driving industry- leading EBITDA growth. We estimate that Rogers will have consolidated EBITDA growth of 12 per cent in 2024 (up 6-per-cent organic), versus BCE at 2 per cent, and TELUS and Quebecor both at 3 per cent (organic, with QBR at 7 per cent reported).”
Believing its valuation discount should narrow as its debt leverage declines, Mr. Valentini reaffirmed a “buy” recommendation and $74 target for Rogers shares. The current average is $68.21.
“The main reason, in our view, why RCI.B trades at a 18-per-cent lower 2025E EV/EBITDA multiple versus BCE/T (42 per cent lower on P/E), is because of excess debt following the Shaw acquisition,” he said. “This is an easy to fix problem with the passage of time, given pending non-core asset sales and excess FCF post dividends to repay debt (RCI.B payout ratio estimated at 42 per cent in 2025 versus over 100 per cent for BCE/T). We forecast debt/EBITDA of 4.2 times at the end of 2025 (versus 4.7 times today), which would be closer to peers around 3.6 times (our FY24E leverage estimates for peers sit at 3.8 times). Meanwhile, more debt as a percentage of EV should drive more equity torque to the upside over the next year as the Bank of Canada lowers rates and as telco ARPU sentiment improves/stabilizes.”
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Investor sentiment around MDA Space Ltd. (MDA-T) is “improving on backlog funding and visibility,” according to RBC Capital Markets analyst Ken Herbert, who sees it “well positioned for incremental satellite contracts.”
“Telesat (TSAT) has recently completed agreements with the Canadian Government for the full $2.5-billion in funding for the Telesat Lightspeed program, of which MDA has booked $2.1-billion in backlog as the prime satellite contractor,” he said. “MDA recently also announced that construction is underway on the expansion at its satellite production facility that will double manufacturing capacity. We view the milestones as positive for the ramp in revenue within Satellite Systems.”
“Despite having already booked the $2.1-billion in backlog, a common question across investors was how much risk should be assigned to Telesat not finalizing funding for Lightspeed (although this had prevented Telesat from ramping its spending on MDA). With funding now fully secured by Telesat, we believe investors see the backlog as a floor to current valuation. We model Telesat to contribute $180-million of revenue in 2024, $500M in 2025, and over $700-million in 2026. MDA has also selected and onboarded over 90 per cent of suppliers for the program, most recently selecting Airbus (AIR-FR) to deliver over 200 Sparkwing solar arrays. Although not adjusting estimates, we do see MDA’s revenue guide as conservative, and believe securing the supply chain is a key aspect of managing risk on the Telesat execution.”
After the Sept. 13 announcement that construction is underway on a 185,000 square foot expansion at its satellite production facility in Sainte-Anne-de-Bellevue, Que., which will be the world’s largest high-volume manufacturing facility in its class, Mr. Herbert emphasized the Brampton, Ont.-based company is “wasting no time to increase satellite capacity” and sees free cash flow and capital expenditure as a “positive.”
“The company is planning to double satellite manufacturing capacity for its MDA Aurora production to meet demand, aiming to be able to deliver 2 satellites/ day exiting 2025,” he said. “The new facility expansion in Quebec is expected to be operational in 2H25. Some investors have pushed back on the expansion efforts beyond just the Telesat contract. However, the LEO satellites that MDA is building for Telesat are likely to have roughly 80 per cnet commonality across other future awards for LEO satellites.”
“Quarterly FCF of $110-million was a significant highlight coming out of 2Q24 results, as consensus previously expected MDA to use ($115-million) in FCF for FY24. We continue to estimate FCF of $315-million for FY24 and see the balance sheet as significantly de-risked.”
Reaffirming his “outperform” recommendation for MDA shares, Mr. Herbert raised his target to $20 from $18. The average is $17.71.
“We believe the focus is now on execution, but finalizing the funding for Telesat is a significant positive,” he said. “Assuming steady margins, we believe the growth in EBITDA and FCF will drive continued multiple expansion. We currently assign a 10.5 time multiple to our $267-million EBITDA estimate in FY25.”
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Ahead Element Fleet Management Corp.’s (EFN-T) investor site visit to Mexico, which is a key growth region, next week, TD Cowen analyst Graham Ryding update his valuation for its shares, resulting in an increased target.
“Mexico represents 22 per cent of Element’s revenue and is the highest growth region for the firm,” he said. “Annualized 1H/24 revenue from Mexico is up 41 per cent year-over-year and represents a 5-year CAGR [compound annual growth rate] of 35 per cent. Element is the leading auto fleet management company (FMC) in Mexico. The firm’s overall commercial growth strategy, and in particular, its focus on converting self-managed fleets, is heavily influenced by the firm’s success to date in Mexico. We are interested to hear about the growth drivers going forward, drivers behind Element’s competitive positioning (relative to other fleet management companies), and momentum behind the conversion of self-managed fleets. We are also interested to hear if there are any concerns over the recent constitutional reforms in Mexico.”
Reiterating his “buy” recommendation, Mr. Ryding moved his target to $32, exceeding the $30.19 average on the Street, from $30.
“A healthy order backlog and constructive originations outlook should be supportive of earnings growth,” he added. “Servicing growth remains strong. The self-managed fleet market appears to be a deep, and a multi-year opportunity. Element has an attractive ROE and FCF profile.”
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Scotia Capital analyst Phil Hardie said he came away from Definity Financial Corp.’s (DFY-T) inaugural Investor Day event impressed by its “operational platform and several of its leading-edge capabilities and more importantly, heightened conviction of its operating ROE upside.”
“The event highlighted its strong operational foundation, a deeper look at the multiple organic levers available to drive operating ROE expansion, growth opportunities, its financial strength and ongoing focus on M&A and integration readiness,” he said.
“Although not a new development, we believe an appreciation of the organic ROE enhancement initiatives has yet to be fully absorbed by investors, and the event helped advance this narrative. A new development coming from the event was that Definity is expecting to be entitled to $180-milllion of uncashed demutualization benefits in October. There is some uncertainty related to the tax implications, but we estimate this could potentially result in 5-per-cent favourable adjustment to book value in Q4/24. This will also add to its already robust levels of capital availability and financial flexibility.
Maintaining his “sector outperform” recommendation, Mr. Hardie raised his target for Definity shares to $53 from $51. The average on the Street is $53.10.
“We think increased investor awareness and confidence in the organic ROE enhancement plan are important to Definity’s investment thesis and valuation,” he added. “Another emerging factor is a shift in earnings mix, which will add to the relative resilience of the company’s ROE through the industry cycle. The changes include a better-balanced and more diversified insurance mix between commercial and personal property lines relative to highly regulated auto lines. There is also a shift toward less volatile sources of earnings, with distribution and investment income now contributing roughly half of operating income. We expect this to trend higher given the company’s focus on expanding its brokerage distribution platform, with management noting that contribution from distribution income could grow to approximately 30 per cent from current levels of 10 per cent. We believe demonstrated ROE resilience will be rewarded with a valuation premium.”
Elsewhere, TD Cowen’s Mario Mendonca raised his target to $55 from $52 with a “hold” rating.
“DFY has delivered on all its growth, profitability, and business mix targets,” he said. “A strong environment also supported the performance. This gives us confidence that DFY will successfully lift ROE by another 200-300 basis points (12.5 per cent) organically in the mid-term. However, at 1.9 times BV [book value], we believe investors have paid for this upside; and we believe it is premature to pay for the next ROE step-up, an acquisition.”
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