Inside the Market’s roundup of some of today’s key analyst actions
Pointing to its “recession-resilient operations and highly liquid shares,” Stifel’s Martin Landry thinks Dollarama Inc. (DOL-T) “continues to be a go-to name for most investors.”
He was one of a large group of equity analysts on the Street to raise their targets for the Montreal-based discount retailer following Friday’s release of stronger-than-anticipated second-quarter 2023 financial results, which sent its shares higher by 1.4 per cent.
“For the Q2FY23 results Dollarama was lapping an easy comparable period,” said Mr. Landry. “Hence, the SSS [same-store sales] growth of 13.2 per cent year-over-year and EPS growth of 37.5 per cent year-over-year are more representative when looked at over a three-year period which translate into SSS growth of 4.5 per cent and EPS growth of 15 per cent. Despite the strong demand for lower margin consumables, gross margins came in at 43.6 per cent, up 16 basis points year-over-year, resulting in flat gross margins in H1FY23. FY23 SSS guidance is increased to 6.5-7.5 per cent on the back of wallet share gains and new customer acquisition. Dollarama should continue to benefit from trade-down patterns seen in H1; hence, we see upside to management’s guidance, which appears to be conservative.”
Moving forward, Mr. Landry expects improvement from Dollarama’s margins, projecting them to come in at the higher end of management’s guidance range and also sees room for same-store sales gains.
“Gross margins in H1FY23 were flat year-over-year, despite the company selling a higher proportion of lower-margin consumables products and the continued impact of higher freight costs. The sustained margin performance to date has been partly driven by lower logistics costs, having a 30 basis points and 70 basis points positive impact in Q1-2. This dynamic is expected to reverse in H2 as inventory rolls through. Despite higher expected logistics costs, we expect Dollarama’s gross margins to come in at 43.8 per cent in the higher end of the 42.9-43.9-per-cent guidance driven by a continued stabilization of the supply chain and strength in seasonal products, carrying higher margins.”
“While the increase in the company’s SSS growth guidance was widely expected, we see further upside potential to the revised guidance. We have raised our SSS growth assumption to 7.8 per cent, higher than management’s guidance, as we believe that the trade-down momentum will continue this fall given high inflation and rising mortgage payments.”
Calling it a “market leader with sustainable competitive advantage” with an “attractive business model with significant control over margin,” Mr. Landry hiked his target to $88.50 from $82, maintaining a “buy” recommendation. The average target on the Street is $86.73, according to Refinitiv data.
“Dollarama’s 10 year EPS CAGR [earnings per share compound annual growth rate] of 19 per cent is remarkable, in our opinion. Its proven growth algorithm consists of: (1) Unit growth, with the company targeting to reach 2,000 stores by 2031, calling for a 4-per-cent unit growth CAGR. (2) Comparable store growth ranging from 4 per cent to 5 per cent. (3) Continued margin expansion driven by scale and operational efficiency. (4) History of returning capital to shareholders, which has resulted in over $5.5 billion returned to shareholders since FY12,” he said.
Elsewhere, others making changes include:
* IA Capital Markets’ Neil Linsdell to $82 from $76 with a “hold” rating.
“The Company continued to deliver strong results in Q2/F23, navigating through a challenging operating environment and building up inventory to better protect against supply chain disruptions through the remainder of the year,” said Mr. Linsdell. “While we see Dollarama as being a favoured shopping destination as consumers potentially seek out more value and purchasing power, recent share price strength means that we see the shares as fully valued and as such, we are maintaining our Hold recommendation, despite a target price increase ... on slightly increased forecasts and valuation multiples.”
* National Bank Financial’s Vishal Shreedhar to $86 from $82 with an “outperform” rating.
“While investor concern about the backdrop persists, DOL suggested that the back-to-school category is showing strength, which bodes well for future seasonal demand. In addition, demand for consumables remains strong amid heightened inflation,” said Mr. Shreedhar.
* Desjardins Securities’ Chris Li to $91 from $86 with a “buy” rating.
“We are maintaining our positive view following the better-than-expected 2Q FY23 results and FY23 SSSG guidance raise. SSSG momentum remains solid for 3Q to date. Management’s 2H outlook is constructive, supported by a strong inventory position for the important seasons, rational competition and continuing rollout of higher price points,” said Mr. Li.
* Scotia Capital’s Patricia Baker to $90 from $81 with a “sector outperform” rating.
“DOL experienced strong consumable sales in the quarter as the strong value proposition resonated well with Canadians as exemplified by the 20.2-per-cent increase in traffic in Q2. DOL’s Q2 operating performance was solid, with the company navigating well through labour and supply chain challenges, although the latter appear to be improving. DOL remains focused on delivering to Canadian consumers a compelling value proposition. This positioning will become even more relevant for Canadian consumers as we move through F23 against the current backdrop of high inflation as DOL’s assortment of everyday essentials, consumables, and well priced seasonal and general merchandise items are expected to resonate well,” said Ms. Baker.
* CIBC World Markets’ Mark Petrie to $82 from $76 with a “neutral” rating.
* TD Securities’ Brian Morrison to $91 from $86 with a “buy” rating.
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The recent market pullback has brought an enticing investment opportunity in Enbridge Inc. (ENB-T), according to Raymond James analyst Michael Shaw.
He raised his rating to “outperform” from “market perform” on Monday.
“Since appreciating through the latter half of August, ENB stock has checked back 5 per cent (TSX down 2 per cent) and is now 8.7 per cent below its 2022 high set in early June,” said Mr. Shaw. “While the equity has been drifting lower, the fundamental outlook for ENB has only gotten better. Enbridge’s near and medium term growth outlook has improved while also maintaining a balanced capital allocation strategy: self-funding, executing a modest NCIB, all while deleveraging. We recommend investors add to positions in Enbridge and are raising our rating.”
The analyst thinks Enbridge is “delivering on its two-pronged approach to fulfill its growth outlook – building project backlogs in both energy transition and conventional energy infrastructure.” He also believes the outlook for its Canadian Mainline segment has improved.
“One of our principal concerns for Enbridge at the start of 2022 was the outlook for the Mainline due to a confluence of issues including ongoing commercial negotiations and the pending completion of the Trans Mountain Expansion that would draw volumes away from the un-contracted Mainline,” said Mr. Shaw. “However, production volumes in western Canada have consistently surprised to the upside this year. Even with the recent crude price decline, crude remains above most producers’ economic thresholds, and as such we expect continued modest volume growth. This production growth should mitigate the impact of TMX’s takeaway on Mainline volumes.”
“A key unknown for Enbridge is the outcome of the Mainline negotiations. Enbridge has been consistent is stating that negotiations with shippers have been progressing well and that they expect an update in “mid 2022″. While Enbridge has stated they are indifferent between a Cost of Service model or Incentive Tolling options (trading risk for return), we strongly expect they would prefer the Incentive Tolling outcome – providing higher return and the option for low-capital volume additions.”
Also touting the company’s “shareholder friendly” capital allocation strategy, he raised his target for Enbridge shares to $60 from $57 after increasing his 2023 financial projections. The average is $60.55.
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National Bank Financial analyst Adam Shine downgraded Corus Entertainment Inc. (CJR.B-T) to “sector perform” from “outperform” in response to Friday’s announcement that it expects “meaningful year-over-year softness” in television advertising revenue due to an “increasingly uncertain” macro environment.
Shares of the Toronto-based media and content company dropped 11.7 per cent following the premarket release, leading Mr. Shine to conclude fourth-quarter estimates need to be “materially scaled back” and forward projections through fiscal 2024 also must be “meaningfully” reduced.
“Expectations were that a seasonally-light Q4 would see a decline in TV ad sales with prior assumptions of around a mid-single digit drop,” the analyst said. “Given Corus’s outlook update, we dropped TV ad sales in Q4 to negative 14 per cent, kept TV subscriber revenues at an increase of 2.8 per cent, and reduced TV Other to up 5 per cent from up 16 per cent as we assume less episodic deliveries. We moved Radio ad sales to negative 0.3 per cent or near flat from up 5 per cent. In the process, total Q4 revenues contracted to $341.6-million from $366.0-million, Adj. EBITDA fell to $57.2-million from $92.8-million, and Adj. EPS decreased to a loss of 2 cents from a 10-cent gain.”
“Corus also warned of material near-term pressures in its TV ad sales heading into a seasonally-important Q1 to start f2023 and that’s before the prospect of any recession next year. As such, we lowered TV ad sales in f2023 to negative 8 per cent from negative 1 per cent and kept Radio advertising at negative 5 per cent. Total f2023 revenues declined to $1537-million (down 3.9 per cent year-over-year) from $1622-million, Adj. EBITDA decreased to $373.4-million (down 16.0 per cent year-over-year) from $469.2-million, and Adj. EPS contracted to $0.40 from $0.72.”
Mr. Shine thinks his reductions may prove “too conservative” and expressed concern that “the greater than expected downswing in TV advertising that Corus is experiencing will be relatively temporary or extend deeper through the new fiscal year.”
“F2024 would be expected to see a recovery after macro/recession pressures, but these estimates have also been generally reset lower, as we now look for total revenues of $1565-million instead of $1619-million, Adj. EBITDA of $425-million rather than $483-million, and Adj. EPS of $0.62 vs. prior $0.81,” he added.
“While operating leverage is being materially impacted by contracting TV ad sales, Corus is also dealing with Cancon catch-up payments of $50-million that might now be spread over 3 years rather than f2022-f2023 (less than $20-million in f2022E). While we noted in our Q3 review that we hadn’t yet baked a recession into our forecast as we’ve now done with an even greater than expected near term downturn in TV, we had lowered our TV multiple (each 25 bps = $0.50) in our NAV.”
Mr. Shine cut his target for Corus shares to $3.25 from $5. The average is $4.58.
Elsewhere, RBC Dominion Securities’ Drew McReynolds downgraded Corus to “sector perform” from “outperform” with a $4 target, down from 7.
“Given near-term revenue headwinds that appear stronger than we would have expected, we see a range bound stock and will look for more timely entry points,” said Mr. McReynolds.
Others making changes include:
* Canaccord Genuity’s Aravinda Galappatthige to $4.25 from $5.25 with a “buy” rating.
“In their release, it was noted ‘in the near-term, the Company expects the complex macroeconomic environment and ongoing pandemic-related impacts to continue to put pressure on advertising revenues. Combined with general advertising spending and seasonal revenue cycles discussed in the prior MD&As, the Company currently expects meaningful year-over-year softness in Television advertising revenue’',” he said. “To us, this suggests that the recent macroeconomic slowdown is having a more potent impact on Q4 than previously expected, in particular on the ad side of the business, and materially so. While the company can adjust costs, especially on the programming side to help mitigate the impact of easing ad revenues on EBITDA, we doubt there was much flexibility to protect Q4/22 profitability.”
* CIBC World Markets’ Scott Fletcher to $3.75 from $6.50 with a “neutral” rating.
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The recent pullback in shares of Cineplex Inc. (CGX-T) provides a “more attractive and timely entry point” for investors, according to RBC Dominion Securities analyst Drew McReynolds, who raised his rating to “outperform” from “sector perform.”
“We believe earnings visibility for Cineplex is steadily improving following a two-year period of major industry disruption. Specifically, we are encouraged by: (i) the prospect of a full year of normal operations in 2023; (ii) early indications that consumer demand and the effectiveness of an evolving theatrical release window remain largely intact relative to pre-COVID-19 trajectories; (iii) management’s expectation of returning to pre-COVID-19 consolidated EBITDA margin levels; and (iv) a balance sheet that should strengthen given adjusted EBITDA growth and outright debt repayment alongside the continued support of lenders,” he said. “We believe the pullback provides a more attractive and timely entry point reflecting: (i) a 2023 EV/ EBITDA multiple of 6.6x versus Cinemark at 6.8 times and a pre-COVID-19 FTM EV/EBITDA range of 7.5–10.5 times; (ii) sequential box office improvement in Q4/2022 and 2023 following a relatively weak Q3/22 and 2022; and (iii) the general resilience of theatrical exhibition as an out-of-home entertainment option during slower economic environments.”
Also seeing “interesting option value longer-term,” Mr. McReynolds cut his target by $1 to $14, below the $15.46 average on the Street.
“We believe the shares provide investors with option value with respect to: (i) the utilization of all (or a portion) of $315-million in non-capital losses available for carry-forward (the bulk of which will expire 2027–41); (ii) any eventual crystallization of diversification businesses (Cineplex Digital Media, amusement and/or location-based entertainment); (iii) what in our view should be continued consolidation within the global theatrical exhibition industry; (iv) a stronger than forecast “off-ramp” for theatrical exhibition in 2023E and beyond; and/or (v) any realization of the $,” he said.
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Desjardins Securities analyst Brent Stadler “materially” increased his third-quarter financial estimates for Capital Power Corp. (CPX-T), citing stronger data in Alberta.
He’s now projecting earnings before interest, taxes, depreciation and amortization of $458-million, up from $294-million.
“In the words of Elton John, we are ‘gonna be hiiiigh’ vs consensus, which was at $305-million (we are 50 per cent ahead),” he said. “Our $458-million estimate is the new high on the Street by a wide margin (‘it’s lonely out in space’).”
“Further, we have ascribed value to better reflect our view that efficient, strategically located gas assets are going to be key to grid reliability ‘for a long, long time”, likely increasing in importance as renewables are built out, inefficient assets are retired and extreme weather patterns persist.”
Mr. Stadler also thinks the Ontario government’s view that more dispatchable resources are need “bodes well” for Capital Power, leading him to increase the value ascribed to its three gas assets in the province.
“We have increased our recontracting assumption (to a 30-per-cent cash flow haircut from 50 per cent) to bring it closer to recent gas asset recontracting,” he said.
“We expect dispatch frequency for certain gas assets will continue to increase. We remain bullish on efficient, strategically located gas assets as we continue to view them as key to grid reliability. The importance of gas assets will likely increase as renewables make up a larger portion of the grid, inefficient assets are retired and more extreme weather patterns persist (on average). For certain gas assets, we have modestly increased our dispatch expectations, which are now more in line with recent results.”
Raising his 2022 and 2023 earnings and free cash flow projections, Mr. Stadler hiked his target for Capital Power shares to $58 from $53, reiterating a “buy” rating. The average on the Street is $51.19.
“In our view, CPX offers investors deep value,” he said. “It offers near-term exposure to a strong Alberta power market and the hot renewables market, but also provides a unique rerate angle as it works to remove coal (by 2023). Longer-term, we believe another rerate is possible as CPX cleans up its strategically important natural gas assets through a hydrogen/carbon capture, utilization and storage solution.”
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Canaccord Genuity analyst Shaan Mir called TerrAscend Corp. (TER-CN) “a compelling investment,” seeing U.S. multi-state operators in the cannabis sector trading at depressed multiples “despite continued fundamental improvements and a plethora of potential growth catalysts that remain ahead (as states enact cannabis reform measures ahead of federal legalization).”
He initiated coverage of TerrAscend, which possesses vertically integrated operations in Pennsylvania, New Jersey, Michigan and California, licensed cultivation and processing operations in Maryland and licensed production in Canada, with a “buy” rating.
“TER has focused on attaining a wide distribution for its in-house brands, positioning it with the largest wholesale sales mix within the MSO peer set,” said Mr. Mir. “Although FQ2/22 saw an industry-wide vape recall in PA cause a momentary dip in its mix, we note that the company continues to focus on establishing new distribution partnerships to drive penetration for its portfolio. With key capex projects near completion (namely NJ, PA, MD), we believe TER is positioned to see growth from its wholesale segment. This is exemplified by the recent transition to adult-use in New Jersey, where TER established early capacity to service wholesale demand ahead of competitors in the state, helping to establish early brand exposure for its offerings.”
“TER has employed a strategy that enters limited license medical markets on the cusp of adult-use reform. We believe the company is now in a position to see meaningful growth from its legacy operations in key regions. TER was one of the first seven operators to receive recreational sales approval at its NJ dispensaries. The company is now one of two players selling into the market from its state max three dispensaries and holds, what we believe, is a top-3 position. In MD, residents are set to vote on adult-use reform as part of November 2022 ballot that, if passed, should offer a key growth catalyst for the business in the tail end of 2023. Lastly, although PA has not formalized language for an adult-use program, key state officials (including Governor Tom Wolf) have voiced support for broader reform as neighbouring states (NY and NJ) have recently enacted programs of their own.”
Mr. Mir thinks the recent acquisition of Gage Growth Corp. provides several brand partnerships that it can “leverage into material relationships across its U.S. footprint.”
Touting its “solid” financial performance and management that is “well aligned to maximize shareholder return,” he set a target of $4.25 per share. The average is $5.39.
“In FY21, TER generated total sales of US$210.4-million, led by its position in the PA medical market. Although macro-level headwinds have contributed to a slowdown in the PA market in H1/22, we expect to see meaningful growth in the second half of the year as NJ adult-use sales, the MD facility, and a re-positioning of the company’s PA facility ramp up,” said Mr. Mir. “As a result, we forecast TER to report FY22 revenue and adj. EBITDA of US$285.0-million and US$41.6-million, respectively. We believe the company is fully funded for initiatives over the next 12 months.”
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In response to Friday’s announcement of the departure of co-founder and chief executive officer Dave Dinesen, Canaccord Genuity analyst Bobby Burlerson lowered Vancouver-based CubicFarm Systems Corp. (CUB-T) to “hold” from “buy.”
“We are also lowering our estimates due to the cancellation of a 96 module FreshHub installation,” he said. “With a search underway for a full time CEO (President Edoardo De Martin has been appointed Interim CEO), uncertainty around the future of CubicFarms module expectations, and a need to raise capital (cash sufficient into 1H 2023), we feel it prudent to move to the sidelines. Our view on HydroGreen remains positive, particularly due to its long-term carbon credit potential. Resolution of capital constraints could prompt us to revisit our rating.”
His target dropped to 25 cents from $1.50. The average is 68 cents.
Elsewhere, Stifel’s Ian Gillies cut the stock to “sell” from “speculative buy” with a 10-cent target, down from 50 cents.
“The strategic alternatives process will need to be executed expeditiously given the company’s precarious balance sheet position, which will require a capital injection in 4Q22E,” he said. “The company’s early stage makes ascribing value challenging, but we estimate a range of $0.06-0.39 per share. The uncertain outlook leads to us moving our target price to $0.10/sh from $0.50/sh, and rating to Sell (from Spec. BUY).”
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In a research report titled The Right Company at the Right Time, Paradigm Capital analyst Gordon Lawson initiated coverage of Electra Battery Materials Corp. (ELBM-X) with a “buy” recommendation, seeing it “focused on building a diversified portfolio of assets that are highly leveraged to the battery market with assets located in North America with the intent of providing a North American supply of battery materials.”
“Our positive outlook on ELBM stems from our confident view of the management team, our view of the battery metals market and the company’s multiple catalysts to boost the stock in the coming quarters and years,” he added.
Mr. Lawson pointed to several factors are likely to boost the Toronto-based company’s stock.
“Electra is making significant progress on its key assets with the Battery Materials Park nearing first production,” he said. “Highlighted catalysts include: Progress at the hydrometallurgical refinery for cobalt sulfate production; Progress on battery recycling; Progress on expansion into nickel sulfate production; Exploration and development at Iron Creek and Offtake agreements with EV battery companies and manufacturers.”
He set a target of $10 per share. The current average is $10.31.
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In other analyst actions:
* H.C. Wainwright initiated coverage of Bausch + Lomb Corp. (BLCO-N, BLCO-T) with a “buy” rating and US$21 target. The average is US$22.50.
* Canaccord Genuity’s Dalton Baretto initiated coverage of Bravo Mining Corp. (BRVO-X) with a “speculative buy” rating and $2.15 target.
“BRVO is advancing the recently acquired, promising, and early stage Pd-dominant Luanga PGM project in the Carajas mineral province, Para State, Brazil,” he said. “We view BRVO as a compelling investment for investors to gain exposure to a relatively rare Pd-dominant PGM deposit outside Russia or South Africa, with attractive project attributes, a proven management team, and blue-sky potential via the discovery of one or more massive sulphide deposits. Our target price is based on an in-situ valuation on the historic resource using a value of C$23.30/oz PdEq (based on the comp trading average).”
* RBC’s Keith Mackey resumed coverage of Enerflex Ltd. (EFX-T) with a “sector perform” recommendaiton and $12 target, up from $11 previously and above the $11.58 average.
“Enerflex’s acquisition of Exterran represents a step-change in it’s strategy to grow its asset infrastructure business. The company essentially doubles its owned-infrastructure footprint, enhances margins and market exposure, while allowing its Engineered Systems business to play a complementary role in its financial framework. Execution on inflight growth projects and return to positive free cash flow generation provide potential catalysts for valuation re-rating,” said Mr. Mackey.
* TD Securities’ Daniel Chan downgraded Enghouse Systems Ltd. (ENGH-T) to “hold” from “buy” and lowered his target to $32 from $35, while RBC Dominion Securities’ Paul Treiber reduced his target to $40 from $45, reiterating an “outperform” rating. The average is $37.38.
“Q3 missed expectations on lower organic growth, as Vidyo revenue continues to normalize,” Mr. Treiber said. “However, we believe the rate of headwind from Vidyo is likely to diminish going forward. With valuation near 9-year lows, we believe that the stock is overestimating the ongoing drag from Vidyo and undervaluing the potential value creation through the company’s M&A model.”
* CIBC World Markets’ Anita Soni reduced her Equinox Gold Corp. (EQX-T) target to $4.90 from $5.30 with a “neutral” rating. The average is $8.26.
* Cutting his forward estimates for Gildan Activewear Inc. (GIL-N, GIL-T), RBC Dominion Securities’ Sabahat Khan reduced his target for its shares to US$47 from US$52 with an “outperform” rating. The average is US$42.43.
“Over the recent quarters, we have been encouraged by the cost-containment measures, FCF generation, and improving POS trends in the Activewear segment. In 2022 and beyond, we believe Gildan will exit the pandemic in a stronger competitive position and with a larger TAM,” he said.
* Desjardins Securities’ John Sclodnick cut his Skeena Resources Ltd. (SKE-T) target to $17 from $19 with a “buy” rating. The average is $16.57.
“We have updated our model to factor in the FS [feasibility study] for Eskay Creek, which delivered impressive economics, even at far lower gold prices,” he said. “We have taken a conservative approach, modelling just the declared reserves despite clear expectations for resource growth; we also model higher capex and opex vs the study. This leads to a high-conviction NAVPS [net asset value per share] of $16.81, which drives our $17.00 target price (was $19.00). Skeena remains our top developer pick.”
David Leeder