Inside the Market’s roundup of some of today’s key analyst actions
In response to share price appreciation over the last two months through Canada’s Competition Tribunal hearings and decisions on its $20-billion takeover by Rogers Communications Inc. (RCI-B-T), RBC Dominion Securities analyst Drew McReynolds lowered his recommendation for shares of Shaw Communications Inc. (SJR.B-T) to “sector perform” from “outperform” on Tuesday, “looking for opportunities elsewhere at current levels.”
“Our investment thesis on Shaw has been to ‘ride it out to the very end’ given what has, at most times since the proposed acquisition by Rogers was announced March 2021, looked an attractive annualized total return to the $40.50 bid price,” he said in a research note. “In light of the remaining potential paths to closing, at current levels we will look for investment opportunities elsewhere within the Canadian telecom sector. In the low probability scenario where the proposed acquisition by Rogers is ultimately terminated: (i) we derive a standalone fundamental value for Shaw of $25 per share (unchanged), which simplistically assumes that a $1.2-billion break fee would be largely offset by future spectrum outlays in 2023 and 2024; and (ii) we see other potential strategic suitors/solutions for Shaw.”
Mr. McReynolds maintained his target price for Shaw shares of $40.50, reflecting the transaction value proposed by Rogers. The average target on the Street is $40.35, according to Refinitiv data.
Concurrently, seeing “a more range bound stock,” Mr. McReynolds also lowered his recommendation for Quebecor Inc. (QBR.B-T) to “sector perform” from “outperform” with a $32 target, down from $34 and below the $33.33 average.
“We are now factoring the proposed acquisition of Freedom Mobile into our Quebecor forecast on what we believe is the high likelihood of closing the Rogers-ShawQuebecor transactions,” he said. “As a result, our price target decreases from $34 to $32. With Freedom Mobile, we believe the scope of the assets acquired along with enhanced network access and the CRTC wireless framework provide Quebecor with greater operating and financial flexibility that increases the probability of success in wireless outside of Quebec. While following the proposed acquisition of Freedom Mobile we see a more range bound stock in the low-$30s given likely upfront investment as Freedom Mobile is integrated, we continue to believe this cost-effective path has minimized downside risk while providing investors with attractive option value longer-term around successful national expansion.”
In a separate note, Mr. McReynolds maintained a “sector perform” recommendation and $69 target for Rogers shares as “the Shaw finish line comes into view.” The average target is $70.58.
“At 8.0 times FTM [forward 12-month] EV/EBITDA, Rogers continues to trade at a discount to large cap telcos (8.3–8.8 times), which we attribute to a variety of factors including execution risk around the Shaw acquisition, higher proforma leverage and the strengthening competitive positions of telco peers given accelerated FTTH deployments,” he said. “Assuming Rogers successfully closes the Shaw acquisition (as has been our longstanding assumption), our near-term focus will be “fine tuning” the $1-billion in targeted cost synergies, the combined Rogers-Shaw capex trajectory and sizing up Quebecor’s competitive impact as the fourth national wireless operator. Longer-term, we continue to see the potential for multi-year upside in the shares driven by a forecast 8-per-cent NAV CAGR [net asset value compound annual growth rate] through 2025E (boosted by Shaw-related cost synergies). We also see option value in Rogers’ portfolio of non-telecom assets that could NAV accretively become a source of funds for strategic initiatives, accelerated debt repayment and/or capital returns.”
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BMO Nesbitt Burns analyst Tim Casey is expecting slowing growth for Canadian telecom companies in 2023.
In a series of research notes released concurrently on Tuesday, he reduced his projections “modestly” for the fourth quarter of 2022 as well as the next two fiscal year to reflect “company specific items and competitive activity.”
For BCE Inc. (BCE-T), his earnings before interest, taxes, depreciation and amortization (EBITDA) estimate for the fourth quarter fell by 3.5 per cent (or $90-million) and 1 per cent for 2023 and 2024 (a decline of approximately $100-million.
The revisions for Q4 are spread across wireline (-$40 million), wireless (-$20 million) and media (-$30 million),” he said. “Wireline revisions reflect the continuing effects of inflation pressures and supply chain issues in Enterprise as well as some lingering weather-related costs. The wireless revisions reflect competitive activity in Q4 where competition was robust. We increased our subscriber loading estimates and lowered margins modestly. The media revision reflects lower margins on advertising pressure and higher rights fees.
“For 2023 and 2024, we trimmed our outlook by 1 per cent based on slightly more competitive activity in wireless and wireline and continued margin pressure in media. We still expect a similar EBITDA growth profile (up 3.5 per cent) in 2023.”
That prompted Mr. Casey to cut trim his target for BCE shares to $66 from $68 with an “outperform” rating. The average target on the Street is $66.25.
“We believe there are two momentum drivers for BCE in the near term,” he concluded. “First, the accelerated capex program will increase broadband penetration, opex efficiencies and a step-up in FCF generation in 2023. Second, improving fundamental outlook for Wireless and base management strategy positions BCE for MSD EBITDA growth through 2023. BCE is a bellwether with attractive dividend yield and growth (up 5 per cent).”
For Telus Corp. (T-T), he also lowered his 2023 and 2024 EBITDA estimate by almost 1 per cent.
“Our EBITDA growth assumption for 2023E declines from 10 per cent to 9 per cent,” he said. “We continue to expect TELUS will raise its dividend by 7 per cent in 2023. We remain Outperform on TELUS based on its dividend growth profile, differentiated asset mix, strong track record, and an accelerating FCF growth beginning in 2023.”
His target for Telus slid to $33, matching the average on the Street. from $35 with an “outperform” rating.
Despite making similar reductions for Rogers Communications Inc. (RCI.B-T) and Quebecor Inc. (QBR.B-T), he maintained his targets for those stocks of $70 and $35, respectively, with “outperform” ratings. The averages are $70.58 and $33.33.
Elsewhere, JP Morgan’s Sebastiano Petti cut his BCE target to $64 from $70, maintaining a “neutral” recommendation.
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Citi analyst Stephen Trent thinks Bombardier Inc.’s (BBD.B-T) sales momentum and free cash flow results “should continue supporting a re-rating in the shares.”
“On the back of its sixth straight quarter of positive free cash flow, Bombardier is also coming off of a good year,” he said. “In 2022, its shares were up 20 per cent, vs. declines of 9 per cent for the TSX and 13 per cent for Air Canada. Ongoing momentum in services revenue and increasing interest in its jets from governmental customers, could provide EPS upside going forward, in our view.”
In a research note released Tuesday, he raised his earnings per share projections for fiscal 2023, 2024 and 2024 to US$1.22, US$3.08 and US$4.74, respectively, from US$1.19, US$2.98 and US$4.57.
“Forecast adjustments for Buy-rated Bombardier include the incorporation of higher, expected services revenue, slightly higher margins and lower net interest expense into our model,” he said. “This is based on channel checks, including what we’re seeing from the airlines (on maintenance), and consensus. Citi’s 4Q’22E EPS for the Canadian jet manufacturer remains unchanged at $0.12.”
Keeping his “buy” rating, Mr. Trent bumped his target for Bombardier shares to $61 from $52. The average is $60.93.
“For Bombardier, Citi arrives at its $61/B-share target price for Bombardier based on 7 times 2024 estimated EV/EBITDA vs. a 6-7-times fair value range,” he said. “This multiple represents a ca. 10-per-cent discount to the stock’s normalized, long-term historical average. Relative to its past, Bombardier now looks to be a much stronger, more stable company – even as ongoing global supply chain issues could put some constraints on the sector’s valuation. However, the discount reflects our avoidance of double counting, as the valuation reference period is ca. two years in the future instead of one.”
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Boralex Inc. (BLX-T) ended 2022 on “a high note” with the “solid” and accretive $340-million acquisition of a 50-per-cent stake in five U.S. wind farms, according to Desjardins Securities analyst Brent Stadler.
“We estimate that the transaction is approximately 14-per-cent accretive to our 2023 FCF/share forecast and that BLX paid an 8.5 times EV/EBITDA multiple, which is solid for operating assets with an average remaining life of more than 20 years,” he said.
“Combination of contracted and merchant assets. 70 per cent of the EBITDA is generated from assets with a ~10-year remaining weighted average PPA. The contracted assets do not have volume risk and while BLX expects some annual curtailments (likely to be alleviated in the future), it has been factored into the EBITDA and FCF metrics. BLX expects to leverage this platform for future growth opportunities and potentially utilize Axium as a tax equity partner going forward. We believe the pricing in BLX’s guidance could prove to be conservative and expect that the company could also increase EBITDA through operating efficiencies and potential repowering opportunities.”
Mr. Stadler thinks Montreal-based Boralex remains “well-positioned” to fund its development pipeline and its stock is trading at “an attractive entry point for investors” at 11.8 times enterprise value to EBITDA.
“In our view, BLX is the onshore renewables name to own, providing investors with growth and a number of near-term catalysts including renewables RFPs, new project announcements, potential additional M&A and results ahead of estimates,” he said.
Reiterating his “buy” recommendation for its shares, he raised his target to $49 from $47. The average is $47.19.
Elsewhere, others making changes include:
* Scotia Capital’s Justin Strong to $53 from $50 with a “sector outperform” rating.
“We view this transaction as very much in line with the company’s long-term growth strategy: by selling down non-op positions in its existing asset base and development pipeline at higher multiples than those at which it invests, either via greenfield development or M&A activity, the company creates long-term value for its shareholders,” said Mr. Strong.
* BMO’s Ben Pham to $49 from $50 with an “outperform” rating.
“While BLX’s acquisition of 50 per cent of five operating wind farms from EDF is immediately accretive and supports its 2025 growth targets, we are not yet sure if it adds longterm shareholder value as it partly depends on future spot price forecasts in ERCOT and the Southwest Power Pool and increased investor comfort of those markets esp. given historical financial challenges observed from its renewable power peers in those regions,” said Mr. Pham. “As such, we are lowering our target.”
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Raymond James analyst Brian MacArthur raised his 2023 earnings forecast for Labrador Iron Ore Royalty Corp. (LIF-T) on Monday.
After increasing his expectations for the first half of the year, he’s now projecting earnings per share of $3.47, up from $3.27 previously. His 2022 estimate jumped to $4.54 with $4.36.
“We note that the fiscal 4Q P65 iron ore price decreased during the quarter and averaged about US$111 per ton, lower than our forecasts, but premiums were higher,” said Mr. MacArthur.
Those changes led him to bump his target for Labrador Iron Ore shares to $36 from $34 with a “market perform” rating (unchanged). The average is $34.43.
“We believe Labrador Iron Ore Royalty Corporation offers investors good exposure to premium iron ore (which we believe should trade at a premium given structural changes in the steel and iron ore markets) through its interest in and royalties on Iron Ore Company of Canada (IOC),” said Mr. MacArthur. “Directly and through its wholly-owned subsidiary, Hollinger-Hanna Limited, LIF owns a 15.1-per-cent equity interest in IOC and receives a 7-per-cent gross overriding royalty on all iron ore produced from leased lands, sold and shipped by IOC and a 10 cents per ton commission on sales of iron ore by IOC. We also note additional value might be created if the royalty cash flows and other cash flows were split into separate companies in a tax-efficient manner given royalty companies historically trade at a higher multiple given their lower risk.”
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In other analyst actions:
* BMO’s Rachel Walsh trimmed her Carbon Streaming Corp. (NETZ-NE) target to $3.75 from $4.25 with an “outperform” rating. The average is $6.50.
“Carbon Streaming provided an update on Rimba Raya,” she said. “While the news has caused us to revise our NAV downwards, we believe the market is ascribing no value to the asset based on the current share price. As a result, we believe the update will be received positively. While uncertainty still remains, we feel this update indicates there is a path toward near-term revenue generation from Rimba Raya.”
“Carbon Streaming remains one of the few ways to gain exposure to potential growth and price appreciation in the voluntary carbon market which we anticipate will be substantial. We expect the company will have significant revenue growth, along with several potential upcoming catalysts, which we believe will be received positively”