Inside the Market’s roundup of some of today’s key analyst actions
While Scotia Capital analyst Konark Gupta is assuming a soft landing for the economy in 2024, he is continuing to warn investors about “uncertaintities” in the Canadian transportation and aerospace industry, pointing to “macro, central bank policies, government elections, and global conflict.”
In a research report released Monday, he “tempered” his estimates for the year to below the consensus expectations on the Street due to these concerns.
“This year, we are switching our relative sector preference to freight from aviation, albeit with some exceptions, as we expect a restocking-driven freight volume rebound and a consumer-driven slower-yet-positive aviation growth, particularly in 2H,” said Mr. Gupta. “As we highlighted in our Focus On 2024 report, our top picks are CJT in a soft-landing scenario and CP in a hard-landing scenario ... We are adding to our top soft-landing ideas: AC, BBD and MTL based on valuations, and MDA and TFII based on catalysts. In addition to CAE, we have an out-of-consensus view on SP-rated AND and CHR.”
Pointing to a more bullish view than his peers on the Street, Mr. Gupta upgraded TFI International Inc. (TFII-T) to “sector outperform” from “sector perform” previously.
“Why upgrade TFII now? Shares have outperformed since the market troughed on October 27, 2023 (up 19 per cent in Canada/up 22 per cent in the U.S. vs. TSX up 11 per cent and S&P500 up 16 per cent), while TFII has also gained the most in our coverage universe since pre-pandemic,” he said. “We believe the recent outperformance is partly driven by the company’s announcement in late December 2023 that it intends to evaluate separating the company into two publicly traded businesses (Truckload and LTL/P&C/Logistics), following the US$1.1-billion (enterprise value) acquisition of Daseke (DSKE-Q; not rated). While we are witnessing signs of a freight market rebound amid ongoing macro uncertainty and like TFII’s self-help earnings growth story, we are more encouraged by its ability to create strong value for shareholders through not only acquisitions but also truckload segment spin-off, which could potentially materialize within the next two years. Our updated sum-of-the-parts (SOTP) analysis below suggests further upside in shares, before any incremental upside from additional larger M&A and/or significant share buybacks.”
His target for TFI shares jumped to $215 from $180. The average on the Street is $180.07.
Conversely, citing “idiosyncratic factors,” Mr. Gupta downgraded CAE Inc. (CAE-T) to “sector perform” from “sector outperform” previously.
“Shares have materially lagged the recent rally since the market troughed on October 27, 2023 (down 1 per cent vs. TSX up 11 per cent and S&P500 up 16 per cent),” he said. “We believe investors have recently grown concerned about the stock’s valuation (amid lack of direct comps) in light of the ongoing delays in the defense segment’s margin recovery. While we remain of the view that the stock has upside in the long term and defense margins have potential to recover over the coming years as the mix between drag, normal and transformational contracts changes favourably, we don’t expect a strong catalyst in the near term due mostly to our reduced conviction in defense margins. CAE could potentially resume shareholder returns (dividend and/or NCIB) in the near term following the closing of the healthcare divestiture (Q1/24) given the leverage ratio is normalizing, but we don’t view it as a sustainable catalyst against margin execution concerns. Civil segment, which accounts for the vast majority of earnings, remains resilient on margins and should continue to grow with secular trends in the commercial and business aviation markets. However, the civil story is well understood by the market, in our view. Thus, we are moving to the sidelines for now, awaiting more clarity and conviction on defense margin execution. That said, we also don’t see a significant downside risk in the near term, unless defense margin recovery takes a U-turn.”
Mr. Gupta’s CAE target slid to $31 from $36.50. The average is $35.17.
He also made these target changes:
* Andlauer Healthcare Group Inc. (AND-T, “sector perform”) to $45 from $43. The average on the Street is $50.
Analyst: “We are out of consensus on AND. Shares were down in 2023 and have also underperformed since the market troughed on October 27, 2023. We like AND’s exposure to positive secular trends in the North American healthcare logistics industry, solid market position in Canada, growing exposure to the U.S., high FCF visibility with low capital intensity, solid management team, and ability to outpace industry growth through organic initiatives and acquisitions. However, we are out of consensus on the name due to the ongoing post-pandemic normalization in certain segments of the business and weakness in the U.S. truckload market, while the stock’s valuation is not overly attractive, in our view.”
* Bombardier Inc. (BBD.B-T, “sector outperform”) to $90 from $85. Average: $78.
Analyst: “BBD is one of our top picks this year. We believe the stock’s significant discount to history and peers is reflecting investors’ key concerns about the bizjet cycle (flying activity, book:bill ratio and pre-owned inventory), the company’s potentially looming product reinvestment cycle, and the return of material FCF seasonality quarter over quarter. In addition, we think some traditional investors remain on the sidelines due to BBD’s rocky past when the company had a more stretched balance sheet while struggling with underperforming assets like CSeries and train division (sold over the years heading into the pandemic). We understand the cycle concern, however, the bizjet industry is not as sensitive to macro as commercial aviation, while BBD is no longer in the relatively more macro-sensitive segment (smaller bizjets). Further, OEMs have built a solid backlog over the past three years, production rates are constrained by industry supply chain issues (e.g., engine suppliers), pricing remains firm, and order cancellation risk is much lower in this cycle due to more stringent penalty terms.”
* Chorus Aviation Inc. (CHR-T, “sector perform”) to $3.30 from $3.50. Average: $3.67.
Analyst: “Shares were materially down in 2023 but have outperformed since the market troughed on October 27, 2023. We like CHR’s strategy to diversify away from Air Canada and significantly delever the balance sheet, driven by its recent acquisition of an asset-light business, Falko Regional Aircraft, which is helping the company unlock a lot of FCF (including asset sales). However, some FCF generation (sale of leased assets) is resulting in earnings erosion, while the Air Canada CPA is witnessing a contractual reduction in fixed fees through 2035 (offset by increased CPA leasing revenue and growth at Voyageur).”
* Cargojet Inc. (CJT-T, “sector outperform”) to $145 from $142. Average: $145.83.
Analyst: “CJT is one of our top picks this year. Although the stock has outperformed the most in our coverage universe since the market troughed on October 27, 2023 (up 53 per cent vs. TSX up 11 per cent), we expect further upside risk this year, albeit with interim volatility on market gyrations and any short-term profit-taking. CJT has been a long-term growth compounder, but growth stalled in 2023 due to tough comps and weakness at some of its domestic/international customers. This year, growth could potentially resume with some recovery in the domestic market and ramp up in the DHL contract, but it is likely to be below the long-term trend due to macro uncertainties and the company’s complete exit from the B777 fleet strategy (offset by B767-driven growth). However, CJT has become more of a FCF growth story this year as the company plans to add only one aircraft (B767) while monetizing its investments in the previously planned B777 fleet. There could potentially be additional asset sales (B757s) later this year, which would point to incremental FCF.”
* Canadian National Railway Company (CNR-T, “sector perform”) to $173 from $168. Average: $169.
Analyst: “We see balanced risk/reward in CNR. Shares have outperformed since the market troughed on October 27, 2023 (up 16 per cent in Canada / up 19 per cent in the U.S. vs. TSX up 11 per cent and S&P500 up 16 per cent). We believe the positive inflection in Q4/23 traffic and CNR’s large valuation discount to CP helped drive the outperformance, aided by continued strong buybacks. We expect traffic momentum to sustain in 2024, except in Q1 due to tough comps and weather events, driving an EPS growth rebound with the help of margin recovery and continued buybacks. However, we remain on the sidelines given valuation appears full now and our EPS growth outlook could take up to 2-3 quarters to de-risk.”
* Exchange Income Corp. (EIF-T, “sector outperform”) to $60 from $62. Average: $63.25.
Analyst: “We continue to like EIF. Shares were down in 2023 and have also underperformed since the market troughed on October 27, 2023. We believe the market at times paints EIF with the same brush as commercial airlines, which is not justified given the company’s niche airline subsidiaries likely account for only less than 25-30 per cent of EBITDA and are far more resilient than commercial airlines due to their focus on northern communities (high entry barriers, low competition and government support). In addition, we think investors recently got concerned about the year-over-year normalization in Northern Mat’s earnings, which could potentially take several quarters to rebound. We are attracted to EIF’s highly diversified portfolio of niche businesses, high dividend yield (5.7 per cent) with a low payout ratio, and continued double-digit EBITDA growth, driven by organic growth/recovery and acquisitions, despite headwinds at Northern Mat, inflation and macro uncertainty.”
* Héroux-Devtek Inc. (HRX-T, “sector outperform”) to $19.50 from $18.50. Average: $19.30.
Analyst: “We continue to like HRX. Shares were up in 2023 but have underperformed since the market troughed on October 27, 2023. We believe HRX’s small market cap, thin trading liquidity and recent industry issues explain the underperformance. The market has likely become more cautious on A&D suppliers after the recent Pratt & Whitney engine issues (A320neo family), followed by the latest Alaska Air incident (Boeing 737 MAX). However, we are not overly concerned by these issues given HRX’s greater exposure to the defense end-market and wide-body commercial jets. Further, we are encouraged by HRX’s recent margin progression, efforts to stabilize production, and ability to re-price contracts amid normalizing inflation, while demand remains solid.”
* MDA Ltd. (MDA-T, “sector outperform”) to $16 from $14.50. Average: $14.68.
Analyst: “MDA is one of our top picks this year. Shares performed the best in our coverage universe in 2023 (up 80 per cent) but have recently underperformed since the market troughed on October 27, 2023. We believe last year’s outperformance was driven mainly by management’s strong execution on growth and margin as well as the mega Telesat Lightspeed contract win (worth $2.1-billion). However, the stock still has room to recover to the 2021 IPO price of $14/sh. We are most attracted to MDA’s significant double-digit growth momentum with relatively steady margins and potential for FCF inflection in 2025/2026 when capex normalizes. In addition, the company is well-positioned to win several more orders to further solidify an already robust backlog with an opportunity pipeline worth $17-billion (and counting).”
* Mullen Group Ltd. (MTL-T, “sector outperform”) to $19.50 from $19. Average: $17.06.
Analyst: “MTL is one of our top picks this year. Shares were down in 2023 and have also underperformed since the market troughed on October 27, 2023. We believe investors typically discount MTL’s valuation due to its slower growth profile relative to TFII and exposure to the trucking and energy markets at the same time. However, we think the company has proven to be more resilient than its competitors during uncertain times, due to its well-diversified portfolio of businesses by operations and geography. In addition to diversification, we are attracted to MTL’s valuation, low double-digit FCF yield, high dividend yield (5.1 per cent) with a low payout ratio, continued share buybacks, and potential for growth through acquisitions. MTL is one of the most undervalued stocks in our coverage universe with forward valuation at the historical trough.”
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Given Thomson Reuters Corp.’s (TRI-N, TRI-T) current valuation, RBC Dominion Securities analyst Drew McReynolds thinks “the bar to deliver consolidated organic revenue growth in excess of 6 per cent has quickly risen driven incrementally by growth-accretive M&A and GenAI monetization.”
Accordingly, he expects the Toronto-based company’s organic revenue growth trajectory over the next three fiscal years to “take centre stage” with the Feb. 8 release of its fourth-quarter 2023 financial results and the release of its guidance as well as its Investor Day event on March 12. His updated forecast now calls for consolidated growth of 6.3 per cent in 2024, 7.0 per cent in 2025 and 7.4 per cent in 2026.
“We believe current valuation levels (i.e., FTM [forward 12 month] EV/EBITDA more than 20.0 times) are fundamentally justified provided: (i) management meets or exceeds this growth trajectory without meaningful changes to the company’s current margin, capex and FCF conversion profile; (ii) solid execution on the GenAI playbook continues with little change to the current GenAI narrative including perceived opportunities and risks; and (iii) the valuation impact of lower interest rate expectations/bond yields at worst is neutral,” said Mr. McReynolds. “Thomson Reuters remains a high-quality, core holding in our coverage capable of generating average annual total returns of 10-15 per cent over the long-term.”
After updating his forecast to account for the its acquisition of Sweden’s Pagero as well as higher growth expectations and “the easing rate environment,” Mr. McReynolds raised his target for Thomson Reuters shares to US$149 from US$133, reiterating his “outperform” rating. The average target on the Street is US$138.06.
“The increase in our target multiple reflects both a higher organic revenue growth trajectory and directionally lower bond yields versus those in 2023, and sits at the high-end of the 16.0-21.0 times range of target multiples we have incorporated into our price targets for Thomson since 2021,” he said.
“For Pagero, management indicated: (i) a total purchase price of $800-million funded with cash-on-hand and with closing expected by the end of Q1/24; (ii) Pagero will be included in the Corporates segment; (iii) the acquisition will be accretive to organic revenue growth and modestly margin dilutive near-term (consistent with our previous expectations) with Pagero generating $71-million in annual recurring revenue (87-per-cent recurring revenue with a 25-per-cent revenue CAGR [compound annual growth rate] over the 2020-2022 period and NRR of 122 per cent as of Q3/23) and with Pagero being slightly EBITDA negative (with mid-30 per cent margins in established markets); and (iv) revenue synergies of more than $50-million are targeted by 2027 driven by cross-selling.”
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Scotia Capital analyst Ben Isaacson initiated coverage of five paper and forest product companies on Monday.
They are:
* Canfor Corp. (CFP-T) with a “sector perform” rating and $22 target. The average on the Street is $23.50.
Mr. Isaacson: “Canfor offers investors exposure to a diversified lumber portfolio, with operational assets in Canada, the United States, and Europe. This is not the Canfor of yesterday, in which more than 80 pe rcent of its lumber capacity was based in British Columbia. Today, nearly 70 per cent of Canfor’s lumber capacity is based outside of the province, while the company boasts a balance sheet flush with deployable cash. This comes at an interesting time for Canfor, given where cycle-trough Paper & Forest Products valuations are hovering. While the valuation of the stock is compelling at 3.1 times/3.5 times Scotia/Street ‘25 EBITDA (not to mention $7.70 per share in U.S. duties on deposit), what keeps us at Sector Perform are: (1) one of the lowest free cash flow (FCF) conversion rates among its peers; (2) significant exposure to the pulp markets via Canfor Pulp; (3) generally weaker through-cycle margins than its peers; and (4) a low probability of excess capital returned to shareholders in ‘24.”
* Canfor Pulp Products Inc. (CFX-T) with a “sector perform” rating and $2 target. The average is $2.08.
Mr. Isaacson: “CFX offers investors exposure to Canadian-produced Northern Bleached Softwood Kraft (NBSK) pulp, the paper industry’s standard grade of feedstock for paper. The company’s share price has fallen by more than 80 per cent since its post-COVID high of $10 per share, largely due to challenges ranging from reduced fibre availability to higher feedstock costs to reduced global demand for pulp. To combat this, CFX is undertaking a $500 million capital re-investment plan aimed at improving plant productivity, although spending will pivot with how the pulp market unfolds mid-term. This is one reason for a Sector Perform rating, the other being valuation. While it’s true the stock is trading at 0.3 times book value, and Canfor Corp., CFX’s majority-owned sponsor, could initiate a roll-up transaction to clean up the structure, our $2 price target seems a little more aspirational for now, given it requires an optimistic 6 times multiple on a vastly improved EBITDA turnaround story.”
* Interfor Corp. (IFP-T) with a “sector outperform” rating and $29 target. The average is $29.50.
Mr. Isaacson: “We like the pure-play lumber commodity torque IFP offers investors to a U.S. and Canadian housing cycle recovery. This should be more relevant in ‘24 than in ‘23, as the probability for U.S. rate cuts has increased recently, which bodes well for housing demand. We also like IFP’s strategy to reduce B.C. exposure via two-pronged regional growth in the U.S. South and Eastern Canada. Our price target doesn’t include more than $10 per share in duties on deposit, which could be partially/fully monetized with a resolution to Lumber V – the latest chapter in the Canada/U.S. Softwood Lumber Dispute. In addition to IFP being our top pick for its operational leverage to a lumber market recovery, we also like the company’s relentless focus on cost control, which has raised its relative margin profile materially recently. While leverage appears stretched on trough-cycle EBITDA, at midcycle economics, the balance sheet should improve toward 2 times by the end of our forecast period. We think IFP is the best way to gain P&FP equity torque to a housing market recovery.”
* West Fraser Timber Co. Ltd. (WFG-N, WFG-T) with a “sector outperform” rating and US$100 target. The average is US$110.
Mr. Isaacson: “West Fraser offers investors the best way to gain large cap Canadian equity exposure to a recovery in both lumber and other wood products commodities markets, as well as exposure to a turnaround in the U.S. housing cycle. This is more relevant now than in the past, given a rising expectation of interest rate cuts in ‘24. Following its transformational acquisition of Norbord in ‘21, results show less margin variability in the more diversified portfolio. This, coupled with reduced B.C. exposure should lead to slight margin expansion over time - another reason why we like the stock. WFG is already one of the lowest-cost producers in the space, resulting in industry-leading margins on a through-cycle basis. Finally, we like the balanced approach to capital allocation, with free cash flow directed toward growth opportunities in the U.S. South, maintaining a healthy balance sheet, as well as returning excess cash to shareholders (50 per cent returned since ‘17). WFG is the only Canadian player to pay a stable distribution”
* Western Forest Products Inc. (WEF-T) with a “sector perform” rating and 80-cent target. The average is 76 cents.
Mr. Isaacson: “Western Forest is the only company under our coverage that offers significant exposure to specialty lumber, with operations largely located in coastal British Columbia. Specialty lumber, which makes up 60 per cent of the portfolio, has historically offered higher and more stable margins than commodity lumber. That said, overall volatility in lumber markets has challenged the company’s financials, its shareholder distribution, and, as a result, investor confidence. This is why WEF is now trading at 0.4 times book value. While the valuation looks attractive, cycle recovery delays could further erode the balance sheet, which is what keeps us on the sidelines. To get more excited about the story, we’re looking for a recovery to consistent positive quarterly EBITDA and FCF, a reduction of leverage, and of course, an eventual reinstatement of the dividend.”
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Several equity analysts on the Street revised their recommendations for rental property owner Tricon Residential Inc. (TCN-N, TCN-T) following Friday’s announcement of a US$3.5-billion friendly takeover offer from New York-based Blackstone Inc. (BX-N).
In a research note released before the bell titled Parting is Such Sweet Sorrow, Citi analyst Eric Wolfe moved Tricon to “neutral” from “buy” with a US$11.25 target to match proposed deal price, up from US$10.50. The current average is US$10.41.
“We view Blackstone’s announced privatization of TCN at $11.25 (approximately 30-per-cent premium to Thursday’s close) as a fair outcome for shareholders, especially given continued volatility in the capital markets and elevated interest rates,” said Mr. Wolfe. ”Due to TCN’s higher leverage vs. public REITs, the NAV is sensitive to the assumed cap rate (we calculate 5.2 per cent at deal price vs. management’s estimate of5.5 per cent before adjusting for the portfolio’s loss-to-lease). It’s possible that another investor could place a higher value on the portfolio, and the break fee is relatively small in the near-term (approximately 20 cents), but we believe a topping bid is unlikely given TCN’s complexity and size (approximately 6.4 billion GAV). We downgrade shares to Neutral.”
Others making adjustments include:
* Raymond James’ Brad Sturges to “market perform” from “strong buy” with a US$11.25 target, up from US$11.
“We view Blackstone’s takeover offer for Tricon’s core SFR home platform to be reasonably fair in the context of the volatile interest rate environment. Further, given Blackstone’s right to match, we assign a low probability that a superior offer could be received by Tricon above the $11.25/share offer price,” said Mr. Sturges.
* BMO’s Stephen MacLeod to “market perform” from “outperform” with a $15.15 target, up from $12.50.
“Blackstone’s proposed acquisition of Tricon at US$11.25 (C$15.17/share) presents an attractive outcome for shareholders,” he said. “The price more accurately reflects fair value (although it sits below US$11.79 NAV) and the implied valuation looks reasonable (23.4 times 2024 estimated P/AFFO vs. SFR peers at 22.2 times; mid-5-per-cent implied cap rate on SFR, in line with peers). While Tricon is pursuing several value-add initiatives, realizing full value could take several years.”
* CIBC’s Dean Wilkinson to “tender” from “outperformer” with a US$11.25 target , rising from US$10.
“While we can’t outright dismiss a competing offer, we note that comparable SFR companies are trading at similar 18.75 times multiples on 2024 estimates which, given balance sheet capacities, makes a superior cash offer a low probability outcome, in our view,” said Mr. Wilkinson.
* TD Securities’ Jonathan Kelcher to “tender” from “buy” with a US$11.25 target, up from US$10.50.
Elsewhere, KBW’s Jade Rahmani raised his target to US$11.25 from US$9.50 with a “hold” rating.
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Ahead of the release of Canadian Tire Corp. Ltd.’s (CTC.A-T) fourth-quarter 2023 financial results on Feb. 15, National Bank Financial analyst Vishal Shreedhar thinks the near-term consumer backdrop remains difficult, predicting a “soft” performance from its flagship retail stores.
“Our analysis of the macroeconomic backdrop suggests that consumer indicators are moderating, which could hamper near-term discretionary spending,” he said. “Our review of Canadian insolvency data (aggregate of consumer proposals and consumer bankruptcies) indicates that consumer proposals have been steadily increasing from their COVID-19 lows, while consumer bankruptcies have been largely stable.”
Mr. Shreedhar is now projecting earnings per share of $5.25, above the consensus estimate on the Street of $5.14 but down significantly from $9.34 during the same period in fiscal 2022. He attributed that 43.8-per-cent year-over-year drop to “an accounting adjustment from a change in the margin-sharing agreement (MSA) and softer sales in Retail, partly offset by a slightly lower tax rate and share repurchases.”
“We expect CTR performance to be soft, reflecting well-stocked dealer inventory levels due to a combination of leftover inventory from the prior year and early shipping in Q3/23,” he said. “Our review of weather data indicates Q4/23 was warmer year-over-year and average snowfall was lower year-over-year, which suggests that additional winter shipments will be pressured, all else equal.
“Our review of select peer commentary suggests the following: (i) The consumer remains cautious (moderation in discretionary spending); and (ii) The competitive backdrop remains rational, notwithstanding incremental consumer pressure. We model slight Q4/23 retail gross margin rate expansion, largely reflecting lower supply chain costs, partly offset by higher promotional intensity.”
While he made “modest” increases to his full-year 2023 and 2024 revenue projections, Mr. Shreedhar trimmed his EBIT expectations to reflect lower margins. He’s now forecasting earnings per share of $12.29 and $15.57, respectively, down from $12.52 and $15.64.
He maintained a “sector perform” recommendation and $152 target for Canadian Tire shares. The average on the Street is $162.60.
“We see more attractive opportunities elsewhere in our coverage as a softening of consumer demand and uneven operating performance keep us on the sidelines,” he said.
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Laurentian Bank Securities analyst Gaurav Mathur thinks the correction the Canadian real estate investment trust sector, which began in the middle of 2023, has “entered ‘a later inning in the ball game’ as the effects of capital constraints, higher interest rates, and higher cost of capital continue to percolate through the sector.”
“In effect, the challenges of a ‘higher for longer’ rate paradigm are potentially expected to persist amid the broader macroeconomic pressures, even though the futures market is pricing multiple rate cuts at the time of writing this note,” he added. “We therefore recommend that Canadian REIT investors remain tactical as we expect multiple opportunities to materialize and create significant value in a volatile year ahead.”
In a research report released Monday titled Livin’ on a ‘Rate Cut’ Prayer, But Which Altar Are You Praying At?, Mr. Mathur upgraded Automotive Properties REIT (APR.UN-T) to “buy” from “hold” with an unchanged $12.50 target. The average on the Street is $12.20.
“The REIT has weathered the macroeconomic storm of 2023 as it remained selective on acquisitions and focused on building liquidity and keeping its powder dry for opportunities unfolding in 2024,” he said. “We forecast 3.4-per-cent AFFO/unit growth (2023-2025 CAGR).”
Conversely, he downgraded three equities:
* Atrium Mortgage Investment Corp. (AI-T) to “hold” from “buy” with a $13 target (unchanged). Average: $13.16.
“We are downgrading our rating ... given the ongoing headwinds in the lending sector and asset re-rating cycle,” he said. “The MIC has raised its loan loss provisions through 2023 to reflect the credit risk in the market and we expect the CRE headwinds to continue in 2024. At the same time, management views construction loans to remain as one of the riskiest avenues of financing, given rampant project cost overruns and time delays, partially offset by lower labour pricing pressures.”
* Killam Apartment REIT (KMP.UN-T) to “hold” from “buy” with a $20.50 target (unchanged). Average: $21.29.
“While the REIT has multiple demand drivers — favourable immigration policy, strong housing demand, newer product, and a track record of improving operating metrics — which allows consistent SPNOI growth, from a cash flow lens we forecast 3.7-per-cent AFFO/unit growth (2023- 2025 CAGR), which is at the lower end of the Canadian multifamily REIT peer set,” he said.
* Plaza Retail REIT (PLZ.UN-T) to “hold” from “buy” with a $4.25 target, down from $4.50. Average: $4.33.
“While the portfolio is concentrated in in essential-needs, value and convenience tenants, we note that Canadian consumers remains stretched which in-turn is expected to affect discretionary tenants,” he said. From a cash flow lens, we forecast 1.0-per-cent AFFO/unit growth (2023–2025 CAGR), which is at the lower end of our Canadian retail REIT peer set.”
Concurrently, he resumed coverage of seven equities:
* Canadian Apartment REIT (CAR.UN-T) with a “buy” rating and $55 target. The average on the Street is $55.83.
* Dream Industrial REIT (DIR.UN-T) with a “buy” rating and $15.50 target. Average: $16.05.
* Granite REIT (GRT.UN-T) with a “buy” rating and $90 target. Average: $87.61.
* InterRent REIT (IIP.UN-T) with a “buy” rating and $15 target. Average: $14.35.
* Mainstreet Equity Corp. (MEQ-T) with a “buy” rating and $180 target. Average: $172.50.
* Nexus Industrial REIT (NXR.UN-T) with a “buy” rating and $10 target. Average: $9.19.
* Primaris REIT (PMZ.UN-T) with a “buy” rating and $18 target. Average: $16.75.
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While seeing the macro environment remaining “uncertain,” RBC Dominion Securities analyst Walter Spracklin upgraded Mullen Group Ltd. (MTL-T) to “outperform” from “sector perform” on Monday, believing that risk is “fully reflected in the company’s valuation.”
“We are upgrading Mullen shares .... reflecting our view that the company is trading on trough earnings on trough valuation as well as operating in an attractive M&A environment,” he said. “The shares yield mid-teen FCF on our 2024 estimates representing a solid value opportunity with recent M&A in our view being executed at discounted valuations - creating a solid investment opportunity at current levels. Looking ahead, we see current weakness in the trucking space as a meaningful opportunity for Mullen to acquire struggling carriers and see the company as well positioned for when pricing eventually inflects.”
As mentioned, Mr. Spracklin emphasized a pair of factors in justifying his change:
* An “attractive” M&A environment
“We see acquisition multiples as discounted in the current environment and point to Mullen’s acquisition of B&R last year,” he said. “Mullen acquired B&R, a company generating $85-million in revenue, for $21-million, which implies (assuming management drives margins consistent with Mullen’s) an EV/EBITDA acquisition multiple below 2 times. While the purchase price of Mullen’s acquisition of ContainerWorld last week was not disclosed, our view is that current truck pricing weakness is creating an attractive opportunity to acquire struggling carriers at discounted valuations, representing a compelling opportunity for Mullen.”
* A valuation at 10-year lows.
“Mullen shares trade at approximately 6 times NTM [next 12-month] EV/EBITDA or at a mid-teen FCF yield,” he said. “This represents the company’s most discounted valuation in the last 10-years (excluding the initial COVID related market sell-off). Moreover, it is our view that street expectations already reflect current truckload weakness. Key is that our investment thesis is not predicated on an uptick in valuation, although each 0.5 times increase in our target multiple represents $2.50 of upside to our target price. We view an inflection in truck pricing and/or a pickup in M&A as catalysts for a higher multiple (and upside to our base case).”
The analyst increased his target for Mullen shares to $17 from $15. The average on the Street is $17.03.
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In other analyst actions:
* CIBC’s Scott Fletcher downgraded Well Health Technologies Corp. (WELL-T) to “neutral” from “outperformer” with a $4.75 target, down from $5.50 and below the $8.08 average.
“WELL faced margin headwinds across its business in 2023 and we expect margins to remain pressured into 2024, slowing EBITDA growth,” he said. “We are also adjusting our valuation to better account for shareholders’ portion of WELL’s EBITDA, leading to a reduction in our price target from $5.50 to $4.75. We prefer a wait-and-see approach as WELL works to implement cost savings initiatives and integrates recent acquisitions. In addition to the WELL downgrade and price target change, we are rolling our financial models forward to 2025 for all three companies and updating our price target calculations.”
* HSBC’s Akshay Gupta downgraded Lululemon Athletica Inc. (LULU-Q) to “hold” from “buy” based on valuation concerns with a US$500 target, below the US$507.70 average.
* Bernstein’s David Vernon raised his target prices for Canadian National Railway Co. (CNR-T) to $187 from $165 with an “outperform” rating and Canadian Pacific Kansas City Ltd. (CP-T) to $112 from $107 with a “market perform” recommendation. Elsewhere, Raymond James’ Steve Hansen raised his CN target to $185 from $175 and CP to $120 from $115 with an “outperform” recommendation for both. The averages are $169 and $114.81, respectively.
“After a tumultous 2023 characterized by acute traffic drawdowns, elevated ORs, and twin guidance cuts, we’re looking forward to a much improved 2024 outlook for both Canadian railroads,” said Mr. Hansen. “As discussed herein, the underpinnings of this recovery already appear in motion, with 4Q23 volumes inflecting positive at both CN & CPKC after an extended period of pain. While we do expect a short-term ‘speed bump’ in this recovery through early 1Q24 (frigid temps, weak grain carry, difficult comps), we expect traffic will subsequently accelerate through spring/summer as the steep comps fade, new tailwinds emerge, and the economic backdrop improves.”
* Jefferies’ Lloyd Byrne lowered his Cenovus Energy Inc. (CVE-T) target to $27 from $34 with a “buy” rating. The average is $30.16.
* JP Morgan’s Richard Sunderland cut his targets for Emera Inc. (EMA-T) to $48 from $50 and Fortis Inc. (FTS-T) to $50 from $53 with an “underweight” rating for both. The averages are $55.33 and $57.57, respectively.
* Following a tour of its flagship Filo Del Sol Project on the border of Chile and Argentina, RBC’s Sam Crittenden raised his Filo Corp. (FIL-T) target to $30 from $27 with an “outperform” rating. The average is $30.38.
“Filo has identified what could be a generational copper asset which continues to grow with further drilling,” he said. “The site visit put the scale in context which reinforced our view that this can be a big mine, likely operated by a big miner, which we think makes Filo a potential takeout candidate. We rate the shares Outperform, Speculative Risk and increase our price target to $30 from $27 as we have increased our resource estimate based on recent drilling success.”
* CIBC’s Krista Friesen increased her NFI Group Inc. (NFI-T) target by 50 cents to $12 with an “underperformer” rating. The average is $15.80.
* After reducing his earnings expectations for fiscal 2024 and 2025, CIBC’s Hamir Patel lowered his target for Richelieu Hardware Ltd. (RCH-T) to $46 from $49, keeping a “neutral” rating. The average is $45.75.
“While excess inventories are likely to weigh on margins for another two quarters, we believe RCH is well positioned to execute on an attractive M&A pipeline and deliver continued market share gains (supported by recent site modernization investments),” said Mr. Patel.
David Leeder