Inside the Market’s roundup of some of today’s key analyst actions
Seeing a “stretched valuation and muted growth outlook,” National Bank Financial analyst Jaeme Gloyn downgraded Fiera Capital Corp. (FSZ-T) to an “underperform” recommendation from “sector perform” ahead of second-quarter earnings season for Canadian diversified financial firms.
“While flows data is not yet disclosed for Q2, Fiera’s pre-released AUM [assets under management] numbers suggests that flows were again negative,” he said. “This marks the thirteenth consecutive quarter of net outflows. Fiera’s consistent net outflow position has resulted in muted AUM growth over that time period. Despite these results, Fiera now trades at a premium valuation to peers. While the management buy-in transaction may inspire confidence, we question if this will be enough to enhance the growth outlook to a level sufficient to warrant the current valuation premium.
“Since Fiera announced the management buy-in on June 21st, FSZ’s trading multiple has run-up substantially. FSZ’s EV/EBITDA multiple has quickly gone from trading in line with Canadian asset manager peers to trading at a significant 40-per-cent premium to the group. We’ve seen a similar expansion in the P/E multiple, which is now the second highest in the peer group behind IGM where the EBITDA growth outlook is substantially better.”
Mr. Gloyn said he’s “awaiting evidence” of growth from the Montreal-based asset management company “before becoming more constructive,” noting AUM growth remains “tepid on the back of heavy outflows in recent quarters.”
“We are cautious on the growth outlook implied by Fiera’s premium valuation,” he said. “We understand the recent management buy-in transaction signals internal confidence and alignment. At the same time, management has expressed confidence in the regional distribution strategy in development. That said, Fiera has yet to prove that these initiatives will result in an enhanced growth outlook and a return to inflows, demonstrated by consensus EBITDA growth expectations that lag peers. We would like to see evidence that the management buy-in will have a positive impact at Fiera and that internal initiatives can ultimately drive net inflows as well as growth in AUM and EBITDA before shifting more positively.”
Mr. Gloyn did raised his target for Fiera shares by $1 to $8, which remains below the average on the Street of $8.14, according to LSEG data.
Mr. Gloyn also made these target adjustments heading into earnings season:
* Goeasy Ltd. (GSY-T, “outperform”) to $235 from $210. Average: $231.11.
“We selected goeasy as a top pick in the case of a soft-landing scenario given its exposure to consumer lending,” he said. “When we selected GSY as a top pick in January, we explained that ‘GSY looks more like an H2 2024 story as we await visibility on the strength of the consumer’. Since then, our confidence in the outlook has improved considerably: 1) GSY has since reported two quarters of stable net charge-offs in-line with guidance, further proving they can manage net-charge offs in the face of rising unemployment, 2) Canadian unemployment has risen to 6.4 per cent in June from 5.7 per cent in January but remains well below GSY’s “moderately pessimistic” case of 8.5 per cent. This suggests the current guidance is achievable, and 3) GSY’s 3-year guidance and updated Q2 guidance suggests more rapid loan growth and stable net charge-offs are still to come. All of which re-affirm our confidence GSY can deliver 15-per-cent-plus EPS growth. While valuation upside may be limited in the near-term until we are given more clarity on leadership succession and macro backdrop, we believe continued execution and double-digit EPS growth will drive solid share price appreciation.”
* ECN Capital Corp. (ECN-T, “sector perform”) to $2.25 from $2. Average: $2.21.
* Intact Financial Corp. (IFC-T, “outperform”) to $265 from $260. Average: $253.56.
* IGM Financial Inc. (IGM-T, “outperform”) to $47 from $46. Average: $43.43.
* TMX Group Ltd. (X-T, “sector perform”) to $43 from $40. Average: $41.61.
Elsewhere, Jefferies’ Aria Samarzadeh raised his targets for CI Financial Inc. to $20 from $19 and IGM Financial Inc. to $39 from $38 with “buy” recommendations.
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While its second-quarter results exceeded expectations, the valuation for TFI International Inc. (TFII-N, TFII-T) has become “less compelling,” according to National Bank Financial analyst Cameron Doerksen, leading him to lower his recommendation for its shares to “sector perform” from “outperform” previously.
“To be clear, we continue to believe that the company will show margin improvement as it executes on lowering costs in both its LTL [less-than truckload] and TL [truckload] segments, and we also believe that the broader trucking end markets will be more supportive later in 2024 and into 2025,” he said.
Mr. Doerksen pointed to three factors in justifying his downgrade:
1. The U.S. LTL market is “improving but will take longer” than previously anticipated.
“Q2 results showed year-over-year improvement in multiple metrics in TFII’s U.S. LTL segment, but with still soft market conditions, shipment volumes are not improving as management was hoping and pricing also remains depressed (revenue per hundredweight down sequentially from Q1),” he said. “As a result, management’s focus for improving margins is on costs, and while there are multiple initiatives underway, the target for hitting an 88-per-cent operating ratio in the segment in 2024 is not going to be reached, pushing out a more meaningful profitability improvement into 2025.”
2. Valuation upside from the split of company will take until 2026 or beyond.
“Whereas the potential valuation lift from a split of the company into separate LTL/Logistics and Truckload companies was originally targeted for later in 2025 or into 2026, management indicates that it would like to beef up both businesses through M&A with any larger-scale deals unlikely until later in 2025 with debt repayment the near-term priority for cash flow,” he said. “As such, a split transaction seems only likely later in 2026 or into 2027.
2. Near-term valuation concerns.
“TFII shares are up 20 per cent year-to-date versus the Dow Jones Trucking Index down 1 per cent year-to-date,” he said . “Furthermore, since we upgraded TFII back to Outperform in late April, the stock is up 16 per cent (versus the TSX up 4 per cent over that same period). Based on our updated 2025 estimates (which assumes a 30-per-cent year-over-year improvement in EPS supported by better end market conditions), TFII shares are trading at 17.7 times P/E versus the weighted average peer group at 20.3 times (peers boosted by some rich multiples in both the LTL and TL comp groups). However, based on 2025 EV/EBITDA, TFII is trading at 10.2 times versus the weighted average peers at 9.8 times.”
Following changes to his sum-of-the-parts valuation and modest reductions to his 2025 forecast, Mr. Doerksen raised his target to $221 from $217, seeing only “modest” upside currently. The average on the Street is $222.50.
Elsewhere, others making changes include:
* RBC’s Walter Spracklin to US$171 from US$162 with an “outperform” rating.
“TFII put up a strong Q2 driven by solid early progress with Daseke,” said Mr. Spracklin. “In terms of takeaways management reaffirmed the 2024 guide despite a tough freight backdrop as the leadership team effectively managed costs, remained disciplined on volumes, and continued to execute on tuck-in M&A. While we expect the weak trucking environment to weigh on results for the foreseeable future, we view robust FCF as underappreciated and see a number of upcoming catalysts as not appropriately reflected in the shares at current levels, namely a large (potential) acquisition in 2025 and a spin-out in 2026.”
* Scotia’s Konark Gupta to $250 from $245 with a “sector outperform” rating.
“TFII positively surprised us with a nice Q2 beat when other carriers have been reporting weaker quarters amid prolonged softness in freight markets, especially in truckload (TL),” said Mr. Gupta. “While the company’s focus on M&A is offsetting weaker organic growth, its strong execution on M&A integration drove the margin beat in Q2. Management maintained full-year guidance as market conditions are stabilizing and TFII continues to realize M&A synergies to grow earnings. Post-2024 outlook also remains positive, driven by synergies from TForce Freight and Daseke, potential market recovery, and interest cost savings. However, management sounded slightly more conservative on TForce Freight’s margin turnaround due to the lack of volume growth in the short term, which is not overly surprising to us. We are keeping our EPS estimates largely intact, while our EBITDA outlook improves mostly on TL and Logistics, which drives our target to $250 (was $245). Potential M&A, especially a larger deal, could provide further upside to our estimates. We maintain our Sector Outperform rating, considering solid FCF and potential catalysts (self-help EPS growth levers and M&A/TL spin-off) over the next two years.”
* CIBC’s Kevin Chiang to US$179 from US$167 with an “outperformer” rating.
“TFII reported solid results and we maintain our positive thesis on the name. We see the company as well-positioned to drive significant earnings growth next year without the need for an improving macro backdrop,” said Mr. Chiang.
* JP Morgan’s Brian Ossenbeck to US$184 from US$170 with an “overweight” rating.
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Believing the “worst is likely behind” Aecon Group Inc. (ARE-T), National Bank Financial analyst Maxim Sytchev thinks it’s “time to upgrade,” raising his recommendation for its shares to “outperform” from “sector perform” previously.
“We downgraded Aecon shares on March 1, 2022 and the resulting negative 10-per-cent return contrasts with those from NOA, Bird, TSX, and S&P 500 of increases of 43 per cent, 170 per cent, 9 per cent, and 27 per cent respectively,” he said.
“Our main contention has been the persistent likelihood of write-downs since 2022 (CGL, 3 large infra projects) that ultimately resulted in multiple negative reforecasts that were further crystalized this quarter in another $237-million charge that was for all intents and purposes preannounced on July 1, 2024 ($237-million worth of write-downs (non-cash) to come with Q2/24E). Looking forward, with a new CFO who will assume “ownership” of cleaned up numbers, a likely revenue inflection in 2025E on the back of backlog build and a small cap rotation that ARE missed, we believe we don’t need to see many catalysts to at least get us to our $20.50 price target (from $17.00) that still implies 30-per-cent-plus upside. When layering on the nuclear thematic, US transmission opportunity, still unaccounted for upside from new airport redevelopments, the 3-year underperformance streak could be coming to an end.”
In a research report released Monday titled When stock wants to go higher, let it, Mr. Sytchev suggests investors “should (sooner or later) appreciate the quantification of potential losses” for the Toronto-based firm.
“Although further potential losses of $125-million are no doubt a material amount relative to Aecon’s size and nominal profitability, we believe that having a specific, quantifiable anchor for pro-forma risks provides a degree of certainty that investors should appreciate,” he said. “We have previously cited ATRL’s decision to provide a $300-million upper bound of losses for its remaining LSTK projects with Q4/21 results on March 3rd, 2022 which, for context, represented 26 per cent of the remaining $1.167-billion backlog at the time (for context, the same ratio would be a more material 46 per cent of Aecon’s $269-million backlog). Looking at the 18-month share price performance of ATRL [AtkinsRéalis Group Inc.] following this announcement, the underperformance relative to the broader Canadian market for the first 9 months post-announcement was material, but paled in comparison to ATRL’s bull run over the second half of the 1.5 year period as the company accelerated its transition to a pure consulting entity.”
The analyst raised his fiscal 2025 earnings expectation for Aecon, expecting a “less bad” year emphasizing a “write-down plagued 2024 creates an easier comp.”
“Our 2024 projection is a ‘clean’ (as much as it’s possible given all the moving parts) run-rate for EBITDA (i.e. excluding the previously announced write-downs),” he said. “In fairness, we believe our 2025 EBITDA estimate to be a better gauge for the underlying business going forward, assuming normalized conditions.
“Consensus for 2024 is still highly dispersed as the Street is not uniform when it comes treatment of accounting charges. With Finch and Eglinton LRT nearing completion, we believe the core earnings for the business should attain a more normalized rate in 2025 and onwards, the year that anchors our NAV. Of course, with legacy projects comes the risk of FCF and WC strain, hence why our conservative FCF estimates remain relatively unchanged. At least the balance sheet is no longer an issue.”
Mr. Sytchev’s new target for Aecon shares of $20 exceeds the average on the Street by 18 cents.
Elsewhere, RBC’s Sabahat Khan raised his target to $17 from $13 with a “sector perform” rating.
“Looking ahead, we maintain some level of caution due to the uncertainty surrounding the recoveries the company will ultimately realize on the remaining legacy projects vs. the provisions/assumptions reflected in the results to-date,” said Mr. Khan.
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Following a second-quarter beat, Scotia Capital analyst Himanshu Gupta sees Toronto-based FirstService Corp. (FSV-Q, FSV-T) entering a period of double-digit earnings gains for the next six quarters, pointing to an organic growth recovery and “healthy” M&A.
“Organic growth averaged 2.5 per cent in the last four quarters due to tough comps and EPS growth averaged negative 7.5 per cent year-over-year,” he said. “We expect 6-per-cent organic growth on average in the next six quarters with EPS growth at 17 per cent.
Leverage (Debt/EBITDA) post $580-million of M&A announced since Dec ‘23 is now 2.6 times, a bit elevated. However, we expect leverage to exit 2024 at 2.2 times and 2025 at 1.8 times. Our estimates do not include storm-related revenues which averaged $124-million since 2020, and as such there is potential upside of 4 per cent to 5 per cent to our EPS estimates. Valuation has never been an easy subject, but we think multiple can be justified as we see acceleration in earnings growth. On P/E basis, FSV is trading at 19.8 times turns premium to Index versus 17.2 times turns premium historical (peak of 30 times).”
Mr. Gupta thinks interest expenses are becoming less of a headwind for the property services provider as variable-rate debt is at its peak.
“This is the main contributor for resumption in EPS growth,” he added. “Easy comps as storm-related revenues are minimal from Q3/23. Home improvement business is not improving but not deteriorating either as Q2 came in similar to Q1. Organic growth on FSR is easing-off to mid-single digit from high-single digit but still remains strong on absolute level. Similar comment for Centure Fire as well - settling down at high-single-digit organic growth from double-digits in recent years.
“Roofing is relatively a new vertical and yet to be seen how organic growth will play out. Looks like roofing had a strong seasonal Q2 so far. Biggest variable will be storm-related revenues in Q3 and Q4/24. As per NOAA, 85-per-cent probability of an above-average hurricane season this year.”
Reaffirming his “sector perform” recommendation, the analyst increased his target to US$190 from US$175.
“FSV is a leader in the highly fragmented outsourced property services markets. Its leading scale supports several sustainable competitive advantages, which play into its organic and acquisition strategy. In the near term, we moved our rating to Sector Perform due to deceleration in organic growth and premium valuation. We think FSV has 10+ year runway of accretive consolidation opportunities and will continue to accrue significant gains for equity holders in the long term,” he concluded.
Elsewhere, TD Cowen’s Tim James raised his target by US$4 to US$178 with a “hold” recommendation.
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BMP Nesbitt Burns analyst Thanos Moschopoulos predicts CGI Inc.’s (GIB.A-T) third-quarter results will be roughly in line on Wednesday, believing IT services spending environment has been “relatively stable in recent weeks.”
“Recent industry data points and commentary suggest that client budgets (particularly for discretionary initiatives) remain constrained due to ongoing macro uncertainty, and that clients continue to prioritize cost-reduction initiatives,” he said. “Client spend on GenAI is ramping, but, we believe, is largely being funded at the expense of other priorities, as opposed to being additive to budgets.
“CGI’s organic revenue growth has been hovering around flat over the past two quarters, and we expect more of the same in the near term—with organic revenue growth returning to the low- to mid-single-digit range in FY2025, on easier year-over-year comps and the assumption of a better macro. In the meantime, we expect CGI’s public sector business, high managed services/outsourcing mix, and vertical/geographic diversification should provide resilient to the business.”
Mr. Moschopoulos is projecting revenue of $3.68-billion, EBITDA of $749-million and adjusted earnings per share of $1.91.
“By our math, consensus estimates imply roughly flat year-over-year constant currency organic revenue growth — not taking into account that the quarter benefited from an extra billable day (we’re slightly above consensus on revenue, perhaps due to taking this into account),” he said.
While he doesn’t expect the quarter to be a significant catalyst for CGI shares, he raised his target to $170 from $160 with an “outperform” rating. The average on the Street is $159.
“[We] continue to view the stock as attractive, taking a 12-month view — given CGI’s relative valuation and our expectation that organic revenue growth may be bottoming,” he said.
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In other analyst actions:
* Jefferies’ Anthony Linton raised his targets for AltaGas Ltd. (ALA-T, “buy”) to $37 from $34, Keyera Corp. (KEY-T, “buy”) to $43 from $39, Pembina Pipeline Corp. (PPL-T, “buy”) to $58 from $56 and TC Energy Corp. (TRP-T, “hold”) to $57 from $52. The averages on the Street are $35.89, $39.18, $55.92 and $55.91, respectively.
* Following recent investor meetings, Canaccord Genuity’s Luke Hannan increased his Aritzia Inc. (ATZ-T) target to $52 from $46 with a “buy” rating. The average is $50.
“We came away from the meetings with a deeper appreciation for the near-term opportunity Aritzia has in the U.S., as well as the ability for the company to tap into other channels, such as the men’s and international markets, to drive growth,” he said
“Notably, as Aritzia’s brand awareness has grown over time in North America, the size of the average boutique has grown as well. At the IPO the size of the average Aritzia boutique was between 4,000-5,000 sq. ft., while today new boutiques are 8,000-10,000 sq. ft. As we’ve written in the past, square footage growth has typically been one of the best predictors of revenue growth for Aritzia historically, and the company has been able to achieve payback periods of more than 12 months for each store opened within the last year given stronger-than-expected sales per sq. ft. and inexpensive rents. Importantly, management also spoke to the resilience of its customer base, which skews higher on household income.”
* BMO’s Tamy Chen reduced her Boyd Group Services Inc. (BYD-T) target to $260 from $280 with an “outperform” rating. The average is $299.85.
“Outlook commentary from aftermarket parts supplier LKQ were quite downbeat,” she said. “There had been hope that volumes would rebound after Q1/24 but there now is a likelihood we may not see sequential improvement until late 2024 into 2025. BYD’s stock declined 8 per cent following LKQ’s results last week.”
* RBC’s Matt McKellar raised his target for Canfor Corp. (CFP-T) to $19 from $18 with an “outperform” rating, while CIBC’s Hamir Patel bumped his target to $19 from $17 with an “outperformer” rating. The average is $19.67.
“Canfor reported Q224 Adjusted EBITDA (adjusted for asset writedowns and impairments, restructuring costs, and duty expense attributable to prior periods) of a loss of $46.4-million; if we were to also adjust out the inventory writedown, EBITDA of $5.0-million was modestly below our $15.2-million forecast and FactSet consensus of $20.6-million,” said Mr. McKellar. “While the complexity of operating in BC presents challenges, we continue to like Canfor’s diversified lumber platform and solid balance sheet. We see good potential upside for Canfor if North American and European lumber markets tighten through the balance of 2024 and into 2025, and reiterate our Outperform rating.”
* National Bank’s Dan Payne raised his CES Energy Solutions Corp. (CEU-T) target to $9.25 from $7 with a “sector perform” rating. The average is $8.97.
“Certainly one of the names with the greatest momentum in the [oilfield services] group, the company has seen top tier share price performance (127 per cent year-to-date) and multiple expansion (57 per cent to 5.7 times year-to-date), as a function of an expanded appreciation for the strength & value of its expanding margin profile that comes as a result of the ‘intensity thematic’ and quality of offering. To that end, Q1/24 margins were a massive blow-out (17.3 per cent vs. 15.3 per cent prior Q), again as a reflection of greater economies of scale and market share being generated from the sale of more and higher-quality specialty chemicals (rather than top line pricing), and as a result, its historical margin forecasts (in the 14-15-per-cent range) is being reassessed. With that, and in association with the strength of its competitive positioning (improved with recent market consolidation), we continue to expect street estimates to drift higher as it embeds a more realistic long-term top-line & margin assumption (we are focused on the latter, and are conservatively walking towards 16.0-16.5 per cent on our forecasts), and which in an otherwise static activity environment, provides a backdrop of value expansion for the company and its equity. That said, Q2/24 results will likely check-back seasonally from the highs of the first quarter, where we are forecasting estimates generally in-line with the street.”
* Canaccord Genuity’s Mark Rothschild bumped his Choice Properties REIT (CHP.UN-T) target to $15 from $14.50 with a “buy” rating. The average is $15.25.
* Ahead of the Aug. 8 release of its second-quarter results, Desjardins Securities’ Gary Ho raised his Dentalcorp Holdings Ltd. (DNTL-T) target to $11 from $10.50, keeping a “buy” rating. The average is $10.06.
“We expect a clean quarter, with DNTL performing consistently vs its guidance, which should be viewed positively,” said Mr. Ho. “The stock has increased 30 per cent since 1Q reporting, likely on BoC rate cut sentiment, take-private news on other Canadian companies/other DSOs, speculation of a U.S. listing and progress on the rollout of CDCP.”
* CIBC’s Paul Holden increased his target for Element Fleet Management Corp. (EFN-T) to $30, above the $28.78 average, from $28 with an “outperformer” rating.
“We expect EFN to post a solid Q2 and believe there is a high probability that 2024 guidance is revised higher. There is potential upside to originations based on improved vehicle supply and strong customer orders. A still strong U.S. economy combined with new customer wins supports a continuation of double-digit growth in servicing income. With the stock trading at 15.5 times P/E (2025E consensus) its harder to argue to make a bull case based on valuation. Upside from here is more likely to be driven by EPS growth (double-digit growth expected for several years) and positive earnings revisions,” said Mr. Holden.
* Canaccord Genuity’s Matthew Lee moved his Hammond Power Solutions Inc. (HPS-A-T) target to $169 from $167 with a “buy” rating. The average is $163.
* Desjardins Securities’ Chris MacCulloch bumped his Headwater Exploration Inc. (HWX-T) target to $9.25 from $8 with a “buy” rating. The average is $9.54.
“We have trimmed our 2025 capex assumption to align with updated disclosures, which provides additional dry powder for exploration, asset development, acquisitions and a dividend increase. We expect capital allocation to remain topical as the company begins fine-tuning its 2025 program while gauging the development potential of several exploration plays,” he said.
* Piper Sandler’s Charles Neivert initiated coverage of Lithium Americas Corp. (LAC-N, LAC-T) with a “neutral” rating and US$3.90 target. The average is US$8.45.
* RBC’s Tom Narayan cut his Magna International Inc. (MGA-N, MG-T) target to US$57 from US$59 with an “outperform” rating. The average is US$54.38.
* CIBC’s Allison Carson moved her Vizsla Silver Corp. (VZLA-X) target to $4.50 from $3.50, keeping an “outperformer” rating. The average is $4.33.
* JP Morgan’s Stephanie Yee raised her Waste Connections Inc. (WCN-N, WCN-T) target to US$198 from US$175 with an “overweight” rating. The average is US$197.24.
* CIBC’s Hamir Patel increased his West Fraser Timber Co. Ltd. (WFG-T) target to $138 from $125 with an “outperformer” rating. The average is US$97.47.
“Although near-term conditions for lumber remain challenging (particularly for R&R and multifamily construction), WFG’s strong balance sheet, low-cost position and diversified commodity exposure (evenly split between OSB and lumber) position it well to take advantage of M&A opportunities that may emerge among wood products peers with deteriorating balance sheets. WFG remains our preferred name in wood products,” he said.