Inside the Market’s roundup of some of today’s key analyst actions
After meetings last week with its senior management team, ATB Capital Markets analyst Chris Murray sees Aecon Group Inc. (ARE-T) as a “multiple expansion and growth story.”
“The discussion touched on several aspects surrounding the Company’s outlook, including the demand environment, legacy projects, concessions, opportunities for Aecon Utilities, capital recycling opportunities, and capital allocation priorities following the completion of three strategic transactions in 2023,” he said. “Management remained upbeat on demand conditions across the Company’s core sectors and expects backlog to continue to trend toward lower-risk work given the ongoing industry shift toward progressive model contracts. The Company reiterated that it is comfortable that the three remaining legacy projects can be completed with potential future losses remaining within the parameters disclosed with Q2/24 results.
“We continue to see attractive value in ARE and expect a higher quality backlog and continued growth in recurring revenue programs to support better earnings quality in future periods, providing meaningful valuation upside over the medium term.”
While reiterating its legacy initiatives, including both LRT projects and the Gordie How Bridge in Windsor, Ont., continue to progress well, the Toronto-based construction company also expects its backlog to double over the next 18 months, according to Mr. Murray.
“A significant number of projects in a PDB [Progressive Design Build] format are approaching a more definitive phase of their execution,” he said. “Combined with other projects, management sees backlog doubling over the next 18 months, however, it noted that it would expect backlog duration to extend, and did note that certain of these projects could issue firm orders in phases, especially for larger contracts.”
“Earnings growth and predictability will be more a function of a larger business, driven by project wins and backlog growth as well as the expansion of the Utilities business, organically and through M&A, as well as small tuck-in M&A around the Canadian construction business, while Construction margins are expected to remain in-line at ~8.0%, which remains near the top of the industry.”
Believing its time for its Construction segment to get out of investors’ “penalty box,” Mr. Murray hiked his one-year target for Aecon shares to $29 from $21 with an “outperform” recommendation (unchanged), citing revisions to his approach to valuing its Concessions segment, higher cash expectations and an expansion of his target trading multiple for Construction. The average target on the Street is $21, according to LSEG data.
“Our discussions during our NDR and over the past several months suggest that we are reaching an inflection point for Aecon shares as the overhang from the legacy projects looks to be reduced with a higher proportional of lower risk projects (PDB) and recurring revenue (Utilities) improving earnings predictability and stability,” he said. “Given Aecon’s end markets in high-demand and specialized sectors with high barriers to entry (Nuclear), arm’s length investments (Utilities investment by Oaktree at 9.3 times) and an increasing focus on ROIC/ROCE and free cash flow per share generation, we believe multiple expansion is warranted. As we have seen with other similarly challenged peers, the process of moving beyond legacy projects where the risk pendulum had swung too far can provide significant returns as multiples normalize.”
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Seeing its valuation as “attractive,” TD Cowen analyst Michael Tupholme upgraded Russel Metals Inc. (RUS-T) to a “buy” recommendation from “hold” on Monday, saying he’s “encouraged” by the recent price rise in hot-rolled coil as well as margin upside from its value-added processing initiatives, potential from its recent acquisition of Samuel Son & Co. Ltd., and a “strong” balance sheet.
“Near-term margin headwinds (Q3/24) may mean some patience is required, but we see healthy upside for RUS on a 12-month basis,” he said.
Mr. Tupholme’s move comes after hosting the Toronto-based company for a series of investor meetings, which he called “generally encouraging” given management’s commentary and tone.
“Key meeting discussion points included 1) a continued focus on increasing the amount of value-added processing performed in RUS’ Service Centers segment; 2) benefits of the recently closed Samuel acquisition; and 3) Russel’s commitment to a flexible but also relatively balanced capital allocation strategy (includes the continued pursuit of attractive acquisitions),” he said.
“The benchmark U.S. Midwest hot-rolled coil (HRC) price recently turned higher (now at US$700/st; up 8.5 per cent since troughing in late-July), which is encouraging, in our view. While the U.S. Midwest plate price has yet to show signs of improvement (now at U.S. $940/st; down 10 per cent quarter-to-date), HRC’s recent upturn and the relative spread between the two products point to a possible near-term bottoming in plate, in our view. Meanwhile, RUS management characterized the demand environment as steady. Although RUS expects its Service Centers segment margins to experience pressure in Q3/24 (due partly to the lag effect of declining steel prices, as well as certain Samuel-related acquisition costs), management has indicated that it expects margins to improve in Q4/24 and into 2025.”
While he lowered his estimates for the second half of the year, Mr. Tupholme raised his target for Russel shares to $46 from $44. The average is $46.67.
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TD Cowen analyst Mario Mendonca called Canadian Imperial Bank of Commerce (CM-T) his “best idea” in the bank sector, touting its combination of “strong” underlying performance and relative valuation.
“In terms of performance, we highlight consistently strong PTPP growth, lower credit losses and strong capital levels (recently announced NCIB),” he said. “On forward P/E basis, CIBC trades at a 5-per-cent discount to group market cap weighted P/E (2025E).
“CIBC delivered another strong quarter with above-average PTPP growth in Q3/24, driven by effective expense management. This growth is supported by a solid CET1 ratio and CIBC has provided guidance suggesting U.S. CRE office losses are behind the bank. The bank also announced a 2-per-cent NCIB this quarter, and which support a strong ROE. These factors, along with a below-average forward P/E, makes CIBC a Best Idea in the Canadian Banks sector.”
In a research note released Monday, Mr. Mendonca said he continues to believe investors “place too much emphasis” on CIBC’s mortgage portfolio, noting “any uptick in delinquencies or impaired loans in CIBC’s mortgage book would likely be viewed negatively.”
“CIBC’s disclosure indicates that variable rate and fixed rate mortgage renewals will reach $89-billion in 2026 (one-third variable and two-thirds fixed),” he added. “The 2026 renewals are greater than the anticipated 2025 renewals of $68-billion and 2027 at $74-billion. Focusing on 2026, CIBC estimates that monthly mortgage payments would increase by 15 per cent and 25 per cent if renewal rates are 5 per cent and 6 per cent, respectively. On its face, these numbers point to material stress for the borrower. However, the analysis also reveals that the increase in monthly payments is only 2.1 per cent and 3.7 per cent of the borrower’s total income at origination and that’s assuming no borrower income growth since origination.
“We believe concerns over mortgage renewals has historically hurt CIBC’s relative valuation.”
He reaffirmed his “buy” recommendation and $91 target for CIBC shares. The average on the Street is $80.15.
“Following another strong quarter, we look ahead to CIBC’s Q4/24 results for confirmation of consistent performance,” said Mr. Mendonca. “We continue to monitor credit conditions for the unsecured Canadian consumer (impacted by the pace of rate cuts and the unemployment rate). Canadian banks currently trade at lower multiples than the U.S. banks, reflecting differences in consumer financial health (i.e. higher mortgage payments from rising rates which put a strain on credit cards and auto payment that may lead to higher credit losses for the banks vs. relatively stronger conditions in the U.S.).”
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In a separate research note, Mr. Mendonca named iA Financial Corporation Inc. (IAG-T) his “best idea” among Canadian life insurance companies on Monday, seeing a discount valuation despite “strong” capital generation that exceeds peers.
“After a challenging 2023, IAG fundamentals have turned the corner,” he said. “In this respect, we highlight improving stability in investment income, lower new business strain, and improving conditions in U.S. dealer services.
“IAG reported another good quarter in Q2/24 with earnings in Canada and WM up double-digits while the U.S. reported modest quarter-over-quarter improvement. Notably, US Dealer Service sales (a key point of weakness in 2023) continued to improve, and the return to positive net flows in seg. funds in WM continued.”
Even with a recent rebound in its share price, Mr. Mendonca emphasized the Quebec City-based firm remains the only life insurance stock trading at a discount to adjusted book value (0.9 times).
“With the 15.9-per-cent ROE IAG reported in Q2/24, we are seeing those negative factors that hurt the stock in 2023 starting to reverse (i.e., two quarters of positive mortality experience, stabilizing investment income, net flows in WM, US Dealers Services turnaround with sales up 15 per cent year-over-year),” he said. “In Q1/24, management also reduced the sensitivities of net investment income to changes in interest rates so as interest rates come down, we do not expect the same negative effect.”
Mr. Mendonca has a “buy” rating and $114 target for its shares. The average on the Street is $107.25.
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While acknowledging “the current environment may not be the most ideal time for vending development land,” Canaccord Genuity analyst Mark Rothschild thinks Canadian retail real estate investment trusts should “reconsider the amount of value in assets not producing income,” believing it would be “accretive and appreciated by many investors.”
“The modern Canadian REIT market was created largely as more conservative ‘yield vehicles’, and every dollar not invested in income producing property was considered ‘dilutive’ to the distribution,” he said. “The new REIT operating model was more conservative than private real estate companies, and although payout ratios were initially close to, if not above 100 per cent, and leverage was elevated compared to current levels. REIT’s mostly took little risk in operating the business. Though there were some management teams with value creation expertise and active projects, this was mostly conducted external to the REIT to reduce risk.
“Over time, however, the REIT market evolved and matured with investors placing greater value on even lower leverage and more conservative payout ratios. Also, investors learned to appreciate that there are some management teams with the ability to create significant value through various forms of development and redevelopment. Further, there were almost always conflicts of interest in having this activity conducted externally. Therefore, investors encouraged REITs to internalize development in order to benefit from the value creation.”
In a research report released Monday, Mr. Rothschild “applauded and encouraged” the transformation, but he thinks it “now appears that some REITs may have taken this too far and own large development sites which will take decades to fully develop and are, in our view, not the best use of public REIT capital.”
“In many cases, the development land or extra density was ancillary to an income producing property, and only became valuable of late with greater land and residential values,” he noted. “Further, we believe that some REITs took on too much development risk and certain large well-publicized development projects have been dilutive.
“Currently, when REITs are generally trading below NAV, thus reducing the ability (or attractiveness) to raise new equity to fund growth, having precious equity tied up in development is a questionable use of capital. This is notwithstanding the fact that some REITs have, in our view, not proven to be able to manage this risk effectively. We, therefore, believe it would be appropriate for REITs to reconsider the amount of value in assets not producing income, and while the current environment may not be the most ideal time for vending development land, ultimately this would be accretive and appreciated by many investors.
Believing the recent decline in bond yields “allows for improved visibility on cap rates,” he raised his targets for a series of REITS in his coverage universe. His changes include:
- Automotive Properties REIT (APR.UN-T, “buy”) to $13.50 from $12.60. The average is $12.56.
- Choice Properties REIT (CHP.UN-T, “buy”) to $16.50 from $15. Average: $15.69.
- Crombie REIT (CRR.UN-T, “hold”) to $15 from $14. Average: $15.61.
- First Capital REIT (FCR.UN-T, “buy”) to $20 from $17.50. Average: $18.89.
- RioCan REIT (REI.UN-T, “buy”) to $21 from $20. Average: $20.85.
“The spread between cap rates and financing rates have moved closer to historical averages,” he said. “Therefore, not only do we not expect further upward pressure on cap rates, there could be some move lower in cap rates. We are therefore lowering our utilized cap rates by an average of 15 bps for five REITs. Our NAV estimates increase by an average of 5 per cent and our target prices rise by an average of 9 per cent. Our ratings remain unchanged.”
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Jefferies analysts Anthony Linton and Lloyd Byrne reduced their targets for a group of Canadian energy equities on Monday.
Changes include:
- Arc Resources Ltd. (ARX-T, “buy”) to $27 from $30. The average on the Street is $30.66.
- Canadian Natural Resources Ltd. (CNQ-T, “hold”) to $49 from $52. Average: $55.38.
- Cenovus Energy Inc. (CVE-T, “buy”) to $33 from $36. Average: $33.67.
- MEG Energy Corp. (MEG-T, “hold”) to $26 from $32. Average: $34.25.
- Nuvista Energy Ltd. (NVA-T, “buy”) to $14 from $17. Average: $17.05.
- Paramount Resources Ltd. (POU-T, “buy”) to $29 from $36. Average: $37.72.
- Strathcona Resources Ltd. (SCR-T, “hold”) to $30 from $35. Average: $36.38.
- Suncor Energy Inc. (SU-T, “hold”) to $55 from $62. Average: $60.93.
- Tourmaline Oil Corp. (TOU-T, “buy”) to $67 from $75. Average: $77.81.
- Veren Inc. (VRN-T, “buy”) to $11 from $13. Average: $14.46.
- Whitecap Resources Inc. (WCP-T, “buy”) to $11 from $12. Average: $13.79.
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In other analyst actions:
* National Bank’s Mike Parkin increased his Alamos Gold Inc. (AGI-T) target to $30 from $28 with a “hold” rating, while BMO’s Brian Quast moved his target to $31 from $27 with an “outperform” rating. The average on the Street is $30.41.
“Thursday evening, Alamos released an updated three-year outlook incorporating the recently acquired Magino mine into the Island Gold mine complex as well as formally incorporating the Puerto Del Aire (PDA) project. 2024-2026 production and capex proved in line with our estimates, with operating costs below our previous estimates,” said Mr. Parkin. “Overall, we were pleased by the higher-than-expected margin/oz at the Island Gold Complex (includes Magino). We continue to view Alamos Gold as a high-quality and safe name to own into year-end, with best-in-class medium-term production growth and strong FCF generation potential. We could see ourselves becoming more positive on Alamos in 2025 as we get closer to an expected robust 2026 operational year, which should benefit from the high-margin Island Gold underground mine expansion and shaft coming online.”
* In response to a higher cost forecast for its Goose Project in the Back River Gold District of Nunavut, Mr. Quast cut his B2Gold Corp. (BTO-T) target to $6 from $6.50 with an “outperform” rating. The average is $5.64.
* Canaccord Genuity’s Carey MacRury raised his target for Altius Minerals Corp. (ALS-T) to $29 from $25 with a “buy” rating. The average is $26.50.
* Following its annual Docebo Inspire user conference in Dallas last week, CIBC’s Stephanie Price hiked her Docebo Inc. (DCBO-Q, DCBO-T) target to US$52 from US$44 with an “outperformer” rating. The average is US$54.13.
“The event was well attended, with a turnout of 700+, nearly double that in 2023. The event reaffirmed our investment thesis; we like Docebo’s large and growing total addressable market, improving profitability and healthy balance sheet,” she said.
* JP Morgan’s John Ivankoe raised his Restaurant Brands International Inc. (QSR-N, QSR-T) to US$84 from US$80 with a “buy” rating. The average is US$84.85.
* CIBC’s Hamir Patel bumped his Transcontinental Inc. (TCL.A-T) target to $19 from $18 with an “outperformer” rating. The average is $20.50.
“TCL.A has now beat estimates for four consecutive quarters while simultaneously executing on its buyback program and continuing to improve mix (Packaging forecast to represent 60 per cent of EBITDA in F2025 vs. 54 per cent last year). We continue to see TCL.A reducing debt over the coming year (reaching 1.8 times by year-end 2024, below its 2 times objective) given strong free cash flow (FCF) generation and real estate asset sales,” said Mr. Patel.