Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities’ Chris Li expects Dollarama Inc. (DOL-T) to report “strong” second-quarter 2024 same-store sales growth on Wednesday as consumers “continue to seek value.”
The equity analyst is projecting earnings per share of 77 cents, up 10 cents year-over-year and driven by same-store sales growth of 10.5 per cent (down from 13.2 per cent a year ago). Both are in line with the consensus projections on Street and match management’s expectations from its first-quarter conference call in early June.
“We expect growth to be largely driven by transaction counts (9.5 per cent) as consumers continue looking for value,” said Mr. Li. “Importantly, we expect DOL to raise its FY24 SSSG guidance to 8 per cent (in line with consensus) from 5–6 per cent, implying low-single-digit SSSG in 3Q and 4Q (up against low- to mid-teen comps last year).”
“Gross margin: We expect 20 basis points year-over-year (in line with consensus), driven mainly by lower logistics costs and scaling, partly offset by unfavourable mix. Shrink is a significant challenge for many retailers in the U.S., including the dollar stores. On DOL’s 1Q call in June, management noted that shrink has been increasing for the past few quarters but this is already embedded in its guidance. Consensus FY24 gross margin of 44.0 per cent is right in the middle of management’s 43.5–44.5-per-cent guidance.”
Ahead of the premarket release, Mr. Li made modest adjustments to his full-year earnings expectations, raising his earnings per share estimate by a penny to $3.16.
He maintained a “buy” rating and $93 target for Dollarama shares. The average on the Street is $91.32.
“Overall, we expect 2Q results to reaffirm our expectation for relatively attractive EPS growth of 15 per cent this year, with a similar growth rate of 15 per cent in FY25 (CY24),” said Mr. Li. “We believe this should support current valuation of approximately 25.5 times NTM [next 12-month] EPS (vs 23–24 times average), with share price appreciation largely driven by EPS growth.”
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Desjardins Securities analyst Brent Stadler thinks investors should be buying Boralex Inx. (BLX-T) at current levels following the closing of a $608-million financing for its Apuiat wind farm on Quebec’s North Shore and the securing of a 15-year offtake for its Limekiln Wind Farm in Scotland.
He pointed to “solid project economics and the recent data point suggesting that a high-quality wind platform should trade closer to 13 times plus” and emphasized the Montreal-based company is making progress toward its 2025 growth targets.
“The announcements on September 8 significantly derisked BLX’s two largest projects in its under-construction/ready-to-build bucket,” said Mr. Stadler. “Combined, we expect the two projects to generate approximately $60-million of EBITDA and $20-million-plus of FCF net to BLX. These projects represent 208MW of BLX’s 319MW of projects expected to be online by roughly the end of 2024. With over two years to go, we continue to believe BLX is in good shape to achieve its 2025 growth targets. Recall that BLX is targeting 4.4GW of installed capacity, $790–850-million of EBITDA and $240–260-million of discretionary cash flow by 2025.”
After incorporated the project updates into his financial model and “modestly reduced the risking carried on the two projects,” the analyst raised his target for Boralex shares to $45 from $44, reiterating a “buy” recommendation. The average on the Street is $44.85.
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In a research note released Monday titled Don’t let the hard days win, RBC Dominion Securities analyst Maurice Choy lowered his targets for a group of regulated utility stocks after introducing his 2025 financial estimates in response to the higher interest rate environment.
“Following the share price underperformances over the past three months (driven partly by the persistently high interest rates), we no longer view the regulated utility stock valuations to be elevated, trading at a 25-per-cent P/E premium to the S&P/TSX Composite index, which is in line with the 5- year trailing average, and compares to the 80-per-cent peak after the war began,” he said. “If/when interest rates come down, the utilities may be favoured again; however, if the market is now looking beyond the short-term macro uncertainty, we believe stocks with the greatest upside relate to companies that investors are most critical of today, being ones that currently utilize DRIP/ATM programs, have stretched balance sheets, and/or have material variable rate debt exposures.
“Over the remainder of 2023, we expect capital allocation (amidst a costlier funding environment) to be at the top of investors’ minds, seeing as the perceived regulatory risks have alleviated with recent favourable regulatory decisions, and as longterm utility fundamentals remain solid. These fundamentals underpin our newly-introduced 2025 EPS estimates, which represent roughly a 5-per-cent average year-over-year growth.”
His changes include:
* Atco Ltd. (ACO.X-T, “sector perform”) to $45 from $49. The average is $48.50.
* Canadian Utilities Ltd. (CU-T, “sector perform”) to $36 from $40. Average: $37.89.
* Emera Inc. (EMA-T, “outperform”) to $62 from $66. Average: $58.86.
* Fortis Inc. (FTS-T, “sector perform”) to $61 from $65. Average: $59.21.
* Hydro One Ltd. (H-T, “sector perform”) to $36 from $38. Average: $38.89.
“We forecast EPS for the utilities to grow by an average of 5 per cent in 2025 (ranging from CU’s 3 per cent to around 6 per cent for EMA and H), driven largely by rate base growth,” said Mr. Choy. “We expect these EPS levels to support average DPS growth of 4 per cent, leading to a modest decrease in the average dividend payout ratios to 76 per cent (from 77 per cent), with a range of 68 per cent (H) to 87 per cent (EMA). Our price target revisions reflect lower P/E valuation multiples in light of the higher interest rate environment (we now use forward multiples of around 18.0 times for premium regulated utilities, down from 20.5 times previously), while moving our base year for valuation purposes to 2025.”
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Several analysts on the Street resumed coverage of Enbridge Inc. (ENB-T) following its $19-billion acquisition of three natural gas distribution utilities from Dominion Energy Inc. (D-N).
Analysts making target adjustments include:
* BMO’s Ben Pham to $52 from $54, with a “market perform” rating. The average on the Street is $56.16.
“The US$14-billion acquisition of three high-growth U.S. gas utilities from Dominion Energy comes with several positive strategic benefits (notably the big pivot to perpetual utility assets), but the accretion is not expected to be meaningful (at least initially), and funding and regulatory uncertainty could persist through most of 2024 (as in past U.S. utility acquisitions we have observed),” said Mr. Pham.
* CIBC’s Robert Catellier to $64 from $63 with an “outperformer” rating.
“We view the acquisition of the three U.S. natural gas utilities for $19-billion as a slight positive given the reduced business risk and improved diversification and growth visibility that result, albeit acknowledging the execution risk on the remaining financing,” he said. “While we were not expecting a major transaction, the deal is a unique opportunity given its scale and attractive valuation. It also reduces the liquids weighting to about 50 per cent.”
Others coming off research restriction include:
* National Bank’s Patrick Kenny with a “sector perform” rating and $53 target.
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Scotia Capital analyst Eric Winmill sees Arizona Sonoran Copper Company Inc.’s (ASCU-T) flagship Cactus project as “highly compelling,” pointing to its “relative ease of development, strong project economics, location in a good jurisdiction, proximity to existing infrastructure and mining districts, and exploration upside.”
In a research report released Monday, he initiated coverage of the Toronto-based company with a “sector outperform” rating, emphasizing copper market fundamentals remain “robust ... with a scarcity of high-quality development projects.”
“Despite recent weakness in the base metals markets, we remain bullish on the long-term outlook for copper, in particular, given the strong demand fundamentals as the global economy continues to rebound from COVID-19-related disruptions,” he said. “At the same time, the supply pipeline of material from new large copper mines remains underdeveloped, in our view, owing to the long lead times involved in copper discovery through the development and permitting process to reach producing status.”
With that view, Mr. Winmill thinks Cactus is an attractive asset with “strong upside potential through continued advancement, which could also position ASCU as a possible takeout candidate.”
“The company has successfully defined a robust heap-leachable copper project, projecting an average production of 56 Mlb of copper annually over an 18-year mine life, with the potential to reach 100 Mlb of copper production annually over a 30-year mine life by incorporating the nearby Parks/Salyer deposit,” he said. “In addition, recent metallurgical testing on the deeper sulphide mineralization has yielded promising results to date, which we believe could provide additional upside to the project’s economics and offers valuable optionality to investors (not included in our valuation at this time).”
He set a target of $3.25, representing a 1-year return of 108.3 per cent. The average on the Street is $3.37.
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BMO Nesbitt Burns analyst Thanos Moschopoulos thinks Coveo Solutions Inc. (CVO-T) is “well-positioned” to take advantage of the accelerating use of generative artificial intelligence, believing “it might well drive an acceleration in revenue growth.”
“CVO sees GenAI as being a supplement to, rather than replacement for, classic search,” he said. “CVO believes search will represent 80-90 per cent of user queries, even as GenAI is more broadly adopted—partly due to user preference and partly because GenAI queries are currently an order of magnitude more expensive to process (meaning that enterprises will be mindful of how GenAI is used/deployed).”
“CVO’s role as the incumbent information retrieval platform for many large enterprises makes it well-positioned, in our view, to monetize GenAI. CVO believes that users will want to interact with a single search/prompt box that can power both search and GenAI, and that enterprises will want to ensure that common data is powering both search results and GenAI content, lest they provide conflicting information. Consequently, it makes sense for customers to turn to a single vendor for both search and GenAI.”
After hosting a discussion with the Montreal-based company on its own GenAI module, Mr. Moschopoulos said Coveo has signed up 45 beta customers, including Informatica, Synopsys, VMware, Xero and Zoom.
“These customers will be testing the module over the coming weeks, and a subset have already committed to fully deploying, and paying for, the solution (with typical pricing representing a 40-per-cent uplift to an existing CVO contract),” he said. “Initial use cases are primarily focused on Service and Workplace (i.e., customer service/support and corporate intranets), for which the ROI is perhaps most tangible. CVO is also developing GenAI capability for Commerce, for which a key use case might be helping consumers with product discovery.”
“While we’re not currently baking a GenAI uplift into our revenue forecasts, we believe that CVO’s GenAI offering has the potential to drive accelerated growth, perhaps starting next year. We also think that CVO’s quick turnaround time in developing, and starting to monetize, a GenAI module, speaks to the company’s agility and execution. These attributes have also been demonstrated by its consistent quarterly performance since IPO, and the fact that it’s been able to drive 19-per-cent-plus year-over-year constant currency SaaS revenue growth in each of the past three quarters while keeping its salary expense relatively flat year-over-year.
Maintaining an “outperform” rating for Coveo shares, Mr. Moschopoulos raised his target for its shares to $13.50, above the $12.90 average, from $12.
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Following better-than-expected quarterly results, RBC Dominion Securities analyst Sabahat Khan reiterated his “positive view” on BRP Inc. (DOO-T), believing the Valcourt, Que.-based company’s management “continues to execute well against an uncertain macro backdrop.”
On Thursday, the recreational vehicle manufacturer reported revenue for the second quarter of its fiscal 2024 of $2.778-billion, up 13.9 per cent year-over-year and exceeding Mr. Khan’s $2.502-billion estimate as well as the consensus projection of $2.696.5-billion. Normalized diluted earnings per share of $3.21 was a gain of 9.2 per cent from the previous year and also topped projections ($2.77 and $2.97, respectively).
However, investors were concerned after BRP said it now expects revenue growth of between seven and 10 per cent for the current fiscal year, down from an earlier projection of nine to 12 per cent.
“While Q2 results were generally ahead of expectations, the downward revision to revenue guidance (driven by Marine and PA&A/OEM Engines) took some focus away from the fact that the Powersports categories continue to trend well and that the Normalized EBITDA guidance was reiterated for the full-year (EPS guidance was actually increased),” Mr. Khan said.
“Questions on the earnings call largely centered around the drivers of the varying trends across Powersports/ Marine, and puts/takes on the H2 outlook. The 2023 Marine season has not gone according to initial expectations due to a combination of supply chain issues (component issues have impacted sales for the second straight quarter), poor weather conditions, and the impact of higher interest rates (which disproportionately impacted Marine given high ticket prices/much long amortization periods). This drove a meaningful reduction to Marine year-over-year revenue growth guidance for F2023 (5-10 per cent vs. 35-40 per cent prev.), with management now refocusing its efforts on the 2024 season (which we believe is prudent). Looking ahead, we remain confident in the company’s ability to execute on its Marine strategy. For instance, the Sea-Doo Switch was the third best-selling pontoon in the U.S. from March-May (retail up more than 200 per cent), while the company continues to report that consumer reaction to the new Rotax Stealth design is positive.”
Emphasizing the strength of its Powersports segment, Mr. Khan raised his target for BRP shares to $147 from $141 with an “outperform” rating (unchanged). The average on the Street is $135.11.
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Canaccord Genuity analyst Mark Rothschild expects Dream Office REIT (D.UN-T) to continue to feel the impact of the “considerable pressure on office fundamentals at this time,” emphasizing “there is no visibility on when a firm recovery will take hold.”
“After divesting most of its western Canada and suburban portfolio, Dream Office is now heavily exposed to downtown Toronto which represents 82 per cent of its value,” he said. “The assets are well-located and many have been recently improved. However, vacancy in the downtown Toronto office market has risen materially and the REIT’s cash flow has been under pressure. Net effective rents are down dramatically, and it will likely take a number of years for this to improve.”
Despite an improvement in occupancy, Mr. Rothschild expects a “challenging leasing environment” to persist in the near term.
“For Dream Office, occupancy currently stands at 80.9 per cent, a 70 basis points quarterly sequential improvement, but down 70 basis points from 81.6 per cent in Q2/22. Vacancy is unlikely to drop in the near-term, although cash flow stability is aided by the REIT’s position in Dream Industrial.”
“In the near-term, the most material concern is the REIT’s exposure to WeWork, which is the REIT’s ninth largest tenant (represents 2.3 per cent of annual rental revenue). WeWork recently expressed doubt of the ability to continue as a going concern due to continued losses and is working on renegotiating some of its leases. WeWork is the sole tenant of Dream Office’s 357 Bay Street property in Downtown Toronto, which comprises 65,000 sf with a remaining lease term of 12.3 years. As a result of WeWork’s financial distress, there is clearly greater risk that the lease may be terminated or renegotiated, which would negatively impact the REIT’s cash flow.”
Trimming his net asset value assumption, Mr. Rothschild lowered his target for Dream Office units to $11.75 from $13, maintaining a “hold” recommendation. The average is currently $14.31.
“Over the long term, we believe the portfolio is significantly more valuable than the current unit price, although with sluggish office fundamentals expected to persist, we remain cautious,” he said.
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In other analyst actions:
* RBC’s Paul Treiber lowered his target for Enghouse Systems Ltd. (ENGH-T) to $43 from $48 with an “outperform” rating. The average is $37.83.
“Enghouse’s shares rallied 5 per cent [Friday], as Q3 adj. EBITDA was in line, despite light organic growth,” he said. “Given Enghouse’s discounted valuation, the surprise from better than expected profitability offset lower organic growth. The organic growth debate is likely to continue, but we see long-term valuation creation continuing. Maintain Outperform, given Enghouse’s discounted valuation and rebounding pace of acquisitions.”
* National Bank’s Michael Parkin cut his Equinox Gold Corp. (EQX-T) target to $8.50 from $8.75 with a “sector perform” rating.
* RBC’s Greg Pardy increased his target for MEG Energy Corp. (MEG-T) to $27, above the $26.79 average, from $24 with a “sector perform” rating.
“Our constructive stance toward MEG Energy reflects its capable leadership team, solid operating performance, balance sheet deleveraging via absolute debt reduction, and rising shareholder returns,” he said. “We maintain our Sector Perform recommendation on MEG but boost our one-year price target by $3 to $27. This change reflects MEG’s potential acceleration to 100-per-cent free cash flow payout in the first half of next year.”
* Raymond James’ Brian MacArthur trimmed his Newmont Corp. (NEM-N, NGT-T) target to US$59 from US$61 with an “outperform” rating. The average is US$54.21.
* Stifel’s Cole McGill lowered his Standard Lithium Ltd. (SLI-X) target to $9 from $13 with a “buy” rating . The average is $9.44.
* Berenberg’s Richard Hatch raised his Wheaton Precious Metals Corp. (WPM-N, WPM-T) to US$61 from US$57 with a “buy” rating. The average is US$56.21.
David Leeder