Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Chris Li warns Empire Company Ltd.’s (EMP.A-T) near-term earnings are likely to be “clouded by business normalization” brought on by adjustments stemming from the pandemic.
However, he continues to think the Nova Scotia-based grocery store operator is in a strong position to grow over the long term through its Project Horizon initiatives, seeing it on track to achieve its three-year goal of reaching 15-per-cent earnings per share compound annual growth.
“Among the Big 3 grocers, EMP has the best self-help story to deliver earnings growth despite a decline in industry sales growth,” said Mr. Li.
Before the bell on Wednesday, Empire reported EPS of 64 cents, exceeding the projections of both Mr. Li and the Street (57 cents and 60 cents, respectively) due largely to lower expenses and tax rate. Food sales store sales growth slipped 6.1 per cent, exceeding estimates (declines of 4.4 per cent and 5.6 per cent, respectively).
The company’s shares fell 5.55 per cent in response to the news, as investors grappled with the potential for future growth given the expectation for increasing food-away-from-home consumption and reductions in grocery industry volumes.
“Despite what some perceived as a cautious tone on EMP’s FY22 outlook, it was in line with our expectations,” said Mr. Li. “As the industry cycles through pandemic-induced sales and shoppers gradually return to discount, it is natural for sales and earnings growth to moderate this year. This was our view all along as we were forecasting only low-single-digit percentage EPS growth in FY22 (ex Longo’s) vs consensus of 8 per cent. Our estimates also reflected higher earnings dilution from Voilà as Montréal gets set to launch in early CY22 and store pickup is expanded. To the extent the market did not share our view, we believe the share price correction reflected reduced consensus estimates.
“Despite slowing earnings growth near-term, EMP is on track to achieve its target of growing EBITDA by $500-million, increasing margin by 100 basis points and more than 15-per-cent EPS three-year CAGR over the timeframe of Project Horizon (FY21–23). In FY21 (Year 1), the main benefits were achieved from the expansion/renovation of the store network, improvement in store operations and merchandising from data analytics along with continued efficiencies gained through strategic sourcing initiatives. For FY22, most of these benefits are expected to continue along with expansion/renovation of the store network, promotional optimization, data analytics and strategic sourcing efficiencies.”
After increasing his revenue expectations, Mr. Li raised his EPS projections for both Empire’s current fiscal year (2022) and 2023 to $2.70 and $3.05, respectively, from $2.65 and $2.95.
Reiterating his “positive” long-term view and a “buy” rating for Empire shares, he also bumped up his target by $1 to $45. The average target on the Street is $45.20, according to Refinitiv data.
Elsewhere, CIBC World Markets analyst Mark Petrie raised his target to $46 from $45, which is the current average, keeping an “outperformer” rating.
“In-line Q4 results were overshadowed by disappointing guidance, which drove a 6-per-cent reduction in our F2022 EPS forecast,” said Mr. Petrie. “We view guidance as conservative and see more upside than downside. Furthermore, we expect above-industry growth in F2023 as Project Horizon continues. Cash flow is strong and valuation is reasonable.”
BMO Nesbitt Burns’ Peter Sklar cut his target to $45 from $47 with an “outperform” rating.
“The stock traded down 6 per cent after the open,” he said. “We believe this was due to two factors. First, investors appeared disappointed that gross margin was flat year-over-year; but in the context of initial COVID dynamics last year which resulted in a higher mix of sales at shelf price (vs. promotional prices) and therefore higher margins, we consider a flat gross margin a good result. Second, some investors may have also been disappointed at the magnitude of expected FY2022 Voilà ramp losses. However, Sobeys indicated FY2022 will be the peak loss year.”
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Converge Technology Solutions Corp.’s (CTS-T) new, long-term fiscal targets provide confidence on continued growth and margin expansion, said Canaccord Genuity analyst Robert Young.
At its annual general meeting on Wednesday, the Toronto-based software-enabled IT & Cloud Solutions provider announced it’s aiming to reach $5-billion in revenue and $500-million in earnings before interest, taxes, depreciation and amortization by the end of 2025.
Mr. Young said the strategic roadmap, which includes further European expansion plans, was “consistent with past messaging.”
Though he called the fiscal targets “aspirational” as they exceeded his projections, the analyst emphasized they provide “opportunity for continued share appreciation.”
“Converge reiterated its plan to exit 2021 at a $100-million run-rate in its organically driven managed services business and laid out a path to $1-billion exiting 2025,” he said. “Mix of managed services is a key driver of margin expansion. Management also intends to remain aggressive on M&A. Given the successful M&A strategy we have seen play out in North America, we expect Converge to replicate as much of it as possible in Europe. Leveraging partnerships with key vendors such as IBM, Red Hat and VMWare and the guidance of new board chair and former ex-CANCOM CEO Thomas Volk, management is mitigating key areas of risk.”
Seeing the plan as “supportive of continued growth” and pointing to both its “bolstered” balance sheet and the expectation of a “sizable” M&A transaction in Europe, Mr. Young raised his target for Converge shares to $11 from $9.50, keeping a “buy” rating. The average is currently $10.44.
Elsewhere, Raymond James analyst Steven Li raised his target to $10.75 from $8.75 with an “outperform” rating.
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In the wake of a noticeable decline since it reported first-quarter results on May 7, CIBC World Markets analyst Nik Priebe thinks Brookfield Business Partners LP’s (BBU-N, BBU.UN-T) performance “does not adequately reflect the upside associated with potential monetization activities that could materialize over a 12-month time frame.”
He now sees that disconnect and “a healthy pipeline of positive catalysts” providing “an attractive entry point” for investors.
“Following an initial bump on the announcement of the Clarios IPO in early May, BBU’s unit price has underperformed private equity peers and the broader Canadian equity market indices,” he said. “The company has also lagged private equity peers on a year-to-date basis, despite the emergence of press reports regarding two transactions that could be materially accretive to NAV [net asset value].
“In a scenario where the Clarios IPO and Westinghouse transactions materialize at the valuations that were reported in the press earlier this year, our “‘back-of-the-envelope’ math indicates potential upside to gross asset value of 74 per cent. Although we can’t corroborate this reporting or speculate on the probability of the transactions materializing, in this report we illustrate the potential upside to the fair market value of BBU’s investing capital.”
Touting “an asymmetric return profile,” Mr. Priebe raised his target to US$60 from US$55 with an “outperformer” rating. The average is US$56.14.
“If the Clarios or Westinghouse transactions materialize, we see potential for significant upside from a net asset value perspective. If neither transaction occurs, we believe downside is limited given that the units trade in line with the previous reported range of gross asset value,” he said.
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Hardwoods Distribution Inc.’s (HDI-T) $303-million acquisition of a Novo Building Products Holdings LLC, a leading U.S. distributor, from Blue Wolf Capital Partners is “transformational and highly accretive,” according to Canaccord Genuity analyst Yuri Lynk.
“In our view, Novo is an excellent strategic fit,” he said. “Without straying from HDI’s core business of distributing high value, non-commodity building materials, Novo deepens these product lines while broadening the addressable market. Novo’s sales are split between two customer groups that HDI has no exposure to: home centres, such as Lowe’s, Marvin’s, and McCormack, and pro dealers, such as Builders FirstSource. We see no overlap between the two companies and thus interesting synergy potential across a number of buckets such as tax, cross-selling, and supply chain savings, especially on import products.”
After raising his sales and earnings projections through 2023, Mr. Lynk hiked his target for the Langley, B.C.-based company’s shares to $57 from $43 with a “buy” recommendation. The average is $50.30.
“We conservatively lower our target multiple to reflect all the usual risks associated with transformational acquisitions such as this one. With that said, the reward-to-risk ratio on HDI looks compelling here,” he said. “The stock is cheap, there is synergy-related upside to our estimates, we view integration risk as low given management’s track record and the lack of overlap, and the macro backdrop is favourable.”
Meanwhile, National Bank Financial analyst Zachary Evershed raised his target to $57 from $45.50 with an “outperform” recommendation, while Acumen Capital’s Nick Corcoran bumped up his target to $55 from $42.50 with a “buy” rating.
“We view the pending acquisition of Novo as very positive. The acquisition significantly increases HDI’s size and scale, adds complementary product lines, broadens the addressable market, and is immediately accretive,” said Mr. Corcoran.
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The acquisition of The Supreme Cannabis Company Inc. “complements and fills gaps” in Canopy Growth Corp.’s (WEED-T) product portfolio, according to Desjardins Securities analyst John Chu, who calls it “a nice fit.”
On Wednesday, Smiths Falls, Ont.-based Canopy announced the closing of the $435-million in which Supreme has become a wholly owned subsidiary and sees its shares de-listed from the Toronto Stock Exchange.
“Not only is Supreme viewed as a top-10 LP, it is considered Canada’s #1 premium flower brand (7ACRES), has a top-ranked PAX vape and is ranked in the top 5 in pre-rolls,” said Mr. Chu. “Premium flower is an area where Canopy is looking to bolster its #1 ranking in the value segment. Canopy’s recent acquisition of Ace Valley boosted its pre-roll market share to #3 and Supreme should further strengthen its position in this fast-growing segment. Supreme’s vape offerings should provide a stronger foundation and its hash offerings fill a void in Canopy’s portfolio. Supreme also brings brand awareness (Supreme has four of the top 10 brands based on a brand awareness survey by Brightfield Group Canada.”
“Without Supreme, Canopy would have remained a top-3 LP by market share. The Supreme acquisition enables Canopy (with an estimated combined recreational market share of 14 per cent) to remain within reach of the other leaders (Tilray at approximately 15 per cent and HEXO in the 15–17-per-cent range, both of which have also recently engaged in M&A). Aurora and Village Farms are a distant fourth and fifth, with 6-per-cent share.”
In response to the deal, Mr. Chu raised his 2022 and 2023 sales and earnings expectations for Canopy.
However, he maintained a “hold” recommendation for its shares, saying “Canopy remains a ‘show me’ story.” His unchanged target of $35 exceeds the $32.61 consensus on the Street.
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A group of analysts on the Street resumed coverage of Algonquin Power & Utilities Corp. (AQN-N, AQN-T) following the close of its US$1-billion mandatory convertible offering.
“While the US$1B mandatory convertibles offering is slightly dilutive to our 2022 estimate, it substantially reduces future common equity requirement required for the five-year US$9.4-billion capex program, shores up the balance sheet for future capex beyond the base program, and improves visibility to the 8-10-per-cent EPS CAGR [compound annual growth rate] guidance through 2025,” said BMO Nesbitt Burns analyst Ben Pham.
He kept a “market perform” rating, citing recent trading levels, with a US$16 target (unchanged). The average is US$17.45.
“[We] continue to have a positive long-term bias given the low-risk business model (minimal commodity price exposure) and high-growth trajectory,” said Mr. Pham.
Elsewhere, TD Securities analyst Sean Steuart reiterated a “buy” rating and US$18.50 target.
“In our view, this capital raise fortifies the company’s balance sheet following a period of accelerated growth for the company. We believe that Algonquin shares offer a compelling valuation in the context of an extensive growth pipeline that includes organic development activity, potential acquisitions, and utility rate-base investments. As the company has a diverse/transparent growth opportunity set, a manageable payout ratio, and comfortable leverage, we believe that above-sector-average dividend growth is realistic,” he said.
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Seeing Chesswood Group Ltd. (CHW-T) “returning to growth” under new chief executive officer Ryan Marr, Raymond James analyst Stephen Boland initiated coverage with an “outperform” rating on Thursday.
“After many years of conservative growth in the portfolio but lack of growth in the operating income, a new CEO was appointed at the parent company,” he said. “Since the new management was appointed, Chesswood has acquired a Canadian leasing competitor and has indicated the mandate is to expand the operations through higher organic growth, entering new business lines, and further acquisitions. The other business lines could expand beyond equipment leasing to other lending verticals including, auto loans or point of sale lending to name a couple.”
He set a $14.50 target for shares of the Toronto-based company, which focuses on commercial equipment finance for small and medium-sized businesses. The average on the Street is $16.
“As the new management regrows the business and completes further acquisitions to generate even higher growth, we believe the valuation range could increase,” he said.
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In other analyst actions:
* After hosting virtual marketing meetings with CEO Mark Foote and CFO Stuart Auld on Tuesday, Scotia Capital analyst Michael Doumet sees Wajax Corp.’s (WJX-T) “foundation set for growth.” He raised his target for its shares to $28 from $27.50, topping the $24.75 average, with a “sector outperform” rating. “
“The conversations centered on the pace of the recovery, the progress of the internal initiatives, and ERS consolidation. Generally (and as expected), the update was positive,” said Mr. Doumet. “We think Wajax’s transformation has been underappreciated. In the last 18 months, it has systematically addressed investor pushbacks: it sold down excess inventory, delevered its B/S, redeployed capital from its share gain strategy into its accretive rollup strategy – altogether reducing the earnings cyclicality, enhancing its FCF profile, and accelerating structural growth. Here are some numbers: in 2020 and 2021, Wajax will have generated $10 per share in FCF, reduced net debt/EBITDA from 2.6 times to 1.7 times, and completed its largest acquisition to date (see Daily Edge). Its EPS run-rate is set to exceed that of 2019 as it exits 2021 – and it has the dry powder to complete another sizable transaction (without levering above 2 times). Meanwhile, as its story has gotten better – its valuation has fallen behind its peers and its historicals (in the context of the cycle).”
* National Bank Financial analyst Michael Robertson downgraded Pason Systems Inc. (PSI-T) to “sector perform” from “outperform” with an $11 target. The current average target is $11.80.
* National Bank’s Patrick Kenny raised his Keyera Corp. (KEY-T) target to $35 from $31, topping the $32.47 average, with an “outperform” rating.
* Eight Capital initiated coverage of GoGold Resources Inc. (GGD-T) with a “buy” rating and target of $4.10, exceeding the $3.77 average.
David Leeder