Inside the Market’s roundup of some of today’s key analyst actions
Citing a “reasonable valuation, increasing M&A potential and recession resistant characteristics,” Stifel’s Martin Landry upgraded Alimentation Couche-Tard Inc. (ATD-T) to a “buy” recommendation for “hold”, declaring it “continues to impress with unabated earnings growth.”
He was one of two equity analysts on the Street to raise their recommendations for the Quebec-based convenience store operator on Thursday in response to its first-quarter 2023 financial results, released after the bell on Tuesday.
“In the last four years, ATD’s EPS increased at a CAGR [compound annual growth rate] of 18 per cent while improving its balance sheet,” said Mr. Landry in a note. “ATD’s leverage ratio of 1.3 times is much lower than 2.9 times four years ago and provides management with ample flexibility. We note that Couche-Tard has not repurchased any shares since June 30th despite having room under its authorized NCIB, This could suggest an acquisition is in the works.
“Overall we believe that ATD is well positioned to navigate a potential economic slowdown as convenience items are affordable treats with recession proof characteristics. We expect strong year-over-year earnings per share of 38 per cent in Q2/FY23 boosted again by gasoline margins.”
On the M&A front, Mr. Landry said Couche-Tard’s management is seeing “good deal” flow in North American and “expects to benefit from the economic outlook uncertainty, which could create some acquisition opportunities.”
“The IPO market is somewhat closed currently, removing an option for potential sellers,” he added. “In addition, the high yield debt market is challenge, removing a potential source of financing for buyers. These market dynamics favour Couche-Tard, which has $2.2-billion in cash and access to $2.5-billion from its revolver credit facility.”
Pointing to “the improved M&A outlook, investors’ increased focus on quality and liquidity and recession resistant characteristics of the convenience channel,” Mr. Landry increased his valuation multiple for Couche-Tard, leading him to increase his target for its shares to $65 from $57. The average target on the Street is $67.57, according to Refinitiv data.
Elsewhere, as its “strategic drivers gain traction,” National Bank Financial’s Vishal Shreedhar raised the stock to “outperform” from “sector perform” with a $68 target, up from $63.
“We are upgrading our recommendation given: (1) Increasing confidence that ATD’s fuel margins will continue to show strength owing to ongoing improvement initiatives. (2) Improved likelihood of an acquisition given management’s comments on higher deal flow as well as an unexpected pause in repurchasing shares. (3) An accommodative valuation as ATD is trading below historical averages. ATD trades at 15.5 times NTM EPS [next 12-month earnings per share] versus the 5-year average of 17.4 times (11-per-cent discount). It also trades at 9.8 times NTM EBITDA versus the 5-year average of 10.5 times (7-per-cent discount),” said Mr. Shreedhar.
Other analysts making target adjustments include:
* Canaccord Genuity’s Derek Dley to $65 from $61 with a “buy” rating.
“Recent price increases should be supportive of margin growth over the course of our forecast period, while fuel margins over the medium term appear to be sustainable above the 30 cents per gallon level. Furthermore, while we have not incorporated share buybacks into our estimate, we expect the company to be active with its NCIB over the next 12 months,” said Mr. Dley.
* Scotia Capital’s Patricia Baker to $73 from $66 with a “sector outperform” rating.
“Our positive view on Couche-Tard is predicated on the company’s ability to grow through M&A as well as organically, as it has generated positive comparable sales consistently throughout its history,” she said. “Importantly, the company drives industry-leading gross margins through its focus on private label and growth in its fresh food offer. C-store trends and the need for convenience and time-savings position Couche-Tard well to gain share from the traditional food retail segment. Couche-Tard is a proven integrator of acquisitions that stands to benefit from further consolidation of the fragmented c-store industry. The company has a proven ability to manage costs below inflation, to share best practices across its organization and to extract operational efficiencies and acquisition synergies, which in turn drive high return on equity and high conversion of EBITDA to free cash flow.”
* CIBC World Markets’ Mark Petrie to $75 from $69 with an “outperformer” rating.
“Fuel margin dollars were the key driver of ATD’s Q1 earnings beat, but cost control was excellent, and merchandise same-store sales (SSS) growth was better than we forecast. Higher fuel prices have wreaked havoc on consumer behaviour but we believe results again reinforce ATD’s relevance with consumers, even in a period of slower tobacco sales. The market has waited patiently for M&A and we believe conditions are generally favourable. Robust cash flow pushed leverage down slightly Q/Q, even from low levels,” said Mr. Petrie.
* TD Securities’ Michael Van Aelst to $69 from $67 with a “buy” rating.
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While the third-quarter earnings from Laurentian Bank of Canada (LB-T) largely fell in line with his expectations, Credit Suisse’s Joo Ho Kim warned the underlying trends displayed in the report were weaker than he anticipated.
“That includes lower-than-expected net interest margins, and while we acknowledge that it was impacted by a few ‘transitory’ items, it still took us by surprise given the guidance provided in Q2, and the performance from the bank’s bigger peers this quarter (and the rising rates),” he said. “While the bank is continuing to deliver on many other fronts (including commercial loan growth, which should help LB exceed its financial targets for F2022), we are also cautious about the potential impact a broader economic slowdown could have on the bank’s growth aspirations in F2023.”
He was one of several equity analysts on the Street to lower their financial expectations and target prices for the bank a day after its shares plummeted 10.3 per cent following the premarket release, which included cash earnings per share of $1.24 that fell 2 cents below the Street’s forecast
Pointing to lower margins and higher PCL estimates, he cut his 2023 earnings per share estimate by 2 per cent to $5.10 from $5.23, prompting a reduction to his target price for Laurentian shares to $39 from $43 with an “underperform” rating. The average is $45.15.
Other analysts making changes include:
* Scotia Capital’s Meny Grauman to $43 from $50 with a “sector perform” rating.
“The steep sell off in LB shares that we saw on earnings day is totally out of proportion to any reasonable downward earnings revision coming out of reporting season,” he said. “However, it does speak to a number of pressures that are likely to weigh on the relative valuation of the shares over the coming quarters, and is the key reason we maintain our Sector Perform rating on the stock despite the sharp move lower. On the margin front NIM contraction of 4bp is certainly not what the market is looking for in the context of rapidly rising rates. And although Management is guiding to margin expansion in Q4 the upside here is quite modest, especially relative to larger peers. Turning to capital, there is an argument to be made that a CET1 ratio of 9.1 per cent is not bad in the context of a 7.0-per-cent minimum, but the issue is that LB’s red-hot RWA growth has already driven an over 100bp drop in this ratio in one year, and will need to slow materially in order for that trend not to continue. At this point we do not believe that an equity raise is imminent, but we do think that it will remain a headwind for some time.”
* TD Securities’ Mario Mendonca to $41 from $47 with a “hold” rating.
“Higher funding costs have impacted the NIM performance of the less deposit-rich franchises,” he said. “While LB posted solid personal deposit growth (up 8 per cent quarter-over-quarter and 17 per cent year-over-year), higher-cost sources of funding continue to make up a significant portion of the bank’s mix. This is expected to remain a near-term headwind as rates are expected to continue to rise and the asset repricing lag will continue to temper NIM performance, in our view. We believe this warrants maintaining our cautious view on the stock.”
* CIBC’s Paul Holden to $43 from $46 with a “neutral” rating.
“FQ3 results were short of expectations, mostly on NIM and non-interest revenue. However, financial and strategic progress is positive. We do think LB is becoming a better bank. That said, we continue to prefer larger diversified banks with excess regulatory capital and strong deposit franchises at this stage of the cycle” said Mr. Holden.
* Desjardins Securities’ Doug Young to $41 from $44 with a “hold” rating.
* KBW’s Mike Rizvanovic to $40 from $43 with a “market perform” rating.
* National Bank Financial’s Gabriel Dechaine to $51 from $53 with a “sector perform” rating.
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Citi analyst Steven Ender thinks Open Text Corp.’s (OTEX-Q, OTEX-T) proposed US$6-billion acquisition of British software company Micro Focus is likely to weigh on its share performance in the near term.
“OpenText was in the early stages of becoming a cloud-based delivery model that should see the model become 85-per-cent recurring in a few years with an acceleration in organic growth yet has seen the narrative shift with the proposed acquisition of Micro Focus (MFGP) for $6-billion in EV (6 times EBITDA, 98-per-cent premium to day prior close),” he said.
“While OpenText believes it can sustain its original targets of driving a $1.1-billion FCF outlook in FY25 including 6-8-per-cent organic cloud growth, we believe the near-term outlook is somewhat out of OpenText’s hands as it waits for the Micro Focus transaction to close in early CY23 in what will be a turn around story with Micro Focus seeing revenue decline. While OpenText believes it can execute its playbook for Micro Focus within 6 quarters of closing, we believe Micro Focus’ own execution will largely drive the near-term OTEX narrative and be an overhang on OTEX shares.”
Given the uncertainty surrounding the deal, which was announced on Aug. 25, Mr. Enders initiated coverage of Waterloo, Ont.-based Open Text with a “neutral” rating and US$34 target. The current average on the Street is US$47.71.
“OTEX has a strong history of M&A execution with the acquisition of Documentum, Carbonite, and Zix in recent years yet the prospect of turning around MicroFocus, a $6-billion EV company that will account for 40 per cent of the combined entity revenue appears to be too much for investors to fathom with OTEX down 14 per cent the day after the MFGP acquisition was announced. Expectations are largely negative on the proposed M&A and we see a limited opportunity for upside in the NT until OpenText can begin to see real success with its turnaround plans (expected close in 1Q23),” he added.
Concurrently, Mr. Enders initiated coverage of 19 other North American back office software firms, which included the HR tech, financial management and collaboration/automation subsectors.
“With elevated recession concerns and back office software likely deprioritized, we favor quality names with strong execution, more resilient pockets of spend with potential catalysts, and a fair valuation,” he said. “Our top picks include CDAY, WK, INTU, and INST with non-consensus Buy ratings on BOX, COUP, and PAYC and non-consensus Neutral ratings on PCTY and SMAR. Included in the report are proprietary CFO and CHRO surveys which indicate a more resilient Back Office spend environment than feared.”
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Calling it “a disruptive proptech firm leading the digital transformation of the traditional property management industry with a differentiated services, platform, and marketplace approach,” Stifel analyst Suthan Sukumar initiated coverage of Tribe Property Technologies Inc. (TRBE-X) with a “buy” recommendation on Thursday.
“With an aggressive consolidation strategy, the company has amassed large and growing scale as a top-10 condo/rental property manager nationally, and is actively unlocking a significant organic growth opportunity by digitizing its existing base and growing pipeline of new communities,” he said. “Tribe is well capitalized and supported by an impressive roster of strategic and real-estate industry backers, positioning the company for solid execution on organic and inorganic growth ambitions, which we see driving strong 20-per-cent-plus top-line growth and steadily improving margins with positive adj. EBITDA by F24. ... We believe Tribe is a high-quality growth story in the making and a compelling play on the powerful yet early days digitization theme within real estate.”
Mr. Sukumar touted the Vancouver-based company’s “highly defensive” business and counter cyclical exposure to real estate with M&A gains as a core growth driver and a “key” source of upside.
“Tribe’s property management business generates a high degree of recurring revenues (more than 80 per cent) with high client retention rates (more than 95 per cent), providing strong forward visibility,” said the analyst. “The company’s digital platform improves scale and operating efficiencies for property managers, driving cost savings and differentiated resident experiences, which we believe is a more attractive value proposition in challenging macroeconomic conditions.”
“While we see M&A as the key growth driver for the story, we believe Tribe has a long runway to grow more than 20 per cent organically over the next several years given multiple drivers for higher-margin revenue growth, including 1) ARPU expansion from delivery of higher-value new construction projects and community deployments via competitive displacements and M&A; (2) monetization of growing end-user transaction volumes on the digital platform within existing communities; and (3) scaling engagement and revenue contribution for the company’s new online marketplace (for 3rd party services like insurance, telco, smart home monitoring) across their national home footprint.”
Seeing an “attractive” valuation, Mr. Sukumar set a target of $4 per share, exceeding the $3.75 average.
“Tribe trades at 1.6 times calendar 2023 estimated Revenues, which compares to legacy property management service firms at 1.0 times, proptech firms at 5 times, and vertical SaaS peers at 6.5 times,” he said. “We believe Tribe’s stronger growth and margin profile from its differentiated tech enabled services model warrants a premium to legacy services peers. Our $4 per share target is based on 3.4 times, a discount to the blended peer average of 4.2 times, to reflect the stock’s smaller scale/market cap and lower liquidity, with room to expand closer to proptech and vertical SaaS peers with continued execution.”
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Echelon Capital Markets analyst Amr Ezzat thinks Blackline Safety Corp.’s (BLN-T) recent $24.9-million financing provides a “runway to sustainability.”
“The financing allows the Company to withstand the elevated working capital drag and high operating costs it currently faces until its recently announced cost-cutting measures and price increases kick into gear and flow into the Company’s P&L,” he said after coming off research restriction.
“Recall, Blackline announced last month a pricing increase on its hardware and services along with cost reduction measures. We believe BLN’s measures will allow it to improve its cash flows and ultimately the sustainability of its business model.”
Maintaining a “buy” rating for shares of the Calgary-based gas detection and cloud-connected safety solutions provider, Mr. Ezzat trimmed his target by $1 to $5, below the $6.25 average on the Street.
Elsewhere, Raymond James’ Bryan Fast cut his target to $6 from $9 with an “outperform” recommendation.
“We maintain our view that Blackline has a competitive lead with its lineup of connected safety products and services,” said Mr. Fast. “Revenue growth has impressed despite facing a disruptive operating environment (COVID, supply chain, economic slowdown), while an outsized gain in expenses in recent quarters resulted in the need to raise cash before the G6 launch. The company addressed the elevated expense levels through several cost-cutting initiatives announced earlier in Aug-22. Coupled with the recent equity raise, Blackline’s financial position is strengthened in advance of the G6 product launch and the ongoing ramp of the G7 product line.”
“Looking ahead, with improved liquidity we expect Blackline is well positioned to roll out the G6 product. The company will balance cost control with high double-digit revenue growth, in an effort to become cash flow positive. We maintain our Outperform, but have reduced our target to $6.00/sh to account for the increased share count and revised assumptions.”
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In other analyst actions:
* RBC Dominion Securities’ Douglas Miehm raised his Bausch Health Companies Inc. (BHC-N, BHC-T) target to $8 from $4.50 with a “sector perform” rating. The average on the Street is $13.83.
“After unrestricting 38.6 per cent of BLCO earlier in August, BHC announced a debt exchange offer taking a step forward with respect to the full separation/spin of BLCO,” he said. “We expect net debt to decline by $2.9-billion (approximately $8 per share) and the leverage at RemainCo to reach close to the 6.7-times levels in the event BHC is successful in the debt exchange. This should pave the way for 50.1% distribution of BLCO shares to BHC shareholders.”
* RBC’s Michael Siperco cut his Skeena Resources Ltd. (SKE-T) to $15 from $23, below the $18.86 average, with an “outperform” rating.
“While we continue to see considerable longer term value at Eskay Creek from ongoing exploration and potential resource growth, we have revised our model ahead of the coming feasibility study primarily to reflect higher cost assumptions (including financing costs/dilution), a mill expansion, longer-dated production and a shorter mine life (with higher average production) and a lower NAV target multiple (1.0 times vs. 1.1 times),” he said. “Our target falls to $15.00 from $23.00; still a significant potential return reflective of the high quality nature of the deposit should financing, permitting and construction milestones be achieved.”
David Leeder