Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Benoit Poirier reiterated his bullish stance on BRP Inc. (DOO-T) after it “once again outperformed expectations by delivering solid results despite ongoing supply chain issues.”
Shares of the Valcourt, Que.-based recreational vehicle maker soared 9.3 per cent on Wednesday following the premarket release of its second-quarter 2023 financial results, which displayed “very robust” consumer demand as “positive” booking activity continues.
“Encouragingly, bookings for Can-Am and Sea Doo products following the recent Club BRP are trending positively, up more than 20 per cent year-over-year,” said Mr. Poirier. “The fully redesigned Manitou and Alumacraft are sold out to dealers, and management is hearing very positive comments on the units pre-sold to consumers.
“BRP revised its guidance for FY23 and now targets normalized EPS of $11.30–11.65 (up from $11.00–11.35); consensus was $11.27. However, management stated that the bulk of the full-year guidance improvement will occur in 4Q (revenue 60/40 and EPS 70/30 weighted toward 4Q vs 3Q). This is mostly due to the small impact of a cyberattack on 3Q results, combined with the continued improvement of supply chain issues over the rest of the year.”
The analyst called the company’s second-quarter results “impressive” with normalized fully diluted earnings per share of $2.94 beating both his $2.54 estimate and the consensus projection of $2.65. Normalized EBITDA also beat expectations ($419-million versus $398-million and $402-million).
“FCF generation was stronger than expected at $220-million vs our forecast of $195-million,” he noted. “Management expects to continue to invest in working capital in 3Q (raw materials as it ramps up production), but this should decline in 4Q and likely contribute to cash generation. In 2Q, BRP increased the capacity of its revolver by $400-million and raised a $100-million U.S. dollar term loan. Net debt to normalized TTM [trailing 12-month] EBITDA ended 2Q at 1.7 times, flat sequentially, compared with our forecast of 1.8 times. BRP still expects capex of $675–700-million in FY23 (we forecast $694-million in FY23) for additional production capacity, product development and manufacturing infrastructure, and to modernize its software infrastructure to support future growth.”
After increasing his estimates for 2023 and 2024 to fall in line with the company’s guidance bump, Mr. Poirier raised his target for BRP shares to $152 from $144, reiterating a “buy” recommendation. The average on the Street is $131.
“Applying a 13-times multiple to the FY25 normalized EPS range of $13.50‒14.50 disclosed at the investor day, we derive a value of $175.50‒188.50 per share,” he concluded. “This revised guidance does not include any share buybacks or M&A. We view this as conservative as management has a long history of delivering shareholder value through NCIB and SIB programs—not to mention the steady increase in the dividend and the possibility of transformative M&A in a new sector. We remain pleased with the targets and the company’s strategic plan. We reiterate our bullish stance on the name and encourage investors to revisit the story given the recent stock pullback.”
Other analysts making target adjustments include:
* Scotia Capital’s George Doumet to $127 from $126 with a “sector outperform” rating.
“Q2 results came in ahead of expectations, driven by robust demand across all products, especially SSVs,” said Mr. Doumet. “The outlook for the rest of the year was constructive, with BRP raising its guidance and calling out some abatement in input cost and supply chain pressures.
“Following upward revisions to estimates in the last few quarters, BRP shares are now trading at a substantial discount to historical valuation (25 per cent). While all signs point to robust demand for the remainder of the fiscal year, we see the sizable ($1-billion-plus) inventory restocking opportunity potentially offsetting any moderation in demand next year. Longer-term, we see continued runway for share gains across all categories (especially with the recent success of Switch) and increased penetration in the marine segment. Finally, on a relative basis, we continue to believe BRP should trade closer in line with Polaris, given its similar growth profile (vs. currently trading at a 2 times discount on EV/EBITDA).”
* RBC’s Joseph Spak to $114 from $113 with an “outperform” rating.
“An F2Q23 beat and guidance raised but mostly due to the better F2Q results so this could prove conservative as retail quarter-to-date is strong and BRP indicated demand solid,” said Mr. Spak.
* CIBC World Markets’ Mark Petrie to $132 from $125 with an “outperformer” rating.
“BRP reported strong Q2 results and increased full-year guidance for revenue and earnings growth. Consumer demand remains strong and pre-orders remain robust. Supply chain conditions are improving and better product availability has supported 20-per-cent unit growth in Q3 to date. Though macro uncertainty will limit valuation, we continue to believe BRP is well positioned to continue building market share and deliver best-in-class growth,” said Mr. Petrie.
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Seeing its “path to profitability not imminent,” Stifel analyst Martin Landry thinks Guru Organic Energy Corp. (GURU-T) shares are now appropriately valued after a drop of 22.8 per cent on Wednesday following the premarket release of its third-quarter results.
Accordingly, he lowered his rating for the Montreal-based plant-based drink manufacturer to “hold” from “buy.”
“Q3FY22 results represented the first quarter that GURU reported a year-over-year revenue decline since becoming public,” he said. “While the company’s volumes increased 14 per cent year-over-year, they were nonetheless lower than expected. GURU was impacted by its product being out of stock at several retail locations during the quarter due to staffing shortages at its distribution partner PepsiCo. The situation has improved post quarter-end, but is not fully resolved and may impact Q4FY22 results. GURU’s shares appear fairly valued, currently trading at 4 times our calendar 2023 sales estimates. This represents a discount of 30 per cent to energy drink peers. This discount is warranted, we believe, given peers are: (1) profitable, (2) growing faster than GURU and (3) more liquid. We have a high degree of confidence in the company’s ability to replicate its Quebec success in the rest of Canada, and our change in rating is more a valuation call than due to concerns about execution.”
Guru reported total revenue for the quarter of $7.73-million, down 4 per cent year-over-year and below Mr. Landry’s $9.242-million estimate. An adjusted earnings loss of 20 cents also missed his forecast (a 6-cent loss).
“GURU is in a marketing investment phase intended to increase its brand awareness,” the analyst said. “Hence, we had expected the large marketing spending (selling & marketing expenses up 75 per cent year-over-year) that occurred this quarter. Comments on the earnings call suggest that Q4 will also face elevated marketing spending before plateauing in FY23. With sales growth slower than expected and expenses sustained, the company’s path to profitability is not apparent in the near term. We have introduced our FY24 forecasts calling for an adjusted EBITDA loss of $10-million, which is a year-over-year improvement from the EBITDA loss $15.5-million we expect in FY23, but still a ways out from breakeven levels.”
“GURU has a strong balance sheet, with cash and cash equivalent of $48 million as of June 30, 2023. We anticipate this cash balance to last beyond FY24, but we forecast a constant depletion, with cash burn of $16 million in FY23 and $10 million in FY24.”
Though he noted the company’s “good” performance in the United States with sales rising 175 per cent year-over-year and improving brand awareness, Mr. Landry dropped his target for Guru shares from $11 to $5, saying he’s “staying on the sidelines until better visibility.” The average on the Street is $9.70.
“We are changing our rating on GURU to a Hold, mostly based on valuation,” he said. “We believe that the shares of GURU are fairly valued trading at 4 times our CY23 sales estimates, a discount of 30 per cent to energy drink peers (MNST, CELH, CBG, OSP). We believe that this discount is fair, given peers are: (1) profitable; (2) growing faster than GURU; and (3) more liquid. Investors currently have a risk-off approach, which reduces the appetite for nonprofitable small caps and, hence, is unfavorable to GURU.”
Other analysts making target changes include:
* Echelon Capital Markets’ Amr Ezzat to $9 from $14 with a “buy” rating.
“GURU Organic Energy Corp. reported mixed FQ322 results ... which saw revenues come 18.9 per cent below consensus but in line with our Street-low forecast,” said Mr. Ezzat. “Revenues were impacted by industry wide logistics constraints. EBITDA was ahead on better GM% and lower SG&A spend than anticipated. We are lowering our target price ... on a tempering of our short- and medium-term forecasts, as well as a recalibration of our valuation parameters.”
* CIBC World Markets’ John Zamparo to $5 from $10 with a “neutral” rating.
“We expect minimal revenue growth over the next two quarters as labour disruptions somewhat persist, the company laps relatively strong results, and GURU narrows its focus to select U.S. markets. Conversely, profitability may be better in F2023 than we had expected, as margins held in well in Q3/F22 and should improve next year, and SG&A has likely peaked. Still, GURU is demonstrating lower growth than anticipated as it learns to operate within the confines of its PepsiCo Beverages Canada (PBC) deal. Although we believe long-term upside is compelling—GURU is taking domestic share in a growing and resilient category—we expect the stock to stagnate until material revenue growth resumes,” said Mr. Zamparo.
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Though Blackline Safety Corp.’s (BLN-T) third-quarter results featured “meaningful” cash outflows, Echelon Capital analyst Amr Ezzat expects it to be the trough in cash burn on “imminent margin improvements stemming from the company’s recent price increase and cost cutting initiatives.”
“Additionally, we expect that favourable changes in working capital management will also help mitigate further cash burn,” he said. “Recall, the Company recently raised $25-million through an equity offering, which padded the balance sheet and mitigates liquidity risk in the near- and medium-term.”
On Wednesday before the bell, the Calgary-based connected safety technology provider reported revenue for the quarter of $18.6-million, up 46.3 per cent year-over-year, in-line with the Street’s forecast of $18.7-million and above Mr. Ezzat’s $17.8-million estimate. An adjusted EBITDA loss of $5.7-million was narrowly better than expected (losses of $6.0-million and $6.1-million, respectively) despite negative free cash flow of $20.6-million.
Trimming his 2022 and 2023 sales and adjusted EBITDA projections, Mr. Ezzat trimmed his target for Blackline shares by $1 to $4, keeping a “buy” recommendation. The average is $5.52.
“We believe a much more aggressive return profile is possible beyond our target price should the Company successfully transition into a positive cash flow generator,” he said.
Elsewhere, Canaccord Genuity’s Doug Taylor to $5 from $6 with a “speculative buy” rating.
“The added liquidity gives the company significantly more breathing room to execute against its highly anticipated G6 launch, which, when combined with the multiple cash flow enhancement initiatives, is expected to propel the company toward breakeven cash flow in F2023,” said Mr. Taylor. “We see evidence that the company is progressing toward this objective as key to unlocking value for shareholders.”
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National Bank analyst Endri Leno anticipates Medical Facilities Corp. (DR-T) will continue with “shareholder-oriented” moves through dividend hikes and its normal course issuer bid.
However, upon resuming coverage following its announcement of a shift in corporate strategy earlier this week, he maintained his neutral stance on the Toronto-based company until he sees “a stabilization of the persistent U.S. medical labour tightness that has also impacted DR’s operations.”
On Tuesday, Medical Facilities announced it intends to “shift its focus away from deploying a growth strategy through acquisitions.” It’s also set to divest its non-core assets, pursue overhead cost reductions, and evaluate and implement strategies to return capital to its shareholders, including the launch of a $34.5-million substantial issuer bid.
“We view the decision to return capital to shareholders positively for several reasons including DR’s: 1) significant cash balance of US$47.7-million; 2) robust CF generation (US$1.05 per share and 12-per-cent CF yield in 2023); 3) minimal capex (US$0.19 per share in TTM); 4) slow capital deployment with the last acquisition,” Mr. Leno said.
The analyst sees MFC Nueterra Holding Co. and SCNC, the company’s ambulatory surgery centres, as the most likely assets to be sold, projecting potential cash inflow of US$22-million.
Maintaining a “sector perform” rating for Medical Facilities shares, Mr. Leno raised his target to $11 from $10.50 after incorporating the SIB updates. The average on the Street is $11.50.
“While we expect 1) improving volumes; and 2) a continuation of returning capital to shareholders, we maintain our Sector Perform rating as we continue to assess DR’s ability to mitigate elevated expenses due to, particularly, tight healthcare labour markets but also inflationary pressures on drugs and other supplies,” he said.
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Seeing its valuation as “more attractive” following a “dramatic” decline in unit price,” Canaccord Genuity analyst Christopher Koutsikaloudis upgraded Inovalis Real Estate Investment Trust (INO.UN-T) to “buy” from “hold.”
“Since announcing a 50-per-cent reduction to its distribution on August 15, Inovalis REIT’s unit price has declined 37 per cent,” he said. “Given the REIT’s retail-dominant investor base, we believe much of the recent selling has been from yield-focused investors following the distribution cut.”
Mr. Koutsikaloudis acknowledged the “significant” near-term challenges facing the REIT, however he thinks “these risks are more than reflected in the current unit price, and value could potentially be surfaced through a going-private transaction.”
“Inovalis SA, the REIT’s asset manager, is a large and sophisticated real estate asset manager with approximately €7 billion of assets under management and relationships with large institutional investors,” he said. “Inovalis SA currently owns a 10-per-cent interest in the REIT. In our view, privatizing the REIT at a large premium to the current unit price but at a discount to IFRS NAV would be a positive outcome for both unitholders and the acquirer. We are, therefore, upgrading our rating.”
He cut his target for Inovalis units to $5 from $7. The current average is $5.81.
“In our view, Inovalis’ recent distribution cut was long overdue and should both preserve the REIT’s balance sheet and provide it with more financial flexibility in the future,” he added.
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Calling its Valeriano discovery “one of the more exciting new Chilean porphyry deposit discoveries in recent years,” Paradigm Capital analyst David Davidson initiated coverage of Atex Resources Inc. (ATX-X) with a “speculative buy” recommendation.
“While Valeriano is an early-stage exploration project, work to date clearly suggests this could develop into a billion-tonne deposit, much like its neighbour to the north, El Encierro,” he said.
Mr. Davidson set a target of $1.25 for shares of the Toronto-based company. The average is $1.95.
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In other analyst actions:
* Morgan Stanley’s Ioannis Masvoulas cut his First Quantum Minerals Ltd. (FM-T) target to $27 from $32 with an “equalweight” rating. The average is $31.69.
* BMO Nesbitt Burns’ Étienne Ricard resumed coverage of Home Capital Group Inc. (HCG-T) with a $45 target, up from $44 and above the $41.67 average, and an “outperform” rating.
“We ... argue the stock is trading at ‘trough earnings, trough multiples’,” he said. “Earnings growth should resume with expectations for NIM to start rebounding in Q4/22 coupled with the accelerated return of capital. Downside risk appears largely priced in (0.7 times book), especially to the extent HCG achieves low-to-mid-teens ROE potential medium term; value investors should take note.”
* National Bank Financial’s Dan Payne increased his target for shares of Kiwetinohk Energy Corp. (KEC-T) to $27.50 from $25, exceeding the $24.20 average, following the release of its preliminary 2023 guidance. He maintained an “outperform” rating.
“Corporate update and preliminary guidance serve to highlight the company’s embedded and on-going value creation; KEC is a poised for a 76-per-cent return profile (vs. peers 33 per cent) on leverage of 0.1 times (vs. peers negative 0.5 times), while trading at 1.4 times 2023 estimated EV/DACF (vs. peers 2.7 times),” he said.
* RBC’s Drew McReynolds lowered his WildBrain Ltd. (WILD-T) target to $3 from $3.50 with a “market perform” rating, while National Bank Financial’s Adam Shine cut his target to $3.50 from $5 with an “outperform” rating. The average is $3.88.
“The company continues to grow its production pipeline with new deals with key partners contributing to enhanced visibility of future revenues and earnings as it switches on more IP in its vault (a new Caillou show as well as 5 new family specials will be produced for Peacock and Teletubbies will see a relaunch on Netflix this November), but guidance implies a necessitated pruning of our growth and margin assumptions,” said Mr. Shine. “HBO Max recently stopped production on a new Degrassi series, with answers being sought by management. WILD still believes that it’s in the early stages of a prolific rollout of Peanuts content over coming years which should steadily drive growth in Consumer Products.”