Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Matt Kornack downgraded Allied Properties REIT (AP-UN-T) to “sector perform” from “outperform”, citing continued weak occupancy rates in the office real estate sector. While declining interest rates will be helpful, he notes that it will come with heightened economic risks.
Mr. Kornack’s price target was maintained at C$18.50.
“We now rate all office names sector perform given continued fundamental weakness and uncertainty around timing of an inflection,” he said in a note to clients. Sector perform ratings are the equivalent of a hold.
“Structural issues around higher capex, continued funding needs for development/repositioning and elevated payout/ leverage ratios are complicating factors.”
The analyst says he continues to view Allied’s real estate portfolio favourably and “believes in the longer-term story.”
“That said, valuation today doesn’t provide a big enough risk premium buffer to offset potential negative catalysts. We could be wrong if management is more proactive in sourcing value closer to book on the disposition front in a more meaningful quantum,” he said.
“Mid-80% occupancy represents a declining trend, and while management is adamant that tour activity has been strong, this hasn’t translated into conversions. Whether we are in a secular or cyclical downturn, it is apparent that it will likely persist longer than anticipated. Our short-term expectation is for earnings pressure on higher vacancy and the impact of converting non-cash interest income into ownership stakes (Westbank transactions),” Mr. Kornack said.
He also believes there is now increased pressure to sell off assets and get the balance sheet in better shape. “The recent credit downgrade highlights a need to accelerate deleveraging initiatives and expand the current disposition program, prioritizing strategic asset clusters while disposing density intensive sites or non-strategic properties. Waiting for a conducive sale environment is possible but the cost of capital and future earnings potential could be permanently impaired without a proactive approach. AP’s spreads on unsecured debt have widened materially. Distribution payout and leverage are higher than we like. Management has been adamant that a distribution cut is not necessary but in doing so have removed a useful deleveraging/cash flow retention tool. Adjusting the payout now would have credibility implications,” he said.
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Mr. Kornack of National Bank also downgraded Primaris REIT (PMZ-UN-T) to “sector perform” from “outperform” while cutting his price target to C$15 from C$15.5.
Primaris is primarily an enclosed mall operator and the downgrade mostly reflects a weak consumer. He said this economic backdrop has made him increasingly defensive, as consumers are stretched and high interest rates may continue to dampen spending.
“Enclosed malls have a tenant roster that includes select consumer discretionary and legacy large department stores that may struggle in a recession and could require major capex outlays to reposition space,” Mr. Kornack said. “Demand for retail assets has skewed to smaller sizes and defensive offerings; secondary market malls haven’t had a robust buyer pool, raising questions on how to appropriately value this business (admittedly, the implied cap rate looks attractive).”
He noted that enclosed malls are more economically sensitive. “While we are cognizant that PMZ’s top tenant list contains essential retailers that mirror its retail peers, enclosed malls have a tenant roster that is more economically sensitive and are less defensive vs. grocery-anchored retail. There is also potential for a large, legacy department store player to exit the market, which from a capex perspective would require further capital outlay to reposition the space.”
“In our view, there are limited catalysts in the short term; however, if the portfolio is resilient and sees continued outperformance in operating metrics, trading may react favourably. Strong pricing on a potential sale of Dufferin Mall or other assets could also happen, although broadly speaking, we think management is inclined to grow the portfolio,” the analyst concluded.
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Mr. Kornack of National Bank also downgraded BSR REIT (HOM-UN-T), moving to “sector perform” from “outperform.” His price target was unchanged at US$12.50.
BSR REIT is a small-cap apartment property owner focused on investing in garden-style properties in the U.S sunbelt.
He said the downgrade reflects “a persistent unfavourable supply backdrop in the REIT’s core markets, which in combination with higher leverage and an overhang from low in-place interest rates on existing swaps will be a drag on earnings growth.”
He suspects the new rating, which is the equivalent of a hold, will eventually return to an outperform. “We view this as a temporary move as portfolio performance is likely to inflect as supply comes down, we are just uncertain on the timing and economic conditions are deteriorating, not improving,” he said.
“The glut of new supply working its way through the U.S. Sunbelt is notable, and while new starts have dropped off, we believe it will take some time to stabilize before a return to landlord pricing power. We have no reason to doubt historic population growth / migration patterns in the U.S., although higher mortgage interest rates have reduced the transience of the broader population,” he added.
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Mr. Kornack is much more upbeat on the prospects of Nexus Industrial REIT (NXR-UN-T), which has been transitioning into a pureplay industrial real estate firm. He upgraded Nexus to “outperform” from “sector perform” while raising his price target to C$8 from C$7.5.
He said the REIT is now well into its transitioning into the industrials space, “and appears to be emerging from some operational / capital allocation challenges with a better outlook for near-term earnings growth.”
“In light of this improving backdrop and a mid-7% implied cap rate we think the current entry point looks attractive for investors looking to add a industrial exposure,” he said.
National Bank has increased confidence in NXR’s sector leading growth profile for 2025. The analyst is forecasting NXR to have growth of about 19% funds from operations per unit growth in 2025 versus peers at about 8%. “Additionally, NXR has $140 million in developments coming online by year-end at an average 7.6% unlevered yield, which should further support fiscal year 2025 earnings growth,” he said.
He added that Nexus has a strong foothold in southwestern Ontario and with it, beneficial private operator partnerships. “About 40% of Nexus’ portfolio is located in SW Ontario with the bulk of this space in London (as well as some well-located assets in St.Thomas, a future EV battery hub). London has fared very well relative to other markets given its proximity to transit corridors and limited new development. Additionally, Nexus is well acquainted with private market players in SW Ontario, providing access to a high-quality asset pipeline, local tenant relationships and a development platform.”
“NXR is now 90+% industrial following the completion of an acquisition spree that drove higher leverage through much of 22/23. With that said, management has committed to debt reduction, reining in spending with the ultimate goal of receiving an investment grade credit rating. Lower leverage combined with a strong near-term growth profile and well located portfolio de-risks the balance sheet and provides more certainty on earnings (management is comfortable in their $200 million disposition pipeline, which will help solidify confidence in the name),” Mr. Kornack said.
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National Bank analysts led by Mr. Kornack also upgraded Storagevault Canada (SVI-T), moving to an “outperform” rating from “sector perform”. He maintained a $5.75 price target on the self-storage company.
“On the back of recent marketing, we have grown more appreciative of SVI’s embedded operating platform, its M&A growth prospects, which is combined with a relative valuation that is attractive vs. a hard to acquire asset type and in a structure that supports compounded earnings growth,” National Bank said in a note to clients. “While operations are normalizing, storage provides longer-term leverage to outsized domestic population growth with some defensive characteristics on the supply/demand side. SVI provides the best/largest in class way to play the asset type.”
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Desjardins Securities analyst Jerome Dubreuil cut his price targets on Canada’s big three telecoms on Thursday as he looked ahead to second-quarter results.
His target on BCE Inc. (BCE-T) was cut to C$48 from C$50, on Rogers Communications Inc. (RCI-B-T) to C$70 from C$74, and on Telus Corp. (T-T) to C$25 from C$25.50.
Overall, he is advising investors to remain cautious on the sector, even as a decline in interest rates should act as a tailwind in coming months.
“The recent improvement in inflation data as well as green shoots in terms of wireless competition are positives for the sector in absolute terms. However, we would not recommend an overweight position in the sector just yet given (1) the uncertainty related to back-to-school promotional intensity; (2) the risk related to the upcoming TPIA decision; (3) our expectation that this quarter’s results will lead to questions regarding top-line guidance; and (4) our view that consensus 2025 wireless net additions remains too ambitious,” he said in a note to clients Thursday.
“We have reduced our target prices for the Big 3 on lower medium-term growth expectations—while competitive intensity could abate, we expect it may remain relatively high for several years as QBR aims to gain market share in wireless, RCI establishes its western franchise and BCE increases penetration on its newly deployed FTTH. The back-to-school period could potentially offer a better (either lower or derisked) entry point,” he added.
Regarding his outlook for the three big telecoms specifically, he said:
On BCE: “We have reduced our target ... mostly as a result of lower top-line growth expectations in both the near and longer term. We believe the company should be able to meet EBITDA consensus in the quarter as its restructuring program starts to bear fruit, but our wireless postpaid net additions forecast of 82,000 is below consensus of 97,300. ... While our base case is that the dividend will not be cut in February 2025, it does not necessarily mean this would be the best way forward for the long-term potential of the company given the high payout and slow improvement on this front. The shares’ relatively high valuation (especially vs RCI) and the company’s low growth make it difficult for us to recommend buying the stock before the dividend decision, which is expected early next year.”
On Rogers: “We knew that RCI was dominant in the new-to-Canada category. However, we were surprised when management recently indicated that RCI had a roughly two-thirds market share in this segment, which was more than we previously thought. As we expect the federal government’s curb on immigration to gradually take effect later this year, we have reduced our wireless net additions forecast for RCI more than we did for peers. However, we continue to expect RCI to be the net additions leader in the coming years. In terms of ARPU, the lapping of the Shaw Mobile acquisition should help the sequential comparison of year-over-year ARPU growth. That said, we do not believe RCI is immune to competitive pressure, and we have lowered our ARPU forecast in the quarter.”
On Telus: “Similar to its peers, we expect T’s top line to be affected by competitive dynamics in wireless as well as in Western Canada as RCI works to improve the Shaw assets. However, given that T has progressed further in its restructuring program (announced in August 2023), the benefits of profitability should be on display in the quarter. That said, similar to peers, we have slightly reduced our target price as a result of our reduced top-line growth forecast due to expectations of protracted competitive intensity. T should nonetheless continue to generate strong, mid-single-digit EBITDA growth in the quarter.”
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Scotiabank analyst Konark Gupta has made several price target changes on the transportation stocks he covers in looking ahead to their second quarter earnings reports, and has some suggestions on how investors should position ahead of the results.
“We view Street expectations as fair to slightly conservative for AC and Exchange Income Fund (potential beats), fair for CAE and MDA, and fair to slightly optimistic for BBD (potential miss). On an absolute basis, we think all five companies are on track to achieve their full-year guidance. Our top pick this quarter is MDA, which has not only underperformed recently on short-termism, but has also witnessed its second-best quarter of order activity. We also highlight BBD for our expected strong sequential improvement in free cash flow usage, unlike last year, and significant FCF seasonality in the second half of the year, although we admit the stock’s recent outperformance could lead to volatility if Q2 fails to impress. Even when we expect a good quarter from AC, unlike the prior two quarters, we think the heightened pessimism could maintain pressure in the near term as investors remain focused on unfavourable RASM-CASM [Revenue Per Available Seat Mile-Cost Per Available Seat Mile] spread this year and AC-specific factors (pilots and capex). Regardless, we are bullish on AC given its lower-than-justifiable valuation,” he said in a note to clients.
He trimmed his price target on Air Canada (AC-T) to C$27 from C$29, while raising his target on Bombardier Inc. (BBD-B-T) to C$120 from C$100 and MDA Ltd. (MDA-T) to C$20 from C$18.50.
Even though he trimmed his price target on Air Canada, he notes it remains the cheapest stock in his coverage and the North American airline industry, with valuation even below the pre-pandemic trough at 2.5x EV/EBITDA based on his 2025 estimates. “Its current EV is 40% below the pre-pandemic peak despite EBITDA surpassing 2019 levels and leverage ratio fully normalizing to being the best in the industry,” he said.
Separately, BMO cut its price target on Air Canada to C$30 from C$32.
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A proprietary survey commissioned by BMO shows that consumers are still flocking to Dollarama Inc. (DOL-T).
“Survey results indicate the majority of Canadians (~70%) visit DOL at least once a month, and that 27% are visiting more vs. three months ago. This suggests Canadians continue to have a preference for DOL amidst inflation and that DOL continues to benefit from trade-down. This suggests so far, recent trends are supportive of company’s guidance to deliver 3.5-4.5% FY25E SSS [same-store sales],” BMO analyst Tamy Chen said in a note.
She raised her price target to C$138 from C$133. The average analyst price target is C$130.73, according to LSEG data.
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CIBC analysts led by Hamir Patel have significantly lowered estimates on wood products stocks under their coverage given weaker-than-expected benchmark prices and lower volume assumptions following their latest channel checks.
This resulted in several price target cuts, which included:
Canfor Corp (CFP-T): Target price to C$17 from C$21
Canfor Pulp Products Inc (CFX-T): Target price to C$1.25 from C$1.75
Cascades Inc (CAS-T): Target price to C$11 from C$12
CCL Industries Inc (CCL-B-T): Target price to C$86 from C$83
Doman Building Materials Group Ltd (DBM-T): Target price to C$8.5 from C$9
West Fraser Timber Co Ltd (WFG-T): Target price to C$125 from C$140
Western Forest Products Inc (WEF-T): Target price to C$0.5 from C$0.6
CIBC’s price target on Interfor Corp (IFP-T) was lowered to C$18 from C$22 and it also downgraded its rating to “neutral” from “outperformer”
The CIBC analysts said the ratings downgrade on Interfor reflects its deteriorating balance sheet.
“With nearly half of its lumber capacity in the South, IFP is facing further large losses in the region which will weigh on the balance sheet in coming quarters. We see Interfor’s net debt to cap (~35% in Q1) peaking at ~40% in Q3, close to its 42.5% EBITDA Interest Coverage Ratio covenant. While the company can likely avoid needing to issue equity by reducing capex/working capital, capturing tax refunds and tenure proceeds, the need for a sub-optimal monetization of a mill or portion of the company’s duties (likely at 35 cents on the dollar) may also become necessary depending how long the pricing slump lasts,” the CIBC analysts said.
More broadly across the sector, the CIBC analysts said they are scaling back their lumber company EBITDA estimates “dramatically” for the year ahead.
“Our channel checks suggest consensus estimates for most wood products companies are looking a bit optimistic for Q2, particularly for lumber companies with exposure to the U.S. South. Further out, we expect a somewhat delayed improvement in the housing backdrop is likely to push out a meaningful pricing recovery until deeper into 2025. For Canadian sawmilling companies, consensus forecasts for lumber EBITDA next year are looking very aggressive. We have reduced our 2025 EBITDA estimates on Canadian lumber names by 20%-35%. Even on the OSB side, price decks are likely too optimistic considering that the ~1.5 Bsf/yr of combined capacity associated with the two new mills which started up in early June (Tolko and RoyOMartin) is likely to constrain upward pricing momentum.”
Mr. Patel and his colleagues said their overall pick in the sector is CCL. “We generally favor the packaging space over forestry/building products given more encouraging volume trends and margin stability. We believe CCL’s diversified global platform and end‑market exposure should support steady top-line growth over the cycle. With leverage of only 1.2x, the company is well positioned to be opportunistic with M&A and share repurchases.”
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Desjardins Securities analyst Gary Ho cut his price target on Superior Plus Corp. (SPB-T) to C$11.50 from C$13.50, but reiterated a buy rating.
The move came has he revised his second quarter EBITDA estimate to US$49 million from US$55 million, which is now below the consensus of US$53 million. While margins have been robust in the U.S. and Canada, he noted warmer weather in the U.S. has been negative for propane use.
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In other analyst actions:
G Mining Ventures Corp (GMIN-T): Jefferies raises target price to C$10 from C$2.5
Great-West Lifeco Inc (GWO-T): Jefferies cuts target price to C$42 from C$46
Sun Life Financial Inc (SLF-T): Jefferies cuts target price to C$78 from C$83
Stella-Jones Inc (SJ-T): CIBC raises target price to C$94 from C$86
Teck Resources Ltd (TECK-B-T): JP Morgan raises target price to C$76 from C$72
Alphabet Inc (GOOGL-Q): Mizuho raises target price to $205 from $190
Tesla Inc (TSLA-Q): Barclays raises target price to US$225 from US$180
Johnson & Johnson (JNJ-N): Bernstein raises target price to US$171 from US$161; TD Cowen cuts target price to $185 from $195
UnitedHealth Group Inc (UNH-N): Several analysts raised price targets, including at HSBC, which increased its target to US$610 from US$580