Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Jason Gursky thinks MDA Ltd.’s (MDA-T) US$2.1-billion contract to build almost 200 low-Earth-orbit satellites for Telesat Corp. (TSAT-T) is “akin to ‘catching a whale’” for a company of its size.
“We like the outcome there as it provides a clear path to solid revenue growth through 2025,” he added. “In the quarter itself, the Robotics and Satellite Systems businesses posted 20 per cent plus and 50-per-cent-plus growth respectively given several wins over the past 18 months, and operating cash flow as a percent of Adj. EBITDA came in at 96 per cent vs. the company’s long-term target of 80 per cent.”
Mr. Gursky said last week’s announcement “positively surprised” investors, noting the award compares favourably to MDA’s current backlog of US$1-billion while reduced Telesat’s cost estimates for the project nearly in half.
“It appears MDA’s technical approach (digital vs. analog payload) allowed it to offer a lower cost solution than a competitor, thus providing Telesat a path to close its long-standing funding gap for the project,” he said.
“We are cautious on firm, fixed-price development programs – particularly in the space industry given the dependency on suppliers and the difficulty of designing and building new types of space craft that are meant to last over a decade in harsh environments. And this is precisely what the company signed up for with the Telesat constellation as it appears the key selling point was a new digital payload system that the company has yet to develop. Also, the company has never produced spacecraft at the type of volume level required for the program. And this problem is further compounded by the fact that the company is also simultaneously working on a multi-satellite build for Globalstar. Perhaps needless to say, management is going to have its hands full in managing a complex technology development project while also ramping a complex supply chain and production system. We recognize that MDA has a long heritage in producing components, robotics, and earth observation spacecraft, but this level of activity is going to be unprecedented, and the firm, fixed price nature of the Telesat order likely leaves little room for the delays and cost overruns that are typical in the industry.”
Raising his financial forecast with the win and after in-line second-quarter results, Mr. Gursky increased his target for MDA shares to $11 from $8, keeping a “neutral” rating. The average target on the Street is $12.79, according to Refinitiv data.
“In our view, current valuation is appropriately pricing in the growth outlook and risk associated with the new win – which is essentially a firm, fixed price development program,” he said.
“We like the company’s positioning as largely a provider of picks and shovels (spacecraft and related components) to a market in which Citi expects mid-to-high single digit growth, and its emphasis on more reliable government customers. However, we are concerned about the timing of the revenue ramp of several key programs, including the Canadian Surface Combatant, Globalstar’s multi-satellite constellation, and the company’s own CHORUS roll-out to provide synthetic aperture radar to both commercial and government customers. Furthermore, we note that Radarsat2, which generates roughly $40-million in revenue, is well beyond its design life and will be operating without contingency until the CHORUS program is fully operational. Importantly, we note that the company recently pulled the slide outlining its 2025 revenue targets from its investor deck, suggesting the outlook is no longer valid. Additionally, we view earnings quality and cash conversion as lower than peers and find that the company’s use of IFRS (vs. US GAAP) makes valuation comps difficult.”
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In a research report released Thursday titled Investors, do your homework now, National Bank Financial analyst Tal Woolley examined the potential outcome for the strategic review underway at NorthWest Healthcare Properties REIT (NWH.UN-T) after meeting with senior management following last week’s release of second-quarter results, believing it is eager to find a “more sustainable footing.”
“Three reasons to spend some time on NWH now ... First, NWH is in the index, so if it does pursue some beneficial changes, it could be an outperformer relative to a highly correlated group of peers,” he said. “Second, NWH holds a portfolio of differentiated assets that are part of local healthcare infrastructure (to varying degrees), with very long-term leases and a high degree of inflation protection, offering good NOI visibility. Third, NWH’s problems are predominantly a balance sheet issue. If the asset performance is stable, a solution for the balance sheet likely exists.”
Mr. Woolley recommends Northwest should “materially” reduce its distribution “as part of rebalancing its stakeholder interests (making as deep a cut as permitted by NWH’s tax position), limiting the NAV drain for unitholders while profitability is lower, and keeping leverage in check for lenders.”
“Distributions can be raised with successful execution,” he added. “We believe NWH should reconfigure its holdings by 1) expanding its disposition program, accelerating the repayment of expensive debt; and 2) consider exiting recently entered markets where long-term JVs are not in place (e.g., U.S., UK) to free up capital to facilitate a permanent reduction in NWH’s debt. This should give NWH the ability to reboot its business/capital markets profile under more manageable terms, allowing its assets’ growth to fall to the bottom line for unitholders.”
While he reduced his funds from operations forecast, Mr. Woolley raised his target for Northwest units to $7 from $6.50 to “compensate for the prospect of a lowering leverage profile on what we see as ‘nearing trough’ forecasts.” The average is $8.64.
“We believe the strategic review is not solely focused on facilitating a change of control (as is the usual custom where one is announced) but is a signal to all stakeholders to expect larger changes,” said the analyst, who reiterated a “sector perform” recommendation.
“As we previously discussed, we believe there are challenges in potentially finding a buyer for the entire REIT, and we believe (but cannot say for certain) that a buyer of the entire REIT would likely need to be Canadian to keep NWH’s structure intact on a tax-efficient basis. We also think splitting up the company to multiple different buyers would bring about a different set of tax and transaction cost questions. Resetting the distribution policy, offering a roadmap for leverage reduction, and possibly considering strategic retrenchments from recently entered geographies are ideas we believe could be successful.”
Elsewhere, BMO’s Michael Markidis cut his target to $6.50 from $7 with a “market perform” rating.
“We believe the change, which is primarily driven by a contraction to our target multiple, is warranted due to (1) the Q223 FFOPU shortfall and (2) what we see as a slower pace to non-core asset sales versus what was previously communicated,” he said. “The operating performance of NWH’s healthcare real estate portfolio has been solid; however, capital structure risk is elevated and near-term liquidity is a concern. Moreover, we believe the probability of an en-bloc sale is low.”
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While he saw Cresco Labs Inc.’s (CL-CN) second-quarter results as “strong,” Echelon Partners analyst Andrew Semple warned of “relatively fewer immediate growth catalysts” and cautions investors will need patience for long-term opportunities after its mutual agreement to terminate a US$2-billion merger with Columbia Care Inc. (CCHW-N).
Before the bell on Wednesday, the Chicago-based cannabis company reported revenue of $197.9-million, up a “surprise” 1.9 per cent quarter-over-quarter and exceeding both Mr. Semple’s $192.6-million estimate and the consensus forecast of $194.2-million. Adjusted earnings before interest, taxes, depreciation and and amortization of $40.5-million jumped 38 per cent sequentially and also easily topped expectations ($33-million and $30.8-million, respectively).
“Reported revenues and adjusted EBITDA were higher than expected, breaking a previous six-quarter streak of underperforming our EBITDA forecasts, with EBITDA 22 per cent better than our Street-high forecast,” said Mr. Semple. “Notably, wholesale revenues held flat quarter-over-quarter compared to our forecast for a 7-per-cent decline. New third-party stores gradually opening in Illinois plus ongoing inventory liquidation helped to stabilize wholesale shipments, despite the ongoing slowdown in wholesale market conditions across many states. In addition, management has taken a meaningful amount of costs out of the business, reporting that normalized SG&A costs declined by $7-million quarter-over-quarter, plus further cost reductions made in the COGS line. These conditions combined to drive the better-than-expected Q223 results.”
Despite the outperformance and the expectation for improving cash flow, Cresco’s guidance indicated sales for the second half of the year that falls short of projections.
“Management expects H223 revenues to be down by high single-digits relative to H123. We calculate that a 5-9-per-cent decline would indicate H223 revenues of $357-373-million, compared to our prior estimate for H223 sales of $398-million and the consensus estimate of $400-million,” said Mr. Semple. “Part of the reason for this was a divestiture made in Maryland, resulting in these revenues needing to come out of our model for H223 – though we conservatively only attributed $7.5-million of H223 sales to Maryland. We also see this guidance as potentially being conservative, and our new revenue estimates call for H223 sales of $375-million, what we would call a mid-single digit decline of 4.4 per cent. But we are not overly confident in the assertion that the sales guidance is conservative, with several moving pieces likely to create variability to our estimates.”
With decision to walk away from the Columbia Care at the end of July, Mr. Semple now does not see major growth catalysts for the next 12-18. Instead, he expects focus to be on “internal optimization” and thinks revenue growth could trail peers with exposure to new markets, including New Jersey, Maryland and Connecticut.
“Longer-term, we see significant growth potential in Cresco’s states such as Pennsylvania, Ohio, Florida, and New York from potential adult-use market legalization,” he said. “We exclude adult-use programs in these states from our financial forecasts and valuation model as we await regulatory catalysts. In the case of New York which has already legalized adult-use, we are looking for a clear start date for former medical operations (such as Cresco) to be allowed to enter the adult-use market. Regulators are eyeing December 2023 or January 2024 to allow medical companies to launch adult-use sales, though some operators have cautioned that this timing is not yet finalized.”
Reducing his long-term financial forecast, he cut his target for Cresco shares to $2.25 from $2.75, maintaining a “hold” rating. The average is $5.18.
“With an implied return to target of 51 per cent (relative to more than 200 per cent on average for most other covered U.S. cannabis companies, given several years of tough capital markets conditions), we believe this continues to warrant a Hold rating,” said Mr. Semple. “We prefer to remain tactfully to the sidelines with our rating since the Company will likely continue to have some ongoing noise in its financial results asset closures undertaken in H123, and with relatively fewer growth catalysts in the immediate term. One factor we previously called out when initially moving to a Hold rating was that our EBITDA forecasts were 30 per cent below consensus estimates at the time. This has narrowed considerably, with the consensus moving closer to our figures. We believe forward estimates may find some support in H223 as Cresco focuses on cashflow and cost cutting, which could lend support to its valuation.”
Elsewhere, Stifel’s Andrew Partheniou cut his target to $1.50 from $2, reiterating a “hold” rating.
“CL reported a Q2/23 beat on all reported metrics, highlighted by the largest sequential EBITDA improvement in our coverage mainly driven by a focus on its highest margin assets,” he said. “Management indicated a continued rationalization of dilutive assets with H2/23 revenues down HSD [high single-digit] sequentially to benefit profitability with EBITDA margin already hitting its previous 20-plus-per-cent guidance for H2/23. Hence, we are encouraged by management’s execution thus far and look towards a pivotal H2/23 as CL navigates its $50-million tax obligation in October for which we would expect some mortgage debt may be necessary to provide a comfortable cash buffer nearterm. As a result, we maintain our HOLD rating, adjusting our target accordingly and could be more constructive on the company’s outlook with greater clarity on its normalized footprint and balance sheet.”
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Scotia Capital analyst Mario Saric thinks there’s “still some gas left in the tank” for Boardwalk REIT (BEI.UN-T), raising his financial forecast following in-line second-quarter results that he saw as a “slight positive.”
“BEI is maximizing occupancy, even if it means moderating rent growth (on both new and renewal leases) as a big improvement in market demand increases a focus on ‘self-regulation’ (as a means of limiting regulatory risk, in our view; question is whether competitors will follow),” he said. “BEI believes Edmonton (35 per cent of Q2 NOI) is its strongest market on the margin (given still affordable rent; $1,282/suite vs. $1,326/suite portfolio avg.) and believes the recovery is only in the ‘early innings’.”
“BEI occupancy is near-max, driving near-record sequential revenue growth, accelerated incentive burn-off, and a 3-per-cent uptick in 2023 FFOPU [funds from operations per unit] guide. That said, the biggest positive change for us is the 4-per-cent upward revision to 2024 FFOPU as it dampens a prior risk; a possible significant deceleration in FFOPU growth.”
Mr. Saric is now expecting year-over-year FFOPU growth of 10.1 per cent in 2024, down from his 2023 estimate of 11.6 per cent versus peer averages of 10.3 per cent and 2.9 per cent.
“We see lower risk of outflows into peers as investors shift focus to 2024 earnings in the fall, though decelerating rent growth should remain on the radar,” he said.
“Overall, while growth is showing signs of decelerating (year-over-year comps getting tougher + rent growth moderating), double-digit FFOPU growth + guidance exceeding in-place consensus supports a higher unit price.”
With higher revenue projections, Mr. Saric hiked his target for Boardwalk units to $76 from $70, keeping a “sector perform” recommendation. The average is $74.23.
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Credit Suisse analyst Fahad Tariq expects a better second half of 2023 for precious metals companies.
“Gold producers in our coverage continue to guide to H2-weighted production,” he said. “For some companies, production will have to pick up meaningfully to meet annual production guidance (e.g., Newmont, Barrick), while other companies can achieve annual guidance even if production remains flattish in H2 (e.g., Agnico Eagle, Alamos Gold, New Gold). As a result of the higher production, costs are generally expected to decline in H2.”
“In Q2-23 conference calls, management teams generally noted stabilizing input costs and/or initial signs of easing inflationary pressures, but no meaningful improvements to the overall cost structure yet. Consumables prices have started to soften a little (e.g., diesel) while elevated labour costs remain a challenge, particularly for Canadian operations. On opex, IAMGOLD is now guiding to the top end of its 2023 cash cost and AISC guidance ranges (i.e., approximately $1,700/oz AISC [all-in sustaining costs]), citing ‘cooling, yet still present, inflationary pressures.’ On capex, Eldorado Gold plans to update its Skouries Feasibility Study capex estimate by the end of Q3-23 based on major contracts to be executed in Q3 and other new information.”
In a research note released Thursday, Mr. Tariq raised his targets for these companies:
- Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “outperform”) to US$61 from US$60. The average is US$66.60.
- Centerra Gold Inc. (CG-T, “neutral”) to $9 from $8.50. Average: $10.57.
- Kinross Gold Corp. (KGC-N/K-T, “neutral”) to US$5.50 from US$5.25. Average: US$5.98.
- Triple Flag Precious Metals Corp. (TFPM-T, “outperform”) to $24 from $21. Average: $23.72.
- Wheaton Precious Metals Corp. (WPM-T, “neutral”) to $66 from $63. Average: $74.13.
Mr. Tariq lowered his targets for these stocks:
- Alamos Gold Inc. (AGI-N/AGI-T, “neutral”) to US$12.50 from US$13. Average: US$13.30.
- Barrick Gold Corp. (GOLD-N/ABX-T, “outperform”) to US$20 from US$22. Average: US$22.96.
- Eldorado Gold Corp. (EGO-N/ELD-T, “underperform”) to US$9 from US$10.75. Average: US$12.75.
- Franco-Nevada Corp. (FNV-N/FNV-T, “neutral”) to US$150 from US$157. Average: US$159.63.
- Iamgold Corp. (IAG-N/IMG-T, “neutral”) to US$2.50 from US$3. Average: US$3.19.
- New Gold Inc. (NGD-N/NGD-T, “neutral”) to US$1.15 from US$1.20. Average: US$1.36.
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Believing “ongoing uncertainty surrounding the timing of credit issuance from the flagship Rimba Raya project represents a concern,” Raymond James analyst David Quezada lowered Carbon Streaming Corp. (NETZ-NEO) to “market perform” from “outperform” previously.
“While we maintain a positive bias on Carbon Streaming’s status as a first mover in the voluntary carbon industry, we harbor concerns over uncertainty stemming from repeated delays in the receipt of credits from the Rimba Raya project,” he said. “Although the company does appear to be making progress in cost-cutting, we believe the timeline to the company reaching cash flow positive operations has also been extended — something we now anticipate occurring in 2H24. As a result, despite an attractive valuation and the ongoing ramp-up of carbon credit volumes, we are adopting a neutral stance.”
Mr. Quezada cut his target for the Toronto-based company’s shares to $4 from $6. The average is currently $4.45.
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In other analyst actions:
* Credit Suisse’s Andrew Kuske raised his target for Capital Power Corp. (CPX-T) to $57 from $56, keeping an “outperform” rating. The average target is $49.92.
“On August 2nd , Capital Power Corporation (CPX) reported Q2 2023 results that were generally on the lower end of expectations largely attributable to ‘ill-timed outages’ versus management’s expectations,” he said. “Even with the weak Q2 print, CPX continues to expect ‘strong fleetwide performance’ in the balance of the year and EBITDA and FFO to ‘be above the midpoints of our annual guidance.’ Much of that view is attributable to the contracting and hedging program along with the expected robust Alberta power pricing, but is more cautious than prior views of ‘trending to the upper end’ of past expectations. The quarter clearly highlighted some operational challenges in a volatile power market and the associated impacts. Even with that view, we continue to favour the risk-reward relationship with CPX – especially with the core Alberta portfolio position ... To us, CPX is very well positioned with the core Alberta portfolio on both price along with further capital investment for volume growth on an advantaged network basis. That core price capture and network expansion potential is balanced by a variety of opportunities for midcycle natural gas plant opportunities on a value-oriented basis mostly outside of Alberta. That established value uplift model is also supported by CPX’s capacity growth in renewable power across several North American regions. Beyond these efforts, the potential for carbon capture and utilization activities are interesting when one considers a recent Canadian private company buyout.”
* CIBC’s John Zamparo cut his Diversified Royalty Corp. (DIV-T) target to $3.20 from $3.30, below the $3.99 average, with an “outperformer” rating.
“We have increased our estimates for DIV’s 2024 distributable cash flow based on another quarter of meaningfully higher revenues than expected from Mr. Lube,” he said. “A slightly lower cash flow multiple (now 12 times, from 12.5 times previously) causes us to trim our price target ... We maintain our Outperformer rating, as we see DIV as a defensive name for investors amidst continued economic uncertainty. DIV’s current valuation (10.7 times 2024E EV/EBITDA) seems to be pricing in a far more negative outcome for AIR MILES (AM) than is likely. We view this asset as mostly derisked, and the pilot with Dollarama should allay some investor concerns.”
* Laurentian Bank Securities’ Jonathan Lamers resumed coverage of Hydro One Ltd. (H-T) with a “hold” rating and $38 target. The average on the Street is $38.96.
“We believe Hydro One has been attracting investment as a ‘safe haven’ given its low mix of variable rate debt in the capital structure and predictable growth plans focused on the regulated Ontario market,” said Mr. Lamers. “As a result, we see limited room for further valuation expansion from current levels and expect returns to be driven primarily by earnings growth & dividends going forward.”
* TD Securities’ Arun Lamba trimmed his Marathon Gold Corp. (MOZ-T) target to $1.45 from $1.55 with a “speculative buy” rating. The average is $1.93.