Inside the Market’s roundup of some of today’s key analyst actions
Given its stock is trading at an all-time high despite a “decelerating” top line, Desjardins Securities analyst Jerome Dubreuil thinks the market is giving CGI Inc. (GIB.A-T) “the benefit of the doubt on the timeline for stronger revenue growth.”
“This creates a situation with less potential upside, but we are also among those anticipating a rebound in the near term based on growing optimism among global peers and sustained strength in bookings GIB has reported lately,” he added. “We also believe GIB’s valuation relative to the market and peers is attractive.
Shares of the Montreal-based business and technology consulting firm rose 0.9 per cent on Wednesday following the premarket release of largely in-line first-quarter 2024 financial results. Adjusted earnings before interest and taxes rose 5.4 per cent year-over-year to $584-million with earnings per share landing at $1.83, meeting the expectations of the Street ($586-million and $1.84, respectively).
Mr. Dubreuil said management’s commentary on its conference call with analysts was “upbeat.” leading him to suggest “the bottom could be over.”
“Our current forecast implies that 1Q FY24 will be the trough for organic growth (1.4 per cent),” he said. “We currently expect organic growth of 2.0 per cent in 2Q and a gradual acceleration to the mid-single-digits in 4Q. Reflecting on this cycle, management believes that the industry has not encountered a deep slowdown, as opposed to some previous cycles, and expects to experience a faster rebound as IT now plays a central role in most business strategies. Comments from global peers also suggest growth is expected to accelerate in 2H.”
“We see many sources of margin improvement in the coming quarters, including: (1) the ongoing cost optimization program (including real estate); (2) better utilization; (3) slower hiring due to lower attrition; (4) growing use of offshore; (5) increased exposure to managed services; (6) higher IP as a percentage of revenue; (7) improvement in geographies that have historically underperformed like Scandinavia; and (8) productivity gains from GenAI. Management also noted that it would not hire in anticipation of higher demand, which should lead to higher margins in 2H. We currently forecast an adjusted EBIT margin of 16.4% in FY24, up from 16.2 per cent in FY23.”
With the company “optimistic” about its M&A potential moving forward, the analyst thinks buyback activity is likely to accelerate.
“Barring significant M&A, we expect management will step up stock repurchases as it aims to achieve its guidance of double-digit EPS growth. It could be challenging to generate this growth without a strong pace of buybacks, in our opinion,” he said. “Meanwhile, during the conference call, CEO George Schindler sounded more optimistic about M&A given the company’s capabilities and current valuations. The company’s low leverage and optimism about the next leg of growth enable CGI to be more aggressive on the acquisitions front, in our view, but we are not holding our breath and forecast minimal M&A given management’s cautiousness in the past. We believe more activity on this front could lead to multiple expansion.”
Maintaining his “buy” recommendation for CGI shares, Mr. Dubreuil raised his target by $1 to $164. The average target on the Street is $158.50, according to Refinitiv data.
Other analysts making adjustments include:
* Scotia’s Divya Goyal to $165 from $155 with a “sector outperform” rating.
“While Q1/24 was a muted quarter for the company (as also noted across global IT players), we expect to see increasing momentum across different CGI verticals and geographies in coming quarters esp. latter half of CY2024 as macro potentially stabilizes, with increased cost optimization efforts to drive margin upside, in turn strengthening the company’s cash profile,” she said.
“Overall, we continue to believe CGI is a well-established global IT Services player which will benefit from increased IT spend as noted by Gartner in their latest F2024 forecast while acting as defensive investment in the meantime, given the sturdiness of the business model driven by its Managed Services practice and IP Solution portfolio and a robust return profile.”
* RBC’s Paul Treiber to $170 from $155 with an “outperform” rating.
“Organic growth continues to slow, given tough comparables and macro headwinds,” said Mr. Treiber. “However, bookings remain solid, which improves visibility to a potential rebound in organic growth. Moreover, management’s optimism regarding acquisitions has increased; CGI has created the majority of shareholder value through acquisitions. Maintain Outperform, as CGI provides long-term capital appreciation (11-per-cent CAGR EPS over the last 10 years) with lower than market volatility (0.85 beta).”
* Raymond James’ Steven Li to $167 from $150 with an “outperform” rating.
“Slower growth in 1Q (approximately 1.3-per-cent organic growth) but bookings and industry data points are constructive and seem to suggest that consulting headwinds are in the rearview,” said Mr. Li.
* Canaccord Genuity’s Robert Young to $166 from $152 with a “buy” rating.
“Managed services performance was a highlight, representing 57 per cent of total bookings and characterized by multiple long duration renewals. We remain confident in management’s margin expansion plans grounded in 1) increasing mix of managed services, 2) growth of IP engagements, and 3) improved utilization with a more stable workforce (lower attrition, more balanced hiring),” he said.
* BMO’s Thanos Moschopoulos to $170 from $155 with an “outperform” rating.
“Organic growth decelerated, reflecting a soft demand environment, although EPS growth was nonetheless up 10 per cent year-over-year (helped by margin expansion, share buybacks and lower interest costs). We’ve made minor changes to our model. We believe the demand environment is likely to improve over the coming months and view the stock’s valuation as attractive relative to peers and our forecasts for EPS growth.,” he said.
* CIBC’s Stephanie Price to $169 from $155 with an “outperformer” rating.
* TD Securities’ Daniel Chan to $170 from $155 with a “buy” rating.
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Touting its “low decline, long life heavy oil asset base supplemented by complimentary Montney assets,” ATB Capital Markets analyst Patrick O’Rourke initiated coverage of Strathcona Resources Ltd. (SCR-T) with an “outperform” recommendation.
“The appeal of Strathcona’s upstream assets and business operations is demonstrated by its low corporate decline and long 2P reserve-life index of 38 years, underpinned by large heavy and thermal oil assets in the Lloydminster and Cold Lake regions, where high quality Montney assets in the liquids-rich fairway at Kakwa and Pipestone provide a natural hedge to gas and diluent heavy oil inputs and further commodity diversification,” he said.
In a report released Thursday, Mr. O’Rourke said he sees the Calgary-based company, which entered the public markets through its late 2023 acquisition of Pipestone Energy Corp., transitioning to organic growth following a “strong track record” of gains by acquisition. He’s forecasting fourth-quarter 2023 total corporate production of 184,100 barrels oil equivalemnt per day, growing to 190,800 boe/d in 2024 and 209,500 boe/d in 2025.
“Management has a strong track record of accretive growth through acquisition in its key assets, growing production by 308 per cent to an ATB estimated 155.0 mboe/d in 2023 (from 38.0 mboe/d in 2020) primarily through its acquisition strategy. However, given that growth has primarily been achieved through acquisitions and not organically to date, some questions have emerged from investors with respect to forecasting the operational acumen of SCR’s technical team. In our view, with the deep and long industry tenure of key management personnel (outlined in our management analysis section), as well as our asset level analysis of the Company’s asset growth and unit operational cost improvements, we believe that we are seeing early indications of strong operations with ample room for significant production and CF growth in both the near- and long-term; operating costs per boe have been noticeably improving over time, while production has been steadily growing, with the Company achieving record Q3/23 thermal oil sales volumes of 57.9 mboe/d and record low thermal oil opex of $17.82/boe (vs a high of $24.78/boe in Q2/22, with quarterly production of 50.4 mboe/d).”
The analyst also emphasized the company’s capital structure transition and a shift to a return model is now important for its shareholder return profile.
“The Company’s current public float is currently limited to approximately 9 per cent of the outstanding 214.2 million shares, which is limited relative to the size of both the production base and overall enterprise value/market capitalization, and is likely to continue to induce a near-term minority interest and liquidity market discount in shares, comparative to similarly sized peers,” the analyst said. “There are several potential paths to improved liquidity and reduced liquidity risk discounts over the next several years; the timing of these events can be difficult to predict, but those investors willing to tolerate liquidity risks in the near-term stand to potentially benefit in terms of equity performance from reduced liquidity discounts over the medium and longer-term. Additionally, we estimate that SCR will exit 2023 with $2.6-billion of net debt outstanding, relative to the Company’s $2.5-billion net debt target at which point the Company will potentially initiate a formal shareholder return of capital program, assuming our ATB estimated 2024 oil price of US$75/bbl WTI. While SCR has significant future shareholder return potential, its near-term 2024 estimated FCF/EV yield of 8.9 per cent (vs average of peers at 10.5 per cent) ranks at the lower end amongst its peers in our coverage, we believe that the appropriate context is to normalize for PPS growth—with 2024 estimated year-over-year PPS growth rate of 15.0 per cent (vs average of peers at 6.5 per cent), SCR then becomes the most attractive total FCF/EV Yield + growth total shareholder yield of 23.9 per cent (vs average of peers at 17.0 per cent). SCR also offers 2024 estimated CFPS growth of 30 per cent (vs peers at 15 per cent) and trades at a 2024 estimated EV/DACF of 3.7 times (vs peers at 5.1 times).”
Mr. O’Rourke set a target of $31 for Strathcona shares. The current average on the Street is $32.31.
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Analysts at RBC Capital Markets added two Canadian companies to the firm’s “Global Energy Best Ideas” list for February.
“In January, the RBC Global Energy Best Ideas List was flat compared to the iShares S&P Global Energy Sector ETF (IXC) which was down 0.8 per cent and a hybrid benchmark (75-per-cent IXC, 25-per-cent JXI – iShares Global Utilities ETF) that was down 1.6 per cent on a sequential basis,” the firm said. “Since its inception in February 2013, the RBC Global Energy Best Ideas List is up 157.4 per cent compared to the S&P Global Energy Sector ETF up 29.2 per cent.”
The newcomers to the list, which now contains 25 equities, are:
* Cenovus Energy Inc. (CVE-T) with an “outperform” rating and $28 target. The average on the Street is $29.63.
“We are adding CVE to the Energy Best Ideas list given the degree to which the stock has underperformed on a relative basis and based upon our candid conversations with Cenovus’ President & CEO Jon McKenzie, which reinforced our confidence that the company’s operating and financial momentum will improve as 2024 unfolds, opening the door to relative share price appreciation,” said analyst Greg Pardy.
* Enerflex Ltd. (EFX-T) with an “outperform” rating and $12 target. Average: $10.53.
“We believe that EFX is positioned for valuation accretion given the stock underperformance in 2023 relative to its peers, with the potential for FCF inflection in FY24 on strong fundamentals and merger integration progress,” said analyst Keith Mackey.
Returning Canadian companies are:
- AltaGas Ltd. (ALA-T) with an “outperform” rating and $32 target. The average on the Street is $32.83.
- Arc Resources Ltd. (ARX-T) with an “outperform” rating and $26 target. Average: $26.64.
- Canadian Natural Resources Ltd. (CNQ-T) with an “outperform” rating and $94 target. Average: $95.61.
- MEG Energy Corp. (MEG-T) with an “outperform” rating and $31 target. Average: $30.12.
- Northland Power Inc. (NPI-T) with an “outperform” rating and $28 target. Average: $32.
- Obsidian Energy Ltd. (OBE-T) with an “outperform” rating and $14 target. Average: $13.06.
- Pason Systems Inc. (PSI-T) with an “outperform” rating and $19 target. Average: $18.29.
- Pembina Pipeline Corp. (PPL-T) with an “outperform” rating and $58 target. Average: $52.29.
- Suncor Energy Inc. (SU-T) with an “outperform” rating and $51 target. Average: $51.
- Superior Plus Corp. (SPB-T) with an “outperform” rating and $15 target. Average: $13.34.
- Topaz Energy Corp. (TPZ-T) with an “outperform” rating and $25 target. Average: $27.04.
- Tourmaline Oil Corp. (TOU-T) with an “outperform” rating and $80 target. Average: $79.53.
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While he reduced his fourth-quarter 2024 financial estimates for Canadian independent power producers based on “mixed weather resources,” Desjardins Securities analyst Brent Stadler is expecting “a relatively positive tone” from companies “given the underlying strong demand for renewables.”
“On a total-return basis in the year to date, our coverage stocks have underperformed the broader resource-heavy S&P/TSX Composite Index by 2.6 per cent but have outperformed by 3.9 per cent over the past three months as inflation has shown signs of easing and rates have started to descend,” he said. “Our IPP coverage universe is generally sensitive to bond yields given its defensive nature and bond-like cash flow characteristics. While rates are in the driver’s seat and primarily affect valuations, we believe fundamentals and sectoral tailwinds remain and continue to gain momentum. We would highlight a positive environment for project returns given continued strong demand from both corporates and governments due to decarbonization objectives and energy security/independence initiatives, with more state-backed RFPs and corporate demand at record levels. Overall, we expect our coverage companies to remain relatively bullish on their outlooks on the quarterly calls. We do not expect any material capex increases or changes to project completion schedules.”
Mr. Stadler continues to recommend investors seek out companies with “solid growth, optionality to fund pipelines and catalysts” and named Boralex Inc. (BLX-T) his “Top Pick” in the group.
“Given its positioning in Canada, France (where it is the #1 IPP), the US and its more recent success in the UK, we continue to believe BLX’s growth outlook is positive. In our view, BLX is the onshore renewables name to own, given its retained FCF, ability to manage industry headwinds, and its delivery of projects largely on schedule and on budget, as well as its impressive rate of backfilling MW in its development pipeline,” he said.
He has a “top pick” recommendation and $44 target for Boralex shares. The average target on the Street is $40.10.
He also named Capital Power Corp. (CPX-T) as his “preferred name” with a “buy” rating and $51 target, exceeding the $44.11 average.
“We believe CPX offers investors compelling value at current levels. It offers exposure to the hot renewables and Alberta power market, and provides a unique re-rate angle, which could add torque to its share price as it works to remove coal (in 2024) and repower the G1 and G2 facilities to be the most efficient gas assets in Canada,” said Mr. Stadler. “Longer-term (2026–27 timeframe), we believe another re-rate is possible as CPX cleans up its strategically important natural gas assets through a hydrogen/carbon capture, utilization and storage (CCS) solution.”
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Seeing accelerating growth as it shifts its focus to a software-as-a-Service (SaaS) business model, Stifel analyst Suthan Sukumar initiated coverage of Sylogist Ltd. (SYZ-T) with a “buy” recommendation on Thursday.
“A CEO retirement and ensuing strategic review set the stage for a new management team, board refresh and growth investments, pivoting Sylogist onto a new trajectory of outsized growth post-successful execution of a SaaS-first model shift,” he said. “We believe this inflection is early days and see potential upside to an already compelling outlook for double-digit organic growth and robust profitability/FCF as the company takes share with proven product-market fit for its ERP/CRM offerings, further differentiated by strong customer service, in an underserved mid-market for public service software. A highly fragmented industry combined with Sylogist’s healthy balance sheet and significant debt capacity presents a unique consolidation opportunity, providing further growth optionality.”
Mr. Sukumar thinks the Calgary-based company now possesses a “differentiated” value proposition in a “underserved” mid-market, providing a “long growth runway.”
“Sylogist sizes their public-service TAM [total addressable market] opportunity at $14-billion-plus across nonprofit, education and government, implying less than 1-per-cent penetration,” he said. “2/3rds of the market is still on legacy software or Excel/Quickbooks with homegrown/manual processes, providing a long runway for displacements and greenfield adoption. NRR expansion (up 2000 basis points since Q1/F22) highlights wallet-share gains with existing customers post roll-out of new SaaS offerings, providing validation of product-market fit, which we believe bodes well for share gains ahead given an underserved midmarket by large vendors and legacy/point solutions that lack the capabilities and scalability required. Further, an emerging displacement opportunity with key comp BLKB’s aggressive renewal pricing strategy could present an opportunity to capture share and yield an estimated $5-25-million in revenue opportunity over the next few years.”
“With a growing pipeline of partners, Sylogist is seeing a ramp in partner-led bookings, which are up 5 times in the recent FQ3, up from 3 times in FQ2, while a long-term strategic partnership with Microsoft is starting to drive stronger inbound interest from the Microsoft partner ecosystem. This is benefiting margins with the off-load of low-margin pro services work to partners, in addition to expanding market reach/customer access, thus freeing up management time for more strategic and highervalue initiatives.”
Touting a “compelling” risk-reward proposition, the analyst set a $14 target of Sylogist shares. The current average is $11.
“Sylogist trades at 8 times fiscal 2025 estimated EBITDA, a discount to larger rule-of-40 vertical software peers at 21 times and SMID-cap software peers at 24 times,” he said. “Our DCF-backed $14/ share target price implies 14 times, a discount to reflect the company’s smaller market cap, lower liquidity, and early-track record of management execution. We see multiple expansions from current levels ultimately tied to better execution on organic revenue growth upside, with more meaningful re-rating on the back of more active M&A (greater pace or size of deals) given potential to accelerate scale.”
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Eight Capital analyst Adhir Kadve thinks the market is “undervaluing” several key segments in Mogo Inc.’s (MOGO-T) total value.
In a Thursday research note titled Uncovering Hidden Value, he said the Vancouver-based financial technology company’s 13-per-cent stake in WonderFi Technologies Inc. (WNDR-T) is worth nearly its entire market capitalization.
“For conservatism, in our valuation we mark-to-market Mogo’s WNDR stake,” said Mr. Kadve. “However, we note that at our WNDR target price [of 50 cents per share], Mogo’s stake would be worth $1.70/share, or approximately $42-million, representing more than 90 per cent of Mogo’s total market capitalization of $51-million, as of January 31st, which, in our view, highlights that the core Mogo operations continue to be undervalued by investors,” he said.
The analyst emphasized its payments subsidiary Carta Worldwide alone could be worth almost 80 per cent of core Mogo’s market value.
“Excluding the mark-to-market value for WonderFi, the core Mogo is currently carrying a market cap of $37-million,” he said. “Mogo noted that its Digital Payments subsidiary, Carta, achieved $9.9-billion in TTM [trailing 12-month] payments volume (as of December 31, 2023), or 36-per-cent year-over-year growth. Assuming a 10 basis points take rate on all volume processed, this would translate to Carta contributing approximately $10-million in revenue to our F23 revenue estimate of $65-million. Companies with payments exposure currently trade at between 2-6 times EV/fiscal 23 estimated Sales and key Carta comp Marqeta (NASDAQ:MQ, Not Rated) currently trades at 2.8 times. Assuming the lower end of that range of 3.0 times EV/Sales and being in line with Marqeta, this would mean that the Carta business is worth $30-million of Mogo’s $37-million total market value (81 per cent). All prior to factoring in any growth assumptions for F24, but recall that the Payments business is another key growth driver in F24.”
Seeing the potential for “significant value to be surfaced,” Mr. Kadve raised his target for Mogo shares to $6 from $5.50, keeping a “buy” rating. The average is $6.50.
“Based upon our analysis above, i.e., Carta value + WNDR stake being worth the entirety of Mogo’s current market cap, it seems as though the market is assigning little or no value to Mogo’s Loan business or the balance of its Subscription and Services business. Both of which are core profitable operations and key drivers helping Mogo return to growth in F24,” he concluded.
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In other analyst actions:
* In response to the late Wednesday release of in-line quarterly results, Canaccord Genuity’s Mark Rothschild cut his Allied Properties REIT (AP.UN-T) target to $20.25 from $22 with a “buy” rating. The average is $22.05.
“We note that 2023 performance was below guidance, indicating that fundamentals have been weaker than management had expected,” he said. “Though management had been presenting a bullish tone consistently over the past few years, that is no longer the case. Guidance for 2024 is less explicit, and suggests that FFO per unit is likely to drop. Specifically, management asserted that FFO per unit, AFFO per unit, and same-property NOI ‘may contract by up to 5 per cent’, and that it would ‘strive for flat metrics’ in 2024.”
* Ahead of next week’s earnings release for both, Scotia Capital’s Mario Saric raised his targets for Brookfield Asset Management Ltd. (BAM-N, BAM-T) to US$46.50 from US$42 and Brookfield Corp. (BN-N, BN-T) to US$49 from US$46.25 with “sector outperform” recommendations for both. The averages are US$38.58 and US$43.76, respectively.
“Overall, we’re reiterating our positive thesis on both BN and BAM (BN prefered in soft landing and BAM in hard landing; slight preference for BN overall) after the Fed [Wednesday] afternoon (’buying the dip’ makes sense), while increasing our BAM and BN target price by 11 per cent and 6 per cent on higher perpetual FRE and the recent BLK-GIP deal,” he said. “One may think we’re “chasing the share price” on the surface but we still think BN is quite undervalued, while BAM’s PEG of 1.4 still looks attractive and our revised multiple is readily supported, in our view. Now we doubt another 35-40-per-cent upside (i.e., BN and BAM bounce from recent trough in late October) and the bar for further share price appreciation moves higher (and AEL deal closing could see BAM share supply), but 15-20 per cent remains an attractive risk-reward profile for 2024.”
* Scotia’s Maher Yaghi reduced his Cineplex Inc. (CGX-T) target to $11 from $11.75, keeping a “sector outperform” rating. The average is $12.96.
“As a result of a general slowdown in box office attendance due to a pushed out movie release schedule as well as accounting dynamics related to the sale of P1AG, we are updating our estimates for Q4 as well as slightly adjusting some estimates for 2024,” he said. “Overall FCF generation in 2024 is still expected to be healthy, but the market remains focused on upcoming debt maturities which, until the company is able to put it behind, the stock will likely remain range bound.”
* Prior to the Feb. 8 release of its third-quarter earnings, CIBC’s Todd Coupland increased his Lightspeed Commerce Inc. (LSPD-T) target to $27 from $24 with a “neutral” rating. The average is $28.34.
“We expect FQ3 year-over-year organic revenue growth of 25.5 per cent, which is aligned with FactSet. Our forecast assumes this will largely be driven by ARPU [average revenue per user] expansion from upselling existing merchants and a rising Payments attach rate,” he said. “We expect this will be partially offset by macro headwinds and churn among merchants at the low end of the market.
“To reconsider our Neutral rating, we would like to see a path to accelerating subscription growth. When that materializes, we expect it to raise Lightspeed’s overall growth, free cash flow and the valuation investors are willing to ascribe to it.”
David Leeder