Inside the Market’s roundup of some of today’s key analyst actions
Canada’s oilfield services market remains “relatively well-balanced” heading into fourth-quarter 2023 earnings season, according to National Bank Financial’s Dan Payne.
“Insulation and opportunity is noted through unique & high-quality exposures, in support of a resilience & quality of earnings that should validate a stability of returns and a very sound risk-adjusted value proposition for the group – very simply, nothing’s hurting and nothing is helping, and an appreciation for balance of a historically volatile sector will be the theme,” said the equity analyst.
However, despite seeing the value proposition of the group remaining “sound,” Mr. Payne reiterated his neutral stance from an investing perspective, hoping for “visibility towards a tangible inflection of activity to support greater momentum of value within the group.”
“Our bias at this time is selective, looking towards names with differentiated value propositions, like an opportunistic narrative in EFX, and an outlier for growth in PSI (tangible growth catalyst to compound its longterm value potential), which are less aligned with the activity cycle than other high-quality businesses like CEU, PD, TCW (which each respectively hold their own value tailwinds),” he said.
Seeing it “appearing to be turning the corner,” Mr. Payne upgraded Enerflex Ltd. (EFX-T) to an “outperform” recommendation from “sector perform” on Thursday, believing its recent operations update is “implying a solid profile of recent earnings, free cash and de-leveraging (perhaps even underappreciated relative to our estimates; somewhere between their $120-million gross debt and our $20-million net debt estimate, or about down 5 per cent quarter-over-quarter).”
“Certainly a positive trend for a company that is in the midst of re-establishing its credibility with the Street, and with continued maintenance of its outlook, with ‘24 returns expected to be intact on a levelset capital program (i.e., $135-million 2024 estimated vs. $175-million 2023e) to support meaningful free cash generation in support of de-leveraging (below its less than 2.5 times D/EBITDA target) before pivoting towards a sustainable inflection to its dividend in the medium-to-long term,” he added.
Mr. Payne also highlighted what he sees as a “disciplined” outlook for the Calgary-based company.
“Reinvestment for the time remains disciplined and moderate growth capex (30-per-cent allocation) will be allocated towards return-oriented opportunities (thematic tailwinds like associated gas and electrification, etc. are notable),” he said. A sound outlook, where validation of earnings, in addition to further streamlining of efficiencies across the business (including the impact of synergies and de-leveraging), should confirm its ultimate value profile in support of multiple re-expansion and shareholder value.”
The analyst maintained a $10 target for Eneflex shares. The current average is $10.53, according to Refinitiv data.
“Absolutely differentiated from a narrative standpoint (relative to traditional OFS peers), and we believe its re-establishment of sentiment should follow on consistency of earnings, and we expect Q4/23 earnings to be sequentially up 3 per cent quarter-over-quarter (vs. peers down 4 per cent), while our 2024 estimates hold a 1-per-cent year-over-year trend before inflecting slightly higher in to 2025 (up 3 per cent),” he said. “The stock currently trades at 3.8 times EV/EBITDA (2024e), a 21-per-cent discount to its historical multiple and 44-per-cent discount to the peers.”
Mr. Payne’s upgrade came alongside an update to his activity forecast for the sector.
“The cycle continues to evolve, where activity & utilization has generally stabilized, and pricing and margins (net of a moderated backdrop of inflation) generally remain intact,” he said. “With that, we expect consistency of returns in the near-term (possibly minor deceleration seasonally), before inflecting higher over the medium-to-long-term. As such, the value proposition of the group to be supported by the resilience & quality of earnings, which in association with ample free cash and return of capital, should suggest an expanding multiple profile for best positioned operators across the group.”
“Our revised forecasts (commodity & activity) sees us largely maintain our estimates (down 3-per-cent change on average), relatively tightly aligned with consensus (approximately +/- 5-per-cent variance), while implying very little rate of change (5-10 per cent per annum), and which is indicative of the suggested resilience & quality of earnings within the group, where stability of returns of a relatively efficient industry should continue to support excess free cash in support of shareholder returns and value for the group that remains trading at a 25-50-per-cent discount to its historical multiple.”
His ratings and targets for the four other stocks in his coverage universe are:
* CES Energy Solutions Corp. (CEU-T) with a “sector perform” rating and $4.75 target. The average is $5.12.
* Precision Drilling Corp. (PD-T) with a “sector perform” rating and $135 target. Average: $125.47.
* Pason Systems Inc. (PSI-T) with a “sector perform” rating and $20 target. Average: $18.29.
* Trican Well Services Inc. (TCW-T) with a “sector perform” rating and $6.75 target. Average: $5.67.
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National Bank Financial analyst John Shao thinks Computer Modelling Group Ltd. (CMG-T) has “meaningful” upside, believing its stock has just “priced in a conservative scenario when it comes to deploying capital towards M&A” despite a rally in 2023.
In a research report titled Answering the Million-Dollar Question, he initiated coverage of the Calgary-based company with an “outperform” recommendation, seeing potential gains from both its existing business and M&A opportunities.
“First started as a research institute, CMG has a rich history in applying advanced physics, mathematical modelling, geoscience and engineering techniques to develop its core simulation offering that is now considered the gold standard in Enhanced Oil Recovery (EOR), unconventional (e.g., shale and heavy oil) and Energy Transition,” said Mr. Shao. CMG’s reservoir simulation is a fully transferrable technology that can be applied to CCS (Carbon Capture and Storage) projects directly, and the Company has already established its leadership in this market. With favourable government policies supporting the sector’s energy transition, this theme is expected to be a major organic growth driver.
“Based on an already strong business model, the biggest opportunity comes from a disciplined M&A strategy to transform CMG into a ‘Tech platform” within the energy and the adjacent verticals to qualify for a valuation re-rating beyond typical oil and gas service providers. While it’s still in the early innings of that strategy, CMG does exhibit a combination of strong attributes to potentially become a successful acquirer.”
Mr. Shao called Computer Modelling “the gold standard in reservoir simulation” and sees its biggest opportunity stemming from its roll-up strategy
“Based on our discussions with a group of industry experts and customers, we learned that CMG stands out in the oil and gas sector (both conventional and unconventional) and the energy transition market with two of its solutions ‘GEM’ and ‘STARS’ effectively being the gold standards in the industry, well ahead of its competitors in terms of both production functionalities and market share,” he said.
“Based on an already strong business model, the biggest opportunity comes from a disciplined M&A strategy to transform CMG into a ‘Tech platform’ within the energy and the adjacent verticals to qualify for a valuation re-rating beyond typical oil and gas service providers. While it’s still in the early innings of that strategy, CMG does exhibit a combination of strong attributes to potentially become a successful acquirer.”
Touting the presence of macro tailwinds and seeing it an inflection point, Mr. Shao set a Street-high target of $12.50 per share. The average is $11.09.
“Candidly, for a Company with more than two decades of history as a public company, the sole focus on reservoir simulation in the past and the volatility in the energy market has historically limited its upside,” he said. “With the introduction of the ‘CMG 4.0′ concept under CEO Pramod Jain, we believe this time is different. If anything, we believe CMG is now well-positioned to monetize market tailwinds and leverage its balance sheet to pursue transformational M&A while repositioning itself from a research-oriented organization to a market-oriented company, all of which have the potential to drive outsized organic growth.”
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BMO Nesbitt Burns analyst Tom MacKinnon expects few surprises from fourth-quarter earnings season in Canada’s insurance sector.
“The fourth of the new IFRS17 prints, so still a learning experience, especially for lifecos,” he said. “Still we expect no surprises, with Q4/23E core/base/underlying EPS estimates generally in line with consensus. MTM impacts that account for a large part of the differences between core/underlying/base EPS and reported EPS are expected to be small for Q4/23 (unlike the case in Q3/23), as the MTM impact of Q4/23 favourable equity markets help offset a portion of the once again likely lower than expected ALDA/private NFI asset returns. We continue to believe organic capital generation is a comprehensive KPI for lifecos, especially under IFRS 17 (IFRS 17 earnings are not representative of organic capital generation), and our top picks, SLF & IAG, look more attractive on this measure. For P&C insurers we are generally in line with consensus, looking for 2024 CAT loss guidance from IFC/DFY. Top P&C picks are FFH & IFC.”
For life insurance companies, he made these target adjustments:
* Great-West Lifeco Inc. (GWO-T, “market perform”) to $44 from $42. Average: $43.
* IA Financial Corp. Inc. (IAG-T, “outperform”) to $101 from $99. The average is $100.75.
* Manulife Financial Corp. (MFC-T, “market perform”) to $31 from $29. Average: $30.50.
* Sun Life Financial Inc. (SLF-T, “outperform”) to $80 from $70. Average: $74.
For property and casualty insurance firms, his changes are:
* Fairfax Financial Holdings Ltd. (FFH-T, “outperform”) to $1,550 from $1,400. Average: $1,607.20
* Intact Financial Corp. (IFC-T) to $230 from $225. Average: $224.73.
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With the group valuation of his North American restaurant coverage universe nearing its three-year average heading into earnings season, RBC Capital Markets analyst Christopher Carril is “continuing to lean more cautious/selective.”
“Fundamentals, meanwhile, appeared to have remained steady in the 4Q (e.g., casual dining industry same-restaurant sales up 1.9 per cent, in line with 3Q), and while we view company commentary from recent investor days and the ICR Conference earlier this month as generally constructive, tougher industry comparisons in January could temper 1QTD commentary,” he said in a research note. “Lastly, following the announcement of [Restaurant Brand’s] plan to acquire [Carrols Restaurant Group], we wonder to what extent M&A will also be a focal point this earnings season.”
For Tim Hortons and Burger King parent Restaurant Brands International Inc. (QSR-N, QSR-T), Mr. Carril expects investor focus to “remain on the company’s and franchisees’ progress toward improving the health and profitability of QSR’s brands, along with comp store sales momentum and development.”
“For Tims Canada, we believe that continued focus on the quality of TH Canada’s food and beverage offerings — along with growing digital engagement — should support continued solid comp performance during the 4Q (we model TH segment comp growth of 7.5 per cent),” the analyst said. “Additionally, potential to further expand the PM daypart business and cold beverage platform mix via menu innovation remain key opportunities for sustainable, longterm growth, in our view.”
He raised his target for its shares by 5 per cent to US$91 from US$87, keeping an “outperform” recommendation. The average on the Street is US$83.41.
“BK US -specifically remodels and franchisee health - will remain in focus, particularly following last week’s announcement re: QSR’s planned acquisition of public-traded franchisee TAST,” he concluded. “We believe BK trends have remained solid, particularly following TAST’s preannouncement earlier this month (7.2-per-cent BK 4Q comp, vs. prior Street estimates at 5.2 per cent). Finally, we’ll be looking for updates on franchisee economics, which the company will provide with 4Q earnings.”
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Seeing a high probability for its definitive agreement to be acquired by an affiliate of U.S. private equity firm Symphony Technology Group to close as announced, Eight Capital analyst Christian Sgro moved MediaValet Inc. (MVP-T) to “tender” from a “buy” recommendation” previously, citing shareholder support, valuation and the strategic rationale.
Before the bell on Wednesday, the Toronto-based digital asset management firm announced the deal for $1.71 per share, which represents a 30-per-cent premium to its previous closing price.
“Considering the $80-million transaction value, we calculate a 3.8 times 2024 estimated revenue takeout multiple that we think is reasonable in this environment,” said Mr. Sgro. “In our coverage, Canadian SaaS peer Q4 (QFOR-T, TENDER, TP: $6.05) was recently announced to be acquired for 2.5 times. Larger high-quality North American SaaS companies trade around 4-5 times; MediaValet’s acquisition price is reasonable if not attractive to us.
“Based in Palo Alto, STG Partners recently reported US$10-billion of AUM [assets under management] and its portfolio is focused on mid-market software and software-enabled services. The rationale is strategic in that STG has consolidated adjacent companies including Wrike, a key partner of MediaValet’s, as well as SurveyMonkey. STG now has the opportunity to invest in MediaValet’s growth, where as a public company MediaValet was previously managing overhead prudently to achieve cash flow breakeven.”
The analyst moved his target to $1.71 to reflect the deal from $2.50. The average is $1.73.
“In our coverage, we think Wishpond (WISH-T, BUY, TP: C$1.30) has a highly comparable software and financial profile and is a likely Private Equity takeout candidate,” he said. “Other redeployment opportunities include Canadian software companies D2L (DTOL-T, BUY, TP: C$13.00) and Vitalhub (VHI-T, BUY, TP: C$5.00), our top picks from 2023.”
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While he called Dream Impact Trust (MPCT.UN-T) “the ESG dream,” Desjardins Securities analyst Alexander Leon initiated coverage with a “hold” recommendation on Thursday.
“MPCT offers investors access to a pure-play impact investment vehicle which is addressing some of the biggest issues currently facing the Canadian real estate industry, including housing affordability and environmental sustainability,” he said. “MPCT owns a portfolio of commercial and multifamily properties that are highly concentrated in the Greater Toronto Area and Ottawa/Gatineau, including an extensive development pipeline comprised of some of the best mixed-use development projects in downtown Toronto.”
Despite viewing the trust’s focus on impact investments “favourably, particularly in the current environment where elevated interest rates are slowing commercial real estate activity globally and housing affordability issues are increasingly dominating news headlines,” Mr. Leon said its neutral rating “primarily reflects the significant risks with respect to (1) our negative adjusted EPS forecast through 2025, bringing into question the sustainability of the distribution; (2) the trust’s elevated leverage profile; (3) the limited trading liquidity of the trust’s units; (4) broader office market and economic volatility; and (5) significant development exposure.”
He set a Street-low target of $7.75 per unit. The current average is $10.19.
“Following three consecutive years of total return underperformance vs the S&P/TSX Capped REIT Index, MPCT is trading at a significant 74-per-cent discount to mean consensus NAV estimates and approximately 2 standard deviations below its long-term average discount of 36 per cent,” said Mr. Leon. “While we believe downside risk is relatively limited at the current valuation, we fail to see any meaningful catalysts that would move the stock materially higher in the near term. Over the medium to long term, we believe MPCT should benefit from an improved trading multiple as (1) development projects reach substantial completion and are sold and/or added to the recurring income portfolio; and (2) funds flow into ESG investments reaccelerate after two years of negative growth in 2022 and 2023.”
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National Bank Financial analyst Adam Shine predicts the response to release of Thomson Reuters Corp.’s (TRI-N, TRI-T) fourth-quarter 2023 results and 2024 outlook will help determine whether a “material” re-rating over the last three months “has legs” or whether its stock has gotten “ahead of itself.”
“On Feb. 8, TRI will report its Q4 and offer guidance for 2024 which has been characterized as an investment year,” he said. “Then and/or during its March 12 investor day, it will also offer some key objectives for 2025 & 2026. Investor days every 3 years have highlighted restructuring programs, forward growth/margin targets, and strategic objectives that ultimately triggered increased estimates and a re-rating. From Nov. 2 (Q3 beat on timing came Nov. 1) to Jan. 23, TRI’s 2024 estimated EV/EBITDA multiple expanded 410 basis points. Why? We acknowledge great execution from a strong management team with a clear vision of how it wishes to further grow the company and leverage $8-billion of capacity with wish to pursue M&A and/or return cash to shareholders. That’s not necessarily the driver of the recent re-rating though. Besides a new $1-billion NCIB (40-per-cent-plus done) and the pending Pagero acquisition, the key new piece of the story in 2023 was Generative AI plus commentary of an anticipated acceleration of growth post-2024. TRI outlined some of its product roadmap in Q3 which should see GenAI-related revenues build in H2/24 and gain more traction thereafter.”
Updating his forecast for the acquisition of a majority stake in Sweden’s Pagero Group as well as new multiples for its operating segments, Mr. Shine raised his target for Thomson Reuters shares to $201 from $180, keeping a “sector perform” recommendation. The average is $189.14.
“While European information publishers trade at an average EV/EBITDA of 19 times 2024 estimates and U.S. peers at 22 times, TRI’s at 25.5 times,” he said. “On a P/E basis, European and U.S. peers average 27 times and 30 times consensus 2024 estimates, with TRI near 41 times. Despite anticipated margin contraction in 2024 (M&A dilution & investments), TRI’s top-line growth is expected to accelerate after this year (NBF estimate up 7 per cent in 2025 vs. 3 per cent or 5.6-per-cent organic in 2023) and its EBITDA growth profile should improve over this year (up 10 per cent 2025E vs. up 4 per cent 2024E). Can we rule out a re-rating going forward? Not necessarily, but subject to what gets said Feb 8 and March, 12, we can’t help seeing a stock that looks a full year ahead of itself.”
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In other analyst actions:
* Seeing 2024 as a “transition” year, CIBC’s Anita Soni downgraded B2Gold Corp. (BTG-N, BTO-T) to “neutral” from “outperformer” with a US$3.60 target, down from US$4.20, while Canaccord Genuity’s Carey MacRury lowered his target to $7.25 from $8 with a “buy” recommendation. The average on the Street is US$4.43.
“We have little clarity on whether the outcome of BTG’s constructive discussions with the Government of Mali will yield a viable option for the Fekola Regional ore which would impact the NAV for Fekola,” said Ms. Soni, who lowered her projections to reflect weaker-than-expected 2024 production, costs and capex guidance and 2025 production outlook.
“The Fekola uncertainty, in combination with headwinds associated with a heavy-lifting year at Goose, causes us to await further visibility on Fekola (outcome of optimization study in Q1/24 and announcement outlining the new Mali royalty regime), progress on the Goose 2024 ice road shipping and 2024 sealift, and finally the Gramalote PEA in Q2/24. Looking beyond our one-year investment time horizon into 2025, the company has exciting opportunities with the ramp-up of Goose, the potential to move forward with a streamlined Gramalote and the potential for higher production at Fekola, pending permits.”
* RBC’s Geoffrey Kwan raised his AGF Management Ltd. (AGF.B-T) target to $9 from $8.50 with a “sector perform” rating, while Scotia’s Phil Hardie bumped his target to $9.50 from $9.25 with a “sector perform” rating. The average is $9.93.
“Q4/23 Op. EPS fell 10 per cent short of Street expectations,” said Mr. Hardie. “Although modestly negative to investment sentiment, we are not concerned with the result given the miss was driven by a lower-than-expected contribution from AGF’s Private Capital business which includes gains/losses from its private investments and carried interest which are inherently volatile. Core earnings results from the investment management business came in ahead of expectations and benefited from lower-than-forecast SG&A expenses. Management also provided a slightly more favourable cost containment target for 2024 than we anticipated.
“AGF’s high exposure to equities can provide torque in an upward equity market swing, and its strong balance sheet helps provide a floor to the stock. Shares continue to trade at a wide discount relative to peers and offer an attractive 5.4-per-cent dividend yield, but we remain on the sidelines given a challenging operating environment and uncertain market outlook following a strong and unexpected rebound.”
* In a note titled The Best of Both Worlds (in the 2HF24), Scotia’s Michael Doumet raised his ATS Corp. (ATS-T) target to $64 from $61, keeping a “sector outperform” rating. The average is $66.
“We are ahead of consensus for 3QF24 — and also expect upside to 4QF24 (i.e., we expect ATS’s 4QF24 revenue guidance [provided with 3Q results] will also be a positive surprise),” said Mr. Doumet. “In essence, what we expect in the next two quarters is the “best” from both Transportation and Life Sciences: Transportation sales should approach their near-term top (as revenue burn with its large customer reaches a high) and Life Sciences sales should rise from higher auto-injector contributions. Similar to last quarter, we think the risk is to the backlog, which we expect to moderate given the high revenue burn.
“ATS trades at 13.5 times on our F25E — expanding from 10.0x following its 2QF24 earnings release — and now trades closer to its three-year average. Since early November, 10-year rates have eased and the probability of an economic soft landing has increased, raising the prospects of continued healthy organic growth (despite slowing EV orders). Last quarter, ATS was also able to demonstrate an ability to backfill Transportation orders with Life Sciences (we think that is less likely in 3QF24).”
* Bernstein’s Bob Brackett cut his Barrick Gold Corp. (ABX-T) target to $29 from $30, keeping an “outperform” rating. The average is $29.82.
* CIBC’s Cosmos Chiu reduced his target for Endeavour Silver Corp. (EDR-T) to $4.50 from $5 with a “neutral” rating. The average is $5.27.
* Raymond James’ Craig Stanley initiated coverage of Lundin Gold Inc. (LUG-T) with an “outperform” recommendation and $17.50 target. The average is $20.47.
* JP Morgan’s Ryan Brinkman lowered his Magna International Inc. (MGA-N, MG-T) target to US$77 from US$80 with an “overweight” rating. The average is US$66.29.
* BMO’s Joel Jackson cut his Nutrien Ltd. (NTR-N, NTR-T) to US$80 from US$86 with an “outperform” rating. The average is US$71.34.
“Ahead of Q4 earnings season, we mark to market all our models for commodity price moves, specific developments etc. This leads to slightly lower 2024E estimates for fertilizer and lithium stocks — we lower some fertilizer target prices accordingly,” he said. “This follows continued underperformance by most of our coverage, which we still deem overdone as we deem both ag and lithium sentiment too negative and see underappreciation that current crop input earnings levels could be new mid-cycle levels, but current multiples (e.g., ferts 5-6 times 2024 estimated EV/EBITDA) remain 2-3 times below mid-cycle averages. We see asymmetrical upside risk for lithium, as well as improving spot nitrogen prices/earnings (positive moves in gas and urea partially offset by weaker ammonia). We continue to prefer CTVA in crop inputs and ALB in lithium, and also recommend NTR, MEOH, CF, SQM, SGML and K+S.”
* CIBC’s Stephanie Price trimmed her targets for Quebecor Inc. (QBR.B-T) to $42 from $43 and Rogers Communications Inc. (RCI.B-T) to $78 from $79 with an “outperformer” rating for both. The averages are $39.48 and $75.43, respectively.
“The Canadian telecom space performed roughly in line with the TSX in Q4, benefitting from a constructive macro backdrop and a more benign regulatory environment after both the 3.8 GHz spectrum auction results and interim wholesale ruling were announced during the quarter,” said Ms. Price. “However, the promotional environment remained competitive, with attractive Boxing Week pricing coupled with higher data allotments on the wireless side. Within wireline, channel checks suggest that Rogers has become more promotional, especially in Western Canada. We expect average consolidated Q4 organic EBITDA growth of 5 per cent for the sector.
“Looking beyond Q4, we expect the focus will be on 2024 guidance at the Big3, and we are 2% below Street EBITDA expectations for the year. We are more materially 7 per cent below Street 2024 FCF expectations given an expectation of higher interest and restructuring costs. Our top picks heading into earnings are Rogers, Quebecor and TELUS.”
* Jefferies’ Stephanie Moore raised her Waste Connections Inc. (WCN-N, WCN-T) target to US$175 from US$170, above the US$163.18 average, with a “buy” rating.