Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Vishal Shreedhar is expecting a “soft” second-quarter from Canadian Tire Corp. Ltd. (CTC.A-T) due to “tepid” consumer spending, but he sees improvement coming through the second half of the year.
“We expect Q2/24 CTR sales to be pressured, reflecting continued discretionary spending softness (typically more than 2/3 of Q2 sales) and dealer caution (tightly managing inventory), in addition to other factors,” he said in a research note. “Management noted that Q2/24 sales were lower year-over-year in April (historically approximately 25 per cent of Q2 sales) and early May. Also, Q2/23 sales included a one-off adjustment due to the March 2023 distribution centre fire.
“We anticipate a return to EPS growth in H2/24, primarily reflecting an improved inventory position (dealers significantly drew down winter inventory last year). Also, management expects slightly better consumer spending due to Bank of Canada interest rate cuts.”
For the quarter, Mr. Shreedhar is now projecting earnings per share of $2.74, exceeding the consensus forecast on the Street of $2.52 but down from $3.08 during the same period in fiscal 2023. He attributed that 11.1-per-cent year-over-year decline to “negative sssg [same-store sales growth] (CTR, Mark’s and SportChek), Retail gross margin contraction and higher interest expense, partly offset by SG&A leverage (reduced headcount), full consolidation of CTFS, lower tax rate (NBF models 26 per cent vs. 27 per cent last year) and share repurchases over the last 12 months.”
The analyst is projected a same-store sales growth decline of 2.5 per cent for its flagship Canadian Tire stores with SportChek seeing a drop of 3.0 per cent and Mark’s down 0.6 per cent. He’s expecting a largely flat earnings performance from its Canadian Tire Financial Services business.
“Management previously listed four focus areas for investments: growing private label, improving the omnichannel experience, strengthening its supply chain/automation capabilities and modernizing its IT infrastructure,” the analyst said. “We believe Canadian Tire is making progress on its private label and omnichannel strategy.”
He added: “Recall that CTC is conducting a strategic review of CTFS. Management has previously indicated that priorities include a loyalty partnership, simplification of the business and reducing short-term indebtedness. There are various permutations in which the strategic review can unfold. Assuming a sale, we estimate that CTFS could command a valuation of approximately $30-$40 per share (6-8 times CTFS EPS). Assuming valuation multiples on CTR normalize and attributing a 10-per-cent discount to CT REIT, we calculate a CTC share price of $148+ today (sum-of-the-parts).”
Maintaining a “sector perform” recommendation for Canadian Tire shares, Mr. Shreedhar trimmed his target to $146 from $149 after “slight” reductions to his revenue and earnings expectations for both fiscal 2024 and 2025. The average target on the Street is $152.10, according to LSEG data.
“Given soft consumer demand and uneven operating performance, we see more attractive opportunities elsewhere in our coverage universe,” he said.
=====
While National Bank Financial analyst Rupert Merer now has a “softer” forecast for Innergex Renewable Energy Inc.’s (INE-T) second-quarter, he sees it “refocusing [its] portfolio for future growth.”
“At the end of Q2, INE announced it sold a minority interest in three assets in Texas, using the proceeds to repay debt linked to the assets, exit a power hedge contract at Phoebe and for general corporate purposes,” he said. “INE’s 35 MW/175 MWh San Andres battery facility came online during Q2 and construction of the 330 MW Boswell Springs project is on track for Q4E COD. We believe INE could add more than $150-million in EBITDA by ‘25E (vs. ‘23A) with pre-financed organic growth and better weather. In Q1, INE’s development pipeline grew to 882 MW from 457 MW, with 400 MW of wind (two projects, 164 MW net) added from INE’s recent RFP win in Quebec. Though large project growth in Quebec could see competition from HQ’s plans to participate more directly, INE could still participate in upcoming bids in Quebec and across Canada, supported by its scale and existing partnerships.”
In a research note released Thursday, Mr. Merer increased his second-quarter production forecast by 2 per cent to 3,118 gigawatt hours (from 3,053 GWh) due to stronger production forecasted for hydro in Chile and wind in Texas. However, pointing to lower projections for Texas, Chile and France, his adjusted EBITDA estimate slid to $188-million from $190-million, below the consensus forecast of $200-million.
However, the analyst sees Quebec-based power producer’s growth as “well-funded” thanks to the federal government’s investment tax credit (ITC) initiative.
“The Canadian government passed the ITC at the end of June, which provides up to 30-per-cent support for construction costs on renewable power projects,” he said. “With its construction pipeline, we believe the ITC could provide up to $150-million in added support to INE. As of Q1, INE had more than $500-million in available liquidity to support its future growth and could pull additional funding levers through asset recycling and refinancing..”
Reiterating an “outperform” rating for Innergex shares after updating his estimates for the quarter, its asset sell-downs and ITC support, Mr. Merer raised his Street-high target by $1 to $17. The average is $11.78.
=====
While Desjardins Securities analyst Frederic Tremblay gleaned little new information from a presentation on Tuesday from Patriot Battery Metals Inc. (PMET-T) chief executive Ken Brinsden, he said it “offered a solid overview of the progress made so far, as well as future milestones at Corvette, which we continue to view as a world-class project within the burgeoning North American lithium supply chain.”
“The webinar showcased the continued progress being made at Corvette, which remains a top 10 resource globally based on its July 2023 maiden resource estimate of 109.2mt at 1.42-per-cent Li2O inferred for the CV5 pegmatite,” he said in a note. “Completion of an 80-room camp and an all-weather road between the Trans-Taiga Road and CV5 will support lower costs of drilling and exploration activities. PMET is on track to deliver an updated resource estimate in August 2024, which is expected to include growth of the resource base (will include a maiden resource at CV13 in addition to CV5) and an increase in resource confidence at CV5 from the inferred to the indicated category. This will underpin an upcoming PEA and feasibility study.”
“Blair Way retired as COO effective June 30, 2024. He will remain on the board as a non-executive director and provide advisory services on a consulting basis. In addition, John Drapack has been appointed to the role of director, studies, and Cathryn Moffett to director, environment. Mr Drapack brings more than 30 years of mining industry experience and will contribute to PMET’s PEA and FS. Ms Moffett, who has more than 15 years of experience in environmental and social impact assessments, will be instrumental in the progress of the ESIA. We view the evolution of the management team (which also includes Mr Brinsden’s appointment as CEO in January 2024) as well-aligned with PMET’s evolution from explorer to a future lithium producer.”
Updating his forecast to reflect its fourth-quarter 2024 results as well as its $75-million flow-through financing, Mr. Tremblay trimmed his full-year 2025 earnings and cash flow expectations. That led him to cut his target for Patriot shares to $16.50 from $18, remaining above the $14.38 average, with a “buy” recommendation.
“We believe Corvette’s scale and quality warrant a premium valuation,” he said.
=====
Calling it a “quality compounder with a proven M&A formula centred on procurement synergies,” Desjardins Securities analyst Gary Ho initiated coverage of TerraVest Industries Inc. (TVK-T) with a “buy” recommendation on Thursday,
“TVK is a diversified industrial company serving targeted end markets focused primarily on manufactured steel products,” he said. “It also provides a range of services to the Canadian energy sector. We view TVK’s business model as one which envisages the company as a quality cash flow compounder, redeploying cash into attractive niche M&A opportunities while defending top-line revenue and containing costs through procurement optimization.”
In a research report released Thursday titled Strong as steel, Mr. Ho said he was “positive” on the Vegreville, Alta.-based company for several reasons, pointing to: (1) It has a proven M&A strategy with meaningful procurement benefits and step-out opportunities to expand its TAM [total addressable market]. (2) With scale, TVK sources steel directly from steel mills vs distributors, leading to 15–30-per-cent savings vs peers; procurement benefits are realized across other COGS materials. (3) It has a strong Canadian market position in compressed gas manufacturing (tanks, maintenance, refurbishment, fleet servicing), with biogas and domestic tank refurbishment organic growth opportunities. (4) The recent equity offering fortified its balance sheet (1.2 times leverage), providing ample dry powder ($560-million-plus, 3 times leverage comfort) to execute on its M&A strategy. (5) With a significant 33-per-cent equity interest, insiders are well-aligned.
“Potential near-term catalysts include: (1) biogas pipeline remains robust (5–6 projects in backlog) with strong quoting activity; (2) $25-milliom Cowansville facility expansion drives incremental organic growth; and (3) future M&A activity (we model $165-million out to FY26) should fuel revenue, EBITDA and FCF.”
Mr. Ho set a $95 target for Terravest shares, implying a potential 32-per-cent return. The average on the Street is $91.
=====
In other analyst actions:
* RBC’s Irene Nattel raised her Aritzia Inc. (ATZ-T) target to $46 from $40, keeping a “sector perform” rating. The average is currently $45.13.