Inside the Market’s roundup of some of today’s key analyst actions
While Dollarama Inc. (DOL-T) reported “strong” first-quarter fiscal 2025 financial results on Wednesday, Stifel analyst Martin Landry emphasized the “major news of the day” was the announcement of its increased stake in Dollarcity, which he thinks has been a “resounding success” for the discount retailer.
The Montreal-based company has acquired an additional 10 per cent of the Latin American retailer in exchange for 6.06 million common shares or a consideration of $762-million based on the closing price of Dollarama on Tuesday.
“Management has been able to replicate its Canadian strategy and business model in LATAM,” said Mr. Landry. “Hence, we view the continued expansion in LATAM as a positive development for Dollarama as it increases the growth runway.”
“Dollarama also announced new developments in its LATAM operations including (1) an entry into Mexico beginning in CY2026, where DOL will have an 80.05-per-cent equity interest, (2) an increase in Dollarcity’s store target from 850 by 2029 to 1,050 by 2031 (excl. Mexico) and (3) the acquisition of a call option to acquire an additional 9.89-per-cent equity interest in Dollarcity and a 4.945-per-cent equity interest in the Mexico partnership.”
While Mr. Landry sees the valuation paid as high, he thinks is warranted given “the rapid growth rate of Dollarcity in the last two years, with an earnings CAGR [compound annual growth rate] of 50 per cent” as well as the expansion into Mexico, which more than doubles the total addressable market and the increased store count target in the four original countries.
“We view [Wednesday’s] announcement as a positive development for Dollarama,” he said. “We estimate that by the end of FY25, Dollarcity will account for 10-12 per cent of DOL’s net earnings with a growth profile potentially 2 times faster. Hence, as Dollarcity continues to grow, this should result in an acceleration in Dollarama’s net earnings growth, which should be well-received by investors and should translate into higher valuation multiple vs. historical levels. We also expect Dollarama to exercise its call option before the December 2027 expiration date, which provides better visibility into the ownership profile going forward. In our view, this supports the thesis that Dollarama remains a long-term compounder. We continue to believe that over time, Dollarcity has the potential to be larger than Dollarama.”
Mr. Landry also called the company’s quarterly results a “good start to the year,” exceeding expectations and pointing to “healthy” customer demand. Revenue rose 8.6 per cent year-over-year, while earnings per share of 77 cents was up 22 per cent. Both were narrowly higher than the analyst’s expectations.
Pointing to the results as well as “improved visibility on growth potential,” he raised his target for Dollarama shares to $125 from $110, keeping a “hold” recommendation “as elevated valuation makes risk/reward profile unattractive.” The average target on the Street is $127.09, according to LSEG data.
“DOL’s shares are up over 65 per cent in the last two years and are trading at 27 times frward earnings, roughly 3.5 times higher than the 10-year average,” he said. “While Dollarama’s financial performance in recent years justifies a premium valuation, we do not see further multiple expansion potential from current levels. We see a risk of multiple contraction under a scenario where investors rotate into consumer cyclical names in 2024.”
Others making target adjustments include:
* National Bank’s Vishal Shreedhar to $132 from $130 with an “outperform” rating.
“We hold a positive view on DOL’s shares given its defensive growth orientation supported by strong cash flows, a solid balance sheet and resilient sales performance,” he said.
* RBC’s Irene Nattel to $138 from $136 with an “outperform” rating.
“Q1 results are supportive of our view that Dollarama is the best positioned of any Canadian retailer for the current consumer spending backdrop, with the growth outlook supportive of its premium valuation. In our view, the stock remains highly attractive with excellent visibility and sustainability of the growth runway, further Dollarcity optionality including planned expansion into Mexico starting 2026, and perennial return of capital to shareholders through both dividend growth and share buyback,” said Ms. Nattel.
* CIBC’s Mark Petrie to $128 from $115 with a “neutral” rating.
“Dollarama includes a rock solid unicorn-type Canadian business facing moderating growth, and a strong LATAM business with rapid growth and multiple future levers. Q1 results and the Dollarcity (DC) investment make us modestly more cautious on Canada, but more bullish on LATAM, particularly as Mexico enters the fold (and at 80-per-cent ownership). We revise our valuation approach to apply a more modest multiple to Canada, but breakout Dollarcity and add an initial value for Mexico,” said Mr. Petrie.
=====
National Bank Financial analyst Zachary Evershed thinks it is “no surprise” that Adentra Inc. (ADEN-T) plans to use the proceeds of its $100.1-million bought deal public offering to solidify its balance sheet ahead of strategic acquisitions.
“With management highlighting a strong pipeline of targets, we anticipate that the proceeds will be deployed on a large acquisition or several smaller ones in short order,” he said after coming off research restriction.
“We note that the offering was not concurrent with an acquisition (as many investors would have preferred) as it remains impractical for ADEN to do so: U.S. targets, often privately-owned, are not keen on a Canadian bought deal process accompanied by audited/reviewed financial statements and instead prefer a cash buyer. Pre-raising the funds positions ADEN to be competitive against other buyers down south, and we note that the company has done this play before, raising $101-million in November 2021, 2.5 months prior to announcing the accretive acquisition of Mid-Am.”
Following Wednesday announcement by the Langley B.C.-based company, known as Hardwoods Distribution Inc. prior to a late 2022 rebrand, Mr. Evershed thinks it now can “handle $350-700 million in incremental revenue from M&A whilst remaining below management’s leverage comfort of 3.0 times, even before counting on FCF generation.”
“With clear intentions and the capacity to execute fully on 2028 goals, we reintroduce our M&A growth premium at 1 times EPS, representing $250 million of incremental sales acquired annually, not baked into our estimates,” he said.
Reiterating an “outperform” rating for Adentra shares, the analyst raised his target to $53 from $51.50, believing earnings per share dilution is likely to be “entirely temporary.” The average target on the Street is $50.93.
“We update our modeling to reflect the equity issuance, seeing Net Debt/EBITDA fall to 2.1 times in Q2/24,” he said. “The 11-per-cent increase in share count is partially offset by the reduction in interest costs on lower debt levels, reducing EPS dilution to 6 per cent in our model. This acts mainly as a placeholder as while we do not bake unannounced acquisitions into our model, we firmly believe that the funds will be rapidly deployed in one or more accretive transactions in the coming months. Historically, ADEN has made tuck-in acquisitions for 4-6 times trailing EBITDA, with larger platforms commanding multiples in the 6-8 times range. While ADEN’s own LTM [last 12-month] multiple of 6.7 times would be crowded at the upper end of the range, we remain confident in management’s capital allocation discipline and would expect day-1 EPS accretion on any consummated transaction, with additional upside as the acquisition is integrated and synergies are unlocked.”
Elsewhere, Scotia’s Jonathan Goldman resumed coverage with a “sector outperform” rating and $51 target.
“Investors are getting a deal on ADEN shares trading at 6 times EV/EBITDA on our 2025E vs. historicals of 7.3 times,” he said. “Our estimates do not include unannounced M&A and represent near-trough earnings as the distribution industry contends with near-term demand softness in R&R due to the lock-in effect of lower mortgage rates and deferral of larger home renos. Moreover, we think the market is underappreciating structural margin enhancements supported by reduced exposure to more commodity-type hardwood lumber/plywood and increased exposure to Pro and Home Center channels. ADEN remains our top small cap pick.”
=====
Blackline Safety Corp.’s (BLN-T) aggregate gross proceeds of $34.6-million from a pair of common share offerings increases its “margin of safety while providing flexibility to pursue growth opportunities,” according to National Bank Financial analyst John Shao.
“Prior to the offering, Blackline Safety had approximately $15 million in cash and short-term investments on its balance sheet,” he noted. “Based on our projection, even without the cash proceeds from the offering, its existing cash balance should be enough to support BLN before it turns EBITDA and cash flow positive towards the end of the year.”
“Since last year, the Company has implemented a series of measures (price increase, lease monetization, accelerated working capital turnover, and restructurings) to improve its profitability and cash generation, and [Wednesday’s] announcement further reduces its already low balance sheet risk.”
In a research note, Mr. Shao resumed coverage of the Calgary-based company, which manufactures and sells wearable software-enabled sensors, following the offerings, which will be used to add capacity to its equipment leasing program, support the application of artificial intelligence to its customer worksite data, and for general corporate and working capital purposes.
He emphasized Blackline’s emerging “data monetization opportunity,” noting: “This opportunity is the direct result of the connectivity feature embedded in BLN’s products which generate a significant volume of data in real time. While historically processing and analyzing those data can be challenging due to the sheer volume, the arrival of GenAI does open up a door for the Company to monetize from this rich data mine.”
“Why Do We Like This Name? We see Blackline Safety as a disruptor in the workplace safety market with a suite of innovative products and services. We continue to like this name for the same reasons outlined in our previous research notes – most notably, the connectivity feature of its hardware that enables the subsequent recurring services. On that note, the Company has made significant progress in growing its Service segment to outpace Hardware in terms of both growth rate and revenue contribution. Looking out, we expect continued innovation to maintain BLN’s growth momentum (38-per-cent organic growth in the past 3 years) which in turn drives an accelerated path towards profitability.”
Seeing it “in a much better shape/well positioned in fiscal 2024,” he reiterated his “buy” recommendation and $6 target for Blackline shares. The average is $5.97.
“We believe Blackline’s technical edge comes from its connectivity that enables flows of data for greater visibility of employee activities and their work environment. Given our positive F2024 outlook and margin expansion potential, we’re resuming our coverage with our previous Outperform rating,” he concluded.
=====
Dynacor Group Inc.’s (DNG-T) first-quarter results position it for “another year of strong growth,” according to Singular Research analyst Jim Marrone.
“Q1:24 results were strong led by elevated gold prices and solid volume growth. Q1:24 run rate suggests Dynacor remains on track to achieve its full year FY:24 guidance,” he said.
On May 16, the Montreal-based industrial gold ore processor with operations in Peru reported record revenue of $67.7-million, up 19 per cent year-over-year. EBITDA of $8.1-million was up 17.4 per cent.
“We expect strong year-over-year revenue growth in Q2:24,” said Mr. Marrone. “Dynacor reported monthly sales of $25.0 million in April 2024. We do note that the gold prices have been on an upward trend which should support sales going forward. We estimate that the revenue for Q3:24 will show strong year-over-year growth. For 2024, we model sales of $273.1 million and EPS of $0.42. We model an average realized gold price of $2,156/oz. for FY:24. We expect gold sales of 126,684 AuEq oz. [gold equivalent ounces] for FY:24.”
Keeping a “buy” recommendation for Dynacor shares, the analyst hiked his target to US$5.50 from US$3.50. The average is $7.52 (Canadian).
“The expansion at its Veta Dorada processing plant (increasing its mill capacity to 500 tpd from 430 tpd) positions Dynacor for continued growth in the ASM ore-processing business through 2024 and beyond,” said Mr. Marrone. “Dynacor is a monthly dividend paying company. The dividend has been consistently growing over the last four years. The firm has increased the dividend to C$0.14 per year from January 2024 (up 16.7 per cent monthly). The current annualized dividend yield is 2.6 per cent. Dynacor trades at an enterprise value of $893 per ounce, which is at nearly 70-per-cent discount to the peer group average despite strong cash flows.”
=====
After his research found “significant strain within the global healthcare system emerging from the pandemic,” Stifel analyst Justin Keywood initiated coverage of HealWELL AI Inc. (AIDX-T) with a “buy” recommendation, seeing artificial intelligence as a potential solution.
“Our physician survey revealed a deteriorating healthcare system, emerging from the pandemic with a worsening doctor shortage, leading to record emergency room wait-times and lengthening delays for imaging, specialist appointments and surgeries,” he said. “Patients also deferred regular check-ups during the pandemic, leading to more health issues and rise in diseases. Primary-care physicians spoke to this dynamic as leading to 6-8 issues raised/appointment, vs. 2-3, pre-pandemic. As a result, doctors’ time to review patient records for preventative care is severely impacted, where we believe HEALWELL AI’s platform could help solve, leading to better patient outcomes. HEALWELL AI is already serving Life Science customers, including six/top 10 pharma, but we see the platform building through M&A and commercialization broadening. Backing HEALWELL AI is WELL Health Technologies (WELL) as the largest shareholder and #1 Canadian health network, along with U.S. healthcare access, serving as a competitive advantage.”
In a research report released Thursday, Mr. Keywood said M&A activity could help build out the Toronto-based company’s platform, which screens patient medical/health records for risk factors and early disease detection with prescription analysis and Pharmacovigilance capabilities, and broaden commercialization.
“”HEALWEALL AI has commercialized its AI platform, mostly to Life Sciences customers, including six/top 10 pharma, validating the offering and providing wide data insights including early disease detection and high-valued therapeutics prescribed,” he said. “HEALWELL AI has patient-data/privacy protections in place, including PHIPA/PIPEDA-compliance. We see HEALWELL AI as continuing to build out its global platform by acquiring commercial grade, profitable software and other AI applications but also electronic health/medical record software (EHR/EMR) for data insights. As indication, we forecast sales to expand from $22-million (run-rate) to $40-million by year-end with $30-millllion in cash to support and $32-million of in-the-money warrants.”
The analyst set a target of $3.60 per share, exceeding the current average on the Street of $3.18.
“Evaluating AI & technology companies at an early stage, in a rapidly evolving and dynamic area presents valuation challenges, risk and volatility where some peers could have multiples soar to more than 20 times sales with limited financials,” said Mr. Keywood. “HEALWELL AI has revenue from different sources, including AI and data science, medical health records software, physician care and CRO as the platform builds out through M&A. To value AIDX, we take into consideration the early-stage, rapid growth trajectory, expected improvements in profitability, market demand for AI solutions to fix healthcare and perceived investor sentiment and compare to other rapidly evolving and dynamic stocks/industries. HEALWELL AI has also recently added management bench strength including a new CFO and two Co-COOs with CEO, Dr. Alexander Dobranowski, continuing to drive the vision as a hands-on medical and entrepreneurial-focused leader.
“From our assessment, we believe an elevated EV/sales multiple can be sustained in the near-term and use 11 times 2025 estimated sales to derive our $3.60 target. Our methodology is not without risk, but the rewards could also be outsized, reflected in our rating as HEALWELL AI can continue the momentum to become a much larger market cap, publicly traded AI play where few TSX/TSXV options exist.”
=====
In other analyst actions:
* CIBC’s Todd Coupland cut Copperleaf Technologies Inc. (CPLF-T) to “tender” from “neutral” with a $12 target, matching the average and rising from $9.
“Industrial and Financial Systems (IFS AB) has offered to acquire Copperleaf Technologies for $12/share in cash. Our view is that this price is fair at 8.2 times 2024 estimated EV/sales. This price and valuation are at a premium to our price target and peers in the BVP NASDAQ Emerging Cloud Index (BVP Index) that have comparable 2024 growth expectations plus FCF margins. Note that the BVP median one-year forward EV/sales multiple is 5.0 times. We expect the IFS acquisition to be successful with limited regulatory hurdles and close around Q3/24,” said Mr. Coupland.
* Jefferies’ John Aiken raised his Canadian Western Bank (CWB-T) target to $52 from $28 with a “hold” rating. The average is $36.55.
* TD Cowen’s Tim James bumped his Cargojet Inc. (CJT-T) target to $173 from $162 with a “buy” recommendation. The average is currently $153.27.
“We are updating our estimates to account for the new agreement with Great Vision HK Express. In addition to providing incremental earnings, the new agreement diversifies Cargojet’s customer base, adds a new recurring China-based revenue source and requires no incremental capex,” said Mr. James.
“We view this agreement, the challenges facing other modes of cargo transportation, and our 13-per-cent year-over-year EBITDA growth forecast in 2024 as highlighting the attractive risk profile of the Cargojet business and its strong competitive position. The rapid recovery in air-cargo volume and rates that began in late 2023 and continued into 2024 has moderated, but not to the point of suggesting a reversal, only implying normalizing growth/stability. We view this backdrop, along with the company’s historically low valuation and the announcement of a three-year, low-capex, e-commerce-related air cargo charter agreement, as supportive of our bullish view on the stock.”
* BMO’s Tariq Saad became the first analyst to initiate coverage of Calgary-based Greenfire Resources Ltd. (GFR-T), giving it an “outperform” rating and $10.50 target.
“Greenfire is a pure-play oil sands producer with two producing assets situated in the Hangingstone area. Although limited drilling activity took place under the prior operator, Greenfire is undertaking various operational improvements that should drive higher volumes and lower per-unit operating costs. The company’s shares trade at a significant discount, which we believe is unjustified given the high rate-of-change potential that could occur as operational improvements are realized,” he said.
* In response to a reduction to its full-year guidance, Acumen Capital’s Nick Corcoran trimmed his Haivision Systems Inc. (HAI-T) target to $7.60 from $8 with a “buy” rating. The average target is $7.75.
“We view the quarter as constructive. Management remains focused on improving margins and proving the underlying profitability of the business,” he said.
* Goldman Sachs’ Christine Cho initiated coverage of Restaurant Brands International Inc. (QSR-T) with a “buy” rating and US$80 target. The average is US$83.79.