Inside the Market’s roundup of some of today’s key analyst actions
Scotia Capital analyst Phil Hardie thinks the Canadian asset and wealth management industries “are in the midst of a rapid evolution, and almost everywhere you look, you will see transformation happening at an accelerated pace.”
“There is no ‘moon shot’ disruption required, as change is already being driven by several secular forces that are reshaping the industry,” he added. “These changes are likely closer and more significant than most investors realize, and they have the potential to tilt the playing field over the next decade. We expect major shifts in momentum, with several of yesterday’s laggards becoming tomorrow’s winners.”
In a research report released Thursday introducing the firm’s Evolution of Wealth 2.0 Series, Mr. Hardie said the changes in the industry as “foundational upheavals” as changes emerge to the composition and needs of the client base as well as a potential shift in the underlying value proposition of wealth and asset management and the way solutions are delivered.
“We think a major structural – and irreversible – shift in demographics will accelerate business transformation and reset the competitive landscape,” he said. “We are reaching an inflection point where we believe the relative size of the retiree population will reshape the industry and significantly alter its dynamics. We expect the changes to be far-reaching and to impact overall industry growth and product and service offerings. An unprecedented transfer of wealth and the monetization of real estate and small business assets should create opportunities and dislocate clients and assets. We expect this to benefit firms that have undergone significant transformation and modernization initiatives to position for the new environment and to create headwinds for those too slow or hesitant to react.
“As demographics shift, technology advances, and investor expectations change, we expect a further evolution of the value proposition offered by advisors. We think the evolving value proposition will include a greater (1) migration toward a goals-based investment (GBI) approach and (2) need for more customized solutions. We believe the environment we are moving toward requires more customization, which could weaken traditional barriers related to the need for significant scale across a single silo. We expect flexibility and agility to become more advantageous than simple economies of scale that come at a cost (i.e., uniformity and rigidity). New technology applications that democratize capabilities are also rewriting the economics of delivering services. These new technology application will likely be a source of competitive advantage for agile players that are able to adopt them, and will likely put players that are reliant on more rigid legacy systems at a disadvantage.”
From an investing perspective, Mr. Hardie predicts a “significant reversal of momentum and change of fortune for some players over the next decade” where “yesterday’s laggards could be tomorrow’s winners.”
“Several firms have undergone difficult but dramatic changes that at times put them out of favour with investors or saw them underappreciated by the market,” he said. “We believe they are now some of the best-aligned to gain market share and exploit new growth opportunities in the evolving landscape.”
Mr. Hardie sees Power Corp. of Canada (POW-T) as “best positioned” to benefit, raising his recommendation to “sector outperform” from “sector perform” previously.
“We believe POW embodies our central thesis of transformation driving a major shift in momentum and is well positioned for the major trends we expect to play out over the next decade,” he said. “Although valuation levels may not yet reflect it, there has been a significant amount of activity and transformation across the Power Group of Companies (Power) over the past few years. Initially, this started with management changes, investment in digital channels, and moves to enhance competitive positioning; however, over the last couple of years, efforts have shifted toward more structural levers to unlock value, including M&A. We believe the benefits of these changes are not fully appreciated by investors, but we expect them to surface value as the company improves its earnings momentum and as the industry landscape evolves. The company offers cradle-to-grave services across asset and wealth management and protection services; we believe it is very well aligned to exploit upcoming industry trends and themes.”
He maintained a $47 target for Power shares, touting an “attractive valuation discount and embedded optionality.” The average on the Street is $44, according to LSEG data.
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Analysts at Scotia Capital raised their gold and silver price projections for both 2024 and 2025, leading to a series of target price and rating changes to stock across their coverage universe.
“We have adjusted upward our 2024 and 2025 gold price forecasts to 1) $2,200/oz for 2024 from $2,000/oz (10-per-cent increase) and 2) $2,200/oz from $1,950/oz (13-per-cent increase), reflecting SC Economics/Strategy forecasts for interest rates, inflation, USD expectations and incorporating the stronger than expected buying of gold from the official sector (290 tonnes in Q1/24 alone),” they said. “Our longer-term gold price (2026 onward) is maintained at $1,800/oz. We have also adjusted our silver price to $26/oz for 2024 and 2025, respectively, with this gold price change.”
For gold stocks, analyst Tanya Jakusconek reaffirmed her top picks in the sector. For operators, they are:
- Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “sector outperform”) with a US$81 target, up from US$71. The average target is US$77.19.
- Kinross Gold Corp. (KGC-N/K-T, “sector outperform”) with a US$9.50 target, up from US$8. Average: US$8.33.
- Barrick Gold Corp. (GOLD-N/ABX-T, “sector outperform”) with a US$23 target (unchanged). Average: US$22.06.
For streamers, her picks are:
- Wheaton Precious Metals Corp. (WPM-N/WPM-T, “sector outperform”) with a US$66.50 target, up from US$59. Average: US$61.51.
- Triple Flag Precious Metals Corp. (TFPM-N/TFPM-T) with a US$20.50 target, up from US$19. Average: $25.48 (Canadian).
Scotia analysts Ovais Habib and Eric Winmill made a pair of rating changes to stocks in their mid-tier precious metals coverage universe:
* Orla Mining Ltd. (OLA-T) to “sector perform” from “sector outperform” with a $5.75 target (unchanged). The average is $6.67.
Mr. Habib: “We are downgrading Orla Mining to Sector Perform from Sector Outperform on account of its rich valuation and persisting permitting headwinds. Orla remains a low-cost junior producer with a robust organic growth pipeline, run by the same skilled management team that successfully brought the Camino Rojo mine from development into operations, but the stock’s sustained uptrend since late 2023 puts the current valuation towards the top end of the range of comparable small- and mid-cap peers on a P/NAV, P/CF, and EV/EBITDA basis. We remain cautious on the timeline for receipt of outstanding permits needed to proceed with the Camino Rojo pit expansion as designed, particularly given the current political climate in Mexico which poses a challenge for local operators, but look forward to the planned oxide and sulphide resource updates at Camino Rojo scheduled for later this year as the stock’s next upcoming catalysts.”
* SilverCrest Metals Inc. (SIL-T/SILV-N) to “sector perform” from “sector outperform” with a US$8 target, up from US$7.50, which is the average.
Mr. Habib: “While we continue to like the high-grade nature of the Las Chispas orebody, the excellent management team, strong balance sheet and the mine’s relatively low operating cost structure (one of the lowest in our coverage), we are moving our rating on SILV shares to Sector Perform given SilverCrest is trading at 1.67x our NAV5% (net asset valuation) versus the mid-tier peer group at 1.41 times using our Scotia price deck. At spot metal prices, SilverCrest trades at 1.19 times our valuation versus peers at 1.02 times. For comparison purposes, we have removed the two companies (FR and FSM) that are currently trading at over 2.0 times multiples. FR has historically traded at high premium relative to peers while FSM exposure to silver is now less than 5 per cent. The Las Chispas mine has a relatively short mine life, 7 years and our valuation also factors 5.5 years of additional mine life over and above the current M&I resource.”
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Following the release of fourth-quarter 2024 financial results that blew past his expectations, National Bank Financial analyst Cameron Doerksen sees “much more growth to come” for Heroux-Devtex Inc. (HRX-T).
“With demand in both the Defence and Civil segments to remain strong over a multi-year period, HRX’s positioning on growing platforms, and the positive impact from the ongoing re-pricing of contracts, we see a sustained multi-year run of revenue growth and margin expansion ahead for the company,” he said. “Even with the strong share price performance in recent days, on our updated F2025 forecast, HRX shares are trading at 8.7 times EV/EBITDA versus the aerospace supplier peer group at 15 times current year EV/EBITDA.”
Shares of the Longeuil, Que.-based airplane landing gear manufacturer soared 7.7 per cent on Wednesday afte it reported revenue of $184-million, up 18 per cent year-over-year and exceeding both Mr. Doerksen’s $168-million estimate and the consensus projection of $172-million due largely from soaring growth in its Commercial business. Adjusted earnings per share of 49 cents was also well ahead of forecasts (29 cents and 30 cents, respectively).
“The EBITDA margin in Q4 was 18.0 per cent versus our 15.0 per cent forecast, and essentially at a record high for the company,” the analyst said. “HRX enjoyed the benefits in Q4 from the re-pricing of expiring contracts completed during F2024, but there is more to come as the company has numerous key contracts that expire in F2025 and F2026 and will be repriced. Importantly, we understand that the company has yet to lose any material contracts because of higher prices, and we fully expect all its key contracts up for renewal this year will be successfully retained at higher pricing.”
“HRX should therefore see solid growth tailwinds on multiple civil aircraft programs for a multi-year period that could be supplemented by new contract wins. On the defence side of the business, HRX will benefit from growth in several existing programs (F-18E/F landing gear overhaul, Sikorsky CH-53K helicopter, MQ-25 unmanned aircraft) in the coming years. Management notes that it is seeing numerous potential new contract opportunities, especially for defence programs. These include new contracts that could support growth in the next two years as well as longer-term aircraft programs.”
With cash flow also “trending higher,” Mr. Doerksen thinks the company is likely to see multi-year growth stemming from “supportive” end market demand.
“Assuming Boeing can ultimately overcome its production issues and engine suppliers can also increase deliveries, based on publicly stated production goals, combined Airbus and Boeing aircraft deliveries will be 45 per cent higher in in calendar 2026 versus actual 2023 deliveries,” he said. “HRX should therefore see solid growth tailwinds on multiple civil aircraft programs (including business jet programs) for a multi-year period that could be supplemented by new contract wins. On the defence side of the business, HRX will benefit from growth in several existing programs (F-18E/F landing gear overhaul, Sikorsky CH-53K helicopter, MQ-25 unmanned aircraft) in the coming years. Management notes that it is seeing numerous potential new contract opportunities, especially for defence programs. These include new contracts that could support growth in the next two years as well as longer-term aircraft programs.”
Seeing its valuation as “still relatively inexpensive,” he raised his target for Héroux-Devtek shares to $29 from $26, keeping an “outperform” recommendation after increasing his revenue and earnings forecasts for both fiscal 2025 and 2026. The average target on the Street is $30.25, according to LSEG data.
Elsewhere, Desjardins Securities’ Benoit Poirier called it a “banner” quarter featuring “high-flying” results.
“When analyzing the level of the 4Q beat vs historical terms and combining this with the commentary on the strong demand backdrop, increased backlog and improved fixed-cost profile of the business, we now have greater confidence that HRX will be able to further expand margins,” he said. “We forecast 16.3 per cent for FY25 (up from 15.4 per cent; implies 170 basis points year-over-year of expansion and EBITDA of $113.5-million) and introduce our estimate of 17.2 per cent for FY26 (implies 90 basis points year-over-year of expansion and EBITDA of $131.6-milllion).
Mr. Poirier hiked his target to $37 from $26 with a “buy” rating.
“We see more upside following a number of aerospace peer transactions at elevated multiples in recent months,” he added.
Meanwhile, other changes include:
* Scotia’s Konark Gupta to $27 from $22.50 with a “sector outperform” rating.
“HRX repeated last quarter’s solid performance, yet again posting a significant beat, driven by stronger-than-expected Civil growth and overall margin (record high),” said Mr. Gupta. “Two back-to-back solid quarters in a challenging supply chain environment speak to management’s credibility in stabilizing production and re-pricing the book, aided by a supportive demand backdrop, while HRX is not losing focus on efficiency gains through automation. With revenue already surpassing pre-pandemic levels, we think the margin is now running at the pre-pandemic level of 15-16 percent and could have further upside risk from volume, pricing and efficiency gains. In addition, it appears that the inventory is finally at a level that supports future growth, so working capital needs should come down to drive a FCF inflection this year.”
* TD Cowen’s Tim James to $28 from $23 with a “buy” rating.
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While he called CAE Inc.’s (CAE-T) large goodwill impairment for its Defense segment a “shocker” and acknowledges investor concern about that business are likely to linger after larger-than-anticipated contract losses, Mr. Doerksen reiterated his view that the flight simulator maker’s core business is “well positioned for growth.”
“Our positive thesis on CAE has mainly been a function of our view that the company will enjoy a multi-year period of growth in its Civil segment supported by growth in pilot training demand and increased aircraft deliveries that will drive higher simulator sales,” he said. “Our view is unchanged on this front noting that Civil will see solid growth in F2025 underpinned by a record segment backlog that sits at over $6.4 billion. Based on our updated F2025 estimates, the Civil segment will make up 83 per cent of total company EBIT.
“If we were to apply a below industry peer group EV/EBITDA multiple of 12.0 times (peers at 13-14 times) to just the Civil segment F2025 forecasted EBITDA, we would get a Civil-only value for CAE of $27.00/share, which based on the current CAE share price implies a negative value for the Defense segment. Notwithstanding Defense’s woes, with a $5.7 billion backlog (presumably at more attractive margins), a F2025 expected margin of 6-7 per cent with upside beyond, and the underlying defense spending backdrop about as positive as we have seen in recent memory, we would argue that there is at least some value in the business.”
Shares of the Montreal-based company fell 4.9 per cent on Wednesday after it announced a $568-million goodwill impairment for its beleaguered defence segment. It has also recorded a $36-million writedown of intangible assets and $90 million in unfavourable contract adjustments tied to fixed-price defence contracts.
“CAE’s Defense margins have been plagued over the past two years by ongoing losses in eight distinct legacy fixed price contracts signed prior to the pandemic,” said Mr. Doerksen. “To re-set the baseline profitability of the business, CAE incurred $90 million in unfavorable contract adjustments in Q4, effectively pulling forward expected losses over the next two years (contracts will be recorded at zero margin until expiry). This is unquestionably a large number, but as we have noted, the alternative to taking all the losses now would have been to have these contracts be an ongoing drag on segment margins for the next two years. As such we view CAE’s decision to put these contracts behind it now as the correct one. Furthermore, given that revenue in these contracts is fixed, and the contracts run-off over a relatively short period of time, the risk that there are materially larger losses than already recorded is low, in our view. Even if the losses wind up being 50 per cent higher than what CAE has provisioned for, it would still be a less than $50 million potential cash impact over the next two years.”
“CAE is recording a $568 million impairment in goodwill in the Defense segment, which is 42 per cent of the purchase price of CAE’s acquisition of the L3Harris Military Training division in 2021 (the bulk of the goodwill carried under Defense was related to this acquisition). However, we note that only one of the eight loss-making legacy contracts came over with the L3Harris acquisition, so most of the issues in Defense appear to be related to the pre-L3Harris CAE Defense segment (revenue was skewed to lower margin training contracts at least a portion of which were structured as fixed price). We also understand that the biggest driver of the impairment is related to a change in the assumed discount rate CAE is using to assess long-term profitability, largely a reflection of the business being more volatile than in recent years than was previously assumed.”
With balance sheet concerns growing, Mr. Doerksen thinks CAE’s management concerns, which included the introduction of a new chief operating officer, “do not go far enough.”
“Although CAE did create a new COO role and Nick Leontidis is a capable leader based on his successful tenure leading CAE’s Civil segment, management changes have not gone far enough in the eyes of many investors,” he said. “The legacy contract problem has been an ongoing issue for over two years and CAE has seemingly only recently fully grasped the magnitude of the program and risk management failures in the Defense segment. While a re-baseline of the business was a necessary step, we suspect that many investors will continue to attribute the underlying problem to a failure of senior management at CAE.”
After cutting his revenue, earnings and cash flow expectations for 2025 and 2026, Mr. Doerksen trimmed his target for CAE shares to $31 from $32, keeping an “outperform” recommendation. The average on the Street is $31.25.
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While acknowledging Canadian Net Real Estate Investment Trust (NET.UN-X) current valuation is “quite cheap on a relative basis” and the stock offers investors a sustainable 7.0-per-cent cash distribution yield, Desjardins Securities analyst Kyle Stanley said he will “remain on the sidelines” following weaker-than-expected first-quarter results, citing its largely flat earnings growth profile through his forecast period.
After the bell on Tuesday, the Montreal-based REIT, which focuses on triple net and management-free retail properties, reported funds from operations per unit of 15 cents, down 2.9 per cent year-over-year and penny below both the forecast from both the analyst and Street.
“The negative variance vs our forecast fell primarily within (1) NOI [net operating income] (0.5 cents per unit); (2) interest expense (0.2 cents per unit); and (3) FFO contribution from equity-accounted investments (0.5 cents per unit),” said Mr. Stanley. “We believe the negative variance within NOI was partially attributable to timing differences on 2024 lease renewals taking effect as total portfolio occupancy was unchanged sequentially at 100 per cent. Debt/GBV (including convertible debentures) was also unchanged quarter-over-quarter at 57 per cent.”
Noting transaction activity “remained muted,” Mr. Stanley lowered his FFO per unit projections for 2024 and 2025 to 62 cents and 64 cents, respectively, from 66 cents and 69 cents.
He kept a “hold” recommendation and $5.25 target for Canadian Net units. The current average is $5.69.
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After closing its upsized $20-million bought deal offering, Eight Capital analyst Christian Sgro thinks Healwell AI Inc. (AIDX-T) has been able to “extend its runway in its land-grab opportunity in healthcare AI.”
“As commercial traction builds in the background, we see HEALWELL as having the ability to potentially acquire $40-milion-plus of revenue, more than doubling the business,” he added. “We look forward to seeing these puzzle pieces slotted in place, and for momentum to continue as the company executes on its M&A pipeline with increased flexibility.”
On Wednesday, the Toronto-based healthcare technology company, which is focused on AI and data science for preventative care, issued 14.8 million units at $1.35 each.
“We model a current net cash balance of $29.0-million, which excludes 1) deep in-the-money convertible debentures that we treat as equity in our valuation analysis, and 2) $16.8-million of related party balances largely payable to WELL Health (WELL-T, TP: $10.00, BUY),” said Mr. Sgro. “Given WELL’s interest in HEALWELL, we believe there will be a collaborative dialogue around timing and cash/equity consideration.
“We expect $20-million of capacity to have the ability to acquire $40-million-plus of revenue in combinations of cash, equity, and earn-outs. We think a premium target area is AI, specifically increasing the screening capacity of HEALWELL from the 200+ conditions currently. The second area is research or digital health assets. A clinical research acquisition would benefit meaningfully from HEALWELL’s screening capabilities, across areas like trial recruitment and design. Digital health assets, including EMRs or practitioner tools, can expand the reach of the platform while scaling high margin recurring revenues.”
He also touted the company’s increasing validation in the sector, noting: “HEALWELL’s technology is seeing continued traction in medical journals. In our view, the most impressive is this week’s feature in JAMA, an international peer-reviewed medical journal. In collaboration with Sunnybrook Hospital, Pentavere’s DARWEN was the AI engine of choice for extracting information from patient records to assist in staging cancer. We think these references are important in conversations with the healthcare network and pharmaceutical partners.”
Keeping a “buy” rating for Healwell shares, the analyst raised his Street-high target by $1 to $2.50. The average is $1.34.
“We think near-term M&A is likely to enhance network effects, unlock synergistic value, and scale HEALWELL into its current valuation. HEALWELL currently trades at 11.3 times and AI-focused healthcare peers trade at 7.8 times. Key risks to our target include unsuccessful M&A and unfavourable regulatory developments,” he concluded.
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In other analyst actions:
* Deutsche Bank initiated coverage of Waste Connections Inc. (WCN-N, WCN-T) with a “buy” rating and US$189 target, exceeding the US$187.33 average on the Street.
* Scotia’s Konark Gupta raised his Bombardier Inc. (BBD.B-T) target to $100 from $90 with a “sector outperform” rating.
“We hosted an investor call with Bart Demosky (EVP & CFO) and the IR team to dig deeper into BBD’s recently revealed plans for transitioning from a turnaround story to an ROIC-accretive growth story through 2030,” he said. “The discussion reinforces our positive thesis and boosts our confidence in our forecasts, which could still prove conservative. In particular, we were quite encouraged by management’s reassurance that the competitive landscape is unlikely to trigger a big capex cycle any time soon, the company will maintain production discipline, and deleveraging will remain a top priority. That, along with this week’s debt refinancing transactions (pending completion), makes us feel more confident about potential for shareholder returns and an investment grade credit rating in 2026, if not earlier. We maintain our SO rating while raising our target ... on slight EV/EBITDA expansion to 7.0 times (was 6.5 times) to reflect our improved confidence in BBD’s long-term strategy. Although the stock has gained 71 per cent year-to-date vs. TSX up 6.6 per cent, which could create some volatility in the near term, we note valuation remains attractive at 8.5 times/6.6 times on 2024/2025 estimates vs. comps (including some more diversified players) at 12 times/10 times.”
* Canaccord Genuity’s Edward Nash raised his target for Oakville, Ont.-based Cardiol Therapeutics Inc. (CRDL-Q, CRDL-T) to US$8 from US$6, keeping a “buy” rating. The average is US$8.50.
* Raymond James’ Farooq Hamed raised his Ivanhoe Mines Ltd. (IVN-T) target to $24 from $21 with an “outperform” rating. The average is $22.24.
“We attended investor meetings with IVN management recently and came away with the view that growth expectations for 2024 are on track with the company having a strong pipeline of future development opportunities. We expect updates on the phase 3 expansion at Kamoa Kakula and start up at the Kipushi zinc mine this quarter,” he said.