Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analysts Michael Markidis and Kyle Stanley expect the Canadian real estate sector to maintain its positive momentum in the new year.
“2021 has been a solid bounce-back year for the Canadian listed-property segment (30-per-cent year-to-date total return for the S&P/TSX Capped REIT Index),” they said. “Restrictive measures were lifted through the year; however, economic activity, population growth and consumer/workspace behaviour are arguably not yet back to ‘normal’. At a high level, we believe continued reversion will be a key theme that drives REIT performance in 2022.”
In a research report released Tuesday, Mr. Markidis made a series of rating changes:
He raised Allied Properties Real Estate Investment Trust (AP.UN-T) and Dream Office Real Estate Investment Trust (D.UN-T) to “buy” from “hold” recommendations.
“The shift to a positive stance reflects (1) relative valuation considerations—among the REITs we track, D and AP have been two of the worst performers on a cumulative basis since the beginning of 2020 (total returns of negative 20 per cent and negative 10 per cent, respectively); and (2) our more constructive view on office fundamentals in 2022,” he said. “Both D and AP have a significant presence in Toronto. Private market liquidity for properties in the downtown core dried up considerably in 2020/21. We believe transaction activity is poised to accelerate. This could bolster investor confidence in the underlying NAVs”
Mr. Markidis raised his target for Allied units to $50 from $48. The average is $51.13, according to Refinitiv data.
His target for Dream remains $27, exceeding the $26.08 average.
“Correcting a regrettable call ... made in May 2020,” Mr. Markidis also raised Killam Apartment Real Estate Investment Trust (KMP.UN-T) to “buy” from “hold” with a $26.50 target, up from $25 and exceeding the $25.67 average.
“We believe the accelerating trend of positive interprovincial migration that has recently strengthened in Nova Scotia, New Brunswick and Prince Edward Island (60 per cent of KMP’s net operating income) has staying power,” he said. “Despite the extension of the 2-per-cent rent cap in Nova Scotia by the recently elected Progressive Conservative majority government, the new regime has heavily emphasized the importance of addressing housing affordability by increasing supply. We are also bullish on KMP’s increasing presence in Kitchener-Waterloo; we believe there is a significant mark-to-market and in-suite renovation opportunity embedded within the 785-suite portfolio acquired earlier this year. Moreover, KMP has lined up an impressive development pipeline that could add more than 1,200 units from 2022–28. Relative valuation is attractive. We see runway for multiple expansion vs certain multifamily peers.”
Conversely, Mr. Markidis lowered Boardwalk Real Estate Investment Trust (BEI.UN-T) to “hold” from “buy” with a $61 target, down from $62. The average is $60.32.
“Our gut is telling us that we might run into pushback from some investors on this call,” he said. “The bulls will likely point to (1) the positive impact that a stronger oil price should have on the Alberta economy; (2) recent cap rate compression in Calgary; and (3) BEI’s implementation of an NCIB. Arguably, these factors are already reflected in the stock price — it may surprise you that BEI is the second-best-performing multifamily REIT under coverage on a cumulative basis since the beginning of 2020 (total return of 26 per cent). We also find it difficult to ignore the increasingly negative net interprovincial migration trend that has emerged in Alberta throughout the pandemic. Weaker-than-expected fundamentals could be a headwind for anticipated net effective rent increases and top-line growth in the coming year.”
Looking ahead to 2022, the analysts picked a trio of REITs as their “best ideas” for the year:
* BSR Real Estate Investment Trust (HOM.U-T)
“A pure-play U.S. multifamily business with significant concentration in Texas (almost 90 per cent). Expanding new and re-leasing spreads should drive outsized organic growth in 2022,” they said.
* Dream Industrial Real Estate Investment Trust (DIR.UN-T)
“We believe underperformance vs industrial peers this year was due to an atypically high volume of equity issuance; this feverish pace will likely not be repeated next year. Performance in 2022 should also be boosted by continued operating momentum in Canada (more than 50 per cent of the portfolio),” they said.
* InterRent Real Estate Investment Trust (IIP.UN-T)
“Robust organic growth, combined with the contributions from recently acquired properties, provide unmatched earnings upside. Our forecast calls for a two-year FFOPU CAGR [funds from operations per unit compound annual growth rate] of 13 per cent through 2023. In our view, the current unit price does not fully reflect this; IIP is trading at a 5-per-cent discount to NAV.”
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Calling it “a copper growth story,” Stifel analyst Alex Terentiew initiated coverage of Teck Resources Ltd. (TECK.B-T) with a “buy” rating, believing its Quebrada Blanca Phase 2 in Chile is “poised to start up at the right time.”
“The long-term bullish outlook for copper, combined with Teck’s copper-focused growth profile and the current exceptional price strength in coking coal, has created an ideal scenario for Teck, one that we believe the investing market does not adequately appreciate,” he said. “Today’s coal driven cash windfall is ideally timed to redeploy funds into the company’s cornerstone copper growth project, QB2, and ultimately support enhanced returns to shareholders and redeployment of additional funds to more copper growth. We expect a start-up of QB2 in the second half, 2022 will establish Teck as a significant global copper producer, which in combination with its other growth opportunities, should provide several catalysts to generate incremental value over the coming years. With 68 per cent of NAV derived from Canadian and U.S. mines, Teck also carries a relatively low jurisdictional risk.”
Mr. Terentiew sees Teck’s met coal division to generate “substantial” free cash flow with prices currently at near record highs, which he expects to be directed toward additional investment in copper.
“Beyond QB2, Teck has five other copper-focused projects (QB3, Zafranal, San Nicolas, Galore Creek, Nueva Union) under various stages of development, each of which may offer future NAV upside potential, giving Teck catalysts in a sought after metal that should provide additional valuation upside,” he said.
Also touting its “strengthening” financially position and “globally recognized ESG metrics,” the analyst set a target of $50 per share, exceeding the average on the Street is $42.36.
In a separate report, Mr. Terentiew initiated coverage of Freeport-McMoRan Inc. (FCX-N) with a “buy” rating and US$48 target, exceeding the US$42.29 average.
“With copper estimated to account for 80-per-cent-plus of revenues and a similar contribution to NAV, the outlook for Freeport is closely tied to the fortunes of the metal,” he said. “Given the current bullish outlook for copper, owing to the global electrification and de-carbonization drive, we believe Freeport is well positioned to ride the commodity upside and generate strong free cash flow, which we forecast to average 9-12 per cent per year over the next decade. Freeport has built itself a portfolio of world-class, long-life and expandable operations across four countries, allowing the company to take advantage of multiple commodity cycles while mitigating geo-political risks pertaining to higher risk jurisdictions.”
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In reaction to share price depreciation since the Nov. 11 release of its second-quarter 2022 financial results, Desjardins Securities analyst Benoit Poirier raised his rating for CAE Inc. (CAE-T) to “buy” from “hold” on Tuesday.
The Montreal-based flight simulator company has fallen 28 per cent during that period, versus a 3-per-cent drop from the S&P/TSX composite index.
“Since the results were released, Street estimates for FY23 and FY24 have declined,” he said. “Consensus now expects a consolidated adjusted EBIT margin of 15.2 per cent in FY23 and 17.0 per cent in FY24, which is more in line with management’s comments on the business. Additionally, consensus currently assumes that the Defence segment’s adjusted EBIT margin will return to double digits in FY24 (11.1 per cent) rather than FY23 as initially anticipated with 2Q results, which is more reasonable, in our view.”
Mr. Poirier thinks management placed CAE in a good position to rebound from the COVID-10 pandemic by strengthening its competitive position in its two major markets with strategic acquisitions, including Flight Simulation Company B.V. and TRU Simulation + Training Canada Inc. for its Civil segment and L3Harris’ military training services business for its Defence business.
“These transactions, combined with the restructuring plan ($65–70-million of annualized savings by late FY22) and the pandemic-induced tailwind for business jet aviation (higher margin business), should help drive further margin expansion in the years ahead,” the analyst said. “Interestingly, CAE has been quite successful at capturing a leading market share in the Civil segment (revenue compound annual growth rate of 13 per cent between FY11 and FY20), including 90 per cent of the FFS market and 30 per cent of the entire market for airline training requirements (only 50 per cent of global training requirements are outsourced). This reassures us that the recent acquisitions in the market for flight, crew management and optimization solutions (eg Merlot in December 2020, RB Group in April 2021 and Sabre’s AirCentre airline operations portfolio in October 2021) should help CAE capture market share in this adjacent segment through cross-selling efforts and potentially additional M&A opportunities in the medium term (nothing in the short term as its focus is on deleveraging).
“This would be positive for CAE’s margin profile as these solutions command very attractive levels of profitability (ie Sabre’s assets generated an EBITDA margin of 37 per cent in CY19 vs 24–25 per cent for CAE prepandemic).”
Mr. Poirier maintained a $38 target for CAE shares. The average target on the Street is $40.80.
“Bottom line, we believe the uncertainty brought by the Omicron variant has created an attractive buying opportunity for long-term investors,” he said.
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Equity analysts on the Street continued to initiated coverage of Definity Financial Corp. (DFY-T) on Tuesday following a research restriction linked to Canada’s largest initial public offering of the year.
Desjardins Securities analyst Doug Young called the Waterloo, Ont.-based automobile and property insurer “a turnaround story set up for success,” emphasizing its “significant excess capital and debt capacity to fund organic growth or acquisitions” and seeing several potential growth catalysts in its commercial segment.
“DFY offers investors a pure play into the Canadian P&C insurance sector. It has invested significantly into its digital platforms, derisked certain businesses and has considerable capital flexibility to grow organically and through acquisitions,” said Mr. Young, who gave the stock a “buy” recommendation.
In justifying his rating, the analyst emphasized Definity’s attractiveness as a potential takeout play for larger companies in the industry.
“DFY can’t be acquired for two years post demutualization, giving it time to execute,” he said. “Alternatively, it could be a target in less than two years.
“In terms of concerns, DFY has higher relative exposure to the Ontario personal auto market, a segment that we’ve had concerns with in the past. The question now is: as individuals start driving more, resulting in more accidents, and as inflation pressures push through, will the regulator allow commensurate price increases? Time will tell.”
He set a target of $32, representing an almost 22-per-cent potential return to its current price.
Others initiating coverage include:
* National Bank’s Jaeme Gloyn with an “outperform” rating and $36 target.
* UBS with a “neutral” rating and $28 target.
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“Helping capital markets participants better connect with investors,” Q4 Inc. (QFOR-T) possesses “significant cross-sell potential as it builds out its feature set and extends into adjacent capital markets solutions,” according to Canaccord Genuity analyst Doug Taylor.
He initiated coverage of the Toronto-based investor relations software provider, which debuted on the TSX on Oct. 25 following its its initial public offering, with a “hold” recommendation, seeing it “benefiting from the increased pace of public company formation and expects to continue to serve as a consolidator in its targeted markets.”
“Q4′s 2,500+ customers already include many of the world’s largest global brands,” said Mr. Taylor. “For example, 50-per-cent-plus of S&P 500 issuers use at least one of Q4′s products, with the outsourced corporate IR website being the most common entry point. Our conversations with industry participants suggest Q4 has quickly become the go-to provider for this type of service, allowing the company to expand its customer engagements to other related services. Other services Q4 provides include IR CRM, newsroom, hosting corporate events such as earnings calls and digital investor days, and investor relations analytics products. While the company briefly offered a virtual shareholder meeting tool launched in partnership with Broadridge Financial, Q4 decided to end the partnership in mid-2021 to focus on building its direct relationships with customers.”
“Despite Q4 already having significant logo share among large North American public companies, we believe the company can continue to build share with smaller issuers, expand its share of overall IR function spending, and expand into tangential markets, including sell-side capital markets and research arenas. The company is also benefiting from the significant growth in the sheer number of public companies owing to strong IPO and SPAC financing activity in recent years. A bottom-up analysis that considers the number of public companies globally and Q4′s top pricing tier suggests a $13-billion TAM [total addressable market] before considering the smaller and less penetrated sell-side market (another $5-billion estimated opportunity).”
Following 80-per-cent revenue growth in 2020, Mr. Taylor is projecting a 35.2-per-cent increase in 2021 (to $54.6-million) followed by gains of 20.8 per cent in 2022 and 36.3 per cent in 2023. He’s expected its EBITDA loss to narrow to $15.5-million in 2023 and reach break even in 2024 “as leverage from the company’s aggressive re-investment cycle to fuel growth begins to show through.”
He set a target of $10 for Q4 shares. The average on the Street is $17.14.
“We view the current valuation at 3.4 times 2022 estimated EV/Sales as reasonable, balancing the 30-per-cent organic growth with still sizable EBITDA losses,” he said. “Our one-year target price is DCF-based and equates to a 3.6 times NTM [next 12-month] sales multiple applied to our forward estimates, one year out. Given the 14% implied return, our initial view on the name is neutral. With Q4′s model relying heavily on ongoing robust capital markets activity to drive demand for its services, we look for better visibility to profitability and further demonstration of the company’s ability to execute on (and finance) M&A to surface additional value against this key risk.”
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In a separate report, calling it “an established leader in online learning systems,” Mr. Taylor initiated coverage of D2L Inc. (DTOL-T) with a “buy” recommendation with “multiple factors expected to lead to sustained, higher organic growth.”
The Kitchener, Ont.-based online learning software provider went public on the TSX in late October.
“Grand View Markets forecasts the global smart education and learning market size to grow at a CAGR [compound annual growth rate] of 17.9 per cent from 2020 to 2027, from US$182.8-billion in 2019,” he said. “The COVID-19 pandemic catalyzed the need for digital learning options amongst education providers and corporations as schools and offices closed and students and workers were sent home. Outside of the pandemic, the smart education and learning market is expected to grow, driven by rising demand for interactive learning techniques, particularly mobile apps, and the use of gamification. We believe D2L’s Brightspace solution is well positioned as a pure cloud platform serving higher education, K-12 and corporate markets, in contrast to many competitors who either do not serve all three or require multiple products to do so.”
“The company has now completed the often-painful migration to 100-per-cent cloud-based and subscription-based deployments last year, said to be a first among peers. This simplifies future development efforts and increases speed to market for new innovations. With this in the rear-view mirror, D2L has also increased its sales effort (40 per cent larger sales team) and expanded its channel partnerships (2 times), which is leading to increased sales velocity and win rates. The combination of these factors is expected to drive an uptick in revenue growth; the company has set a target of 20 – 25% annual revenue growth. Delivering on this growth profile outside of the COVID environment, where virtual and online learning was thrust to the forefront, will be an important proof point for investors.”
Seeing it “reinvesting to support growth” and possessing a balance sheet that is “more than adequate to support reinvestment cycle,” Mr. Taylor set a $20 target for its shares. The average is currently $21.75.
“The company anticipates sustained top-line growth at elevated levels (20–25 per cent annually) as it benefits from an expanding go-to-market sales effort and recently streamlined product offering,” the analyst said. “We believe that the current valuation, at 3.1 times F2023/C2022 estimated revenue, leaves room for upside as the company proves out the durability of its growth rate outside of the pandemic environment and gives better visibility to returning to profitability.”
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Raymond James analyst Brad Sturges thinks Flagship Communities Real Estate Investment Trust (MHC.U-T) offers “unique” investment exposure to the U.S. manufactured housing communities (MHC) sector, which he calls a “a defensive asset class providing attractive risk-adjusted turns.”
“After its initial public offering (IPO) was completed in October 2020, Flagship is the only TSX-listed REIT to focus on owning and acquiring U.S. manufacturing housing communities,” he said. “Importantly, the U.S. MHC sector has achieved more than 20 consecutive years of above-average positive same-property rental income (SP-NOI) growth year-over-year (averaging 4 per cent annually), while requiring relatively lower amounts of maintenance capital expenditures given the investment focus on the land versus a physical structure.”
Touting its “above-average organic growth prospects derived from growing demand for affordable housing combined with U.S. MHC supply constraints, he initiated coverage of Flagship, which owns and operates a portfolio in Kentucky, Indiana, Ohio and Tennessee, with an “outperform” recommendation.
“Competing land uses and scarcity of land zoned for the development of MHCs form meaningful barriers to new manufactured housing supply across the U.S.,” he said. “Further, MHCs offers a lower cost housing option versus both multi-family residential apartments and single-family residential housing, which supports growing leasing demand for MHC lots. Given this favorable fundamental backdrop, Flagship anticipates that its average lot occupancy rate could rise by 200 basis points year-over-year, up from 82 per cent at September 30. Flagship expects to generate average annual same-property lot rent growth of 4 per cent to 5 per cent year-over-year.”
“Since going public, Flagship has acquired 16 MHCs and 2 RV resorts totaling over 3,000 lots for $173-million (average going-in cap rate: 5.5 per cent), above the REIT’s annual acquisition target of $30- to $50-million. Notably, Flagship suggests that its acquisition pipeline has benefited from vendor concerns surrounding possible changes to the U.S.’ 1031 Exchange program. The highly fragmented U.S. MHC sector is ripe for industry consolidation, which can provide Flagship with a potential active acquisition pipeline in target U.S. Mid-West markets. While MHC owner groups include other publicly-traded REITs and institutional investors, the vast majority of MHC investors tend to be small, local owner-operators.”
Mr. Sturges set a target of US$23 per share, topping the US$22.75 average.
“Flagship’s senior management holds significant expertise privately and now publicly in operating and acquiring MHC sites within the U.S. Mid-West. We believe Flagship is well positioned to generate solid AFFO/unit growth through internal and external growth avenues, aided by the REIT’s value-creation initiatives. Future external acquisition growth in the REIT’s U.S. MHC platform that is partly funded by future equity issuances, which in turn improves the REIT’s unit trading liquidity, may augment the possible expansion in Flagship’s P/AFFO multiple,” he said.
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In other analyst actions:
* Canaccord Genuity analyst Kevin MacKenzie cut Great Bear Resources Ltd. (GBR-X) to “hold” from “speculative buy” with a $29 target, matching the consensus and up from $27.
* In a research report titled We Think the Market is Wrong Thinking ZYME Doesn’t Work. , Bloom Burton analyst David Martin cut his target for Zymeworks Inc. (ZYME-N, ZYME-T) to US$50 from US$70 with a “buy” rating. The average is US$45.38.
“Last January, ZYME began a nearly year long slide that we think is overdone,” he said. “The decline kicked off with the reporting of weak early results for ZW49 with management providing little in the way of detail. The trajectory continued as AstraZeneca (NASDAQ:AZN; unrated) and Daiichi (T:4568; unrated) reported a steady stream of positive data for Enhertu – a HER2-targeted ADC challenger to both of Zymeworks’ pipeline leads: Zanidatamab and ZW49. We had not included ZW49 in our valuation model so the January flop did not change our target or rating. In retrospect, however, we now realize there were several points where we could/should have reduced our target as the Enhertu results rained down. At the time, we held course based on our conviction that Zanidatamab is a good product – one which will find an important position in treatment algorithms for HER2-expressing cancers.
“For the most part, we believe this is still the case .... Nonetheless, we have made changes to our Zanidatamab forecasts – fine tuning future sales estimates in light of recent Enhertu results.”
* With the sale of its gold stream on the Blackwater project owned by Artemis Gold to Wheaton Precious Metals for $300-million, Raymond James analyst Farooq Hamed increased his target for New Gold Inc. (NGD-T) shares to US$2 from US$1.75, maintaining an “market perform” recommendation. The average is US$1.84.
* CIBC World Markets analyst Robert Bek cut his BBTV Holdings Inc. (BBTV-T) target to $11 from $13, keeping an “outperformer” rating. The average on the Street is $13.50.
“We recognize more risks on the back of a slowing Base Solutions segment, which provides a material source of funding and momentum for Plus Solutions growth,” said Mr. Bek.
“In our view, the stock remains attractive relative to its material opportunity to arrive at profitable growth over the next few years, as the company is well positioned to add value to video creators across multiple platforms and content types. While we continue to expect the shares to appreciate as the company executes on its Plus Solutions strategy, risks in the story have increased.”
* CIBC’s Scott Fromson initiated coverage of StorageVault Canada Inc. (SVI-X) with an “outperformer” rating and $7.75 target, exceeding the $7.31 average.
“SVI is an easy-to-understand specialty real estate story offering high growth in a moderate-growth sector. We believe SVI will further build on a strong growth track record, underpinned by: 1) Robust demand drivers in the low-penetration Canadian self storage market; 2) Scale-related organic growth levers, reflecting a network of stores that is more than twice as large as its nearest competitor; and, 3) A well-defined acquisition strategy and track record in a highly fragmented industry. SVI’s premium valuation reflects its premium growth profile,” he said.
* Jefferies analyst Suji Jeong raised her Bellus Health Inc. (BLU-Q, BLU-T) target to US$15 from US$10 with a “buy” rating. The average is US$11.96.
* CIBC’s Bryce Adams lowered his target for Copper Mountain Mining Corp. (CMMC-T) to $4.75 from $5, which is the current consensus with an “outperformer” rating, while BMO Nesbitt Burns’ Rene Cartier cut his target to $4.50 from $4.75 with an “outperform” recommendation.
“CMMC provided an update on its Eva copper project, including capital and operating costs, as well as commentary around an associated development plan and timeline. In our view, higher capital costs were expected, and telegraphed, though the increase was higher than our forecast,” said Mr. Cartier. “We have refined our project timeline, and continue to expect CMMC will take a disciplined approach toward development with funding through a combination of internally generated cash flow and debt financing. After factoring in the update, our target price lowers slightly.”
* National Bank Financial initiated coverage of Good Natured Products Inc. (GDNP-X) with an “outperform” rating and $1.25 target. The current average is $1.76.
David Leeder