Inside the Market’s roundup of some of today’s key analyst actions
ATB Capital Markets analyst Chris Murray expects WSP Global Inc.’s (WSP-T) proposed $975-million acquisition of UK-based consulting firm RPS Group PLC to expand its “environmental capabilities globally while moving the company another step closer to delivering on its 2022-2024 strategic plan.”
In a research note released Tuesday reviewing the deal, which was announced on Aug. 5, as well as the company’s in-line second-quarter results, he did emphasize the valuation and margin profile “make the transaction appear less accretive than prior deals.”
WSP Global CEO eyes more takeovers as company pursues relentless growth
“The proposed transaction is expected to add 5,000 employees and further strengthens WSP’s environmental franchise, primarily in the UK and Australia, while increasing the company’s exposure to consultancy type revenue, which remains a key tenet under management’s 2024 plan,” said Mr. Murray. “Our revised estimates call for net revenue and EBITDA of $11.0-billion and $1.86-billion, respectively, in 2023, in line with WSP’s 2024 targets.
“RPS represents WSP’s second sizable transaction announced since May 2022, reflecting a robust M&A environment coming out of the pandemic. While pro-forma leverage (approximately 1.9 times at Q4/22) could support further deal flow, we expect management’s focus to shift toward integration over the near term given 12,000 employees are expect to join WSP (up 20.0 per cent) by year-end, with the transactions calling for meaningful realization of synergies over the next 24 months.”
Predicting the deal will close in the fourth quarter of the current fiscal year and forecasting a 4-per-cent organic growth rate into acquired revenue, Mr. Murray trimmed his adjusted fully diluted earnings per share estimate for 2022 to $5.13 from $5.32. His 2023 projection jumped to $6.74 from $5.96.
Keeping a “sector perform” rating for WSP shares, he raised his target to $175 from $170. The average on the Street is $181.62, according to Refinitiv data.
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The departure of co-founder and chief executive officer Jesse McConnell from Rubicon Organics Inc. (ROMJ-X) is a “material loss” for the Vancouver-based organic cannabis producer, according to Raymond James analyst Rahul Sarugaser.
On Aug. 25, Rubicon announced Mr. McConnell, who is currently on parental leave, resigned from his position and will depart on Dec. 31.
“We viewed Mr. McConnell as ROMJ’s navigator through the Canadian cannabis market’s choppy waters, and it was on his shoulders that we placed our confidence in ROMJ’s ability to become one of Canada’s leading cannabis companies. So, while we await further clarity on who will succeed Mr. McConnell, and how the market will respond to such succession, we take a more conservative stance,” said Mr. Sarugaser.
Though he is “dialing back” his long-term financial expectations for Rubicon, “handicapping its capacity to continue growing its market share,” the analyst said he has “confidence” in the company that Mr. McConnell and chief financial officer Margaret Brodie “have built, which should drive durable +EBITDA performance going forward.”
“While it took a year longer for ROMJ to turn +EBITDA than we had originally anticipated, the company has indeed done so particularly in the face of an oversupplied and extremely competitive Canadian cannabis market populated by a wide array of often-irrational players,” Mr. Sarugaser said. “We have credited ROMJ’s recent +EBITDA turn to (1) Mr. McConnell’s unique understanding of the cannabis market as it stands today (i.e. informed by the legacy Cdn market + U.S. market), and (2) to Ms Margaret Brodie, ROMJ’s CFO, who has steeped ROMJ in a culture of financial and operational rigour.”
Maintaining an “outperform” rating for its shares. he lowered his target to $3 from $5. The average on the Street is $3.25.
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Despite “mixed” second-quarter results and a third reduction to its guidance this year, Echelon Capital Markets’ Andrew Semple is “encouraged” by Jushi Holdings Inc.’s (JUSH-CN) revenue momentum and expects both margins and operating leverage to improve as it adds additional production capacity.
However, the equity analyst expects improvements to be “gradual” through the second half of 2022 and into 2023.
“The Company now expects to exit the year at annualized run-rate revenues of $320-350-million with adj. EBITDA margins (%) in the low double digits,” said Mr. Semple. “This is a modest reduction to the revenue outlook, which previously called for $340-380-million. The new EBITDA guidance appears to be a larger shift. Using a 10-15-per-cent EBITDA margin, we believe the new guidance implies an annualized Q422 run-rate EBITDA of $32-52-million, below the prior EBITDA guidance of $60-80-million. The revised guidance reflects a slower than expected development of the Jushi’s cultivation/processing facilities and wholesale business, which will defer some of the margin expansion in key states to 2023.”
In its first quarter reporting under U.S. GAAP accounting standards, the Florida-based multi-state cannabis operator reported “solid” sales growth of 17.6 per cent sequentially to US$72.8-million, topping the Street’s forecast of US$69.6-million due largely to the benefits of M&A and organic growth. Adjusted gross margins and EBITDA both fell short of expectations, which Mr. Semple attributed to price discounting.
“Jushi’s history as a leading retail operator has resulted in the Company over indexing in third party product sales relative to peers,” he said. “This conflicts with the industry’s recent push towards vertical integration to protect margins from lower average selling prices across maturing state markets. Jushi has started to direct more of its branded products towards its retail network, with a 21-per-cent sell-through rate of its branded products in Q222, up 770 basis points from 14 per cent in Q122. Most of this increase was driven by the acquisition of vertically integrated NuLeaf in Nevada. On an organic basis, Jushi’s in-house brand sell-through rate improved 270 basis points quarter-over-quarter. There remains significant opportunity to expand on this sell-through rate, which the Company is starting to realize in Pennsylvania where branded sales have been as high as 40-per-cent-plus of weekly units sold. Improved supply of branded products coming from the expanded cultivation facilities in PA and VA will allow for increased vertical integration, supporting both revenues and margins.”
Mr. Semple said he’s keeping a close watch on Jushi’s balance sheet as it refinances maturing debt, expecting a “significant” debt raise before the end of the year.
“We estimate that Jushi would likely want to raise $125-million of new debt capital before year end in order to refinance this maturing debt, as well as to provide additional capital for growth,” he said. “We include this assumed financing in our model, at a weighted average cost of debt of 10.5 per cent.
“We believe there are several sources of debt capital available to the Company. Management indicated to us that the Company has so far primarily explored traditional mortgages or sale leasebacks as capital markets conditions have been tough, although management noted that term loans and bond issuances may also be possibilities. The Company’s Virginia assets (including its grower-processor facility) is currently unencumbered, and securing a mortgage against this attractive asset in a high-growth U.S. cannabis market is likely to provide the most favourable cost of debt.”
Maintaining a “speculative buy” recommendation for Jushi shares, he cut his target by $1 to $4.50. The current average is $5.85.
Elsewhere, Canaccord Genuity’s Bobby Burleson cut his target to US$2.75 from US$4.50 with a “buy” rating.
Mr. Burleson said: “We are lowering our estimates and price target ($2.75 from $4.50) following weak Q2 results, and a reduced 2022 outlook from management. Inflation is impacting consumers across several of JUSHF’s markets, reducing average basket size as seen elsewhere this earnings season. In response to macro headwinds, 2022 revenue expectations have been modestly reduced, although the EBITDA reduction is more pronounced due to timing of vertical integration start-up costs. We are reiterating a BUY ahead of accelerating growth expected in VA where JUSHF holds a strong position in a fast-liberalizing medical market that we believe will soon likely flip to rec sales. We also note management’s comments during Q&A, in our view, appeared to allude to an active strategic environment where consolidation is likely to occur between MSOs. In such a scenario, we would expect JUSHF to provide an attractive target.”
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While underwhelmed by the second-quarter results from Think Research Corp. (THNK-X), Desjardins Securities analyst Jerome Dubreuil sees an “inflection point in profitability” in the back half of 2022.
“THNK reported disappointing 2Q results, with a miss in both the top line and adjusted EBITDA,” he said. “Recall that the market was hoping for near breakeven adjusted EBITDA this quarter, a goal which is now expected to be reached later this year. However, management provided added precision in its financial guidance, suggesting decent visibility, supported by the company’s increased confidence in its clinical research backlog.”
Before the bell on Monday, the Toronto-based healthcare technology company reported revenue of $18.4-million and an adjusted EBITDA loss of $1.6-million, both below Mr. Dubreuil’s projections ($21.6-million and $0.0-million, respectively). He attributed both misses to “a sequential decline in revenue associated with delays in clinical research programs and lower one-time revenue in software and data solutions, slightly offset by continued cost synergies from past acquisitions.”
Even though Think Research’s management also reduced its full-year guidance, the analyst sees the company as an “attractive” investing proposition.
“In light of the 2Q22 results, we have lowered our estimates. Software integration and the transition to more Phase 1 trials create lumpiness in results, but the stock still trades at just 0.8 times 2023 sales (despite its strong performance in the weeks prior to the results) vs 2.6 times for peers,” he said. “With clinical research approaching full postCOVID-19 recovery, we see potential for THNK to reach an inflection point in terms of profitability in the coming months, which should be a catalyst for the stock.”
Maintaining a “buy” rating, Mr. Dubreuil cut his target to $1 from $1.25. The average is $1.81.
“We recommend buying THNK as we view it as a unique company focused on building a digital healthcare backbone to drive medical knowledge to the point of care, reduce costs and improve outcomes,” he added.
Elsewhere, Canaccord Genuity’s Doug Taylor lowered his target to $1.50 from $2, keeping a “speculative buy” rating.
“Think Research reported Q2 results that were below expectations as supply chain issues pushed BioPharma trials further to the right,” said Mr. Taylor. “Despite the resultant guidance pulldown, the company continues to target a substantially positive EBITDA run rate exiting the year as these programs resume and as cost rationalization efforts flow through. While management speaks to a solid trial backlog and improving overall revenue visibility, our focus remains on the timing to profitability and FCF generation. We have lowered our target ... on the delayed growth ramp and associated positive adj. EBITDA inflection, which we now expect in Q4.”
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Credit Suisse analyst Andrew Kuske downgraded Canadian Utilities Ltd. (CU-T) to “underperform” from “neutral” on Tuesday with a target of $41.50, up from $40 and above the average on the Street of $40.03.
Mr. Kuske also made these target changes:
- Atco Ltd. (ACO.X-T, “neutral”) to $49.50 from $48. Average: $50.43.
- Algonquin Power & Utilities Corp. (AQN-N/AQN-T, “neutral”) to US$15 from US$14.50. Average: US$16.33.
- Hydro One Ltd. (H-T, “neutral”) to $36 from $34.50. Average: $37.11.
“Rather interestingly, on near-term indexed performance dynamics, utilities with overwhelmingly Canadian-centric exposure delivered superior results versus their US-focused Canadian peers. That performance delta along with structurally lower growth helps to support our downgrade of Canadian Utilities (CU) to Underperform from Neutral in light of limited excess return potential to our target price. From our perspective, two themes are worth noting: (a) in general, a restoration of the typical relationship of declining interest rates and positive utility performance; and, (b) a selection of reasons that support the near-term outperformance of the Canadian names versus the more heavily exposed US names,” he said. “With this backdrop, the Regulated Utilities sector remains our least preferred sub-sector in the Canadian infrastructure universe after reviewing the major sub-sectors in recent works.
“In terms of stock specifics, our only Outperform rated stock in the core regulated utility sub-sector is largely a ‘non-utility’ being Brookfield Infrastructure Partners LP (BIP). As outlined in our broader Brookfield Group work, we remain focused on the Group’s ability to raise a significant amount of third party capital and invest globally in a growing network of opportunities – largely on a value-oriented basis. That positioning combined with some degree of economic sensitivity is unique in this sub-sector of coverage along with our overall coverage universe. With the pure regulated utilities, opportunities do exist for selected companies to benefit from the combination of rising macro interest rates and new regulatory frameworks – namely CU and Hydro One Limited (H). Yet, at times, there is still uncertainty in an environment of re-basing.”
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Raising his fourth-quarter forecast for Vecima Networks Inc. (VCM-T) ahead of its Sept. 22 earnings release, Acumen Capital analyst Jim Byrne said he expects “strong” growth to continue for the next several quarters.
“Our FY22 estimates have been increased slightly to reflect our expectations for another record quarter for VCM,” he said. “We estimate Q4 revenue of more than $54-million, up 54 per cent from Q4/FY21 results as demand for their DAA product lines (Entra products in the VBS segment) continues to grow. Our margin assumptions are little changed as we expect gross margins of 47 per cent will continue, given the supply chain challenges. Longer term, the company expects to generate gross margins in the 48-52-per-cent range.”
“Management noted they continue to see escalating demand for its DAA solutions, and its backlog continues to grow. The company continues to add customers and grow its top line significantly.”
For the quarter, Mr. Byrne is now projecting revenue of $54.4-million with EBITDA of $8.7-million and earnings per share of 12 cents. That’s in-line with the consensus estimates on the Street ($53.6-million, $8.6-million and 12 cents, respectively).
Maintaining a “buy” rating, he raised his target for Vecima shares to $24.50 from $24. The average is $23.67.
“The company is poised to deliver outstanding top line growth in the coming quarters as product demand and backlog continues to accelerate,” he said. “Management has done an excellent job managing the supply chain challenges that have plagued the tech sector. While still a challenge, we believe calendar 2023 should see supply chain issues ease, which could drive margin expansion into next year. The shares have performed well so far in 2022, returning 26 per cent (excluding dividends) compared to the S&P/TSX Composite Index decline of 6.6 per cent and the drop of more than 23 per cent for the tech heavy NASDAQ index. We believe VCM’s shares are attractively valued given the top line growth and margin expansion anticipated in 2023 and beyond.”
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In other analyst actions:
* Raymond James’ Steve Hansen trimmed his Enwave Corp. (ENW-X) target to 85 cents, below the 93-cent average from $1.10, keeping a “market perform” rating.
“While we continue to admire EnWave’s long-term prospects, we are trimming our target price ... based upon another lackluster quarter that exhibited weaker-than-expected EWC machine sales and NutraDried margins. We will continue to monitor,” he said.
* Cowen and Co.’s John Kernan raised his target for Lululemon Athletica Inc. (LULU-Q) to US$512 from US$505, reiterating an “outperform” rating. The average is US$378.43.
* Desjardins Securities’ Gary Ho trimmed his target for shares of PowerBand Solutions Inc. (PBX-X), a Burlington, Ont.-based fintech provider in the automotive industry, to 40 cents from 50 cents, keeping a “buy” rating.
“PBX reported a noisy kitchen-sink quarter. Originations, revenue and gross profit were below our estimates, but adjusted EBITDA beat,” said Mr. Ho. “PBX wrote down $6.6-million in goodwill and intangible assets. That said, with added flexibility following its private placement, as well as cost-reduction initiatives and a focus on the profitable DF segment, we view PBX as being at an inflection point although patience is required near-term.”
* Canaccord Genuity’s John Bereznicki cut his Questor Technology Inc. (QST-X) target to $1.25 from $1.40 with a “hold” rating, while ATB Capital Markets’ Tim Monachello lowered his target to $1.30 from $1.50 with a “sector perform” recommendation. The average is $1.40.
“Management is encouraged by the recent passing of the US Inflation Reduction Act (IRA), which includes several provisions targeting methane reduction. While we believe the IRA represents yet another secular tailwind for Questor, we nonetheless expect the company’s financial results to remain choppy for (at least) the balance of this year and remain on the sidelines as we await signs of a sustained earnings recovery,” said Mr. Bereznicki.
* Scotia Capital’s Patricia Baker raised her target for Saputo Inc. (SAP-T) to $40 from $36, exceeding the $39.13 average, with a “sector outperform” rating.
“Saputo reported a stronger-than-anticipated first quarter with adjusted EBITDA of $347-million, ahead of our $308.1-million forecast and consensus of $316.2-million,” she said. “Q1 EPS of $0.39 handily beat forecast/consensus of $0.27/$0.29. Q1 revenue totaled $4.3-billio up 24 per cent year-over-year, also bettering forecast and consensus. SAP saw strong pricing momentum across each of its sectors and benefited in Q1 from higher international cheese and dairy ingredient market prices. Price increases have also been taken in June and July which should help manage the high inflation backdrop. SAP also implemented further productivity and efficiency initiatives, announcing further streamlining of its US manufacturing footprint. The shares have outperformed over the last several months and re up more than 16 per cent year-to-date, marking a strong outperformance relative to the overall market (down 6.6 per cent ) and the Consumer Staples Index (down 4 per cent ). This though comes after several years of serious under-performance. It appears the market is attaching heightened credibility to Saputo’s stated strategic plan to drive EBITDA higher to $2.125-billion by F25.”
David Leeder