Inside the Market’s roundup of some of today’s key analyst actions
Scotia Capital analyst Maher Yaghi increased his wireless subscription projections for the Canadian telecommunications sector on Monday, citing “a recent surge in population growth that Canada is witnessing, which should be sustainable given the governments’ immigration targets set for 2022, 2023, and 2024.”
Also pointing to “a more open economy,” he now sees a “better uptake” for wireless services, moving his estimates above the consensus on the Street and leading to higher target prices for the companies’ shares.
“Net wireless loading for publicly listed Canadian service providers totaled 450K in Q2, the highest level for a second quarter in the last 15 years. This level of wireless loading is usually reserved for a normal Q3 or Q4 (i.e., the back-to-school and winter holiday seasons),” said Mr. Yaghi. “In ‘normal’ times, Q2 usually saw 200K-350K net new activations. ... We don’t believe the industry is benefiting from a sudden improved wireless service penetration rate. The likely reasons behind this surge are pent-up demand from consumers going out to shop in brick and mortar stores as the economy reopened in March/April as well as a recent significant increase in immigration. Both of these factors are likely to have a sustainable impact on loading in the next few quarters.”
“Population growth was not even across Canada. Ontario and British Columbia saw an outsized increase compared to Quebec which was closer to recent levels. The reason we highlight these divergences is due to the higher market share that Rogers has in Ontario and TELUS in BC in normal times. This also could explain why Quebecor did not see a material increase in year-over-year net loading in Q2 vs previous years as population growth in Quebec has not increased to the same extent as Ontario or BC.”
While he said the financial impact on short-term results will be “small,” Mr. Yaghi said “the cumulative positive impact over multiple quarters from the higher loadings has led to a slight increase in a few target prices.”
His increases were:
- BCE Inc. (BCE-T, “sector outperform”) to $69 from $68.50. The average on the Street is $68.60.
- Quebecor Inc. (QBR.B-T, “sector perform”) to $32.25 from $32. Average: $34.52.
- Telus Corp. (T-T, “sector outperform”) to $34.50 from $34. Average: $34.23.
Mr. Yaghi lowered his target for Rogers Communications Inc. (RCI.B-T, “sector outperform”) to $72.50 from $73 due to payments needed to extend the mandatory redemption for its financing of the Shaw acquisition. The average is $74.97.
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Alimentation Couche-Tard Inc.’s (ATD-T) better-than-expected first-quarter 2023 financial results “once again demonstrate the resiliency of its business model despite ongoing cost pressures and fuel demand destruction,” said Desjardins Securities analyst Chris Li.
“While future quarterly performance is unlikely to be linear, we believe ATD is well-positioned to sustain 10-per-cent-plus organic EPS growth longer-term, supported by a robust pipeline of fuel and merchandise growth initiatives and share buybacks,” he said.
In a research report released Monday, Mr. Li raising his full-year fiscal 2023 and 2024 financial expectations, emphasizing “a key share price determinant” is its ability to sustainable earnings growth in 2024 as record high fuel margins normalize.
“We expect FY24 EPS to be largely flat vs FY23 with the normalization of fuel margins, partly offset by growth in merchandise and share buybacks,” he said. “While our estimate is largely in line with consensus, there is significant variability among estimates for FY24 — from low- to high-teen percentage declines to 6–7-per-cent growth. This mainly reflects differences in the fuel margin outlook for next year. We believe mid- to high-US30 cents per gallon fuel margins are sustainable longer-term. This is based on industry fuel margins normalizing to US29–30 cpg (vs US24–25 cpg pre-pandemic) and ATD maintaining a US6–7 cpg premium to the industry, supported by its margin enhancement initiatives. All else equal, a one-cent change in US fuel margin impacts our EPS by US$0.08 (3 per cent).”
With the Montreal-based company’s management seeing rising interest rates and the potential for a recession bringing M&A opportunities, Mr. Li thinks a “sizeable” acquisition might be ahead, pointing to its “strong” balance sheet and lack of share buyback activity in July and August.
“If no transaction materializes, we expect ATD to repurchase close to 10 per cent of its shares in FY23 and FY24, with leverage gradually rising to 1.7 times vs its 2.25-times target,” he said.
Maintaining his “positive long-term view” and a “buy” recommendation for Couche-Tard shares, Mr. Li raised his target to $65 from $63. The average on the Street is $70.18, according to Refinitiv data.
“ATD currently trades at only 16 times forward P/E,” he said. “We expect upside to valuation as macro conditions improve, with better visibility on ATD’s long-term earnings power. Valuation is also supported by its strong balance sheet (M&A and capital return). Conversely, we see downside to mid-C$50 on earnings risk concerns (ie recession), based on 15 times P/E (-1sd from average).”
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The Canadian downtown office sector is getting “more interesting” following the announcement of the delisting of Dream Office REIT (D.UN-T) from the S&P/TSX Composite Index, according to iA Capital Markets analyst Gaurav Mathur.
On Friday after the bell, S&P Dow Jones Indices announced the move as part of its quarterly review after Dream’s weight in the Index fell below the minimum of 0.025 per cent. It will take effect prior to the bell on Sept. 19.
“With the downtown office market in continuous flux, the delisting may force investors to look for other avenues of defensible growth in the Canadian Downtown Office market,” said Mr. Mathur.
“According to Bloomberg, by fund objective, ETFs hold 45.2 per cent of the shares. In our view, investors should expect some automatic selling of units from ETF holders, based on fund mandates, as they will trade out of the stock given that D.UN will no longer be part of the S&P/TSX Composite Index for at least one year post the date of delisting.”
While he called the slowdown demand for office space in Toronto and Vancouver “a negative phenomenon,” the analyst emphasized tenants are still looking to move into Class A/I space, which he thinks investors should not ignore.
Accordingly, he reaffirmed Allied Properties REIT (AP.UN-T) as his top choice in the sector, maintaining a “buy” rating and $44 target. The average target on the Street is $42.30.
“The REIT currently trades at an 35-per-cent discount to NAV and offers an attractive entry point for investors looking for a resilient blue-chip office REIT with a dividend yield of 6 per cent,” he said.
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While the Coalition Avenir Québec party’s pledge to create an online platform to access medical appointments for the province’s residents is a “threat” to Dialogue Health Technologies Inc. (CARE-T), Desjardins Securities analyst Jerome Dubreuil emphasized the Montreal-based company has a “strong head start.”
“We consider the government to be a competitor of CARE — the more difficult it is to access the government’s system, the more attractive CARE’s platform is to employers, and vice versa,” he said. “However, the Québec government has a weak track record in tech development, in our view. That said, we have noticed recent improvement on this front—for instance, the deployment of the Clic Santé platform, which exhibited both flexibility and scalability during the pandemic. With (1) Votre Santé not launching until 2026, (2) its functionality still a big question mark, and (3) CARE progressively reducing its exposure to primary care, we do not view the CAQ’s initiative as an immediate threat to CARE. However, the announcement suggests that competition could increase for CARE in the medium to long term.”
Pointing to its expertise in the field, Mr. Dubreuil thinks Dialogue should be “well-positioned to continue adding value for its customers and their employers when/if the Quebec government succeeds in launching Votre Santé as intended.”
“However, there could be more pressure on CARE to innovate to stay ahead of publicly available services,” he said.
Also calling the Monday announcement of CVS Corp.’s (CVS-N) acquisition of Signify Health Inc. (SGNY-N) for US$30.50 a share a “bright spot” in the the healthcare tech sector, he maintained a “buy” rating and $7.50 target for Dialogue Health shares. The average on the Street is $6.89.
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Despite calling it an “intriguing energy play,” H.C. Wainwright analyst Kevin Dede initiated coverage of Vancouver-based Cathedra Bitcoin Inc. (CBIT-X) with a “neutral” recommendation on Monday, emphasizing “cracking the industrial-class ceiling [is] difficult.”
“While the mention of ESG advantages and bitcoin mining in the same sentence tends to draw either a hack or sneer, there exist clear avenues in which bitcoin mining strengthens the energy use case: (1) balancing power generation and consumption with mining as a governor; (2) creating funding sources for renewable investment;(3) mitigating natural gas flaring or damage from waste coal; and (4)re-purposing waste heat—warming greenhouses during the winter in Northern Sweden, for instance—generated in mining,” said Mr. Dede. “Cathedra lands at the intersection of flare gas use and the exploitation of stranded energy in the form of natural gas. Ultimately, the company hopes to scavenge inexpensive natural gas at its source, perhaps through the outright purchase of wells, and using the directly accessed gas to mine bitcoin, completely removed from a grid connection, and at a lower energy cost than competing miners. Currently, the majority of company’s mining fleet is hosted at sites in Kentucky and Tennessee until the bitcoin economic environment improves sufficiently to support acquiring off-grid power and employing the company’s novel, portable mining stations called ‘Rovers.’ Contributing to our initial cautionary stance is Cathedra’s ‘on-the-cusp’ positioning where we cannot point to a site that defines its strategic ambition in the vertical integration of well gas and bitcoin mining ... However and importantly, Cathedra has experience working at well sources in North Dakota that leaves us confident enough to want to officially monitor progress.”
Mr. Dede said he was “initially attracted” to Cathedra due to its attempts to secure natural gas at its source “when those prices were as much as nine-times less than current levels.”
“We expect the energy market to right itself, maybe sooner rather than later, in which case, Cathedra may return to its harvest and mine agenda,” he added. “Meanwhile, in its diverse spectrum of operating geographies and mining operations, bolstered by in-house design and construction of mobile rig housing, we are enamored by Cathedra’s spunk, but hedging on scaling concerns in against a difficult bitcoin mining economic backdrop.”
However, he thinks the company’s “small scale and recent patchy performance warrant a bit of wait and see.”
“Nearer-term, Cathedra is managing a balance between finances and deployment, upgrading containers to return to work at sites it believes it may source power at low cost, while deploying more efficient machines,” said Mr. Dede. “We see the pause in deployment sensible, and would expect nothing less from this financially savvy management team; the downside is the length of time to step increases in hash and the establishment of operating history, something we value in our study of bitcoin miners. For the near-term, we are taking a Neutral stand on the stock while withholding offering a price target at this juncture. From a numbers perspective, Cathedra trades at approximately 1.6 times price-to-sales on our initial $11.4 million 2022 sales estimate. Clearly well below the comparable range referred to on our master valuation matrix, we are still more comfortable on the sidelines, until we see: (1) established off-grid mining with direct access to a natural gas well; (2) consistently improving quarter-to-quarter operations; and (3) greater visibility to expansion.”
Currently the lone analyst on the Street covering the stock, he did not specify a price target.
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In other analyst actions:
* Raymond James’ Brian MacArthur raised his target for Vancouver’s Gold Royalty Corp. (GROY-A) to US$4 from US$3.75 with a “market perform” rating after its US$27.5-million deal with Nevada Gold Mines LLC for three royalties on properties in Nevada. The average is US$6.05.
“We believe royalty companies like Gold Royalty offer equity investors exposure to precious metals prices, while mitigating downside risk given limited exposure to operating and capital costs,” he said. “At the same time, upside optionality exists through exploration potential. Gold Royalty’s portfolio consists of over 190 royalties — that is, precious metals focussed, with a favourable jurisdictional risk profile and longer-term growth. Gold Royalty also has a flexible balance sheet and pays a quarterly dividend of $0.01/share.”
Elsewhere, BMO’s Rene Cartier trimmed his target to US$4.75 from US$5 with a “market perform” rating.
* With its acquisition of a portfolio of 22 royalties from Barrick Gold Corp., Mr. MacArthur raised his Maverix Metals Inc. (MMX-T) target to $8 from $7.75, reiterating an “outperform” rating. The average is $7.49.
“Maverix is a precious metals streaming/royalty company formed in 2016 with a portfolio of assets spun out from Pan American. Given its smaller market capitalization and lower trading liquidity, Maverix may not be a suitable investment for all investors. However, for smaller-cap investors, we believe Maverix offers a gold-focused royalty/streaming company with growth, as well as a flexible balance sheet,” he said.
* Following STEP Energy Services Ltd.’s (STEP-T) announcement of the acquisition of four coiled tubing spreads in the U.S. for $20-million last week, Stifel analyst Cole Pereira raised his target for its shares to $11.75 from $11.50 with a “buy” rating, seeing it remaining “undervalued.” The average on the Street is $10.50.
“The company expects a payback on its investment in an attractive timeframe of 18-24 months,” he said. “STEP also announced that CEO Mr. Regan Davis will retire at the end of the month, and President & COO Mr. Steve Glanville will assume the role of President & CEO and will join the board. We believe this transition was expected, and view Mr. Glanville as well positioned to step into the CEO role. As we update our model for the acquisition and other housekeeping changes, our EBITDAS/sh and FCFPS estimates in 2023E increase by 2 per cent and 9 per cent, respectively.”
* Ahead of the release of a feasibility study on its Eskay Creek Project before the bell on Thursday, Raymond James’ Craig Stanley cut his target for shares of Skeena Resources Ltd. (SKE-T) to $16 from $20, below the $18.87 average, with a “strong buy” rating.
“Our target price has decreased primarily due to a lower equity financing price given the downturn in markets this year,” he said.
* CIBC World Markets’ Stephanie Price cut her Telus Corp. (T-T) target to $33 from $34 with a “neutral” rating. The average target on the Street is $34.20.
“We are reinstating coverage of TELUS post key regulatory and shareholder approvals of the LifeWorks acquisition. While relatively immaterial to consolidated TELUS, we see LifeWorks as significantly enhancing the TELUS Health offering, nearly doubling its revenue base. LifeWorks broadens TELUS Health’s international exposure, deepens its B2B health offering and adds scale to its employee and family assistance plan. With LifeWorks, TELUS Health will have revenue of $1.6-billion and we see the opportunity for TELUS Health to continue to consolidate the e-health market at attractive valuations, given public market volatility,” she said.
* Ahead of Tuesday’s earning release, CIBC’s Kevin Chiang lowered his target for Transat AT Inc. (TRZ-T) target to $2 from $2.50, below the $3.30 average, with an “underperformer” rating.
“We have adjusted our H2/F22 earnings to reflect an increase in opex, given the operational disruptions impacting the aviation industry and higher fuel costs,” he said.