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Inside the Market’s roundup of some of today’s key analyst actions

Calling it a “best-in-class” apparel retailer, Stifel analyst Martin Landry initiated coverage of Aritzia Inc. (ATZ-T) with a “buy” recommendation on Tuesday, seeing the potential for earnings per share to double over the next four years.

“We see significant growth potential for Aritzia, which should come from: (1) Geographic expansion in the United-States, where ATZ sees a potential for 100-plus stores vs 42 stores currently, (2) Product depth expansion with additional sizes, lengths and colors, (3) Category expansion, including swimwear, intimates and men’s apparel, (4) Margin expansion with the in-sourcing of the Ontario DC and a larger proportion of sales coming from the U.S., which have the same price points as in Canada,” he said.

“Aritzia has top tier profitability, with EBIT margins 410 basis points higher than its peer average. In our view, this is explained by: (1) strong sales/sq. ft. that is 35 per cent higher than peers; and (2) limited promotions, with only 11 per cent of items discounted vs. 32 per cent on average for peers, according to our analysis. Aritzia’s marketing spending (less than 5 per cent of sales) is also much lower than peers, suggesting strong customer loyalty. Finally, over the last five years, Aritzia has generated, on average, comparable-sales growth of 15 per cent, the fastest pace of growth amongst peers, highlighting the brand momentum.”

In a research note titled Dress for success with Aritzia, Mr. Landry said the Vancouver-based company benefits from a loyal customer base and its diverse portfolio of 12 brands that “follow its customers across various life stages.”

“While being everything to everyone rarely works, Aritzia found a balance offering both formal and casual items for older and younger customers,” he said. “Aritzia is one of few Canadian retailers to be successful in the United States, and we believe there is much more room to grow with only 42 stores in 19 states.”

While warning that gross margins are likely to remain under pressure in fiscal 2023, the analyst thinks those issues are not permanent, noting: “Logistic challenges are abating, which should reduce the need to air freight textiles and benefit margins.” He projects EPS will rise to $3.57 in fiscal 2026 from $1.53 in 2022, calling its earnings power “impressive” over the long term.

“In addition, the U.S. expansion should be margin accretive as price points in the U.S. are the same as in Canada, providing an approximate 25-per-cent lift in Canadian dollars,” said Mr. Landry. “Larger U.S. revenues also reduce Aritzia’s FX exposure as the company buys the majority of its products in USD.

“Aritzia has one of the best balance sheets in the consumer sector in Canada, with $179 million of cash and no bank debt. Including lease liabilities, Aritzia’s debt/EBITDA ratio stood at 0.8 times as of May 29, 2022. Aritzia’s valuation multiple has contracted significantly year-to-date, going from 35-times forward earnings to 23 times, mostly in line with the five-year average. We see a potential for ATZ’s multiple to expand.”

While warning of near-term headwinds, he called Aritzia’s long-term outlook “bright,” setting a target of $57 per share and believing recent valuation contraction offers an “appealing” entry point for investors. The average target on the Street is $57.38.

“Aritzia’s shares have come off significantly from their all-time high of $60 reached in January,” said Mr. Landry. “The year-to-date decline of 22 per cent in Aritzia’s shares from peak is in line with the 20-per-cent decline from peak of the S&P 500 index. Aritzia’s valuation has also contracted significantly, trading at 23-times forward earnings (consensus), down from a peak of 35 times in January. Before the market decline this spring, Aritzia’s shares had significant momentum, and, in January 2022, the company reported a sizeable earnings beat (EPS of $0.61 vs consensus estimate of $0.41). At that time, the company also increased its guidance, sending its shares to all-time highs. The recent valuation decline offers an appealing entry point, in our view, with valuation multiple expansion potential.”


Scotia Capital analyst Phil Hardie sees “attractive opportunities” for investors to buy shares of Fairfax Financial Holdings Ltd. (FFH-T) “given their discounted valuation that does not likely reflect the company’s underlying earnings power.”

“We believe the stock should garner a sustainable re-rate on the back of the organic expansion of its insurance operations that likely enhance its ROE [return on equity] and growth rate potential of its book value, and potentially add greater consistency to both metrics,” he added.

In a research note released Tuesday, Mr. Hardie called Fairfax “a much simpler story than in the past” and said he thinks investors have “yet to fully appreciate a number of the changes in its business, and the likely implications for future stock performance.”

“Given the historical complexity of its operations and disclosures, we believe many investors have struggled with gaining a deep appreciation for and ability to quantify the key factors that drive Fairfax earnings and how they have evolved,” he said. “In fact, the company has historically been viewed as one of the most confusing investments in the financial services sector, which limited investor appetite and interest in the stock. Fairfax is now a much simpler story than in the past, its financial disclosures have improved, and we commend its CFO Jennifer Allen and her team for continuing to advance this initiative. Nonetheless, we believe the majority of investors have yet to recognize the changes in Fairfax business and their likely implications for its future stock performance. We see the higher growth at a potentially more consistent pace. The sustained steep valuation discount relative to its peers, over the past two to three years, suggests to us that this has yet to be reflected in the stock price.”

Mr. Hardie raised his target for Fairfax Financial shares to $950, exceeding the $936.38 average on the Street, from $860 with a “sector outperform” recommendation.

“We continue to believe Fairfax is well-positioned for a rising interest rate environment, and, given its value investing approach, it has the potential to continue to generate outsized investment returns – even against a backdrop of more modest equity market returns,” he said. “Further, we believe its increased underwriting leverage and favourable operating environment for its insurance operations add a greater lever for growth than in the past.”


Pointing to “macro/recessionary concerns,” National Bank Financial analyst Adam Shine thinks the Street’s expectations for VerticalScope Holdings Inc. (FORA-T) are too high and are “likely poised for more pruning” after Corus Entertainment Inc. (CJR.B-T) warned of a “meaningful softness” in advertising earlier this month.

“We tend to skew above Street estimates based on our assumptions for M&A done by the company over the past year and related to future acquisitions as management works through its pipeline of targeted deals,” he said. “Heading into 3Q reporting which is nearly two months away, we had been expecting revenues of $21.3-million and Adj. EBITDA of $10.0-million, including respective M&A contributions of $6.1-million and $3.1-million. Consensus currently sits at $20.7-million for revenues and $8.7-million for Adj. EBITDA.

“Roughly 10 days ago, Corus [Sector Perform, Target $3.25] warned about its 4Q22 (August FYE) performance and highlighted material reductions in its TV ad sales in the near term. This being early reactions by marketers to the prospect of consumers cutting back spending as well as a focus on their bottom lines to close out 2022. Taking a cue from this and evolving macro headlines that are increasingly turning more somber, we further trimmed our annual estimates, with our 3Q revenues moving down to $19.4M and Adj. EBITDA to $7.2-million. Besides reducing growth rates for digital advertising and e-commerce, we also reset margins lower 2022-2024 and scaled back M&A spending in 3Q and 4Q this year to $1-million and $8-million, respectively, from $10-million and $12-million.”

Mr. Shine also thinks several of Verticalscope’s ongoing initiatives, including its Fora mobile application and efforts to improve user experience & engagement. “appear more poised for traction next year.”

After reducing his financial forecast, he cut his target for the Toronto-based company’s shares to a Street-low $19 from $22, keeping an “outperform” recommendation. The average is $24.17.

“The stock appeared to find a 2022 bottom just below $7.50 ahead of 2Q reporting in August with a brief doubling thereafter, but renewed pressure across capital markets is now likely to be exacerbated by a resetting of estimates,” said Mr. Shine. “As such, FORA’s summer lows could possibly get retested over coming months before a more sustainable recovery might ensue in 2023, subject to the severity and length of the anticipated recession next year.”


RBC Dominion Securities analyst Paul Treiber expects Shopify Inc. (SHOP-N, SHOP-T) will continue to see a decline in merchants in the third quarter.

Analyzing July and August data from BuiltWith, an Australia-based internet analytics firm, he expects a 3-per-cent decline from the second quarter to 1.75 million.

“This is similar to Q2, where BuiltWith showed that Shopify’s merchants fell 2 per cent quarter-over-quarter,” said Mr. Treiber. “The implied Q3 net churn of 60k is slightly above the 4-quarter trailing average of 23k.”

Shopify to launch ‘Flex Comp’ software, giving employees choice in mix of cash and equity paid

However, the analyst thinks the company’s Shopify Plus, Payments and POS systems are “showing continued momentum,” which will help to lift monthly recurring revenue and take rates.

“Despite total merchants declining slightly this year, Shopify has achieved MRR growth through the uptake of higher priced plans (e.g., Q2 MRR up 13 per cent year-over-year),” he said. “Data suggests Shopify Plus merchants are tracking to increase 11 per cent quarter-over-quarter in Q3, which is similar to 12 per cent quarter-over-quarter Q2. Similarly, Shop Pay penetration according to BuiltWith data is now 62 per cent, up from 58 per cent Q2. Higher Shop Pay penetration is driving faster GPV growth relative to GMV growth and helps lift Shopify’s take rate.”

Mr. Treiber thinks macro “uncertainty” is creating volatility for Shopify shares, however he continues to see the Ottawa-based company as “one of the most compelling growth stories in our coverage universe.”

He maintained a US$60 target and “outperform” recommendation, citing its large total addressable market and “attractive long-term opportunity.” The average on the Street is currently US$42.06.

Elsewhere, Morgan Stanley’s Keith Weiss cut his target for Shopify shares to US$40 from US$44, reiterating an “equal-weight” rating.

“Fulfillment remains top of mind for investors, who now focus on the cost of building out a 1P network. While details remain sparse, our initial analysis suggests a multi-billion dollar investment cycle with a difficult path to profitability. A view which brings our PT to $40,” he said.


In response to recent rare earth pricing weakness, Canaccord Genuity analyst Yuri Lynk reduced his 2023 revenue and EBITDA estimates for Neo Performance Materials Inc. (NEO-T) by 4.0 per cent and 13.7 per cent, respectively, on Tuesday.

“Recall, lower rare earth pricing generally drives lower revenue and dollar margins for Neo due to its lead/lag pricing strategy,” he said.

Mr. Lynk made the reductions after his firm sponsored a non-deal roadshow with the Toronto-bassed company’s president president and chief executive officer Constantine Karayannopoulos.

“Neo continues to boast a credible plan to double 2021 EBITDA over the next five years via a greenfield magnet manufacturing facility in Estonia.” he said. “However, the stock has underperformed since August 26 when Hastings (HAS-ASX| Restricted) announced it had purchased a 22-per-cent (now 19.6-per-cent) stake in Neo from Oaktree Capital Management. We believe there are several reasons for this. Firstly, based on questions we’ve fielded, it appears some investors misunderstand how Neo will fund its upstream expansion plans (in short, it won’t). Secondly, the $75-million relocation of the Zibo rare earth refinery in China will bring very little in terms of expanded capacity and efficiency (but it had to be done to meet environmental regulations). Lastly, rare earth pricing continues to weaken with benchmark neodymium prices 50 per cent lower from their February peaks.”

While he emphasized phase 1 of Neo’s proposed greenfield magnet manufacturing facility in Estonia is now fully funded, Mr. Lynk cut his target for its shares to $18, below the $22.83 average, from $24, keeping a “buy” recommendation.


Canaccord Genuity analyst Carey MacRury views Agnico Eagle Mines Ltd.’s (AEM-T) US$580-million deal for a 50-per-cent share in Teck Resources Ltd.’s (TECK.B-T) San Nicolás copper-zinc mine in Zacatecas, Mexico as “slightly positive” for the Canadian gold miner.

“In our view, the deal provides incremental growth at an attractive price and with a strong partner, and it allows the company to leverage its strong Mexico-based management team,” he said. “Our NAV per share has increased 3.9 per cent.”

“Based on the parameters provided from the PFS and at current spot prices ($1,670/oz gold, $19.50/ oz silver, $3.50/lb copper, and $1.45/lb zinc), we estimate an NPV8% of $980 million (50-per-cent basis and net of Agnico’s initial $580 million contribution), 4 per cent of AEM’s total NAV. At full run rate in 2027, we estimate that the base revenues from the mine would represent 7 per cent of Agnico’s total revenue and below that of some senior gold producer peers.”

Reiterating a “buy” rating for Agnico shares, Mr. MacRury raised his target by $2 to $91. The average is $85.39.

He kept a “buy” rating and $46 target, below the $52.02 average, for Teck shares.


In other analyst actions:

* Following a tour of multifamily (MFR) properties in the Netherlands, Raymond James analyst Brad Sturges trimmed his target for units of European Residential REIT (ERE.UN-T) to $5 from $5.25, keeping an “outperform” rating. The average is $5.04.

“Potential clarity combined with a more limited future operating impact from any new proposed Dutch regulations may act as a material near-term positive catalyst for ERES’ unit price,” he said. “Further, if ERES’ sizable NAV discount valuation does not narrow, we fully expect ERES’ strategic sponsor and largest unitholder (66-per-cent interest), CAPREIT, to explore its strategic options to unlock ERES’ inherent underlying value, which may include exploring an M&A/privatization transaction, and/or optimize ERES’ capital structure (e.g. increase its trading float).”

* BMO’s Jackie Przybylowski raised her Kinross Gold Corp. (KGC-N, K-T) target to US$6 from US$5.50, exceeding the $5.83 average, with an “outperform” rating.

“Kinross will repurchase US$300-million in shares in 2022 and has committed to potential further share repurchases in 2023 and 2024,” she said. “The renewed and enhanced share buyback program shows the company’s continued commitment to shareholder returns and takes advantage of Kinross’s attractive relative valuation versus its closest gold peers.”

* Citi’s P.J. Juvekar cut his target for Toronto-based Li-Cycle Holdings Corp. (LICY-N) to US$8 from US$10, keeping a “buy/high risk” recommendation. The average is US$10.11.

“LICY reported adj. EBITDA loss of ($31.6)-million vs. our ($13.4)-million due to production delays at two of its spokes and downward FMV adjustments due to lower cobalt and nickel prices,” he said. “LICY’s lower black mass target for 2022 was disappointing, but we caught up with the company afterwards and it seems like there was an issue with the chute design and battery material flow at its AZ spoke, which is now fixed. The company will also use that fix in its AL hub in the future. Spoke operations are relatively more straightforward in our view, but starting up the Rochester Hub will be critical for the company. Any future delays/issues with the Hub could be a concern for investors.”

* H.C. Wainwright’s Robert Burns his target for Toronto-based Portage Biotech Inc. (PRTG-Q) to US$22 from US$32 with a “buy” rating. The average is US$24.67.

“Last week, Portage Biotech provided an update with regard to its R&D programs. In summary, the company is prioritizing the following: (1) initiation of the company-sponsored Phase 2 IMPORT-201 trial, which has the same design as the PORT-2 trial and shall parallel PORT-2 in the E.U. and U.S.,” he said. “Notably, management has decided to drop the 1L melanoma arms from the study, given the evolving treatment paradigm and since the standard-of-care in that setting is different between the U.S. and U.K., in favor of recruiting additional patients into the 1L non-small cell lung cancer (NSCLC) cohort; and (2) launch of the company-sponsored ADPORT trial, which shall evaluate the company’s adenosine pathway-targeted agents PORT-6 and PORT-7 in the U.S.”

* Scotia’s Ovais Habib cut his target for Skeena Resources Ltd. (SKE-T) to $16.50, matching the average, from $17 with a “sector outperform” rating.

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