Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Ryan Li expects a shift in consumer behaviour to increasingly result in a significant execution risk for Goodfood Market Corp. (FOOD-T).
Based on that “difficult backdrop” and seeing its shares under pressure as “investors await traction with on-demand,” he lowered his recommendation for the Montreal mealkit delivery company to “sector perform” from “outperform.”
“As indicated by most of the traditional grocers, elevated inflation and an uncertain economic backdrop have caused a shift in consumer behaviour, including: (a) Slower e-Commerce growth; (b) Trade-down activity; (c) A shift towards discount banner shopping; and (d) Increasing private label penetration,” said Mr. Li. “For reference, recent indications from Empire suggest that its e-Commerce sales declined by more than 20 per cent year-over-year. While a portion of this decline is related to difficult year-over-year comparisons, we believe that heightened inflation is causing consumers to seek more economical alternatives. (2) In our view, the challenging backdrop could place pressure on Goodfood’s ability to execute on its strategic plan to grow the on-demand business.”
While Goodfood remains focused on returning to positive EBITDA in the first half of fiscal 2023, the analyst thinks the coming release of the company’s seasonally slower fourth-quarter results are unlikely to bring the signs of progress in its on-demand business desired by investors.
“Specifically, last quarter, management indicated that it would use the slower Q4 to test different variables in its on-demand rollout (delivery radius, delivery time, automation, picking, technology, location) in order to improve profitability,” he said.
Lowering his revenue and EBIDA projections for fiscal 2023 and 2024 to “reflect higher uncertainty with the online grocery backdrop,” Mr. Li cut his target for Goodfood shares to $1.50 from $2. The average on the Street is $1.81.
“We are downgrading Goodfood to Sector Perform from Outperform given increasing execution risk associated with the company’s on-demand strategy, particularly amid a high inflation environment with slowing grocery eCommerce growth (as indicated by grocery peers) and an uncertain consumer backdrop,” he said. “In our view, over the near term, the share price will remain under pressure until Goodfood can demonstrate traction with delivering sales growth (on-demand in particular), margin recovery, improved cash burn and sustained execution.”
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In a research note titled Challenging Year Ahead For Lumber & OSB, CIBC World Markets paper and forest products analyst Hamir Patel “moved to the sidelines” on lumber companies after reducing his 2023 estimates for producers by an average of over 20 per cent.
“Reflecting lower volume assumptions and higher unit costs for next year, we have reduced our 2023 EBITDA estimates on IFP by 14 per cent, WFG by 17 per cent and CFP by as much as 50 per cent (now reflecting significant market-related downtime in BC next year),” he said. “Our revised 2023 estimates are 30-50 per cent lower than consensus on the three major Canadian lumber producers. While we are still largely comfortable with our pricing assumptions for next year (projecting SPF at $500/mfbm and North Central OSB at $315/msf), this forecast is predicated on CADUSD averaging 0.76 in 2023 (vs. spot of 0.72), so there is some downside risk to our pricing assumptions next year if U.S. dollar strength persists (though this will be an offsetting tailwind for many wood products companies).”
With those revisions, he downgraded a trio of stocks in his coverage universe and reduced his price targets on seven wood products-exposed equities by an average of 20 per cent.
“In the forestry/building products space, our only remaining Outperformer-rated names under coverage are distributors Richelieu Hardware (top pick) and Hardwoods, as well as treated lumber producer Stella-Jones. In the pulp/packaging space, our Outperformer-rated names include CCL and Mercer. We also continue to view Winpak as a defensive name for a recessionary environment (90% of sales tied to food/beverage packaging), with strong margin visibility and above-market growth prospects,” he said.
Mr. Patel lowered his recommendation for these stocks:
* Canfor Corp. (CFP-T) to “neutral” from “outperformer” with a $25 target, down from $36. The average target on the Street is $38.
* Interfor Corp. (IFP-T) to “neutral” from “outperformer” with a $32 target, down from $42. Average: $43.
* West Fraser Timber Co. Ltd. (WFG-T) to “neutral” from “outperformer” with a $120 target, down from $156. Average: $148.79.
Mr. Patel also made these other target adjustments:
* Conifex Timber Inc. (CFF-T, “neutral”) to $1.75 from $2.25. Average: $1.88.
* Doman Building Materials Group Ltd. (DBM-T, “neutral”) to $6.25 from $7.50. Average: $6.71.
* Mercer International Inc. (MERC-Q, “outperformer”) to US$16 from US$20. Average: US$19.30.
* Stella-Jones Inc. (SJ-T, “outperformer”) to $45 from $46. Average: $49.
Elsewhere, Scotia Capital’s Benoit Laprade trimmed his Interfor target by $1 to $42, keeping a “sector outperform” rating, in response to its $325-million acquisition of Chaleur Forest Products.
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Emphasizing “rising recessionary uncertainties,” RBC Dominion Securities’ Nelson Ng reduced his 2023 earnings expectations for Methanex Corp. (MEOH-Q, MX-T).
“We note that Methanex’s North American reference price continues to be at a significant premium (approximately 62 per cent) to the North American spot price (illiquid market), and the China reference price is 32 per cent higher than the spot price,” he said. “As a result, we believe the company’s realized price will have a larger-than-normal discount to the posted price for H2/22 (22 per cent vs. guidance of 20 per cent).”
“Methanol spot prices in China hit a low of $270/MT in July 2022, and have since recovered to around $300/MT. Methanex estimates the cost curve in China to be ~$350/MT (set by the cost of coal). Chemical Markets Analytics’ expects a moderate price improvement in Q4/22, with tight supply during winter and an anticipated recovery in demand. We also expect prices to increase closer to the cost curve, absent a significant economic downturn.”
Pointing to Methanex’s latest non-discounted reference prices and Chemical Market Analytics’ updated methanol price forecast, Mr. Ng lowered his 2022 and 2023 adjusted EBITDA estimates to US$962-million and US$800-million, respectively, from US$949-million and US$864 -million.
With an “outperform” rating, Mr. Ng cut his target for Methanex shares to US$50 from US$55, above the US$47.18 average.
“We are maintaining our Outperform rating as we believe the shares are suitable for investors that have a more constructive view on the economy (i.e., soft landing/minor recession) and expect natural gas prices to remain elevated, supporting methanol prices,” he said.
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Canaccord Genuity analyst Derek Dley expects to see “another strong quarter” from Aritzia Inc. (ATZ-T) with top-line momentum continuing.
However, ahead of the Oct. 12 release of its second-quarter 2023 results, he’s warning the Vancouver-based clothing retailer is likely to face growing margin concerns.
“On the margin front, we are expecting gross margins for the quarter to come under pressure from (1) ongoing inflationary pressures and (2) the front-loading of costs associated with expedited freight into Q2/F23,” he said. “Accordingly, we are forecasting gross margins of 41.1 per cent, a decline of 350 basis points year-over-year. Looking further out, we see the gross margin profile improving in the back-half of the year as costs related to expedited freight subside, resulting in a full-year forecast of 42.5 per cent, down 150 bps from F2022 and consistent with management’s expectations of a 100-150 bps year-over-year compression.
“Further, we are forecasting SG&A as a percentage of revenue to come in at 27.1 per cent, up 75 bps year-over-year and consistent with the mid-point of management’s expectations of a 50-100 bps year-over-year increase, as the company continues to invest in ramping up its technology and operating footprint and acquiring talent. Together with our gross margin forecast, this drives our EBITDA estimate of $74 million, which translates to an EBITDA margin of 16.3 per cent, down from 20.8 per cent in Q2/F22 and 17.1 per cent in Q1/F23.”
Calling its last quarterly release “another strong set of results,” Mr. Dley is forecasting revenue of $455-million, ahead of the midpoint of the Vancouver-based retailer’s guidance ($440-$460-million) and matching the consensus estimate. His EBITDA projection of $74-million exceeds the Street’s expectation of $67-million.
“Commenting on Q2/F23, Aritzia noted that strong retail momentum from Q1/F23 has continued into the current quarter, helping drive the company’s revenue expectations of $440-$460 million, which corresponds to year-over-year growth of 26-31 per cent,” he said. “Our forecast of $455 million is slightly ahead of the midpoint of the company’s expectations, given the impressive retail momentum it carried into Q2/F23, particularly in the U.S.”
Maintaining a “buy” recommendation for the company’s shares, Mr. Dley trimmed his Street-high target to $64 from $70 after “modestly” revising his multiple to reflect a decline in best-in-class peer valuations.” The average is $55.71.
“In our view, Aritzia has done a great job of navigating a changing retail landscape by offering an aspirational customer experience within its brick-and-mortar locations and an improved e-commerce platform,” he said. “With a healthy track record of comparable sales growth and strong growth for the latest quarter, a robust pipeline of new store openings, a healthy balance sheet to support growth and margin enhancement initiatives, and a well aligned management team, we believe Aritzia is deserving of a premium valuation.”
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Scotia Capital’s Phil Hardie sees the move by Definity Financial Corp. (DFY-T) its stake in McDougall Insurance to 75 per cent “positively,” emphasizing it shows it can “deploy its significant levels of excess capital to enhance its ROE and help drive growth.”
After the bell on Monday, Waterloo, Ont.-based Definity announced it was increasing its ownership interest in the property and casualty insurance brokerage from 25 per cent for $217-million. It said the deal is immediately accretive to operating return on equity and earnings per share.
“It demonstrates that the management team is prepared to deploy capital in the near term when it sees attractive opportunities, and given McDougall’s track record, the partnership provides Definity with further M&A expertise in the brokerage space,” said Mr. Hardie.
“The common expectation among investors is likely to see the bulk of capital deployed to acquire insurance carriers to support Definity’s goal of growing to be a top-five player in Canada. That said, acquisitions of brokers and the distribution side of the business are also part of its M&A strategy. Along similar lines to what we have seen with Intact Financial, we believe acquisitions that enhance distribution income are attractive, given that they not only strengthen but also provide additional stability to operating ROE.”
Reiterating a “sector outperform” rating, Mr. Hardie raised his target for Definity shares to $39 from $36. . The average is $39.68.
“Although the stock may take a near-term breather following a strong run, the significant M&A optionality embedded in the stock could yield further upside potential to our one-year target price, and we continue to see an attractive risk-reward profile over the mid-term,” he concluded.
Elsewhere, BMO Nesbitt Burns’ Tom MacKinnon increased his target to $45 from $42 with an “outperform” rating.
“Lots to like about this deal. The acquisition of an established P&C insurance brokerage, with an excellent track record that builds on a strong partnership, is a positive, as is further earnings diversification and immediate operating EPS accretion (we estimate 7 per cent and lift operating EPS estimates accordingly),” said Mr. MacKinnon.
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Seeing it “meaningfully” outperforming the industry as its market share gains continue, Echelon Capital analyst Andrew Semple added High Tide Inc. (HITI-X) to the firm’s “Top Picks” portfolio for the fourth quarter, touting its “plentiful” growth opportunities and “bolstered” balance sheet.
“The Company’s discount club model is demonstrating incredible growth in the competitive retail vertical with High Tide rapidly gobbling up market share,” he said. “Very few competitors have the balance sheet strength to respond to High Tide’s discount club retail strategy, allowing the Company to remain aggressive with its growth plans. The Company is seeing strong organic growth (e.g., SSS-growth of 46 per cent year-over-year in FQ322), while also growing through organic new store openings and store acquisitions (e.g., the acquisition of two Jimmy’s Cannabis Stores BC announced just last week, see p. 2). High Tide is on track to reach its 150-store target by year-end and plans to reach 200 operating stores by YE 2023. In addition to cannabis retail, the Company’s international e-commerce businesses provide high-margin and asset-light growth opportunities as hemp-derived CBD and cannabis accessory demand grows over time.”
Mr. Semple thinks the recent deceleration of Canadian cannabis retail store openings will “ease competitive pressures in the coming quarters and will allow for a gradual expansion of gross margins at the retail level.”
“Other initiatives including the rollout of Fastendr technology and the paid ‘Cabana Elite’ loyalty program will further bolster the Company’s profitability,” he added.
“Meanwhile, High Tide has much improved its balance sheet and financial flexibility after adding $30-million of new capital to its balance sheet over the past three months, including $11.5-million of equity and $19.0-million of debt. We believe these proceeds will be deployed to accelerate growth in the coming quarters by advancing new store openings and new M&A timelines. We view these financings as also significantly reducing HITI’s risk profile, as the Company’s capital requirements were one of the more prominent risks in the past.”
The analyst reiterated his “speculative buy” rating and Street-high $12 target for High Tide shares. The average is $7.56.
“With demonstrated historical growth and clear future drivers, significant market share gains, and a derisked balance sheet, we believe High Tide’s shares are ripe for rerating higher,” he said.
The remainder of the firm’s “Top Picks” portfolio is: GoGold Resources Inc. (GGD-T); Silver X Mining Corp. (AGX-X); BSR REIT (HOM.U-T); Flagship Communities REIT (MHC.U-T); Redishred Capital Corp. (KUT-X); Calian Group Ltd. (CGY-T); Playmaker Capital Inc. (PMKR-X); Converge Technology Solutions Corp. (CTS-T); Quisitive Technology Solutions Inc. (QUIS-X); Osino Resources Corp. (OSI-X); Pan Global Resources Inc. (PGZ-X); Quipt Home Medical Corp. (QIPT-X); Diagnos Inc. (ADK-X) and Verano Holdings Corp. (VRNO-CN).
“We unfortunately report that Echelon’s Top Picks Portfolio underperformed for Q322 with a decline of 9.9 per cent while the S&P/TSX Composite and S&P/TSX Small Cap Indices saw declines of 1.4 per cent and 2.5 per cent, respectively,” it said. “Our decline of 9.9 per cent compares to the broader S&P/TSXV Composite Index decline of 3.7 per cent. Our performance was within the context of the Russell 2000 Index and the larger cap S&P 500 Index declining 2.2 per cent and 4.9 per cent, respectively.
“For the third consecutive quarter, we note that our lack of exposure to oil and gas impacted our relative performance. Energy companies within the S&P/TSX Composite declined 0.7per cent on the quarter exiting at a weighting of 17.7 per cent of the broad index while energy companies within the S&P/TSX Small Cap index were down an average of 2.8 per cent for the quarter where they closed the quarter with a weighting at 18.8 per cent of the index.”
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Believing recent price weakness “creates a compelling deep value and higher yield play in the TSX-listed MFR sector,” Raymond James’ Brad Sturges raised his recommendation for Dream Residential Real Estate Investment Trust (DRR.U-T) to “outperform” from “market perform.”
“We are upgrading our rating for Dream Residential REIT (DRR) to Outperform from Market Perform, to reflect: 1) a significant P/AFFO multiple contraction since the REIT’s recently completed initial public offering (IPO) transaction back only in early May; 2) defensive rental demand characteristics for DRR’s core Class B US MFR portfolio as U.S. housing affordability erodes in a rising mortgage rate environment; and 3) DRR’s strong balance sheet metrics,” he said.
Mr. Sturges cut his target to US$10 from US$13, below the US$13.10 average on the Street.
“DRR may generate solid same-property revenue growth YoY that is driven mainly by rising AMRs year-over-year, backed by the REIT’s below-market AMR profile and augmented by its value-add suite renovation program that is expected to further roll-out in the coming quarters. Currently, we expect DRR to generate annualized organic growth year-over-year in the mid-to-high single-digit range. While we believe DRR’s external management structure and low unit trading liquidity does warrant some level of a relative valuation discount, we believe the material sell-off in DRR’s unit price since the start of May is completely overdone, offering very sizable total return upside in our view,” he concluded.
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In other analyst actions:
* Canaccord Genuity’s Carey MacRury raised his Aris Mining Corp. (ARIS-T) target to $7.50 from $7 with a “buy” rating. The average is $8.52.
“While we acknowledge potentially higher geopolitical risk related to Colombia and Guyana, we are encouraged by the depth and experience of Aris Mining’s new combined management team and board, as well as the community relations success that has been achieved at the Segovia operation, which can potentially be transferred to Aris Mining’s other operations and projects. Aris is trading at 0.22 times NAV vs. intermediate precious metal producer peers at 0.55 times, and we believe there is potential for shares to re-rate as the company progresses towards intermediate producer status,” said Mr. MacRury.
* With its $125-million acquisition of a royalty interest in the global net sales of Omidria, Canaccord Genuity’s Tania Armstrong-Whitworth raised her target for shares of DRI Healthcare Trust (DHT.UN-T) to $15.50 from $14.75 with a “buy” rating. The average is $14.64.
* TD Securities’ Daryl Young lowered his Park Lawn Corp. (PLC-T) target to $34 from $43 with a “buy” rating. The average is $39.31.
“Overall, we had a broadly positive takeaway from the investor day regarding PLC’s facilities, its M&A agenda, organic growth opportunities, and its ability to improve performance versus the weak Q2/22,” said Mr. Young. “However, we have tempered our estimates to reflect a more conservative stance around the pre-need sales environment, particularly across the lower-income consumer segment, reflecting escalating macroeconomic headwinds and given uncertain at-need volumes as COVID-19-related impacts subside. We have also reduced our target multiple to 12.0 times 2023E EBITDA (from 13.5 times previously), reflecting the broader risk-off market sentiment.”