Inside the Market’s roundup of some of today’s key analyst actions
ATB Capital Markets analyst Nate Heywood thinks Secure Energy Services Inc. (SES-T) continues to “see the benefits and relief following the alleviation of the overhang tied to the [Tervita Corp.] acquisition and related Competition Tribunal decision.”
Shares of the Calgary-based company slid 0.4 per cent on Monday despite the premarket release of better-than-anticipated fourth-quarter 2023 results, including EBITDA of $162-million that topped both the $153-million forecast from both Mr. Heywood and the Street. He attributed the beat to outperformance and volume tailwinds from its Environmental Waste Management business.
Moving forward, Mr. Heywood sees capital allocation as an important focus for both the company and investors.
“While SES has been active on the NCIB, management has prioritized debt repayment ahead of a potential SIB as the $340-million notes (due 2026) were described as having restrictive covenants that may hinder returning value to shareholders, which is a motivator for redemption in the coming weeks,” he said in a note titled Knocking Down Debt but Appetite for Repurchases Remain. “With the balance sheet strength following the asset divestiture, management commented that it may look to invest in businesses with stable/predictable cash flows and would be interested in industrial waste businesses. There is potential for modest tuck-in acquisitions that build off the strength of the existing portfolio.”
“SES is flagging improved customer economics in the years ahead with growing export capacity for crude and natural gas. With SES’ facilities only operating at 60-65-per-cent utilization, rising volumes will provide pure upside with minimal capital requirements. SES noted a 5-6-per-cent annual SSSG across its portfolio. The Clearwater play is a focus for organic growth with today’s announcement to expand its Nipisi oil terminal, and was flagged as a region that could receive additional capital in the future. SES continues to guide towards 2024 adjusted EBITDA of $440-$465-million (ATB estimated: $454-million | consensus: $463-million.”
Reiterating an “outperform” rating for Secure shares, Mr. Heywood raised his target by $1 to $13 to reflect enhanced cash flow outlook, lower interest expense, and a lesser share count from buybacks. The average target on the Street is $12.42.
“With roughly 2/3 of the acquired TEV business remaining with SES, the combined entity continues to offer a resilient cash flow base and attractive returns to shareholders,” he said. “In the near term, Secure is proceeding with modest growth initiatives, largely directed at contracted/production-based cash flows. This follows a recent emphasis on free cash flow generation, returns to shareholders and the repayment of current indebtedness. With the new-found flexibility following a $1.1-billion asset sale, SES has prioritized the repayment of debt and has been actively repurchasing shares under its NCIB, while further exploring an SIB. Going forward, we expect SES to maintain a healthy balance sheet (targeting 2.0-2.5 times debt/EBITDA) while evaluating growth opportunities across the basin, including M&A opportunities around predictable and stable cash flow generating assets. SES currently trades at a discount to waste management and energy infrastructure peers with a 2024e EV/EBITDA of 5.9 times (peers: more than 8 times).”
Elsewhere, others making changes include:
* Raymond James’ Michael Barth to $13.25 from $13 with an “outperform” rating.
“SES continues to put up solid operational and financial results, and 4Q23 was right down the fairway,” said Mr. Barth. “We continue to believe that the core business is less cyclical than ever before, and that the company has multiple high-ROIIC organic growth levers to pull across their various businesses that should drive mid-to-high single-digit Adj. EBITDA growth over the foreseeable future. In addition, SES will exit 1Q24 with net cash on the balance sheet, and should be well positioned to ramp up shareholder returns via an SIB over the coming months. While the timing and magnitude are difficult to predict, we continue to believe that share repurchases around current prices would be accretive to shareholders. We’ve revised our estimates and our target price increased to $13.25 representing 24-per-cent upside to market price (no value for an accretive SIB). Despite a lower return-to-target than other names that we cover, we note that SES is the most stable business in our coverage universe with the narrowest range of outcomes. As such, we believe that the risk-adjusted return is still attractive and reiterate our Outperform rating.”
* Stifel’s Cole Pereira to $12.50 from $11.25 with a “buy” rating.
“SES reported another strong quarter, with 4Q23 EBITDAS ahead of Stifel and consensus estimates,” said Mr. Pereira. “The company also announced that founding CEO Mr. Rene Amirault plans to retire in May, and will be replaced by long-time SES executive Mr. Allen Gransch, who we view as well-positioned for the role. SES plans to also redeem its 2026 unsecured notes given certain restrictive covenants, after which it will be debt-free, and positioned to add value via increased shareholder returns or other avenues. Our EBITDAS and FCF estimates move higher with this update, and we are raising our TP to $12.50 per share on a higher 2025 estimated EV/EBITDAS target multiple (7.6 times from 6.8 times) to better reflect its clean balance sheet and capacity to add value to shareholders. We reiterate our Buy rating and despite recent out-performance, continue to believe SECURE’s valuation (6.5 times EV/EBITDAS and 9-per-cent FCF yield in 2025E) is biased higher.”
* National Bank’s Patrick Kenny to $13 from $12 with an “outperform” rating.
* RBC’s Keith Mackey to $12 from $11 with an “outperform” rating.
* Cormark Securities’ Brent Watson to $14 from $12 with a “buy” rating.
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Equity analysts at Jefferies initiated coverage of a group of Canadian energy companies on Tuesday.
The firm gave “buy” recommendations to these stocks:
- AltaGas Ltd. (ALA-T) with a $34 target. Average: $32.86.
- ARC Resources Ltd. (ARX-T) with a $28 target. The average on the Street is $26.59.
- Crescent Point Energy Corp. (CPG-T) with a $12 target. Average: $12.96.
- Enbridge Inc. (ENB-T) with a $53 target. Average: $53.39.
- Gibson Energy Inc. (GEI-T) with a $25 target. Average: $24.88.
- Keyera Corp. (KEY-T) with a $38 target. Average: $36.21.
- NuVista Energy Ltd. (NVA-T) with a $13 target. Average: $14.89.
- Paramount Resources Ltd. (POU-T) with a $33 target. Average: $35.11.
- Pembina Pipeline Corp. (PPL-T) with a $52 target. Average: $52.73.
- Topaz Energy Corp. (TPZ-T) with a $23 target. Average: $26.54.
- Tourmaline Oil Corp. (TOU-T) with a $70 target. Average: $77.97.
- Whitecap Resources Inc. (WCP-T) with a $11 target. Average: $12.67.
These companies received “hold” recommendations:
- MEG Energy Corp. (MEG-T) with a $28 target. Average: $29.96.
- Strathcona Resources Ltd. (SCR-T) with a $26 target. Average: $31.50.
- TC Energy Corp. (TRP-T) with a $57 target. Average: $55.03.
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Citi analyst Vikram Bagri expects Ballard Power Systems Inc. (BLDP-Q, BLDP-T) to report break-even gross margins for the fourth quarter of 2023, which he predicts could “generate a sharp positive reaction given the myriad of negative headlines in the sector that have pressured the stock to trade marginally above its per share value of cash on the B/S.”
Ahead of the March 11 release of the Vancouver-based company’s quarterly report, Mr. Bagri is estimating revenue of US$40-million, above the Street’s expectation of US$34-million, which he called “conservative” given US$39-million was implied in its guidance. He said his forecast is above the quarterly run-rate of $37.5-$40.0-million required for break-even gross margins.
“Sequential revenue growth this quarter should be driven by stationary, bus, and truck applications, partially offset by weaker rail shipments,” he said. “We are comfortable with our above-consensus revenue forecast as it implies a 1.7 times conversion rate on the NTM [next 12-month] order book ($72.7-million as of 3Q23). This is higher than the historical average of more than 1.3 times but only slightly above >1.5x conversion achieved recently.
“BLDP has historically indicated that GM may break even above $150-$160-million in run-rate revenues. As our 4Q23 estimate implies an annualized run-rate in this range, BLDP could report breakeven GM this quarter, excluding one-time items such as inventory writedowns. Sustained revenue momentum in 2024, if achieved, could pull forward breakeven GM, currently expected starting early 2025.”
After raising his capex forecast for 2023, Mr. Bagri trimmed his target to US$3.50 from US$4.50, maintaining a “neutral” recommendation. The average on the Street is US$5.02.
“We like BLDP’s strategy of targeting the truck and bus market in Europe, California, and China,” he concluded. “However, we think growth and profitability are likely back-end loaded. Furthermore, the company is reliant on the build-out of hydrogen delivery infrastructure.”
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While investors did not give the fourth-quarter 2023 financial release from Cargojet Inc. (CJT-T) an enthusiastic response, sending its shares lower by over 3 per cent on Monday, ATB Capital Markets analyst Chris Murray called the results “solid” despite ongoing macro pressures and emphasized an outlook for growth and margin expansion in the year ahead.
He said the report kept him “constructive on the name, particularly with valuations remaining favourable.”
“While an amortization charge concerning the Amazon warrants added noise to the print, revenue sourced from core air cargo service (i.e., Domestic/ACMI/All-in charter) exceeded ATB estimates as continued strength in ACMI [Aircraft, Crew, Maintenance and Insurance] and All-in charter offset the softer volume environment with moderate cost pressures reflected in the Adjusted EBITDA variance,” said Mr. Murray. “Management remained constructive on the demand environment, with underlying volume trends improving in Q4/23 and into 2024, and reiterated that its revised CapEx plan is supportive of continued growth and increased returns to shareholders over the near term.”
For the quarter, the Mississauga-based company reported revenue of $221.9-million, below both Mr. Murray’s $246.9-million estimate and the consensus forecast of $248.6-million as lower volumes on the Domestic network, lower fuel surcharge, and non-recurring warrant amortization weighed. Adjusted fully dilute earnings per share of a 14-cent loss also missed expectations (profits of $1.15 and 88 cents, respectively) due to a variety of unexpected adjustments.
“While strength in ACMI and Charter offset headwinds in Domestic, management confirmed that volume trends on the domestic network continued to improve in Q4/23 but were masked by a challenging comp,” said Mr. Murray. “Management noted that volume growth has extended into Q1/24 and remained positive on the demand environment, providing visibility for high single-digit plus revenue growth in 2024 given pricing escalators took effect on January 1.
“Management believes it can generate an additional 10.0-15.0-per-cent revenue growth on its existing block hours, which bodes well for margin trends in 2024 and is reflective of recent rightsizing initiatives. CJT is retaining two 757s (previously intended for sale) for its fleet to support growth opportunities which we expect to strengthen margins and asset utilization going forward”
Also emphasizing potential gains from its “evolving” relationship with Amazon, Mr. Murray raised his target for Cargojet shares to $160 from $155, maintaining an “outperform” recommendation. The average target is $147.08.
Elsewhere, others making changes include:
* Acumen Capital’s Nick Corcoran to $165 from $160 with a “buy” rating.
“CJT has navigated a weak macro environment by executing cost controls to maintain margins, right sizing its fleet, derisking the business model, and moving to a lower growth business model. We expect multiple expansion as the market gains comfort with the new business model,” Mr. Corcoran said.
* BMO’s Fadi Chamoun to $115 from $110 with a “market perform” rating.
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While acknowledging “there have been some challenges on the drilling side,” Echelon Partners analyst Adam Gill thinks TAG Oil Ltd. (TAO-X) is “currently providing a very attractive risk-reward proposition,” pointing to its resource potential.
In a research report titled Great Pyramid of Production, he initiated coverage of the Vancouver-based oil and gas exploration company with a “speculative buy” recommendation on Tuesday.
“TAG is currently working to unlock new resource potential in Egypt through the novel application of horizontal multi-frac drilling/completion design,” he said. “The Company had a successful vertical well test in 2023 which demonstrated that the concept of fracing the Abu Roash F (”ARF”) formation works and is currently working on drilling and completing its first horizontal well in the play.”
Expecting development to continue at “a steady pace with producing infrastructure already in place,” Mr. Gill set a target of $1.10 per share. The average is $1.05.
“Given the play’s early-stage nature, we are looking at the stock on a risk-reward basis,” he said. “Based on the geological work undertaken by independent evaluator RPS Energy, it is expected that a horizontal multi-frac well in the ARF could deliver 1,000-1,500 barrels per day IP wells and provide recoverable resources of 27.0 MMBbl over the 20 locations identified (11 vertical wells have penetrated the ARF from development in lower zones). With that, we see a NAVPS (f.d.) of $1.13-$2.42 based on the 1,000-1,500 Bbl/d IP rates, and even if we are more conservative and use a 750 Bbl/d IP rate, we would still see a NAVPS of $0.54, ahead of where the stock is trading today. With that, we believe the story’s risk-reward potential is attractive and while the stock has been heavy on the back of drilling complications, the potential in the ARF remains as it was before the delays. With that, we like the setup going forward with a near-term catalyst of seeing results from the first well in early April.”
In a separate report, Mr. Gill also gave Calgary’s New Stratus Energy Inc. (NSE-X) a “speculative buy” recommendation and $1.40 target, below the $1.45 average.
“New Stratus has recently announced its entry into Venezuela, delivering on the Company’s core strategy of gaining exposure in Central/South America, working with NOCs (in this case PDVSA) and bringing its technical capabilities and local relationships to help drive value creation in undercapitalized assets,” he said. “With that, New Stratus has acquired a 50-per-cent stake in GoldPillar International Fund SPC Ltd., gaining 20-per-cent exposure to an onshore redevelopment opportunity. GoldPillar will hold a 40-per-cent equity position in Petrolera Vencupet S.A. (’Vencupet’) with Venezuela NOC, Petróleos de Venezuela S.A. (’PDVSA’) holding the other 60-per-cent equity position. Vencupet will have oil production rights in five onshore fields in the eastern Venezuelan states of Anzoátegui and Monagas that are ripe for reactivation
“We believe the story is relatively low risk from a geological perspective, given that production will be driven by a reactivation/work-over program on wells that have already shown production. There are also other revenue streams that lower the risk to commodity exposure. While jurisdictional risk is higher given that the assets are in Venezuela, the portfolio is expected to be diversified over time and if the U.S. reimposes sanctions, it should not impact New Stratus/GoldPillar’s business. With that, we feel comfortable seeing the stock move higher based on its current, substantial NAVPS trading discount.”
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In other analyst actions:
* Jefferies’ Owen Bennett cut his targets for these Canadian cannabis stocks on Tuesday: Aurora Cannabis Inc. (ACB-T, “hold”) to $4.95 from $6.12, Canopy Growth Corp. (WEED-T, “hold”) to $4.90 from $7.28 and Organigram Holdings Inc. (OGI-T, “buy”) to $4.40 from $4.95. The averages are $7.83, $6.92 and $3.44, respectively.
* National Bank’s Don DeMarco lowered his target for B2Gold Corp. (BTO-T) to $5.25 from $5.50 with an “outperform” rating. The average is $6.32.
* After weaker-than-anticipated fourth-quarter results that pushed its shares lower by 3.4 per cent on Monday, CIBC’s Mark Jarvi cut his target for Emera Inc. (EMA-T) to $53 from $54 with a “neutral” rating, while Raymond James’ David Quezada trimmed his target to $55 from $59 with an “outperform” rating. The average is $53.75.
“We maintain our constructive stance on Emera — a function of the company’s premium regulated footprint, discounted valuation, and strong rate base growth,” said Mr. Quezada. “While we acknowledge the risk posed by EMA’s credit metrics, we continue to believe management has a viable path to bringing them onside in 2024 with increased clarity in coming months. We see potential for a multiple re-rating beyond this. We have reduced our target price reflecting revised 2024 earnings estimates.”
* Stifel’s Cody Kwong reduced his Enerplus Corp. (ERF-T) target to $27.25 from $27.75, keeping a “buy” rating. The average is $24.15.
“On February 21, it was announced that Enerplus will be acquired by Chord Energy (CHRD) to create the largest Bakken producer in the Williston Basin, with a proforma market cap of over US$10-billion,” said Mr. Kwong. “The implied transaction valuation, based on the closing price of Chord the day before the transaction was announced, was CAD$25.40/sh, which comes in at the high end of our previously estimated take-out range of between $22.00-$26.00/sh, a clear recognition of the depth and quality of ERF’s Bakken assets. With our view that Enerplus received a fair value for its assets while excited about the combined entity ahead, we are moving our target price to CAD$27.25/sh, reflecting the exchange ratio to the new Chord target price (covered by our colleague Derrick Whitfield, Buy, US$157.27, Target US$178), plus the cash and incremental dividend component.”
* CIBC’s Bryce Adams lowered his Ero Copper Corp. (ERO-T) target to $24, below the $24.91 average, from $25 with a “neutral” rating.
* Mr. Adams raised his Hudbay Minerals Inc. (HBM-T) target to $11 from $10 with an “outperformer” rating. The average is $10.13.
“In the copper space, we prefer Capstone and Hudbay. In our view, Capstone has peer-leading growth and Hudbay has an impressive near-term FCF profile,” he said.
* Scotia’s Phil Hardie lowered his target for Guardian Capital Group Ltd. (GCG.A-T) to $58 from $60 with a “sector outperform” rating. The average is $57.
“Guardian’s sizeable corporate investment portfolio likely provides a high degree of optionality for value creation that includes levers ranging from M&A strategies to share buybacks which could potentially double the share price over the next few years,” said Mr. Hardie. “With the stock trading below the value of its corporate investment portfolio and little or no value ascribed to its asset management business, Guardian remains our top small-cap value idea.
“Management outlined several key financial objectives for the next five years, focusing on profitability and capital allocation strategies to drive shareholder value. The objectives included a goal of doubling the current annual operating earnings from its core investment management segment within the next five years. The team plans to accomplish this by diversifying its earnings across multiple strategies and solutions, client segments, and geographies. We expect the significant increase in operating earnings to contribute to a structural narrowing of the NAV discount.”
* Jefferies’ Samad Samana initiated coverage of Open Text Corp. (OTEX-Q, OTEX-T) with a “buy” rating and US$45 target. The average is $51.46.
* Beacon Securities’ Douglas Cooper initiated coverage of Pet Valu Holdings Ltd. (PET-T) with a “buy” recommendation and $42 target. The average is $37.08.
* In a report titled Necessity-based retail portfolio should continue delivering steady operating performance, Canaccord Genuity’s Mark Rothschild resumed coverage of Plaza Retail REIT (PLZ.UN-T) with a “buy” rating and $4 target, while RBC’s Pammi Bir reduced his target to $4 from $4.25 with a “sector perform” rating. The average is $4.08.
* CIBC’s Christopher Thompson raised his Spartan Delta Corp. (SDE-T) target to $3.75 from $3.25 with a “neutral” rating. Other changes include: ATB Capital Markets’ Patrick O’Rourke to $4.25 from $4.50 with a “sector perform” recommendation and Stifel’s Cody Kwong to $4.50 from $4.25 with a “buy” rating. The average is $4.93.
“Spartan Delta’s 4Q23 results were slightly ahead of expectations, while 2023 reserves were as expected with the high-profile disposition/spin-out activities that unfolded earlier in the year,” said Mr. Kwong. “The 2024 budget observes a 4-per-cent reduction in its base capital plans and a 9-per-cent decrease in operating costs, while ideally reconfirming an unchanged production range of 38,500-40,500 boe/d. While the Company has yet to offer insights on its Duvernay development plans for the year, it did disclose that its Duvernay acreage position has increased to over 170,000 net acres (up from 130,000 acres in January), with the potential to add more through the spring. With our cash flow estimates pushing higher, we increase our target price.”
David Leeder