Inside the Market’s roundup of some of today’s key analyst actions
Ahead of second-quarter earnings season for Canadian steel companies, RBC Dominion Securities analyst James McGarragle reduced his estimates for the alloy to reflect “a gradual decline in pricing early in the quarter and a more pronounced decline in June.”
“The general decline in steel prices, coupled with uncertainty surrounding domestic demand, has put pressure on pricing in our view,” he added. “Moreover, the current high interest rate environment has negatively impacted construction activity and industrial production, as evidenced by ABI and PMI indicators both trending below 50. We expect prices to move higher to the mid $700 per ton in Q3 and to trend toward $800 in 2025.”
In a research report released Tuesday, Mr. McGarragle noted share prices for both North American distributors and producers are down significantly in the quarter, which he thinks have “priced in the weaker steel price environment to some extent.”
“The sector was impacted by weakening steel prices during the quarter,” he said. “Stelco shares were down 17 per cent in the quarter, in line with the peer average at down 18 per cent. Similarly, Russel shares traded down 17 per cent in Q2, above the group average of down 24 per cent. The decline in steel prices, coupled with softening domestic demand as evidenced by weak PMI and ABI readings, has put pressure on distributors and producers alike. Additionally, the current high interest rate environment in our view has further pushed out capital projects exasperating these issues.”
Seeing both Russel Metals Inc. (RUS-T) and Stelco Holdings Inc. (STLC-T) as “still cheap, relatively,” he added: “Russell and Stelco continue to trade at meaningful discounts relative to their peers within the steel industry, despite in our view solid operational performance and similar market dynamics. Specifically, Russell currently trades at a 31-per-cent discount to the broader peer group, its worst relative valuation gap in the last 10 years and significantly lower than its historical average premium of 9 per cent. Meanwhile, Stelco is trading at 3.6 times NTM [next 12-month] consensus EV/EBITDA, well behind its blast furnace-focused competitors, both of which trade above 6 times.”
With reductions to his forecasts, Mr. McGarragle lowered his targets for shares of Russel to $43 from $47 and Stelco to $43 from $47 with a “sector perform” rating for both. The averages are $48.17 and $50.08, respectively, according to LSEG data.
“We expect focus into the quarter will be colour on the pricing and demand outlook into Q3, in addition to commentary on cost controls and value add production,” he said.
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In a separate report, Mr. McGarragle said the firm’s Canadian Airlines & Aerospace Heatmap points to “weaker leading indicators, including airfares, travel indexes, and search interest, which aligns with commentary from Transat last month highlighting demand and yield pressure.”
“Looking ahead, we see this as pointing to ongoing challenges for airlines stemming from downward pressure on ticket prices, in addition to upward pressure on operational expenses, particularly labor costs,” he said. “Furthermore, our Business Jet Heatmap indicates a sustained uptick in usage, low pre-owned inventory, and robust wealth generation, factors we consider to be tailwinds for BBD.
“BBD remains our top pick within our aerospace coverage due to a robust demand outlook that we anticipate will lead to a significant positive shift in free cash flow by 2025. In addition, we highlight EIF as attractively valued and believe the growth potential from upcoming air ambulance contracts as well as from a pickup in Windows, Northern Mat, and Leasing, is not appropriately reflected in the shares (especially within the context of recent weakness).”
While he lowered his quarterly projections for Air Canada (AC-T) and CAE Inc. (CAE-T), Mr. McGarragle emphasized companies in his coverage universe remain at the lower end of historical ranges.
“Canadian Airlines & Aerospace share prices were mixed during the quarter, with BBD and CHR outperforming the index, up 50.9 per cent and 18.0 per cent, respectively,” he said. “BBD’s performance was driven by an investor day focused on profitable growth in aftermarket services and defense, with the company noting it will focus on an upgrade or refresh as opposed to a clean sheet until new technology justifies the investment, which was well received. CHR was up due to unconfirmed reports in the Air Finance Journal that it was exploring strategic options. AC and EIF underperformed against the index, down 8.7 per cent and 9.2 per cent, respectively, with AC shares down given weaker demand sentiment from airline peers and EIF on no company specific news. CAE’s share price performance (down 8.7 per cent) was negatively affected by a major goodwill write down.
“AC is trading below its historical average and in line with pre-pandemic levels as the industry grapples with normalizing demand, yield pressure, and higher costs. Bombardier is trading in line with its historical average (despite a recent increase in multiple following a successful investor day) and remains our top idea on the back of an upcoming FCF inflection and long-term growth in Services, Defense, and CPO longerterm. CAE is trading at the low end of its historical range due to challenges in the defense segment as is CHR driven by concerns surrounding the delay of Fund III. Finally, we flag EIF as attractively valued, with the stock price not reflecting significant upcoming growth on the back of new air ambulance contracts.”
Mr. McGarragle made these target changes:
* Bombardier Inc. (BBD.B-T) to $133 from $99 with an “outperform” rating. The average on the Street is $95.40.
“Our target price moves to $133 (from $99) on our increased target multiple of 8 times (from 6.5 times) closer to in line with current NTM [next 12-month] valuation (7.8 times) reflecting increased visibility to delivery plans and effectiveness in mitigating risks related to supply chain challenges. BBD remains our top idea,” he said.
* CAE Inc. (CAE-T) to $30 from $31 with a “sector perform” recommendation. Average: $30.17.
“We flag risk to F25 Civil adj. operating income growth guidance of low double digits on the back of pilot hiring freezes at US airlines and supply chain issues at OEMs delaying deliveries. We therefore bring down our F25 Civil adj. operating income estimate to up 10 per cent from up 11 per cent,” he said. “Our F25 EBITDA estimate moves to $1,100-million (from $1,079), in line with consensus $1,103-million as we update our depreciation assumptions partly offset by our lower civil expectations. We expect sentiment to remain weak until the company can show meaningful traction in defense margins. Target price remains to $30 (from $31) on our lower target multiple of 10.6 times (from 11 times). Key focus into the quarter will be on margins in Defense segment, and the impact of continuing OEM delays and hiring freezes on demand in Civil.”
He maintained his targets for these stocks:
* Air Canada (AC-T) at $18 and a “sector perform” rating. Average: $26.85.
* Chorus Aviation Inc. (CHR-T) at $3.50 with an “outperform” rating. Average: $3.02.
* Exchange Income Corp. (EIF-T) at $65 with an “outperform” rating. Average: $63.61.
Elsewhere, Citi analyst Stephen Trent raised his Bombardier target to $103 from $83 with a “buy” recommendation (unchanged).
“Bombardier looks well positioned for further multiple expansion, as the company continues to demonstrate good operational reliability, valuation looks attractive among small- and mid-cap aerospace companies, while some sector multiple expansion seems possible, as we move towards late July’s Farnborough Air Show,” he said.
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Desjardins Securities analyst Benoit Poirier said the $237-million in charges to be taken by Aecon Group Inc. (ARE-T) in the settlement of its construction dispute related to the Coastal Gaslink Pipeline Project and cost revisions for a trio of legacy contracts are “substantially larger” than he had expected.
“Hopefully, this is a sign that the end is near, but the lack of visibility on the timing makes it difficult to forecast future cash flows and is likely to push the stock down [Tuesday], in our view,” he said.
On Friday, the Toronto-based company announced “an amicable and mutually agreeable” global settlement to resolve the dispute “fully and finally” over the construction of Sections 3 and 4 of the Coastal GasLink Pipeline Project in British Columbia. Aecon expects an approximately $127-million, non-recurring charge and also anticipated a additional $110-million charges related to three remaining legacy projects (Eglinton Crosstown LRT, Finch West LRT and Gordie Howe Bridge).
“This is significantly larger than our 2Q charge estimate of $30-milllion (both we and the Street were forecasting $100-million of legacy project charges for the year),” said Mr. Poirier. “Additionally, this charge will impact ARE’s cash (unlike CGL).”
“Adjusting our 2Q numbers for the new charges, our 2024 FCF estimate falls to negative $94-million (from positive $19-million). However, Aecon Utilities is a subsidiary with its own credit facility, so it should not impact management’s ability to execute on tuck-in M&A targets with Oaktree. Additionally, the increase in the consolidated leverage ratio is being artificially impacted by the now depressed TTM [trailing 12-month] EBITDA (not representative of the future, in our view). Finally, we only slightly tweaked our 2025 estimates. We continue to take a conservative approach and assume charges of $80-million in 2H24 and $80-million in 2025 from the problematic projects.”
Cutting his adjusted earnings per share estimate for 2024 to a loss of $2.41 from a gain of 75 cents previously, Mr. Poirier lowered his target for Aecon shares to $18 from $20, maintaining a “buy” rating. The average on the Street is $18.69.
“ARE has been a takeout candidate in the past,” he noted.
Elsewhere, BMO’s Devin Dodge downgraded Aecon to “market perform” from “outperform” with a $17.50 target, down from $18.50.
“In our view, the lack of settlement payments related to the Coast GasLink project was disappointing,” said Mr. Dodge. “The additional costs to complete the other legacy fixed-price projects suggests a more pronounced cash flow drag in 2024 that could potentially carry over into 2025, with prospects for partial recoveries of cost overruns appearing to diminish. We have lowered our rating to Market Perform to reflect a more cautious outlook for near-term financial performance.”
Other analysts making target changes include:
* Stifel’s Ian Gillies to $16.25 from $18.25 with a “hold” rating.
“This announcement re-affirms our view that there remains risk at closure for the three remaining fixed price contracts. Once the Eglinton project has reached closure we are likely to become more positive on the stock, all else being equal,” he said.
* RBC’s Sabahat Khan to $13 from $16 with a “sector perform” rating.
“Overall, we maintain some level of caution looking ahead due to the uncertainty surrounding the remaining work on Aecon’s remaining legacy fixed-price projects and potential settlement,” said Mr. Khan.
* TD Cowen’s Michael Tupholme to $17 from $18 with a “hold” rating.
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Calling it “an attractive Athabasca uranium explorer-developer,” Scotia Capital analyst Orest Wowkodaw initiated coverage of Denison Mines Corp. (DML-T) with a “sector outperform” recommendation, touting the “compelling” economics of its Phoenix deposit in north Saskatchewan as uranium fundamentals “shine bright.”
“We believe DML shares warrant a premium valuation given the company’s attractive Phoenix deposit, a large high-grade uranium discovery on the cusp of development, and ongoing exploration upside across the portfolio, combined with a very attractive long-term fundamental outlook for uranium,” he said.
Mr. Wowkodaw predicts the uranium market will remain in a multi-year structural net-deficit position over the next several years, citing “a massive planned reactor build in China and the dual Western-world agendas of decarbonization and energy independence.”
“Though the development of Phoenix with NexGen Energy Ltd.’s (NXE-T; Sector Outperform) giant Arrow project may temporarily disrupt the market around 2030 (at peak, we expect Phoenix to be the world’s eighth-largest mine at 4 per cent of primary output), we believe this supply will be required to meet growing demand from nuclear,” he said. “We forecast the re-emergence of large structural market deficits beginning in 2033.”
Also highlighting its “attractive” valuation, Mr. Wowkodaw set a target of $3.75 per share. The current average is $3.99.
“We estimate that DML shares are currently trading at 1.09 times P/NAV(10 per cent), well below Cameco Corporation (CCO-T; Sector Outperform) at 1.70 times (P/NAV8 per cent) and slightly below NexGen at 1.20 times,” he said. “The spot P/NAV(10 per cent) is only 0.91 times. Alternatively, DML shares are trading at an in situ EV/uranium pound resource of $11/lb versus the relevant development/ exploration peers’ $12/lb average. We expect DML shares to trade at a premium to these peers given the attractiveness of the Phoenix deposit and its relatively advanced development stage. We expect several near-term catalysts for the shares, including the receipt of permits and a final investment decision for Phoenix, along with portfolio exploration results.”
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RBC Dominion Securities analyst Drew McReynolds thinks Boat Rocker Media Inc.’s (BRMI-T) sale of its 51-per-cent interest in Untitled Entertainment is “consistent with the renewed focus on owned-IP providing additional balance sheet flexibility for content investment and M&A (more than $75-million in available cash) while maintaining ties to representation.”
On Friday, the Toronto-based firm announced the sale of its stake in the talent management company to global investment firm TPG for approximately $51.6-million. It will receive 8.8 per cent of TPG’s new talent company.
Calling the move “somewhat surprising,” Mr. McReynolds thinks Boat Rocker is “leaning on execution and diversification in a more challenging content environment.”
“In the wake of COVID-stimulated content production and U.S. guild strike resolutions, we expect some kind of new normal in the global content cycle to emerge in 2025/2026 that is likely characterized by moderating demand as major streaming platforms rationalize content budgets to improve profitability and linear broadcasters navigate ongoing disruption,” he said. “Despite the more challenging environment, we expect still healthy levels of content spend to benefit Boat Rocker. We continue to see value in the shares reflecting: (i) an attractive valuation at 2.0 times 2025 estimated EV/EBITDA versus an average for independent content peers of 7.2 times; (ii) what we believe is normalized annual EBITDA of $20-million for the company alongside stable FCF, no corporate debt and more than $75-million in available cash; (iii) a diversified revenue mix by genre, platform and geography enabling the company to navigate changing content environments; and (iv) a strong management team that is commercially and FCF focused.”
Mr. McReynolds cut his target for Boat Rocker shares to $3 from $4 with an “outperform” rating after trimming his earnings expectations to reflect “near-term growth headwinds from ongoing industry delays.” The average is $2.29.
Elsewhere, TD Cowen’s Vince Valentini raised his target to $1.75 from $1.65 with a “buy” rating.
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In other analyst actions:
* CIBC’s Mark Jarvi cut his target for shares of Algonquin Power & Utilities Corp. (AQN-N, AQN-T) to US$7 from US$7.50, keeping a “neutral” rating. The average on the Street is US$6.79.
“We believe that Algonquin (AQN) will soon carry out the sale of its power assets (excluding hydro/thermal power assets) as the company looks to improve its balance sheet and focus its business on regulated utility assets. The announced sale of its stake in Atlantic Sustainable Infrastructure (AY) is a positive (albeit slightly dilutive) step to cleaning up AQN’s story. We reflect the AY disposition, along with other model updates outlined below to form our new base case estimates. We then explore scenarios on a power business sale, which should get AQN onside with credit metric targets but is likely modestly dilutive (drives a higher payout ratio of 90-100 per cent). While a solid headline number (more than 10.5 times EV/EBITDA) on an asset sale might be viewed as a modest positive, the pro forma outlook is not compelling,” said Mr. Jarvi.
David Leeder