Inside the Market’s roundup of some of today’s key analyst actions
“Against a waning economic backdrop,” National Bank Financial analyst Giuliano Thornhill thinks Canadian seniors’ housing represents “a logical shift for investor sentiment as valuations remain at a spread to the cost of financing, margins are improving, while near-term supply risks appear to be muted.”
In a research report released Thursday, he initiated coverage of the sector, predicting it will continue to climb from occupancy lows with pricing gains to follow with it.
“Demographics are finally working (4-per-cent growth seniors for the next decade), resulting in industry occupancy to exceed pre-COVID levels by next year,” said Mr. Thornhill. “Suite availability will decline as the industry approaches these higher occupancy levels. A stretched LTC [long-term care] system should also turn into a key tenant demand driver. These trends will shift pricing power in the operators’ favour, as supply deliveries fade like other asset classes, and lead to a window of outsized rental growth.”
The analyst calls seniors’ housing “an alternative way to play the tight Canadian multi-family space.”
“Multifamily is well-liked across income/REIT funds,” he noted. “Seniors’ has many of the same drivers, with a few caveats, but also benefits to investors. For starters, these too are short duration leases that reset in a more predictable fashion than multi-family (MF) and may be sought after if the housing market enters a deadlock state. While rent controlled, seniors’ has a substantial services component that differentiates them from their purely real estate peers. This does bring operating risks with it, and we believe that a declining number of firms reporting labour shortages may ease staffing pressures felt by operators over the previous two years. In addition, seniors’ housing has 240 basis points higher dividend yields, 17-per-cent lower valuation (on average P/FFO 2025) and trades at an implied cap rate at a positive spread to the average cost of financing.”
In the report, titled Seniors’ Housing: A Wise Investment, Mr. Thornhill gave both Chartwell Retirement Residences (CSH.UN-T) and Sienna Senior Living Inc. (SIA-T) “outperform” recommendations, seeing “a confluence of factors leading to a 2-3-year window where demand will outstrip supply, until caught by new deliveries.”
He set a target of $15 per unit for Chartwell, calling it “the sector proxy with a diversified portfolio, and a primary beneficiary of the retirement rebound.” The average target on the Street is $15.30, according to LSEG data.
“Recent initiatives to simplify the story, including exiting LTC, the removal of a large JV partner and less development, have zeroed focus on higher growth retirement,” said Mr. Thornhill. “As occupancy recovers, CSH will retain a greater ability to pass on rental/service increases than in the previous decade as demographic demand takes shape, new suite supply/availability decline. We see the occupancy uplift driving NOI margins higher, as properties require full staffing levels prior to fully occupied status. Leverage ratios are on a downward trajectory, providing debt capacity that may be utilized for additional capex or external M&A. The latter of these two options features transaction cap rates at a positive spread to financing sources, unlike other industries under coverage. CSH has effectively refreshed its portfolio over the previous decade – we see this continuing.”
Seeing Sienna “exposed to many of the same tailwinds as its larger peer, and should feature lower earnings volatility thanks its steady LTC segment,” the analyst set a $17 target. The average is $16.33.
“Half of NOI is generated from LTC, which we view as effectively an infrastructure-like asset and providing predictability to results,” said Mr. Thornhill. “While there may be heightened political/operating risks, strict regulations and growing waitlist insulate this segment to supply risks. Ultimately, regulators need these private operators within the healthcare system. Q1 2024 featured a pair of announcements which signalled their commitment to the asset class, as operators were nearly made whole of pandemic expenses accrued and received the long-awaited 11.5-per-cent increase in accommodation funding to catch up with inflationary pressures. This restored LTC’s predictability that had begun to be called into question.
“Despite the LTC redevelopment headwind and lower growth vehicle, SIA and CSH trade in tandem, offering investors a cheaper valuation and higher yield. Outperformance of SIA is best realized when held for an extended period, as the additional income from LTC, alongside growth from retirement, is likely to lead to steadier performance.”
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Desjardins Securities analyst Chris MacCulloch expects second-quarter earnings season for Canadian energy companies to be a “relatively uneventful affair from an operational perspective,” however he cautioned the impact of wildfire activity remains a concern moving forward.
“While heavy oil producers have benefited from tightening WCS differentials following the recent commissioning of the TMX pipeline, 2Q24 also included the heaviest period of the year for maintenance turnarounds, which disproportionately impacted oil sands producers and refiners,” he said. “Natural gas producers also faced another challenging quarter within the context of depressed commodity prices, particularly for those highly exposed to the AECO and Station 2 market (with limited relief on the horizon until 4Q24). As a result, we expect most producers to post slightly lower sequential cash flows (vs 1Q24).
“With respect to our 2Q24 CFPS projections vs consensus, we highlight that our estimates are generally skewed below Street expectations, with the notable exception of HWX (up 6 per cent), VRN (up 6 per cent) and TVE (up 3 per cent) where we anticipate modest beats. Meanwhile, we could see potential misses from AAV (down 17 per cent), IMO (down 15 per cent), NVA (down 11 per cent) and MEG (down 8 per cent) to the extent that our CFPS estimates are materially below consensus expectations, although we caution that the first three are based on less reliable Bloomberg data (vs corporate surveys).”
In a research report released Tuesday, Mr. MacCulloch made modest adjustments to his commodity price forecast, particularly for the second half of the year. That led to a series of target adjustments for stocks in his coverage universe.
“From a high level, returns to target have expanded since our last sector update in late May, in part a reflection of subdued equity performance,” he said. “By extension, we are growing more constructive on the sector, with a particular bias toward natural gas–weighted producers given our expectation for a robust recovery in AECO prices next year coinciding with the first phase of LNG Canada.”
His top picks are currently:
Large-cap oil: Cenovus Energy Inc. (CVE-T) with a “buy” rating and $33 target, up from $31.50. The average on the Street is $33.77.
Natural gas: Tourmaline Oil Corp. (TOU-T) with a “buy” rating and $74 target (unchanged). Average: $77.88.
Liquids-rich natural gas: Arc Resources Ltd. (ARX-T) with a “buy” rating and $31.50 target, up from $30. Average: $30.72.
Small/mid-cap oil: Veren Inc. (VRN-T) with a “buy” rating and $15 target (unchanged). Average: $14.81.
Special situations: Vermilion Energy Inc. (VET-T) with a “buy” rating and $21 target (unchanged). Average: $21.10.
Royalty: Topaz Energy Corp. (TPZ-T) with a “buy” rating and $28.50 target, up from $26.50. Average: $28.92.
His other large-cap changes are: Imperial Oil Ltd. (IMO-T, “hold”) to $101 from $92 and Suncor Energy Inc. (SU-T, “hold”) to $59 from $56. The averages are $98.68 and $60.48, respectively.
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After Monday’s prerelease of mixed second-quarter results and a reduction to its full-year core profit forecast, ATB Capital Markets analyst Chris Murray thinks the valuation for shares of Air Canada (AC-T) now fairly reflect normalizing yield trends and macro conditions, but he noted an agreement with its pilots and resumption of share repurchases remain potential catalysts for the second half of the year.
“We expect healthy demand conditions and better cost controls to support H2/24 and 2025 margin trends,” he added.
While Air Canada reported a 1.7-per-cent year-over-year rise in operating revenue to a record level, which Mr. Murray said reflects “strong” demand conditions and above-average load factors in the quarter, its earnings before interest, taxes, depreciation and amortization slid 25 per cent to $914-million, missing both his $1.401-billion estimate and the consensus of $1.045-billion.
“Full-year guidance was revised downwards, reflecting a more challenging backdrop for H2/24,” the analyst said. “AC cited expectations for weaker pricing conditions in H2/24, consistent with the commentary from competitors in recent weeks. Management highlighted expectations for lower load factors for H2/24 and the competitive pressure it is seeing on certain international routes. Full-year EBITDA guidance was lowered to $3.1-$3.4-billion (from $3.7-$4.2-billion) in 2024, given the weaker-than-expected H2 outlook and ongoing negotiations with ALPA.
Mr. Murray did emphasize moderating cost pressures support the airline’s outlook, noting: “Full-year capacity growth for the year has been lowered by 100 basis point (to up 5.5-6.5 per cent, from up 6.0-8.0 per cent), reflecting supply chain issues and current market conditions. Despite the lowered outlook for capacity growth, the Adjusted CASM (i.e., unit costs) outlook improved (2.5-3.5 per cent from 2.5-4.5 per cent) on strong cost control, particularly on a decrease in ASMs. Management maintains that overall demand conditions remain healthy entering H2/24.”
Reiterating an “outperform” recommendation for Air Canada shares, Mr. Murray cut his target to $28 from $33. The average target is $23.65.
Elsewhere, others making target adjustments include:
* National Bank’s Cameron Doerksen to $24 from $28 with an “outperform” rating.
“Our view on Air Canada shares has been that while we recognize that there is weakness in yields that will pressure year-over-year results in the coming quarters, and the stock is likely to remain under pressure until a new agreement with the pilots is reached, the current valuation reflects an overly pessimistic earnings outlook for the company,” said Mr. Doerksen. “On our new 2024 EBITDA forecast, which is at the low end of management’s new guidance range, Air Canada shares are trading at just 3.2 times EV/EBITDA, well below the historical average for the stock of 4.3 times forward EV/EBITDA and well below the U.S. legacy airline peer group average of 5.1 times.”
* Scotia’s Konark Gupta to $21 from $27 with a “sector outperform” rating.
“AC issued a Q2 profit warning while reducing full-year guidance, citing yield pressures, competitive dynamics, persistent capacity constraints, ongoing geopolitical issues, and FX headwind,” he said. “Still, the airline noted continued healthy demand environment with record Q2 revenues and load factors above historical averages, along with effective cost management as it improved adj. CASM outlook despite capacity cuts. Although we recently trimmed our yield assumptions to reflect softness, it seems conditions are worse than expected. We believe tough comps from last year, consumers’ reduced willingness-to-pay amid inflation in cost of living, and certain one-off factors (e.g., Paris Olympics) are putting pressure on yield. While we are encouraged by healthy demand, improved adj. CASM guidance and AC’s industry-leading balance sheet, we are significantly reducing our Q2/24 and 2024-2026 earnings estimates. Our target decreases to $21 (was $27) as we maintain our conservative 3.5 times EV/EBITDA multiple. Even before [Monday’s market reaction, AC is trading quite attractively at 3.0 times on revised guidance and our updated estimates, well below U.S. peers’ 4.8 times 2024 estimates/4.2 times 2025.”
* CIBC’s Kevin Chiang to $25 from $28 with an “outperformer” rating.
“We continue to view AC as a deep-value name,” said Mr. Chiang.
* BMO’s Fadi Chamoun to $28 from $30 with an “outperform” rating.
“Not an entirely surprising announcement following recent results from global peers and supply-driven pressure on the Atlantic, a key profit segment for AC. AC is still on track to deliver the third-highest EBITDA in its history in F2024. We continue to expect fleet expansion in the coming years will support significant earnings/FCF growth,” said Mr. Chamoun.
* RBC’s James McGarragle to $17 from $18 with a “sector perform” rating.
“The company flagged yield pressure and demand headwinds in the second half of the year, in addition to competitive pressures in international markets, as drivers of the lower guide. Key looking ahead will be the impact weaker demand has on yield and load factors into 2025, especially within the context of increasing capacity in the domestic Canadian market. We are increasingly cautious on the set-up into 2025 and see better opportunities elsewhere,” said Mr. McGarragle.
* Raymond James’ Savanthi Syth to $22 from $28 with an “outperform” rating.
* CIBC’s Kevin Chiang to $28 from $33 with an “outperformer” rating.
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National Bank Financial analyst Vishal Shreedhar thinks the takeout price of Sleep Country Canada Holdings Inc.’s (ZZZ-T) friendly takeover agreement with a subsidiary of Fairfax Financial Holdings Ltd. (FFH-T) is “reasonable” and reflects the retailer’s “strong market share, solid returns on capital albeit cyclical, and ongoing market uncertainty.”
In response to Monday’s announcement, he moved his recommendation for its shares to “tender” from “sector perform” and his target to $35 to reflect the offer price from $30. The average on the Street is currently $24.60.
“Given the healthy premium, we do not anticipate a superior bid to be likely,” he said.
“ZZZ is a strong operator in mattress retailing, with a solid balance sheet (we model Q4/24 net debt to EBITDA of 2.2 times) and a leading market share of 40 per cent, We believe the acquisition of ZZZ reflects Fairfax’s willingness to look through uncertainty associated with the backdrop.”
Mr. Shreedhar also previewed the company’s approaching second-quarter financial report, projecting earnings per share of 42 cents, which matches last year’s results and exceeds the consensus expectation on the Street by 5 cents.
“We expect Q2/24 EPS to be flattish year-over-year, reflecting higher SG&A expenditure (logistics, advertising, telco/IT, wages, D&A, etc.) and higher interest expense, offset by positive same store sales growth, higher gross margin, new store openings in the last 12 months, contribution from Casper acquisition (closed in April 2023) and share repurchases in the last 12 months,” he said.
“Our review of industry indicators suggests that the operating environment is sequentially improving, albeit with volatile trends. Specifically, (i) Mattress manufacturing sales declined 6 per cent in Q2/24 (data until May 2024); a sequential improvement from a decline of 21 per cent year-over-year in Q1/24, (ii) Following 3 quarters of positive year-over-year growth, residential unit sales (CREA data) declined 4 per cent year-over-year in Q2/24, and (iii) The consumer confidence index improved to 66.0 in June 2024, rebounding from a 2024 low of 59.3 in April 2024.
”Our review of U.S. peer commentary points to the following themes: (i) Near-term industry performance is expected to be soft (although ZZZ typically outperforms the industry in Canada), (ii) An increase in the average selling price (mix shift as higher-priced units performed better than the lower-priced units), and (iii) Stable commodity prices.”
Elsewhere, BMO’s Stephen MacLeod moved Sleep Country to “market perform” from “outperform” with a $35 target, up from $32.
“Fairfax’s proposed acquisition of Sleep Country at $35 presents an attractive (we would say dreamy) outcome for shareholders,” said Mr. MacLeod. “The price more accurately reflects fair value and the implied valuation looks reasonable (8.2 times 2024 estimated EV/EBITDA). We have for a long time appreciated Sleep Country’s multi-year opportunity for growth and market share gains for everything ‘sleep.’ However, the near-term reality is that consumer spending remains choppy, and this offer provides shareholders with price certainty.”
Meanwhile, RBC’s Tom Callaghan moved his target to $35 from $30 with a “sector perform” rating.
“Over the last five years, Sleep Country has traded at an average NTM [next 12-month] consensus EBITDA multiple of roughly 7.0 times, and over the long term (since 2015), just above 8.5 times. On balance, we see the proposed acquisition as an affirmation of the brand’s strong market position as Canada’s leading mattress retailer with a diversified omnichannel approach,” he said.
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Desjardins Securities analyst Chris Li predicts Loblaw Companies Ltd.’s (L-T) second-quarter earnings release on Thursday before the bell will reflect “continued solid” earnings per share growth, supported by “its consistent execution and strong positioning within the food and drug retailing market (largest relative discount mix, private label, loyalty, expanded scope of practice, specialty drugs, etc).”
“High earnings visibility and preference for safety support a peak valuation (approximately 19 times NTM [next 12-month] EPS),” he added.
He’s currently projecting EPS of $2.14 for the quarter, up 10 per cent year-over-year and in line with the Street’s expectation. That reflects food same-stoe sales growth of 1.7 per cent and pharmacy gains of 6 per cent.
“Largely stable Retail EBITDA margin (10 basis points year-over-year), with higher gross margin (70bps yoy) offset by higher SG&A rate (60bps yoy),” he said. “On gross margin, lapping a peak shrink impact last year, continued growth from freight-as-a-service and faster growth in higher-margin drug retail are expected to more than offset incremental pricing/promo investments. Inflationary pressures and network optimization efforts should drive SG&A expense rate higher.”
Maintaining his “hold” rating for Loblaw shares, Mr. Li raised his target to $172 from $157 to fall in line with its current valuation. The average is $168.88.
“Our Hold rating reflects the limited potential return to our target,” he said. “We have a relative preference for WN given its wide holdco discount (15 per cent vs 10-per-cent fair level).”
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Touting its “buoyant” reserves and recently “elevated” status, National Bank Financial analyst Don DeMarco initiated coverage of Montage Gold Corp. (MAU-X) with an “outperform” recommendation on Tuesday.
Vancouver-based Montage is a single-asset gold developer advancing its 90-per-cent-owned, fully permitted Koné gold project in Côte d’Ivoire, which a “sizeable” after-tax net present value and internal rate of return, according to an updated Feasibility Study.
“There has been recent two seminal events which have transformed Montage,” said Mr. DeMarco. “First, in June 2022, upside potential increased significantly when Montage acquired the Mankono JV from Barrick Gold Corp. (TSX: ABX, “sector perform”, $28 target, Analyst: Mike Parkin) and Endeavour Mining plc (TSX: EDV, “outperform,” $47 target), and with this, expanded the total footprint to 2,259 km2, one of the largest in West Africa. Secondly, in February 2024, Montage assigned a new management team and announced a strategic investment by the Lundin Group to become a 19.9-per-cent shareholder. The endorsement from the Lundin Group elevates Montage’s profile and lends for de-risking.”
Seeing it “upside focused,” Mr. DeMarco set a target of $2.50 per share. The current average is $2.27.
“Our investment thesis is supported by (i) a valuation re-rate as the Koné project development is de-risked. Côte d’Ivoire’s mining competitive advantage combines the Birimian Greenstone Belt and the Fraser Institute top five in Africa for overall investment attractiveness; and (ii) NAV accretion as Montage delivers on near-mine and regional exploration driving resource accretion, production and FCF growth,” he said “Resource conversion and accretion opportunities show potential to lift and extend the 300k oz/year, a wheelhouse of interest among Senior producers.”
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In other analyst actions:
* Raymond James’ Daryl Swetlishoff raised his targets for Canfor Corp. (CFP-T, “outperform”) to $23 from $20, Canfor Pulp Products Inc. (CFX-T, “outperform”) to $2.75 from $1.75, Conifex Timber Inc. (CFF-T, “outperform”) to $1.50 from $1.25 and Interfor Corp. (IFP-T, “outperform”) to $30 from $26. The averages are $20, $1.81, $1.50 and $24.17, respectively.
“It’s fair to say that no one is looking forward to the 2Q24 Trees Earnings Season,” he said. “A combination of low lumber prices, high log costs, abating seasonal tailwinds and higher unit costs has left us positioned below quarterly consensus estimates for the bulk of our coverage list. However, with the average stock in our coverage universe trading well below book value and down 25 per cent year-to-date (vs. the TSX up 8 per cent) we expect downward earnings revisions are largely priced in. That said, we see West Fraser and Mercer having the biggest miss potential.”
* Scotia’s Himanshu Gupta hiked his Colliers International Group Inc. (CIGI-Q, CIGI-T) target to US$150 from US$135 with a “sector outperform” rating. The average on the Street is $142.50.
“CIGI stock is up 23 per cent in month of July so far (vs S&P/TSX Composite up 3.7 per cent), as real estate brokers (CBRE & JLL) are all up 15-18 per cent on improved expectations of rate cuts,” he said. “Alternative asset managers are up 11 per cent and CDN REIT sector is up 7.4 per cent as well in July so far. Given the recent price move, we could expect some volatility around Q2 results as CIGI updates 2024 guidance. Based on our model, we think CIGI can achieve mid-point of full year 2024 revenue and EBITDA guidance. However, we expect 2024 EPS to be at the low end of the guidance range i.e. Scotia estimate of 10-per-cent year-over-year growth vs guidance range of 10 per cent to 20 per cent. We continue to expect superior 18.8-per-cent year-over-year EPS growth in 2025, and reiterate our SO rating.”
* Previewing earnings season for Canadian property and casualty insurance providers, Desjardins Securities’ Doug Young raised his targets for Intact Financial Corp. (IFC-T, “buy”) to $255 from $250 and Definity Financial Corp. (DFY-T, “hold”) to $47 from $45. The averages are $252.75 and $49.41, respectively.
“We expect benign weather in Canada to benefit 2Q24 results for both IFC and DFY by way of lower CAT and non-CAT weather losses (vs a typical 2Q),” he said. “We have updated our 2Q24 and 2024 estimates to reflect these expectations. Also, a depreciating Canadian dollar will likely be a tailwind for both IFC and TSU for the rest of 2024 and in 2025. We increased our target prices for IFC and DFY slightly but maintained our ratings and pecking order [IFC, TSU, DFY].”
* Calling it “a home run investment opportunity,” Ventum Capital Markets’ Devin Schilling resumed coverage of Kits Eyecare Ltd. (KITS-T) with a “buy” rating and $11.25 target. The average is $10.58
“We view KITS as being at the forefront of transforming the eyecare industry through innovation and personalized customer experiences,” he said. “With a robust technological infrastructure, a scalable business model, and a clear focus on customer satisfaction, we see KITS poised to capture market share and deliver long-term value to investors seeking exposure to the growing digital eyecare sector. With KITS trading at 1.6 times 2025 EV/Sales compared to peers at 2.1 times, in addition to a 24-per-cent upside to our DCF-derived valuation, we see the Company as undervalued and representing an excellent entry point given the long-term tailwinds provided from the increasing adoption of digital eyecare solutions.”
* Ahead of its July 31 earnings release, National Bank’s Vishal Shreedhar cut his target for Parkland Corp. (PKI-T) to $49 from $52 with an “outperform” rating, while Desjardins Securities’ Chris Li moved his target to $48 from $51 with a “buy” recommendation. The average is $52.83.
“We believe PKI’s valuation (6.6 times NTM [next 12-month] EBITDA vs 6.4 times trough and 8.7 times blended average) reflects macro headwinds,” Mr. Li said. “We thus expect PKI to fine-tune its 2024 EBITDA guidance with 2Q results. We believe risk/reward is positive for long-term investors. Key catalysts are strong FCF and leverage approaching management’s target of low 2.0–3.0 times by 2025, which would provide PKI with more flexibility for share buybacks and accretive M&A. We believe valuation is also supported by a solid FCF yield of 8 per cent/10 per cent in 2024/25.”