Inside the Market’s roundup of some of today’s key analyst actions
In a sector “deprived of trading liquidity and institutional engagement,” Canopy Growth Corp. (WEED-T) “delivers a differentiated proposition,” according to ATB Capital Markets analyst Frederico Gomes, emphasizing the it is the only company offering direct exposure to cannabis markets in Canada, the United States and Europe along with a Nasdaq listing.
“One of the key barriers to attracting institutional investors to the sector is the inability of companies with plant-touching activities in the U.S. to list on major U.S. exchanges, such as Nasdaq or NYSE,” he said. “Canopy’s pioneer structuring of CUSA addresses this issue, offering much better trading liquidity compared to MSOs [multi-state operators]; Canopy has approximately 14 times higher trading volumes over a one-year period vs the MSO average. We expect Canopy’s higher accessibility to investors to not only be reflected in its valuation via a higher multiple but also to support its position as one of the leaders in the industry. Cannabis is a growth industry, which makes access to capital a differentiator; Canopy is one of the most privileged companies in this regard.”
In a research report released Tuesday titled Global Cannabis Exposure Meets Nasdaq Listing, Mr. Gomes initiated coverage of the Smiths Falls, Ont.-based company with a “sector perform” recommendation, believing its current valuation “already prices in reasonable growth expectations” even though he sees " attractive upside upon regulatory developments in the U.S., notably considering Canopy’s position as a capital magnet in the sector.”
“We expect Canopy to reach positive adj. EBITDA of $1.5-million in Q4/FY25 (from a loss of $15.1-million in Q4/FY24) driven mostly by cost savings,” he said. “While near-term growth opportunities remain scarce in Canada, international markets offer them plenty, notably in Germany. Long-term, we expect the Canadian market to rationalize, allowing Canopy to gain share profitably.”
Mr. Gomes called its U.S. segment, Canopy USA, its “crown jewel” currently and also pointed to the importance of the ongoing transformation of its core operation in driving margin growth.
“On a pro forma basis, we estimate CUSA has exposure to roughly 23 states in the U.S.,” he said. “With Wana and Jetty, CUSA can expand in an asset-light way through licensing deals and partnerships; with Acreage, CUSA has exposure to catalyst-states such as OH and NY, which supports the turnaround of a business that has been operating as a distressed asset. Rescheduling would present further upside to CUSA’s operations and to its minority interest in TerrAscend. We value Canopy’s interest in CUSA at $5.15/share, making it Canopy’s most valuable asset.”
“A comprehensive transformation of Canopy’s core business is driving margins in the right direction and reducing cash use, materially de-risking the investment case for Canopy. Management has divested assets (e.g., BioSteel, This Works, Hershey facility) and transitioned to an asset-light model in Canada, resulting in a cost structure more commensurate with its addressable market and a keener focus on profitability. Gross margins have expanded from 5 per cent in FY2023 to 27 per cent in FY2024, and we expect adj. EBITDA to turn positive by H2/FY25e. While the near-term environment in Canadian cannabis remains challenging, we think Canopy can grow internationally, notably in Germany. Over the long-term, we think Canopy will re-gain share in Canada as the market rationalizes.”
Mr. Gomes set a target of $10 for Canopy shares, noting his “sector perform” rating is “supported by the low upside implied by [his] price target relative to current market price.” The average target on the Street is $9.13, according to LSEG data.
“Our estimates do not include CUSA, which is only factored into our valuation. We forecast sales to grow at a 14.0 per cent CAGR [compound annual growth rate] from FY2024 to FY2031, with higher growth rates in later years as the Canadian market rationalizes and international markets accelerate,” he said. “We estimate steady-state adj. EBITDA margins bracketing 26 per cent (vs negative 20 per cent in FY2024) as Canopy realizes benefits of cost savings and further improves operations. We conservatively do not forecast near-term FCF generation; we estimate Canopy would need to raise capital to finance its operations and growth plans (there is a US$250-million ATM program available).”
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Ahead of Thursday’s release of its fourth-quarter 2024 financial report, Desjardins Securities analyst Chris Li expects Empire Co. Ltd.’s (EMP.A-T) results to reflect ongoing macroeconomic challenges
“We expect 4Q to reflect ongoing macro challenges that are having a greater impact on the Sobeys parent company than its peers given its limited discount exposure,” he said.
“While this will continue in the near term, EPS growth should resume in FY25 as market conditions improve and cost-reduction benefits ramp up.”
Mr. Li is now projecting earnings per share for the quarter of 62 cents on same-store sales growth of 0.5 per cent, down from 1.9 per cent in the previous quarter as food CPI slid to 1.8 per cent (from 4.2 per cent). Both estimates fall in line with the consensus expectations on the Street.
“We believe FY24 likely represents trough earnings, with growth resuming in FY25 but skewed to 2H due to macro pressures,” he said. “We and consensus forecast EPS growth of 8–9 per cent in FY25 (vs negative 2 per cent in FY24), supported by SSSG of 2.5 per cent (vs 2.1 per cent in FY24), gross margin up 20 basis points (in line with EMP’s target) and a modest increase in SG&A expense rate of 10 bps. This should drive 4-per-cent net earnings growth, with another 4 per cent from share buybacks.”
After modest reductions to his fiscal 2025 revenue and earnings forecasts, Mr. Li maintained a “buy” recommendation and $38 target for the Stellarton, N.S.-based retailer, which also owns grocery banners such as Safeway, FreshCo, Longo’s and Farm Boy. The average on the Street is $37.86.
“We expect the shares to be range-bound until the consumer improves,” he said. “Our positive view is based on EMP’s large discount to peers (10.5 times forward P/E vs 17.5 times for L [Loblaw] and 16.1 times MRU [Metro]), which we believe has potential to improve later this year assuming it can show a path to 8–9-per-cent EPS growth.”
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Resuming coverage of GFL Environmental Inc. (GFL-T) following the close of its $500-million note issuance, ATB Capital Markets analyst Chris Murray does not see the sale of the entire company as “feasible, barring a significant premium that reflects the remaining earnings potential of operational improvements and RNG and EPR-specific investments.”
On June 4, the Globe and Mail reported the Toronto-based waste management company has retained J.P. Morgan to assess two buyout offers – one for the entire business and another for its environmental services division.
“We believe the Company should fetch 17 times to 18 times 2024 estimated EBITDA in a takeout scenario, an enterprise value of $41.0-billion reflecting the value of executing the current strategy, implying a fair value of $76 per share (approximately US$55 per share),” said Mr. Murray. “More interesting to us is the idea of selling the ES division, which could accelerate deleveraging and permit a sizeable buyback. The key in this scenario is the market response to the remaining solid waste business earnings and the multiple expansion driven by a more conventional capital profile.”
“In light of several other significant transactions, including the Waste Management (WM-N, NR) announcement offering to acquire Stericycle (SRCL-O, NR) for US$7.2-billion, a 24-per-cent premium to SRCL’s 60-day VWAP and an implied 15.7 times forward EBITDA, we believe that these types of inquiries come as part of the normal course of business, particularly as we see GFL’s shares trading at a significant discount to peers, while the Company continues to deleverage and optimize the margin profile primarily through adding proven and sound strategies common in many other parts of the solid waste industry, maturing and optimizing a diverse group of assets built from several acquisitions over the years.”
Mr. Murray also stressed the importance of GFL’s dual share capital structure with “majority voting shares controlled by the founder and key private equity holders (10:1 vote to share ratio), ensuring that their agreement is required for any transaction to occur.”
“We find it challenging to make the case, however, for a transaction as post sale, GFL may need to re-lever, which could challenge a potential private equity buyer’s exit strategy, given concentrated industry conditions would likely eliminate strategic buyers while a new IPO would be difficult without significant deleveraging,” he said. “With that said, at the right price, a transaction is possible.”
Seeing the debt rollover stemming from the note issuance continuing to improve its balance sheet, Mr. Murray reaffirmed an “outperform” recommendation and Street-high $66 target for GFL shares. The average is $53.27.
Elsewhere, analysts at Stifel reaffirmed GFL’s place on their “Select List” and raised their target to $70 from $60 with a “buy” rating.
“Through a combination of self-help and strategic investments (organic and inorganic), we expect GFL to expand margins by over 200 basis points over the next three years with FCF doubling as net leverage is reduced to 3.0 times or less,” he said. “The potential opportunity to sell the Environmental Services business would allow GFL to delever immediately and unlock shareholder value faster.”
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While stock reaction to Monday’s announcement of Primo Water Corp.’s (PRMW-N, PRMW-T) merger agreement with BlueTriton Brands Inc. was “muted,” RBC Capital Markets analyst Nik Modi reaffirmed it as one of his top picks, believing the deal “only adds to the bull case.”
“PRMW shares were only up modestly, which raised many questions as a deal with BlueTriton was something investors have been hoping for since Nestle owned the assets several years ago,” he said in a note titled Don’t Lose Sight of the Real Bull Case. “We believe the modest reaction can be attributed to several things: 1) PRMW shares have been on a tear year-to-date - with the stock up 51 per cent (best performing name in our coverage) prior to today’s announcement—with some investors likely taking profit. 2) investors might have been confused by Primo combining with the entire BlueTriton business rather than just trying to combine with its home/office water business as Primo recently divested its single use bottled water business (which investors applauded due to its slower growth and it was ESG friendly). We believe there are a lot of opportunities to premiumization the combined companies water assets. The success of Mountain Valley and Liquid Death are great examples of this. 3) Financial details of the deal were incomplete and by our math, the deal would be slightly dilutive in 2025 before flipping to accretion in 2026 as the $200-million in synergies start to flow through the P/L.”
Mr. Modi called the deal, which will see the combined company headquartered in Tampa with Primo’s Robbert Rietbroek serving as chief executive, “nice” and emphasized “a strong underlying bull case.”
“As we wrote in our recent report where we made Primo Waters one of our top picks, we believe the stock is trading at a discount to its growth opportunities,” he said. “For starters, Primo Water’s end market demand is significant. PRMW expects the water category to grow at a 5-per-cent CAGR in the coming years, and we think PRMW can likely exceed that via share gains and bolt on M&A. With 29 million addressable households of which only 5 per cent have a water dispenser, we see a substantial growth runway in North America that PRMW can now focus on solely and grow its 1.5 million Water Direct customer base. Furthermore, we believe the category will continue to benefit from a number of secular tailwinds including health & wellness, aging water infrastructure, environmental awareness, and concerns over municipal water quality. As one of the industry’s leading players with a variety of flexible channel options and ample route infrastructure to service customers at scale, we believe PRMW is well positioned to capitalize on these trends.”
Seeing its valuation remaining “cheap considering the long-term opportunity,” Mr. Modi maintained an “outperform” recommendation and US$30 target. The current average is US$26.50.
“We continue to believe PRMW shares are under-valued relative to the company’s longer-term revenue and profit opportunity,” he said. “We think PRMW’s current residential/commercial water delivery focused business model looks far more similar to those of consumer/ business services stocks, its next most popular comp group based on a recent investor survey we conducted. Investors in the services space seek out consistent revenue streams that translate to steady FCF generation, and they generally assess valuation using EBITDA or FCF multiples as a result—the two favorite valuation metrics for PRMW based on our survey results.”
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National Bank Financial analyst Zachary Evershed said executives at Richelieu Hardware Ltd. (RCH-T), including president and CEO Richard Lord, struck a “cautious tone” during a recent fireside chat and virtual meetings with institutional investors as cost pressures continue to linger.
“In expounding on the puts and takes affecting Q1 EBITDA, management noted the various impacts: $2.5-million from sub-optimal cost absorption at the new Calgary facility and other recent investments, $1-million stemming from additional amortization on new leases, and $3-million from price deflation,” he said. “In aggregate, these pressures mounted to a 230-basis points year-over-year headwind in Q1. Though Q2 will likely be stronger given typical seasonality, management reiterated that gross margins are likely to bear a similar impact as in Q1, before pressures gradually abate in H2.”
“With a slower start to the year given these cost pressures, management is hopeful to achieve 12-per-cent EBITDA margins in 2024 as a whole, before ticking back up to 13 per cent as a healthy operating level for the current environment.”
Ahead of the July 11 release of its second-quarter 2024 results, Mr. Evershed is projecting sales of $481.9-million, up 2.1 per cent year-over-year and exceeding the Street’s forecast of $477-million. However, fully diluted earnings per share are expecting to fall 23.9 per cent to 42 cents, which misses the consensus estimate by 6 cents.
The analyst reaffirmed a “sector perform” recommendation and $45.50 target for Richelieu shares. The average is currently $45.25.
“Despite mild revisions to our near-term estimates in light of the cautious tone in discussions during marketing, our target remains unchanged at $45.50, based on 20.5 times 2025 estimated EPS (19 times base and 1.5 times M&A growth premium based on $75-million in incremental revenue added through M&A each year without baking it into our estimates),” he said. “Our target can be replicated via a DCF with an 8.6-per-cent discount rate, and implies a 4.7-per-cent FY2 FCF yield. Though we believe pressures will abate in H2, material margin expansion will likely depend primarily on improving operating leverage; with a cloudier outlook in R&R end markets vs. new residential, we reiterate our Sector Perform rating for now.”
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In other analyst actions:
* Calling National Bank of Canada’s offer “compelling,” CIBC’s Paul Holden cut Canadian Western Bank (CWB-T) to “tender” from “neutral” with a $55.80 target, up from $30. Elsewhere, Desjardins Securities’ Doug Young hiked his target to $52 from $32 with a “buy” rating after resuming coverage and Scotia’s Meny Grauman bumped his target to $52 from $30 with a “sector outperform” rating. The average target is $43.89.
“As we consider NA’s offer appealing and given the competing priorities of the other Big 6 banks (eg regulatory issues, acquisition integration and strategy revamp), we see a low probability of a higher bid materializing,” said Mr. Young.
Mr. Grauman said: “National Bank’s proposed acquisition of CWB certainly provides significant upside to the pre-announcement share price, but the take-out valuation pales in comparison to the stock’s glory years. Although we expect the deal to close despite some elevated political risk, and don’t see any competing offers coming over the top, we can’t help but think that ‘this was not the way this story was supposed to end’. That said, we are many years removed from the days when CWB traded at a big premium to its much larger peers. The Canadian banking landscape has changed since then, and in many ways this transaction is the logical conclusion of that. ... Given our view that this deal will go through, we now value CWB shares at $52, up from $30 previously, which is roughly the deal price at announcement. With CWB shares closing on Friday 16% below their implied conversion price we continue to rate the shares Sector Outperform.”
* Mr. Young cut his National Bank of Canada (NA-T) target to $116 from $119 with a “hold” rating, while BMO’s Sohrab Movahedi reduced his target to $115 from $121 with an “outperform” rating. The average is $119.33.
“While the deal makes strategic sense on several fronts, it will be dilutive to cash EPS in the first two years; based on our math, it is marginally accretive in year 3,” Mr. Young said. “It is also 100 basis points dilutive to cash ROE, by our math.”
* CIBC’s Krista Friesen initiated coverage of RB Global Inc. (RBA-N, RBA-T) with an “outperformer” rating and US$95 price target, exceeding the US$86.12 average.
“We believe RBA’s current valuation reflects uncertainty around the integration and synergy opportunities of its $7-billion transformational acquisition of auto salvage business IAA, Inc. We believe the discount is unwarranted given the opportunities we see within the auto salvage industry, the synergies within the RBA legacy business, and management’s ability to improve operations within IAA,” she said.
* In response to its maiden resource update for its flagship Rogue/Valley project in the Yukon, Scotia’s Eric Winmill raised his target for Snowline Gold Corp. (SGD-X) to $9.50 from $9, keeping a “sector outperform” rating. The average on the Street is $10.48.
“We view this update as positive for SGD shares as the maiden resource compares favourably to our estimates. We look forward to further results from the 2024 field season where drilling is ongoing with 4,000m completed to date,” he said.
David Leeder