Inside the Market’s roundup of some of today’s key analyst actions
BCE Inc.’s (BCE-T) $5-billion acquisition of internet provider Ziply Fiber will strengthen it as a “fiber player” in North America, according to Scotia Capital’s Maher Yaghi.
However, much like the cautious early view taken by investors of Monday’s announcement, which sent its shares plummeting 9.7 per cent, the equity analyst has concerns about the deal, which allows Canada’s largest telecommunications company to operate in four U.S. states in the Pacific Northwest – Washington, Oregon, Montana and Idaho – and provide fibre internet services to 1.3 million residential and business locations
“Implementing a DRIP and holding back on dividend increases did not come as a surprise [Monday],” he said in a report titled A Bold New BCE. “We discussed this potential in a note in September. That note was published post the company’s MLSE deal. What was new was that BCE is essentially using the proceeds of the MLSE deal to invest in a new market to gain growth but which will also lead to FCF dilution until 2028 and FCF/share dilution until 2030 by our estimates. We agree with the premise that fiber is a long term winner in broadband however the price paid for that growth needs to be commensurate with that opportunity.
“Would it have been better for the company to buyback its own stock at 6.8 times EBITDA and grow FCF per share that way or pay 14.3 times EBITDA out-of-home on the premise that this investment will have a higher long term ROIC than existing assets? It will take time to get a definitive answer to that question. Clearly the decision to go into the U.S. is bold, could be a first of many and possibly lead to divestitures in Canada.”
With Ziply is projected to generate earnings before interest, taxes, depreciation and amortization (EBITDA_ and revenue of US$400-million and US$700-million in 2025, Mr. Yaghi sees the acquisition as a “positive,” expecting it to be dilutive to free cash flow in the next few years due to the cost to load customers and capex to expand the fiber footprint.
“As a result of the transaction, BCE is also maintaining the annual dividend at the current level of $3.99/sh for 2025 and implementing a discounted DRIP ... Wile the DRIP will lead to some deleveraging starting in 2027, it will be hard for the company to remove the DRIP before 2030 in our view without bringing FCF distributions (including lease costs) above 100 per cent,” he said. “On a comparable basis, our new estimates show a dilutive impact to FCF/share from the transaction until 2030.”
Maintaining his “sector perform” recommendation for BCE shares, Mr. Yaghi trimmed his target to $47.50 from $50.50. The average target on the Street is $47.56, according to LSEG data.
Elsewhere, Canaccord Genuity’s Aravinda Galappatthige downgraded BCE to “hold” from “buy” with a $41 target, falling from $51.
“BCE’s proposed acquisition of Ziply, in our view, is likely to place incremental near-term pressure on the investment thesis on a number of fronts, including lower FCF generation over the next three years, delayed easing in balance sheet leverage, and the incremental dilution from the DRIP introduction (we estimate almost $1B in new equity annually),” he said. “While we recognize the longer-term strategic case, we also believe that the market will take a while to digest the 14.3 times 2025E multiple, especially considering the heavy capex phase over the next 3-4 years. Notwithstanding the longer-term growth opportunities the U.S. fibre space opens up for BCE, we believe that the stock is likely to focus more on FCF generation and de-risking of the thesis through balance sheet management over the next 12-18 months, given the conditions in the local market. An encouraging element of BCE’s prior thesis was the de-levering that would have occurred post the Northwestel and MLSE divestitures, which we estimated would touch 3.2x by mid-2025, when their peers would be higher. We also note that the capex profile of Ziply over the next three years is likely to be notably elevated, likely going above 100-per-cent CI, placing significant pressure on BCE’s FCF. This raises more legitimate questions of dividend sustainability beyond 2025. Consequently, we are downgrading the stock.”
Other analysts making target changes include:
* RBC’s Drew McReynolds to $47 from $52 with a “sector perform” rating.
“Notwithstanding near-term NAV dilution, we believe the Ziply acquisition along with the pause in dividend growth and institution of the DRIP do provide incremental visibility around the balance sheet trajectory and dividend sustainability, and reinforces management’s fibre-first strategy,” said Mr. McReynolds. “While we continue to believe BCE is well equipped to navigate a slower revenue environment leaning on a scale advantage, FTTH investment and Internet market share gains, cost efficiencies, an extensive array of tactical initiatives across wireless, wireline, and media, and long-term growth in 5G B2B (IoT, MEC, private network, cloud, security), we look for more timely entry points with the closing of the MLSE and Ziply transactions, an associated uptick in revenue and EBITDA growth, and greater progress in tracking towards targeted dividend payout and leverage ratios potential catalysts for the stock. "
* National Bank’s Adam Shine to $42 from $48 with a “sector perform” rating.
“There were always going to be concerns that Bell in future, after delevering with non-core sales and completing key part of its fibre build next year, could pursue an acquisition that wouldn’t please some investors,” said Mr. Shine. “We just didn’t think this would happen in final part of 2024, with an expensive U.S. foray that won’t be FCF accretive until after 2028 and will elicit ongoing questions of ‘why’ despite Bell’s strategic rationale for doing this deal now. Not to be ignored is that growth is slowing in Bell’s domestic market. This in and of itself is often a trigger for diversification, but the U.S. has a rapidly evolving competitive landscape among large established players that appears destined to increasingly touch areas in and around Ziply’s footprint, while Bell has struggled of late in Canada with stepped-up competition and more aggressive pricing tactics by the Big 3. It’s not a given that Ziply will fulfill the promise of materially improving cash flow growth after its fibre build across the more rural parts of its four-state footprint in U.S. Pacific Northwest.”
* Desjardins Securities’ Jerome Dubreuil to $45 from $51 with a “hold” rating.
“Plugging Ziply’s low penetration and impressive footprint growth target into a DCF suggests a much better financial outcome than implied by yesterday’s share price reaction. However, the large number of assumptions required to get there, the delayed improvement in the pre-DRIP payout ratio, the negative signal on Canadian assets and the little integration potential between assets lead us to use a higher discount rate, lower our target price and maintain our Hold rating.
* TD Cowen’s Vince Valentini to $43 from $50 with a “hold” rating.
“Many questions from investors about why BCE needed to take on more debt leverage for a seemingly expensive acquisition. We do not like the move (simply doing nothing and paying down debt with the MLSE proceeds would have been better, in our view) and our forecasts and TP have been lowered,” he said.
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While Sun Life Financial Inc. (SLF-T) reported better-than-anticipated third-quarter results, TD Cowen expressed concern over the lingering weak performance of its Boston-based MFS Investment Management.
“SLF beat estimates on strong morbidity (group) and fee income (group retirement savings), partially offset by elevated credit losses,” he said. “The quarter again featured surprisingly high outflows at MFS. While U.S. dental earnings remain weak (expected), U.S. group sales (including dental) did show momentum over Q3/23. Management remains confident that dental sales/earnings will recover in ‘25.”
After the bell on Monday, Canada’s second-largest life insurer reported underlying earnings per share of $1.76, up 11 per cent year-over-year, “reflecting strong growth in group earnings & fee income, offset by higher credit losses (Canada & US).”
“EPS was above our estimate of $1.68 (consensus $1.70), mostly reflecting experience gains (morbidity in LTD & stop-loss, partially offset by expenses) and strong growth in fee income (group retirement),” said Mr. Mendonca. “SLF raised the quarterly dividend to $0.84 (as expected), up 7.7 per cent year-over-year”
“Top line results were mixed. Individual protection sales were up 9 per cent year-over-year, reflecting weak results in Canada (lower third-party) and strong sales in Asia (HK & India). U.S. group sales were up 22 per cent, reflecting stronger dental and employee benefits sales. Better dental sales included Medicaid and commercial. Management believes dental disenrollment is complete. Despite good Asian insurance sales, CSM from new business was up only 3.5 per cent year-over-year, reflecting softer HNW sales.”
Reiterating a “hold” rating for Sun Life shares, he raised his target to $81 from $77 after increasing his 2025 and 2026 earnings expectations by 4-5 per cent to reflect “better” U.S. group results, fee income and higher experience. The average target on the Street is $84.62.
“In our view, the following support a premium valuation for SLF: 1) lower interest-rate sensitivity; 2) solid capital levels; 3) track record of earnings stability; and 4) strong ROE (low capital-intensity business mix). However, we rate SLF HOLD and continue to favour IAG and MFC (Buy, $41.32) over SLF,” he said.
Other analyst changes include:
* TD Cowen’s Mario Mendonca to $81 from $77 with a “hold” rating.
“SLF beat estimates on strong morbidity (group) and fee income (group retirement savings), partially offset by elevated credit losses. The quarter again featured surprisingly high outflows at MFS. While US dental earnings remain weak (expected), US group sales (including dental) did show momentum over Q3/23. Management remains confident that dental sales/earnings will recover in ‘25,” said Mr. Mendonca.
* National Bank’s Gabriel Dechaine to $82 from $81 with a “sector perform” rating.
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After “solid” third-quarter results, RBC Dominion Securities analyst Robert Kwan sees shares of Brookfield Asset Management Ltd. (BAM-N, BAM-T) “poised to benefit from multiple tailwinds that we expect to result in stronger earnings, more attractive asset transaction valuations and valuation multiple expansion.”
“We believe an improved asset monetization environment is the key to unlocking significant value within several of the company’s businesses, and in particular the Real Estate segment, Brookfield Business Partners and Brookfield Infrastructure Partners,” he said. “Specifically, management called out lower interest rates, easing inflation and liquidity returning to the markets, while highlighting its ‘strong pipeline of further asset sales’.”
“Acquisition environment has also improved. Particularly for businesses that require significant capital, which could include sectors such as AI/data and nuclear power, BAM noted that capital deployment opportunities have also improved.”
Mr. Kwan also emphasized Brookfield Asset’s decision to move its head office to New York could help” achieve inclusion in certain broad-based indexes and result in increased share ownership by passive institutional investors, as well as the potential for increased interest in BAM’s shares from active managers if the stock is included in their benchmark and/or investment universe.”
On Monday, the asset manager reported its fee-related earnings were US$644-million in the three months that ended Sept. 30, up 14 per cent from a year earlier. Its distributable earnings rose 9 per cent to US$619-million, or 38 US cents a share, beating analysts’ consensus estimate of 36 US cents a share.
“New channels could drive further growth,” said Mr. Kwan. “BAM highlighted the completion of its strategic transactions to invest in Castlelake (asset- backed private credit) and SVB Capital (venture capital). The company also noted that it completed its first third-party insurance separately managed account (SMA) for $1 billion during Q3/24, and that this business could grow to $50 billion over the next five years.
“Solid fee related earnings (FRE) [has] driven across multiple segments. In Q3/24, fee related earnings attributable to BAM were $644-million versus our estimate of $618 million, and on a per share basis, FRE/share was $0.39 compared to our forecast of $0.38. On a year-over-year basis, FRE was up 14 per cent versus our forecast of being up 9 per cent ... The stronger-than-expected FRE was driven by slightly better-than-forecast results across almost all business segments.”
Reiterating an “outperform” recommendation for Brookfield Asset Management’s U.S.-listed shares, Mr. Kwan raised his target to US$68 from US$55 to reflect his 2026 forecast and higher comparable valuations. The average is US$52.13.
“We believe BAM can generate a compound annual growth rate (CAGR) in Fee Related Earnings (FRE) of roughly 17 per cent over the next five years, which we view as an attractive growth rate,” he said. “Furthermore, we think BAM’s FRE valuation multiple is well positioned to benefit as arguably the purest publicly traded private equity/alternative asset manager in North America, reflecting: (1) asset-light, with almost no principal investments; (2) debt-free; (3) initially no accumulated, but unrealized carried interest and with material realized carried interest unlikely until 2027, this makes BAM essentially a 100-per-cent fee revenue story in the near-to-medium term; and (4) an asset management business at scale with $566 billion in Fee Bearing Capital (FBC).
“We see valuation upside potential in the near and medium term driven by: (1) mid-teens annual FRE growth; (2) FRE valuation multiple expansion as the macro environment improves; (3) an attractive dividend yield with mid-teens dividend growth potential; and (4) growth in carried interest generated, for which we think the current share price is reflecting little to no value.”
Other analysts making target adjustments include:
* TD Cowen’s Cherilyn Radbourne to US$64 from US$61 with a “buy” rating.
“BAM shares rose about 3 per cent, based on a solid DE beat, and further anticipation of wider potential for index inclusion,” she said. “Year-to-date fundraising of $50-billion is a bit light, but BAM still anticipates coming in at/near $90-$100-billion in 2024, and catch-up fees fully mitigate the impact of any slippage into 2025. BAM is increasingly leveraging its nuclear capabilities to advance its leadership position in supporting AI.”
* Scotia’s Mario Saric to US$59.50 from US$55.50 with a “sector outperform” rating.
“We are surprised with the BAM share price strength on a decent (not drastic) Q3 earnings beat, which escalated during the call,” said Mr. Saric. “We think the market is reflecting higher margins, higher BIP/BEP/BBU unit prices and positive Index implications. ... Our FRE and DE forecast do move 4 per cent higher (we’re now up 5 per cent and up 4 per cent vs. consensus 2025/2026 FRE), but less than the share price move, so we’re relying on the notion that BAM’s trading discount to capital-light U.S. peers can further narrow as part of our retained SO-rating, something that U.S. Index inclusion could accomplish (we think will take time...esp. the big S&P 500 prize). ... Bottom-line, we’re relying more on per share growth than in-place dividend yield for the intact SO rating, but results today were a step in the right direction.”
* BMO’s Sohrab Movahedi to US$50 from US$40 with a “market perform” rating.
“Heading into 2025, fundamentals remain constructive with BAM progressing on fundraising initiatives across asset classes, supported by a “more constructive” environment for asset monetizations. That being said, we are mindful optimism is well-reflected in the stock, with BAM trading at an implied 19x 2029E fee-related earnings it is targeting as presented at its most recent investor day. We maintain our Market Perform,” he said.
* CIBC’s Nik Priebe to US$63 from US$58 with an “outperformer” rating.
“Brookfield Asset Management printed a solid earnings beat. Fundraising appeared a bit light in the quarter, but management is signaling an acceleration of capital raising activity in Q4 and into 2025. Market conditions appear to be thawing, and an increase in the velocity of private market transaction activity could lend further support to the fundraising outlook. We are increasing our estimates and price target,” said Mr. Priebe.
* KBW’s Kyle Voigt to US$68 from $55 with a “sell” rating.
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Following a “bad” third-quarter miss, the retirement of its chief financial officer and with its leverage increasing, National Bank Financial analyst Maxim Sytchev sees a “weak set-up” for Wajax Corp. (WJX-T), predicting a “tough slog” for the industrial products and services provider.
“We’ve been up and running on the name very recently .... our concerns around flagging Western Canadian backdrop and lack of scale/competitive advantage in Industrial Parts/ERS are on display [Monday night],” he said. “While investors always need to evaluate ‘value’ as defined by some metric, P/E, EV/EBITDA, we have always felt that it’s ‘value relative to an intrinsic dynamic’ that determines a compelling thesis. We are not yet seeing this with Wajax, especially in light of post-pandemic pricing unwind that we are witnessing across the distribution space.”
After the bell on Monday, the Toronto-based company reported revenue for the quarter came of $481-million, down 6 per cent year-over-year and 9 per cent under the Street’s expectation of $526-million and Mr. Sytchev’s $521-million estimate due, in large part, to timing of large mining shovel deliveries weighing in on product support revenue. Adjusted EBITDA dropped 25 per cent to $37.4-million, missing expectations by 23 per cent ($49-million and $48-million, respectively, while adjusted earnings per share dropped 54 per cent to 43 cents from 93 cents and missed the 83-cent projection from both Mr. Sytchev and his peers.
“Given management’s commentary around the competitive environment pressuring Product Support and Industrial Parts margins, we moderated our near-term growth assumptions slightly for Q4/24 and 2025, with a similar compression in ERS to reflect weakness in recent quarters,” the analyst said. “We accounted for the (further) shift in sales mix by slightly lowering gross margins, partially offset by lower expected interest costs on imputed rate cuts and constrained SG&A growth as we expect cost control to become a major focus for management moving forward.”
Reiterating a “sector perform” rating for Wajax shares, Mr. Sytchev cut his target to $23 from $26. The current average is $27.50.
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Touting an “attractive” valuation, Canaccord Genuity analyst Mark Rothschild upgraded InterRent REIT (IIP.UN-T) to “buy” from “hold” previously.
“The unit price has been under pressure and has declined 12 per cent since the REIT reported Q2/24 results in August 2024,” he said. “Though fundamentals are likely to be less robust over the next year, particularly as the rate of immigration declines, the REIT should continue to achieve healthy organic growth and the long-term fundamental outlook for affordable rental apartment properties is healthy, in our view. Reflecting a more attractive valuation, we are upgrading InterRent.”
His target fell by $1 to $13. The average is $14.75.
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National Bank Financial analyst Travis Woods thinks Imperial Oil Ltd.’s (IMO-T) upstream business “keeps putting on a show.”
“Although we acknowledge the value and contribution of the downstream segment within IMO (set to wrap up near the high end of guidance), the upstream segment continues to generate significant cash through a combination of execution and cost compression,” he said. “The company delivered its highest Q3 production in over three decades (despite the absence of XTO volumes) backed by strong performance across its portfolio. At Kearl, IMO matched its highest ever Q3 production of 295 mbbl/d gross (209 mbbl/d net) with Q4 volumes starting out at 310 mbbl/d in October. The company continues to progress towards its goal of best-in-class cash costs (down 11 per cent year-over-year, partially due to favorable energy costs) and is on track to achieve US$20/bbl on a yearly basis. At Cold Lake, strong production of 147 mbbl/d was achieved as a result of Grand Rapids Phase 1 (GRP1) ramp. Although its still in its early stages of start up, GRP1 has been exceeding expectations producing 15 mbbl/d in the quarter (averaged 20 mbbl/d in September with peak rates of 22 mbbl/d achieved since start up) and management has confirmed that the asset currently has the potential for up to ten phases (we expect more details to be shared at the next Investor Day, which will be held in the spring).
“As a result of a higher production base and supported by lower energy costs year-over-year, efficiencies continue to be harvested with over US$5/bbl savings over the same time period.”
In a note released Tuesday, Mr. Wood updated his financial forecast for the Calgary-based company in response to the Nov. 1 release of its third-quarter results, which saw average production jumped 11 per cent sequentially and 6 per cent year-over-year to 447,000 barrels of oil equivalent per day. That fell in line with the expectations of both the analyst and Street, while cash flow was better than anticipated.
“IMO will release its 2025 guidance on December 12th, and we expect additional details on the potential upstream volume growth (given the continued outperformance at Kearl, we believe management is likely to provide growth targets supportive of the long-term target of 300 mbbl/d with a more detailed timeline most likely saved for their Investor Day next spring) and capital allocation cadence throughout the year,” he said. We currently forecast 448 mbbl/d and $1.8 billion of capital investment for next year.
“We have made changes to our forecast in connection with the quarter update, mainly to reflect management’s commentary towards strong downstream momentum and slightly higher-than-anticipated capital expenditures in 2024 due to a shift in project development timing ... As a result, our 2024 and 2025 cash flow forecasts are up by 4 per cent and down by 1 per cent, respectively.”
Maintaining a “sector perform” rating, Mr. Wood bumped his target to $113 from $112. The average is $101.24.
Elsewhere, TD Cowen’s Menno Hulshof increased his target to $93 from $92 with a “hold” rating.
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In other analyst actions:
* Ventum Capital Markets’ Amr Ezzat initiated coverage of Exchange Income Corp. (EIF-T) with a “buy” rating and a Street-high $74 target. The average is $65.61.
“EIF is a diversified operation with an enviable track record of value creation through acquisition, underpinned by disciplined capital allocation and an operational focus that consistently drives shareholder returns,” he said. “Few in its peer group blend growth with resilience as well as Exchange Income. The Company is strong in its niche industries, with a deep management bench, and is primed to continue capitalizing on inorganic growth opportunities.
“In this initiation, we argue that the market has, time and again, misjudged Exchange Income’s long-term value. The Street’s reliance on short-term multiples to value the Company significantly undervalues Exchange Income, as it fails to capture its disciplined M&A strategy and its capacity to significantly enhance shareholder returns. Simply applying a multiple to near-term earnings misses the essence of what Exchange Income is: a diversified growth platform with the ability (and, indeed, the track record) to deploy capital accretively.”
* Jefferies’ Sheila Kahyaoglu raised her Air Canada (AC-T) target to $22 from $18 with a “hold” rating. The average is $25.12.
* Expecting “another tough” print when AutoCanada Inc. (ACQ-T) reports its third-quarter results on Nov. 13, Canaccord Genuity’s Luke Hannan cut his target for its shares to $14 from $15. The average is $18.46.
“We continue to take a cautious approach on the near-term outlook for ACQ, given the current macroeconomic environment and the company’s weakening balance sheet,” he said.
* Canaccord Genuity’s Matthew Lee bumped his CAE Inc. (CAE-T) target to $28 from $27 with a “hold” rating. The average is $28.83.
* CIBC’s Anita Soni cut her target for Centerra Gold Inc. (CG-T) to $12.50 from $13, keeping a “neutral” rating. The average is $12.38.
“We are revising our price target downward ... and we reiterate our Neutral rating after fine-tuning our model for CG’s Q3/24 results,” she said. “Our CFPS estimate (rolled forward from an H2/24E to 2025E annualized basis to a Q4/24E to 2025E annualized basis) increases slightly from $1.53 to $1.56 (rolling forward to higher average gold prices), while our NAV5% decreases from $10.26/share to $9.03/share.”
* CIBC’s Scott Fletcher moved his target for DRI Healthcare Trust (DHT.UN-T) to $19.50 from $18.50 with an “outperformer” rating, while RBC’s Douglas Miehm increased his target to $17 from $16 with an “outperform” rating. The average is $19.58.
“While the announced royalty acquisition on sebetralstat revenues has a higher risk profile than the usual royalty transactions undertaken by DRI, we find the long duration of the asset (royalty receipts are anticipated to be collected through at least 2041, according to management) and strong cash-on-cash multiple (approximately 3.49 times; RBC estimate) along with a 13.6-per-cent IRR (RBCe) as attractive attributes,” said Mr. Miehm. “Overall portfolio duration is expected to increase from 9.9 years to 10.8 years. Ahead of the Q3/24 results (AMC 06-November), we have also updated our estimates to reflect changes to the outlook for assets held within DRI’s portfolio.”
* Ahead of its third-quarter earnings release on Thursday, TD Cowen’s Michael Tupholme trimmed his Nutrien Ltd. (NTR-N, NTR-T) target to US$63 from US$64 with a “buy” rating. The average is US$59.40.
“Our Q3 EBITDA estimate is essentially in line with consensus,” he said. “We have made various adjustments to our forecast, but overall, our estimates are not materially changed. We remain encouraged by NTR’s expectation that fertilizer sales volumes and Retail EBITDA will grow in 2024. Meanwhile, we see potential for improvement in key fertilizer prices over time. We see NTR as offering attractive long-term value.”