Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Benoit Poirier came away from recent virtual meetings with Bombardier Inc.’s (BBD.B-T) chief financial officer, Bart Demosky, with a “positive” view, seeing favourable market conditions for business jets and increased visibility on its goal of reaching EBITDA of US$1.5-billion by 2015.
“Management reiterated that bizjet fundamentals remain very robust on the back of two key indicators: (1) pre-owned business jet inventory available for sale, and (2) business jet activity, which increased 15 per cent in the first three weeks of September 2021,” he said. “Booking activity also remains strong, which enabled BBD to replenish its backlog at healthy levels across both platforms (Challenger and Global). Notably, BBD’s book-to-bill ratio reached 1.8 times in 2Q21 (based on net units) and is poised to reach an even healthier level in 3Q21 on the back of the recent order for 20 Challenger 3500 aircraft. The strong market conditions would likely support a production rate increase, in our view.”
Mr. Poirier said Bombardier is now focused on debt repayment, but it “opened the door to some bolt-on acquisitions that strengthen BBD’s aftermarket position.”
Maintaining a “hold” rating for its shares, Mr. Poirier raised his target to $2.25 from $1.75. The average is $2.
“On the back of strong execution so far and the bizjet market recovery, the stock has rebounded nicely and is up 325 per cent in the year to date,” he said. “Valuation multiples for peers (General Dynamics, Embraer, Textron and Dassault) have also expanded to an average of 10.4 times EV/FY2 EBITDA. As a result, we believe it is fair to boost our valuation multiple to 10 times (from 9 times), which translates into a new target of $2.25, up from $1.75. In light of BBD’s recent stock performance, elevated debt situation and limited potential return vs our target price, we believe the stock is fairly valued.”
Despite that view, the analyst touted Bombardier’s long-term value, seeing the potential for its shares to be worth $5 if it delivers on its 2025 strategic plan.
“We derive a potential value of $3.06 based on our 2024 estimates, $3.85 based on our 2025 estimates and $5.35 under a bluesky scenario in 2025 (this would imply EBITDA of US$1.5-billion, in line with management’s five-year target vs our current forecast of US$1.182-billion in 2025),” he said.
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In response to a surge in chemical prices, Desjardins Securities analyst David Newman upgraded Chemtrade Logistics Income Fund (CHE.UN-T) on Wednesday.
“We are moving to a Buy (from Hold) despite some near-term challenges (impact of the Vale strike, transitory margin pressure on water solutions) given the strong rally in chlor-alkali (caustic soda and HCl/chlorine) and sulphuric acid prices, rising industrial production, increasing refinery utilization rates and secular tailwinds in the semiconductor market,” he said.
Maintaining his third-quarter financial projections, which fall in line with the Street’s view, Mr. Newman raised his target from Chemtrade units to $10 from $8. The average target is $8.93.
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In a research note titled Big moves, in all the right directions, RBC Dominion Securities analyst Matt Logan thinks Tricon Residential Inc.’s (TCN-N, TCN-T) upsized U.S. initial public offering and notable private placement “move the needle on deleveraging.”
“We’re pleased to see Tricon Residential Inc.: 1) dual list its shares on the NYSE; 2) complete its initial public offering in the U.S.; and, 3) execute a concurrent private placement to Blackstone REIT Inc. (’BREIT’),” he said. “At a high level, we see meaningful deleveraging progress, a wider base of potential investors, and little impact to key financial metrics (e.g., NAVPS, AFFOPS). This is set against the backdrop of accelerating organic growth and a substantial external growth opportunity, as TCN moves toward becoming a pure-play single-family rental operator.”
Mr. Logan sees Tricon poised to benefit from “robust” residential demand south of the border, which he anticipates will lift its organic growth profile.
“In Q3, U.S. re-leasing spreads were 18 per cent, per RealPage, up from 10 per cent in Q2,” he said. “With TCN outperforming the U.S. average, and its SFR peers, we see a mark-to-market opportunity of about 20 per cent, up from the mid-teens. Together with 20–25-per-cent turnover and renewal spreads near the high-end of TCN’s 3–6-per-cent self-governed range, we think this supports: 1) mid- to high single-digit top-line growth; and, 2) high single-digit to low double-digit SP-NOI [same-property net operating income] growth over a 4+ year horizon.”
“Over the next 3 years, TCN aims to acquire/build 7,200 homes, increasing its SFR portfolio to 25,900 homes (at share). This carries a total investment and equity commitment of approximately $2.0-billion and $600–650-million. Of which, we estimate TCN can fund $250–275-million from retained earnings and a further $25–30-million from for-sale housing distributions. With cap rates of 5.0–5.5 per cent for individual homes and 3.5–4.5 per cent for ‘rolled up’ SFR portfolios, we think capital deployment could create $1–3 of NAVPS — not including growing fee income.”
Mr. Logan sees the offering, which involved the issuance of 46.2 million shares for net proceeds of US$540-million, having little impact on Tricon’s key metrics, including being “neutral” to net asset value per share.
He raised his target to US$15.50 from US$14, citing continued cap rate compression, with an “outperform” rating. The average is $17.07 (Canadian).
Elsewhere, BMO Nesbitt Burns analyst Stephen MacLeod resumed coverage with an “outperform” rating and $19 target, up from $18
“We believe Tricon has a multi-year opportunity for FFO and BVPS growth, while leveraging third-party fee-bearing equity capital and reducing leverage. On top of numerous successful initiatives this year (SFR JV-2, U.S. MFR syndication, third-party capital raises, leverage reduction), the dual listing and U.S. IPO broadens Tricon’s potential investor base to align with its U.S. sun belt-focused investment strategy, improves the company’s financial position, and provides capital for future property acquisitions. We believe Tricon remains well positioned for growth, and we rate the stock Outperform,” said Mr. MacLeod.
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CIBC World Markets analyst John Zamparo thinks the Street’s response to the third-quarter results from MTY Food Group Inc. (MTY-T) belies its “tasty” results.
Shares of the Montreal-based restaurant operator dropped 5.6 per cent on Friday following the premarket release.
“Friday’s reaction to MTY’s FQ3 would suggest a declining business, or one struggling to navigate the current environment. The reality looks quite the opposite,” said Mr. Zamparo. “System sales continue to recover (and are at pre-pandemic levels in the U.S.), and profitability was as high as it’s been in three years. M&A aspirations should be moderated, but only because of elevated multiples. MTY continues to perform above expectations, and the stock should, eventually, continue to be rewarded.”
The analyst noted system sales have bounced back to within 6 per cent of 2019 levels with U.S. results matching pre-pandemic levels. Third-quarter EBITDA exceeded 2019 by 16 per cent due to reduced costs, which the analyst thinks “looks sustainable.”
Mr. Zamparo also emphasized investors are placing undue emphasis on the performance of mall and office tower locations, which have also shown growth. Noting they generate just 15 per cent of system sales, he said earnings growth from those restaurants is not essential.
“A great deal of investor focus within the restaurant space involves labour scarcity and inflation of all sorts of costs,” he added. “However, while this matters to MTY, and managing franchisee profitability over the long term is critical, it likely won’t impact MTY’s results unless labour becomes so insufficient as to materially reduce operating hours, which has not been the case.”
After raising his 2021 and 2022 earnings expectations, Mr. Zamparo increased his target for MTY shares to $84 from $74, keeping an “outperformer” rating and seeing an “attractive” valuation. The average on the Street is $72.69.
“The movement in MTY stock this year has almost entirely been the result of increased estimates rather than multiple expansion. At an FCF yield of 7.5 per cent on 2022 estimates (peers average 4 per cent), we still consider the stock attractively priced,” he said.
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Ahead of third-quarter earnings season for North American waste sector, RBC Dominion Securities analyst Walter Spracklin expects a recovery in volumes to continue and pricing to remain elevated.
He thinks that strength will lead to further share price after momentum throughout the quarter.
“Share price performance across the majors bounced back this quarter, with each company handily outpacing the S&P 500 leading to group average outperformance vs. the index of 9pts,” he said. “The outperformance was led by GFL, though each of RSG, WM, and WCN posted solid share price gains as well. We note that GFL’s outperformance comes following a Q2 that saw the company materially underperform the market and its waste peers, with the recent trend reversal largely attributable to increased conviction around the company’s anticipated FCF inflection and leverage to Canadian reopening (which has lagged the U.S. though is expected to pick up materially in Q3). From a sector perspective, we attribute the share price strength seen during the quarter to a combination of strong Q2/21 results, pricing leverage to inflationary trends, and increasing expectations for out-sized levels of M&A to materialize this year ahead of possible changes to U.S. capital gains taxes.”
“During the third quarter we saw forward multiples across the group expand, with the sector average forward multiple recently hitting its alltime high. Despite that ... on a 2-year forward basis, each of RSG, WCN, WM, and GFL are trading at or slightly below the upper-ends of their historical 3- year forward valuation ranges. At an intra-sector level, we see the most relative valuation upside in the shares of GFL – driven by increasing expectations for significant M&A activity coupled with an anticipated FCF inflection in the near term. Going forward, we see company specific valuation differentiation/divergence being driven by M&A activity, the beneficial impact of recycled commodity prices, regional exposure to areas with reopening momentum, and pricing.”
Mr. Spracklin raised his target prices for stocks in the sector. He sees these factors pushing valuations forward: “1) M&A activity and expectations for it to remain elevated to end the year ahead of possible changes to U.S. capital gains tax rates; 2) a sustained increase in pricing driven by persistently elevated inflation in the near-to-medium term; 3) the increasing financial benefit from recycling, particularly as recycled commodity prices continue to rise; and 4) stronger-than-expected volume recoveries in regions with increased exposure to reopening.”
His changes include:
- GFL Environmental Inc. (GFL-N, GFL-T, “outperform”) to US$44 from US$41. The average is US$40.23.
- Waste Connections Inc. (WCN-N, WCN-T, “outperform”) to US$139 from US$134. Average: US$140.20.
“Our preferred names in the waste sector remain our two Outperform-rated names: GFL and Waste Connections,” he said. “However, we remain incrementally more positive on GFL for the following reasons: 1) the company’s relative exposure to Canada’s still-progressing economic reopening (40 per cent of revenues vs. next highest peer WCN at 14 per cent); 2) expectations for potentially even more M&A activity in the near term following the recent financing announcements; 3) the anticipated FCF inflection set to materialize in the next year; 4) lower exposure to tax rate changes; and 5) the emerging landfill gas-to-energy opportunity, which management noted could add an incremental $7-million-$100-million in FCF.”
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Canaccord Genuity analyst Katie Lachapelle upgraded Standard Lithium Ltd. (SLI-X, SLI-N) following the release of a “robust” maiden Preliminary Economic Assessment on its South-West Arkansas Lithium Project.
The results included production of an average of 30,000 tons per year of battery-quality lithium hydroxide monohydrate over a 20-year mine life at operating costs of US$2,599 per ton. It results in after-tax US$1.97-billion NPV at an 8-per-cent discount rate and internal rate of return of 32.1 per cent.
“We have updated our estimates to reflect the operating parameters (pending the full technical report), with a 20-per-cent increase to both capital and operating cost assumptions to be conservative, and a two-year delay to production (Canaccord estimates 2027),” said Ms. Lachapelle. “Our timeline to production considers the time required to secure a partner, finance the project, and permit the site. The SWA Project will be subject to a full permitting process (relatively low risk but time-consuming), as opposed to the Lanxess project where existing permits can be amended.
“In our view, the primary challenge facing SLI with regard to the SWA Project is the substantial pre-production capital of US$870 million, which represents 83 per cent of SLI’s current market cap. As such, we believe a strategic partner is key to unlocking value from this asset. Our estimates currently assume that SLI advances the project with a minority partner (40 per cent), to help fund upfront capex alongside debt and SLI equity. Management indicated that the partner is likely to be lithium focused.”
After her net asset value per share estimate jumped by 57 per cent, Ms. Lachapelle increased her target to $14 from $9.25. The average is $7.39
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Dexterra Group Inc. (DXT-T) is “like a coiled spring set to release,” according to Raymond James analyst Frederic Bastien, who sees “catalysts abound.”
“Dexterra commands less than a percent of the $20-billion market for [Facilities Management] services in Canada,” he said. “We believe this leaves the firm with significant room to grow organically as the aviation and nonessential retail sectors improve with the gradual reopening of the economy, DXT wins long-term contracts away from competitors in the post-secondary and government segments, and more owners turn to professional service firms to handle ever more complex requirements. Among those are the transition to a net-zero carbon footprint and air quality concerns in a post-pandemic world. We also know management has ambitions to play a key role in the sector’s consolidation. There are opportunities for FM to bolt on new capabilities and geographies domestically, and acquire a footprint in the equally fragmented U.S. market.”
Expecting to see “solid” third-quarter results on Nov. 9, the analyst also thinks the Calgary-based company, formerly known as Horizon North Logistics Inc., is enjoying “good momentum” with both its Modular Solutions and Workforce Accomodation segments.
“Dexterra’s vision to combine with Horizon North Logistics and create a full asset lifecycle support services champion with broad geographic and end-market exposure is starting to click,” said Mr. Bastien. “The public entity’s transition from an energy-heavy capital-intensive model to a diversified asset-light one is not only effecting stable and growing cash flows from operations, but also driving multiple expansion and share outperformance. Since we expect Dexterra’s re-rating to continue in the foreseeable future as the more recurring and repetitive activities of the Facilities Management and Modular Solutions segments outpace those of the more cyclical WFES business in growth, we are increasing our target price to the tune of 33 per cent to $12.”
Keeping an “outperform” rating for its shares, he hiked his target to $12 from $9, exceeding the $10.19 average.
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In other analyst actions:
* Following Tuesday’s announcement of the acquisition of a Texas facility for US$300-million, Raymond James analyst Daryl Swetlishoff raised his target for West Fraser Timber Co. Ltd. (WFG-T) to $175 from $170 with a “strong buy” rating. The average is $139.27.
“With building products commodity prices grinding higher and seasonal tailwinds to both commodity and share prices we advocate investors add to positions of building materials leveraged names,” he said.
* In response to its deal to be acquired by Zijin Mining Group Co. Ltd, Stifel analyst Anoop Prihar moved Neo Lithium Corp. (NLC-X) to “hold” from “buy” with a $6.50 target, up from $5.80. The average is $6.63.
“The offer represents a 36-per-cent premium to NLC’s 20-day VWAP [volume-weighted average price] and an 18-per-cent premium to NLC’s closing price on October 8. Because of the high quality nature of the 3Q Project, there is a possibility that a superior proposal will be made for the company, however, we would note that the $6.50 per share offer price is equivalent to our fundamental NAV for the project and higher than our previous target price of $5.80 per share. As such, we would recommend shareholders tender to the offer and, in conjunction, lower our rating to Hold to account for the proximity between the current market price and the tender price.”
* Resuming coverage following the completion of its Special Committee process. Scotia Capital analyst Paul Steep lowered his Dye & Durham Ltd. (DND-T) target to $53 from $61 with a “sector outperform” rating. The average is $54.30.
“Our view is that the firm’s financial results will continue to be fueled by its organic growth and integration of acquisitions completed during the past year,” he said. “We believe that DND’s existing mix of business and geographic markets offers the potential for further acquisitions given fragmented legal information and software markets. We are watching the following factors for any potential impact on DND’s shares: progress on integrating acquisitions undertaken over the past year, potential competition from the new Ontario business registry, and the outlook for its end markets in key geographies (e.g., Canada, U.K. and Australia). Our target price moves to $53 per share (previously $61 per share) based on our revised estimates and an update to the valuation multiple applied to 16 times NTM 1-year forward EV/EBITDA (previously 19 times) bringing the multiple in line with the full peer group given the firm’s smaller market cap, consolidation driven model, and focus on legal software.”
* Mizuho analyst Christopher Parkinson initiated coverage of Nutrien Ltd. (NTR-N, NTR-T) with a “neutral” rating and US$70 target. The average is US$75.88.
“We have a favorable view of NTR’s platform, strategy and capital allocation optionality vs. peers, but given its recent rally, elevated expectations, and presumption of near-perfect execution (which isn’t necessarily wrong), at its current price the risk/reward is fairly symmetric. Even near a 52-weekk high, the dividend yield is more than 2.5 per cent,” he said.
* Deutsche Bank analyst Brian Mullan cut his target for Restaurant Brands International Inc. (QSR-N, QSR-T) to US$75 from US$81, maintaining a “buy” recommendation. The average on the Street is US$72.51.
* In a third-quarter earnings preview, RBC’s Alexander Jackson lowered his Stelco Holdings Inc. (STLC-T) target by $1 to $61 with an “outperform” rating. The average is $59.
“We expect Stelco to report another record quarter on steady volumes, and higher steel prices and view the recent pull back as an opportunity to build a position at a more attractive share price. We continue to like Stelco for its highly fixed, low cost operations and despite our expectations of a moderating steel price the shares continue to look attractive,” he said.
* With the prerelease of its third-quarter catastrophe losses, RBC’s Geoffrey Kwan cut his target for Intact Financial Corp. (IFC-T) to $195 from $197 with an “outperform” rating. The average is $197.31.
“Bigger picture, we like IFC’s blend of positive fundamentals, defensive attributes, attractive valuation and potential positive catalysts (e.g., de-risking of the RSA acquisition via divestitures and/or an asset swap),” he said.
* CIBC’s Cosmos Chiu cut his Fortuna Silver Mines Inc. (FVI-T) target by $1 to $8 with a “neutral” rating. The average is $6.99.
* National Bank Financial analyst Richard Tse resumed coverage of Nuvei Corp. (NVEI.U-T, NVEI-T) with an “outperform” rating and US$160 target. The average is US$125.84.
* National Bank’s Michael Parkin increased his target for Eldorado Gold Corp. (ELD-T) to $18 from $17.50, topping the $13.97 average, with an “outperform” rating.
* JP Morgan analyst Jeremy Tonet cut his Gibson Energy Inc. (GEI-T) target to $26 from $27 with an “overweight” rating. The average is $24.93.
* BMO Nesbitt Burns analyst Ryan Thompson cut his First Majestic Silver Corp. (FR-T) target to a Street-low $13.25 from $13.50 with a “market perform” rating. The average is $20.30.
* Paradigm Capital analyst Scott McAuley initiated coverage of Vancouver-based NervGen Pharma Corp. (NGEN-X) with a “speculative buy” recommendation and $5.20 target. The average is $6.
“GEN is a Canadian biotech story set to break through to a global investor audience,” he said.
“NGEN is a clinical-stage biopharmaceutical company that could revolutionize the treatment of neurodegenerative diseases and central nervous system (CNS) injury. Its peptide therapeutic activates neuronal regeneration and remyelination by disrupting the interaction between CSPGs in the extracellular matrix and the cell receptor PTPσ. Pre-clinical studies have demonstrated the potential for this mechanism to improve outcomes in multiple sclerosis (MS), Alzheimer’s, spinal cord injury (SCI) and others. NGEN’s lead candidate, NVG-291, is currently in a Phase 1 study to confirm the safety profile of the drug in humans. This will be a significant de-risking event in advance of planned Phase 2 trials in MS and spinal cord injury and a Phase 1b study in Alzheimer’s patients in H2/2.”
David Leeder