Inside the Market’s roundup of some of today’s key analyst actions
Reacting to “outsized” recent share price appreciation, Raymond James analyst Steve Hansen lowered his recommendation for shares of Canadian Pacific Railway Ltd. (CP-T, CP-N) on Wednesday.
“CP shares have strongly outperformed its closest peers over the past several weeks, seemingly drawing strength from the company’s healthy exposure to key bulk commodities such as wheat, coal, and potash, all which are enjoying extraordinary pricing moves in light of the ongoing conflict between Russia-Ukraine,” he said in a research note released before the bell.
Moving CP to a “market perform” recommendation from “outperform” previously, Mr. Hansen expressed concern over recent traffic trends.
“Despite this optimism, CP’s more recent trafffic pattern tells a more cautious story, in our view, with QTD RTMs [quarter-to-date revenue ton miles] currently tracking down 11.0 per cent year-over-year, largely owing to weight emanating from three primary categories, including: Grain (down 22 per cent, weak Canadian harvest last fall), Coal (down 21 per cent, Teck contract switch), and ECP (down 15.5 per cent, narrow diffs),” he said. “While we’ve observed emerging strength in select categories such as Intermodal, Potash, and Met/Min, they remain modest on a relative basis.”
“As our estimates suggest, we do fundamentally believe CP will enjoy healthy traffic tailwinds through 2H22, particularly with the arrival of what we hope will be a very robust fall harvest for Canadian farmers. Unfortunately, this won’t occur until mid 3Q22. We will continue to monitor accordingly.”
Mr. Hansen maintained his financial projections and $105 target for CP shares. The average target on the Street is $106.69, according to Refintiv data.
“As suggested in prior missives, we remain big fans of the CP team, network, and growth outlook, particularly in the context of its pending STB merger approval,” he said. “We also recognize that the ongoing Russia-Ukraine crisis has put a spotlight on key commodities that CP moves in substantive volume, including grain, potash, and coal. Still, we’re also mindful that the carrier’s traffic headwinds are expected to persist through the balance of 1H22 given Canada’s weak harvest last year and residual supply-chain bottlenecks. In this context, we will look for a more attractive entry point to resume our constructive rating.”
=====
Scotia Capital analyst Michael Doumet thinks there is not “sticker shock” in Clearlake Capital Group LP’s US$2.6-billion deal to acquire Intertape Polymer Group Inc. (ITP-T).
Shares of the Montreal-based packaging company soared 76.2 per cent on Tuesday in reaction to the premarket announcement of the deal, which sees the U.S. private equity firm pay $40.50 a share in cash, representing an 82-per-cent premium to its Monday closing price.
“For some time, we believed ITP shares were fundamentally undervalued ... The purchase price reflects an EV/EBITDA multiple of 10.1 times on our 2022 estimates (or 9.4 times using Adjusted EBITDA). We believe such a multiple, which is roughly in-line with its peer group, is justified given its superior fundamentals,” said Mr. Doumet, who lowered his rating for Intertape to “sector perform” from “sector outperform” in response to the deal.
“Intertape has come a very long way over the last 10 years with this management team. Its gross margins more than doubled in the turnaround (c. 2010-2016) and EBITDA doubled in the growth phase (c. 2017-2021). Through the period, Intertape grew sales in its core product lines, expanded into high-growth verticals, namely wovens and ecommerce, reduced costs, and drove continuous plant efficiencies. All-in, ITP grew EBITDA per share at a 15-per-cent CAGR [compound annual growth rate] (and 15 per cent over the last five years), the highest growth rate among its plastic packaging peers, while reducing leverage. Yet, shares remained at a perennial discount to peers, which we have long argued was unwarranted. Our views (and those of its shareholders) were validated by the announced take-out.”
Calling it “a fair price for a best-in-plastics company,” Mr. Doumet raised his target to $40.50 from $38 to reflect the sale price. The average on the Street is $39.63, according to Refinitiv data.
“Despite its success, the company’s trading multiple compressed below pre-pandemic levels, reflecting unwarranted discount versus its peers (on concerns that its EBITDA would moderate). We believe the company and management team had larger growth aspirations that required more efficient access to capital – that the capital markets were unwilling to provide at the right price,” he added.
Other analysts making rating changes include:
* BMO’s Stephen MacLeod to “market perform” from “outperform” with a $40.50 target, up from $38.
“Clearlake’s proposed acquisition of Intertape at $40.50 per share represents a price that we think more accurately reflects the fundamental improvements in the business over the past two years,” he said.
* PI Financial’s Ben Jekic to “tender” from “buy” with a $40.50 target, up from $39.50.
“ITP gains an owner with ample operational and financial resources to deploy into M&A, as well as invest into innovation, and market expansion,” Mr. Jekic said. “The transaction will be put to a vote at a shareholders meeting in May, when further details will be communicated on how the negotiations developed overtime, and how competitive the process was.”
* CIBC World Markets’ Hamir Patel to “tender” from “outperformer” with a $40.50 target, up from $36.
“While the transaction multiple Intertape is being acquired at is a bit lower than recent plastic packaging M&A comps, we believe the valuation is fair given ITP’s business mix and pricing mechanisms (at will pricing vs. formal pass-throughs). We do not expect another bidder to emerge,” said Mr. Patel.
=====
Nuvei Corp.’s (NVEI-Q, NVEI-T) “solid momentum continues,” said RBC Dominion Securities analyst Paul Treiber following the release of better-than-anticipated fourth-quarter results and a raise to its 2022 guidance.
“Nuvei’s outlook appears conservative and assumes 30-35-per-cent organic growth (above medium-term more than 30-per-cent target), taking into account macroeconomic uncertainty and assumed 50% contraction in its crypto vertical,” he said in a research note.
TSX-listed shares of the Montreal-based global payment technology firm soared 13.6 per cent on Tuesday after it announced fourth-quarter 2021 revenue grew 83 per cent to US$212-million, above its guidance range (US$204-US$210-million) and exceeding both Mr. Treiber’s US$210-million forecast and the consensus estimate of US$209-million. Adjusted earnings per share of 47 US cents topped the 45-US-cent projection from both the analyst and the Street.
Nuvei also revealed better-than-anticipated 2022 guidance, including 30-35-per-cent year-over-year revenue growth (to US$940-US$980-million) and adjusted EBITDA gains of 28-34 per cent (to US$407-million-US$425-million). Both beat the Street’s expectations (US$943-million and US$412-million, respectively).
“The outlook appears conservative and achievable, considering the outlook: 1) incorporates macroeconomic uncertainty; 2) assumes 50-per-cent contraction in crypto-related revenue; 3) new disclosures show broad-based momentum in 2021; 4) cohort and net revenue retention suggests high visibility to near-term growth; and 5) Nuvei’s new customer pipeline ‘has never been stronger,’” he said.
“New disclosures validate Nuvei’s success with its land-and-expand strategy, new customer momentum, and importance of its APM value proposition. 2019 cohort customers expanded 38 per cent year-over-year FY21 and net revenue retention improved from 101 per cent FY20 to 146 per cent FY21. The 2021 cohort is 72-per-cent larger than 2020, implying strong new customer momentum. Modular Technology revenue rose 138 per cent FY21, showing differentiated software is driving momentum. APM transactions rose 285 per cent year-over-year FY21 and were 26 per cent of FY21 transactions, up from 12 per cent FY20.”
While he sees Nuvei’s current valuation as disconnected from its 30-per-cent organic growth, Mr. Treiber cut his target for its shares to US$100 from US$145 “given the material valuation multiple contraction in high-growth payment peers.” The average is US$104.75.
“Nuvei is trading at 13 times calendar 2023 estimated EV/EBITDA, which is below high-growth payment peers at 19 times , despite faster growth (32 per cent vs. 19 per cent),” said Mr. Treiber, keeping an “outperform” recommendation. “Valuation is also at the low-end of Nuvei’s historical range. We believe Nuvei’s discount to peers will narrow overtime, on greater awareness of Nuvei’s competitive advantages and the sustainability of Nuvei’s growth momentum.
“We believe Nuvei is well positioned to sustain more than 30-per-cent revenue growth. With Nuvei’s valuation below peers, we believe the stock is attractive.”
Other analysts making target adjustments include:
* Citi’s Ashwin Shirvaikar to US$63 from US$68 with a “neutral” rating.
“Nuvei provided incremental disclosure about its business mix, etc., – clearly a step in the right direction…this is info we have requested for some time though we believe the stock can benefit if the company provides this on an ongoing basis (e.g., at least the ability to back into organic growth quarterly and vertical info annually),” he said. “The quarter itself straddled consensus and our expectations – note we remain positive on robust volume trends for Nuvei. We agree with the need to make investments in technology and people but believe this is likely to be ongoing in nature given the competitive nature of the industry. This results in higher volumes but lower EBITDA in our forward model.”
* Scotia’s Paul Steep to US$74 from US$107 with a “sector outperform” rating.
“We expect Nuvei will continue to grow through a combination of organic and acquired initiatives and that the company’s primary focus will remain on expanding its client base in new and existing verticals,” he said. “We believe the firm will remain active in evaluating acquisitions that further enhance its product/service capabilities.”
* CIBC’s Todd Coupland to US$80 from US$76 with an “outperformer” rating.
“Nuvei’s Q4 results and outlook for Q1/22 and 2022 came in slightly above expectations and continue to confirm that the company’s mid- and long-term targets are achievable, with the possibility of being overachieved. While Nuvei’s stock price has yet to recover from its recent sell-off, the company is positioned to benefit from the opportunities in its core markets. We believe its shares are attractive and should be purchased,” said Mr. Coupland.
* Credit Suisse’s Timothy Chiodo to US$95 from US$125 with an “outperform” rating.
=====
InterRent Real Estate Investment Trust (IIP.UN-T) is “starting the year from a position of strength,” according to Desjardins Securities analyst Michael Markidis.
On Tuesday, shares of the Ottawa-based REIT, which focuses on multi-family residential properties in high-growth, urban markets, rose 2.4 per cent with the premarket release of its fourth-quarter financial results. Funds from operations per unit of 14 cents topped the analyst’s estimate by 1 cent.
“The 4Q21 same-property NOI increase of 9.5 per cent marked a material improvement vs the 2–3-per-cent growth rate in 2Q21 and 3Q21,” said Mr. Markidis. “In light of concerns over opex inflation, investors should be encouraged by the momentum established on the top line. Same-property revenue was up 7.8 per cent. Occupancy improvement will likely be the biggest driver of year-over-year gains in 1H22 (December vacancy loss was 3.8 per cent, down 130 basis points vs September and down 440 basis points vs December 2020). The burn-off of incentive amortization should become a more important contributor in 2H22.”
After a “record year” for acquisitions, including $213-million in the fourth quarter, Mr. Markidis expect InterRent management to be “keen to keep adding scale in its four core markets.” However, he expects volume will decelerate this year.
Instead, he expects 2022 to be “very busy on the refinancing front.”
“IIP’s net debt increased $550-million last year,” he noted. “Fair value gains ($330-million) helped keep debt to gross book value in check (37per cent at quarter-end); however, on our numbers, forward D/EBITDA increased by more than two and a half turns to 12.6 times. Nearly one-third ($460-million) of IIP’s total mortgage debt matures this year. The weighted average rate of 2.0 per cent is below current market for CMHC-insured financing. This is a partial driver of the modest revisions to our 2022–23 FFOPU outlook.”
Trimming his 2022–23 outlook to “reflect the anticipated impact of higher rates on near-term mortgage maturities and G&A inflation,” Mr. Markidis cut his target for InterRent units by $1 to $20, keeping a “buy” rating. The average is $19.71.
“Regardless, the FFOPU growth potential over the next two years is impressive (estimated two-year FFOPU CAGR [compound annual growth rate] of 11 per cent) and the stock continues to trade at a discount to our spot and one-year-forward NAVPU,” he said.
Others making adjustments include:
* Scotia’s Mario Saric to $19.50 from $20 with a “sector outperform” rating.
“It is not often that a high-quality REIT like IIP trades at a discount to NAV (despite 14-per-cent NTM [next 12 month] NAVPU growth) and our $20.00-$21.00 NAVPU road-map in 2023 is intact,” he said. “Assuming no adverse regulatory updates in the Federal Budget (we think in next 2-3 weeks) and Ontario Election (June 2nd), we think IIP unit price can really recover (i.e. 15 per cent plus) and outperform through the summer. We recommend due diligence in March with a bias to add post-Budget.”
* BMO’s Joanne Chen to $20.25 from $20 from with an “outperform” rating.
“We continue to believe that IIP.UN’s solid platform and attractive repositioning program will drive consistent NAV growth. Furthermore, the strength of IIP.UN’s balance sheet also provides it with enhanced flexibility to capitalize on any acquisition/development opportunities,” she said.
* CIBC’s Dean Wilkinson to $18.50 from $19.50, maintaining a “neutral” rating.
“While IIP has many favourable attributes, we believe that investor focus could continue to gravitate towards macro economic issues, particularly that of rising rates and relative spreads thereto. Valuations have become more compelling, however, implied spreads to benchmark bond yields have only expanded marginally. In our view, this has been a reflection of investor apprehension towards the embedded convexity of cap rates in the apartment sector overall and not a company concern per se, and this could continue to weigh on sentiment in the near-term. Moreover, the current interest rate environment could present a re-financing drag given nearly a third of IIP’s mortgages are scheduled to roll over in 2022,” said Mr. Wilkinson.
=====
CIBC World Markets analyst Paul Holden made a series of target changes to Canadian banks in his coverage universe on Wednesday.
“The banks posted better-than-expected FQ1 earnings and positives included more than just strong capital markets results,” he said. “We remain constructive on earnings growth premised on strong loan growth, NIM expansion, operating leverage discipline and regulatory capital ratios. Continued economic expansion remains our base case, supporting our expectation for doubledigit returns for the sector. TD and BNS are our top picks.”
- Bank of Montreal (BMO-T, “neutral”) to $156 from $160. The average on the Street is $167.97.
- Bank of Nova Scotia (BNS-T, “outperformer”) to $105 from $103. Average: $97.72.
- National Bank of Canada (NA-T, “neutral”) to $108 from $110. Average: $110.91.
- Royal Bank of Canada (RY-T, “neutral”) to $151 from $152. Average: $151.15.
=====
Jefferies analyst Christopher LaFemina raised his targets for a group of TSX-list gold miners on Wednesday.
His changes include:
- Barrick Gold Corp. (GOLD-N, ABX-T) to US$24 from US$23 with a “hold” rating. The average on the Street is US$26.53.
- First Quantum Minerals Ltd. (FM-T) to $53 from $50 with a “buy” rating. Average: $39.16.
- Kinross Gold Corp. (KGC-N, K-T) to US$6 from US$5.50 with a “hold” rating. Average: US$7.68.
- Sierra Metals Inc. (SMT-T) to $2.15 from $1.80 with a “hold” rating. Average: $2.79.
=====
Evertz Technologies Ltd. (ET-T) is rebounding from a pandemic-driven slowdown, said Canaccord Genuity analyst Robert Young, pointing to “a backlog that continues to grow to record levels, driven by larger projects, software shift and pent-up demand.”
On Tuesday after the bell, the Burlington, Ont.-based developer and manufacturer of electronic systems for the broadcast and film industry reported third-quarter 2022 reveniue of $120.6-million, up 30 per cent year-over-year and easily topping the estimates of both the analyst and Street ($106-million and $104.8-milion, respectively). Adjusted EBITDA of $30.9-million also beat expectations ($25.3-million and $26.2-million) due largely to higher gross margins.
“The company’s backlog hit a high-water mark again at $176-million (from $162-million in FQ2; $151-million in FQ1), owing to longer-duration infrastructure contracts and strong demand dynamics for IP and cloud products,” said Mr. Young. “Note that a large $10-million customer order press released on March 1 is included in the backlog. The February shipment figure at $25-million was lower quarter-over-quarter due to seasonality. This, combined with the strong backlog, however, provides support to our increased FQ4 estimates, which may prove conservative if the pandemic recovery continues. The combined figure is 190-per-cent coverage of our FQ4 revenue estimate of $105.9-million, at the high end of recent data. On the less positive side, Evertz continues to face supply chain constraints and logistical/installation delays, which have lengthened the backlog, although installation challenges are easing, particularly in NA. We expect cash generation to be dampened by working capital and increased OpEx in F23. Evertz reported sub 2-per-cent exposure to Russia/Ukraine in each of the last three years, which is a headwind but less than feared.”
Raising his revenue and earnings expectations due to the quarterly beat and “strong backlog trends,” Mr. Young increased his target for Evertz shares to $17.25 from $16.50, keeping a “buy” rating. The average is $17.08.
“A return to a more normal event schedule and easier access to customer sites is likely to result in faster conversion of the backlog, benefitting the top line,” he said. “Management implied that the order pipeline is robust, particularly for its IPbased video products within North America, and we expect that Evertz is emerging from the pandemic in better shape than its competitors. That said, we do expect OpEx to grow in the near term with resumption of travel and trade shows and curtailed government subsidies. On balance, we continue to rate Evertz a BUY given an improving demand environment, strong competitive position and robust balance sheet and a 5.3-per-cent annualized dividend yield (ignoring the $1 special dividend declared in September) at current levels.”
=====
In other analyst actions:
* National Bank Financial’s Rupert Merer reduced his target for Anaergia Inc. (ANRG-T) to $20 from $22, keeping a “sector perform” rating. The average is $30.
“We revised our near-term forecasts, with delays to construction and operations due to COVID restrictions and feedstock delays,” he said. “In Italy, we pushed out estimates by a few quarters, while in California, facilities such as RBF are operating at low capacity levels. There could be some moving parts to our estimates given supply chain challenges, however, a growing backlog, higher energy prices and a growing need for energy security in Europe should support future investments.”
* CIBC’s Hamir Patel cut his target for Conifex Timber Inc. (CFF-T) to $2.50 from $2.75 with a “neutral” rating. The average is $2.92.
“The potential data center/bitcoin-hosting business at Mackenzie would represent upside to our earnings projections. With its one BC sawmill (and associated bioenergy plant), CFF is well positioned to benefit from attractive fundamentals for North American housing,” said Mr. Patel.
* CIBC’s Mark Petrie raised his Dollarama Inc. (DOL-T) target to $68, above the $67 average, from $60 with a “neutral” rating.
* CIBC’s Bryce Adams increased his target for Ero Copper Corp. (ERO-T) to $23 from $22 with a “neutral” rating. The average is $25.14.
“While valuation has recently narrowed with peers, we maintain our Neutral rating based on an emerging capex cycle and project execution risk,” said Mr. Adams.
* Ahead of the March 23 release of its fourth-quarter results, Raymond James analyst Steven Li cut his target for Mogo Inc. (MOGO-T) to $8 from $13.50, keeping an “outperform” rating, based on lower sector multiples. The average is $9.
“We are looking for an in-line 4Q with F4Q21 sales of $16.1-million (up 61 per cent year-over-year) vs. consensus of $15.9-million, adjusted EBITDA loss of $3.4-million vs. consensus of a loss of $5.0-million,” he said. “MOGO comparables average multiple has contracted 50 per cent since our last published company comment. We have adjusted our target price accordingly.”
* CIBC’s Todd Coupland increased his Optiva Inc. (OPT-T) target by $1 to $27, below the $32.50 average, with a “neutral” rating.
* After a first-quarter EBITDA miss, National Bank Financial’s Adam Shine cut his Transcontinental Inc. (TCL.A-T) target to $24.50 from $28, reiterating an “outperform” rating, while while Scotia’s Mark Neville cut his target to $23.50 from $25 with a “sector perform” rating. The average is $25.58.
“A disappointing start to fiscal 2022 should give way to better execution, especially in H2. Absenteeism is getting resolved but the pass-through of inflationary pressures will take time,” Mr. Shine said.
* Stifel analyst Cody Kwong hiked his Vermilion Energy Inc. (VET-T) target to $34, above the $25.90 average, from $18.50 with a “hold” rating.
“Rising European natural gas prices has been a boon for Vermilion, helping its 4Q21 FFO outperform by 10 per cent while also being the key driver to our 2022 FFO literally doubling since our last formal update,” he said. “That said, we believe it is equally important that management has decided to keep its 2022 guidance unchanged, which signals to us, that its commitment to debt reduction and an expedited pathway to accelerated return of capital for shareholders is truly a priority.”
* Scotia Capital’s Michael Doumet lowered his Wajax Corp. (WJX-T) to $28 from $30, keeping a “sector outperform” rating, while TD Securities’ Michael Tupholme cut his target to $27 from $34 with a “buy” rating. The average is $28.50.
“As can be expected, Wajax is going to have to manage equipment availability and technician capacity in what we believe will be a strong operating environment,” said Mr. Doumet. “The setup, in our view, is such that 2022 EPS growth will skew towards the 2H, particularly as mining shovels are delivered. Its B/S is strong. And, we think the prospect of solid EPS growth is likely to get supplemented by M&A. Valuation is undemanding and the growth story in ERS and Industrial Parts remains underappreciated by investors, in our view.”