Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Cameron Doerksen is expecting Transat AT Inc. (TRZ-T) to report “strong” third-quarter results on Sept. 14, pointing to better-than-expected summer demand and pricing on its core Atlantic routes.
While he warned higher assumed jet fuel costs will be “a watch item” and weigh on profitability, Mr. Doerksen “modestly” increased his financial forecast for the next two quarters on Wednesday, believing the airline’s summer looks “very strong” with momentum into the winter despite growing capacity from its competitors.
“In reporting its fiscal Q2 results, Transat noted at the time that its load factor for the summer was running 2.6 pts lower than 2019, but yield (pricing) was up 29 per cent versus 2019,” he said. “Since reporting in early June, there has been further evidence that demand and pricing this summer are very strong, especially on trans-Atlantic routes, which is Transat’s core market in the summer (fiscal Q3 and Q4). Air Canada reported that for its fiscal Q2, Atlantic routes saw yields up 19.9 per cent year-over-year and unit revenue up a remarkable 33.6 per cent year-over-year. Air Canada’s Atlantic revenue in Q2 was nearly 44 per cent above 2019 levels. Other international airlines have also noted strength on routes between North America and Europe.”
“Based on management commentary from both Transat and Air Canada, air travel demand looks to remain strong into the fall. We believe demand for sun destinations (Transat’s core market in fiscal Q1 and Q2) this upcoming winter will be solid, but additional competitive capacity could dampen yields.”
Mr. Doerksen did warn that the Montreal-based company’s current debt level is high even with its notable financial flexibility.
“Transat’s financial flexibility is comfortable, enhanced by the recently announced sale of the company’s property in Mexico (US$38-million), which will help lower debt levels modestly,” he said. “However, even under our assumption that EBITDA will continue to improve in F2024, we still see net-debt-to-EBITDA at 4.5 times at year-end, which we deem to be too high. Interest expense on the company’s unsecured debt will also begin to escalate in 2024. As such, we still see an equity dilution risk.”
With higher projected revenue through the next fiscal year, he raised his earnings per share projection for the third quarter to 12 cents from 7 cents previously. His full-year 2023 estimates rose to a loss of $1.51 from a loss of $1.62.
Maintaining an “underperform” recommendation for Transat shares, Mr. Doerksen bumped his target to $3.75 from $3.50. The average target on the Street is $4.45.
“Transat should continue to show margin and cash flow improvement through our forecast period, but we still view overall leverage as too high, which shapes our cautious view on the stock,” he said.
=====
Believing the new management of Suncor Energy Inc. (SU-T), led by Rich Kruger, has “the vision and strategy to improve execution, returns, CFFO and FCF,” Wells Fargo analyst Roger Read upgraded its shares to “overweight” from “equal weight” on Wednesday.
His target jumped to $54 from $44 based on higher earnings expectations and a revised trading multiple. The current average is $50.50.
=====
Credit Suisse analyst Andrew Kuske thinks West Fraser Timber Co. Ltd. (WFG-N, WFG-T) is poised to benefit from “relatively favourable” prices and margins, which he thinks “potentially speak to an evolving [housing market] industry structure along with changing cost curves.”
“An array of housing market data exists that underpins core elements of West Fraser Timber Co Ltd.’s (WFG) businesses and much of that data is mixed, in our view,” he said. “We remain concerned about near-term impact of negative housing market data points – albeit with positive potential in a severely cyclical industry. In that context, we view WFG as a well-positioned cyclical stock with, at times, accentuated moves – in both directions and the “perfect timing” typically elusive. Interest rates remain high on a near-term basis with impacts across housing markets. Importantly, potentially declining rates continues to push out into the future (potentially 2024 now).”
Despite that optimism, the analyst lowered his 2023 earnings per share estimate to a loss of US$1.26 from a profit of 41 US cents previously and his 2024 projection to US$5.90 from US$6.32 based on its second-quarter results and “operationally adjustments” in a research report released Wednesday titled Timing the Turning Point.
“We remain constructive on WFG’s business exposure – albeit the re-rate path is unlikely to be linear and rather rocky at times,” he said. “Language from the Fed’s upcoming Jackson Hole Economic Symposium will be critical for some broader market moves that are inextricably intertwined with WFG’s exposure. Beyond that event, ongoing wildfire and cost issues may create various near-term headwinds for cash flow generation.”
However, Mr. Kuske raised his target for West Fraser shares to US$108.50 from US$106.50, maintaining an “outperform” recommendation. The average on the Street is US$113.38.
“We believe West Fraser has an enviable position in lumber and OSB markets and commodity prices along with housing dynamics look increasingly supportive,” he concluded.
=====
BMO Nesbitt Burns analyst Mike Murphy views Hammerhead Energy Inc. (HHRS-T) as “optimally positioned within the over pressured oil window of the Montney fairway, with depth and quality of inventory to support its longer term growth objectives.”
He initiated coverage of the Calgary-based oil and gas exploration and production company, which began trafding on both the TSX and Nasdaq in February following its business combination with Decarbonization Plus Acquisition Corp., with an “outperform” recommendation on Wednesday.
“We are expecting the company to deliver peer leading and liquids-weighted annual production growth averaging approximately 24 per cent through 2024,” said Mr. Murphy. “Additionally, with major infrastructure spending largely completed, we are forecasting an upcoming free cash flow inflection point and see potential for a dividend to be launched in 2024
Touting its “top tier growth and upcoming FCF” as well as its “attractive” valuation, he set a target of $22 for Hammerhead shares. The average is $18.33.
“Given its growth trajectory, strong balance sheet, and oil-weighted inventory, we view the shares as trading attractively at a 2023 estimated EV/EBITDA of 4.0 times (BMO Deck) versus the Montney peer average at 4.7 times. The company is fast approaching a FCF inflection point, with a 2024 FCF yield of 14 per cent relative to the group at 6 per cent,” said Mr. Murphy.
=====
While Sabio Holdings Inc. (SBIO-X) second-quarter results fell in line with expectations, Eight Capital analyst Kiran Sritharan warned a “softer demand environment” has created a significant headwind for the Toronto-based provider of connected TV and over-the-top advertising platforms.
“The broader ad industry remains challenged as the uncertainty with the macro has led to conservative advertising budgets and reduced visibility into spending patterns,” he said. “As a positive for Sabio, political spend is expected to tick up before year end as the Republican Party primaries kick off. Across the U.S. landscape, recent political spending patterns on minority groups and non-English media have risen to record levels as this strategic voter bloc grows.”
“Management expects an increase in cost trimming across their opex profile as they right-size for the environment. The shift to CTV from Mobile continues to benefit the gross margin profile. Sabio is looking to launch a new programmatic platform in 2024, we expect this to increase wallet share gains and win non-contracted portions of customer’s budgets. An increase in integration of Vidillion’s inventory (up 19 per cent quarter-over-quarter) and improving contributions from the white-labeled App Science offering should continue to benefit unit economics of Sabio’s end-to-end ecosystem.”
On Monday after the bell, Sabio reported quarterly revenue of $8-million, narrowly above the Street’s $7.9-million forecast, while an adjusted earnings before interest, taxes, depreciation and amortization loss of $1.7-million matched the consensus projection.
“CTV revenue of $5.0-million was slightly behind our $5.3-million estimate (no consensus) as brands are more cautious in this environment,” said Mr. Sritharan. “Management noted healthy retention with no loss of large logos and new customers coming in at larger deal sizes alongside the broader shift to nonlinear TV.”
“We have reduced our revenue estimates reflecting the demand dynamics and the uncertainty on positive growth. We expect flat growth exiting the year, and our 2024 estimates reflect management’s path of demand recovery. Our revisions to profitability are similar with GM% and EBITDA improving from the new cost optimization measures and topline recovery in Q4.”
Maintaining a “buy” recommendation for Sabio shares, he trimmed his target to $2.50 from $3.50 based on his reduced revenue and earnings expectations. The average on the Street is $2.44.
“The shift to CTV remains prominent (now 62 per cent of revenue) and the growth in the segment continues to outpace the industry,” said Mr. Sritharan. “Focusing on 2024, with the political cycle a tailwind, investments made to their inventory, targeting platform and new product developments gives us confidence in improving unit economics as demand recovers. With a recently strengthened balance sheet, we think Sabio is well-positioned for the back half of this year supported by its customer retention and cost discipline.”
Elsewhere, iA Capital Markets’ Neehal Upadhyaya cut his target to $1.75 from $2.50, keeping a “buy” rating.
“Management noted that revenue visibility for Q3 was unclear as many of its larger customers continue to push spend due to challenging macroeconomic conditions,” he said. “Furthermore, with the SAG strike and a potentially impending autoworker’s strike, entertainment and automotive adspend has softened. Furthermore, advocacy, which was a significant contributor last year, has been weaker this year. Because of these headwinds, we expect a flattish Q3 (quarter-over-quarter) with Q4 being the ‘money quarter.”
=====
Ahead of the Sept. 6 release of its first-quarter fiscal 2024 results, RBC Dominion Securities analyst Irene Nattel reaffirmed Alimentation Couche-Tard Inc. (ATD-T) as her “best idea” through the remainder of the calendar year, seeing it moving “from seed to harvest on key organic growth initiatives, with strong FCF [free cash flow] and clean B/S [book-to-sales] providing upside optionality, notably around M&A.”
“Against the backdrop of elevated rates, consumer wallet pressure and growing economic uncertainty, we favour staples/staples-like names that perform across the cycle and that enjoy stock-specific optionality,” she said. “Favourable longer-term outlook on ATD predicated on: 1. sustainable fuel margins close to 40¢/g; 2. rising share of wallet inside the box, and 3. value-creation from untapped B/S capacity, both M&A and NCIB.”
Seeing “resilient” consumer activity through the quarter, Ms. Nattel is forecasting EBITDA and earnings per share of $1.366-billion and 75 cents, largely in-line with the consensus projections of $1.366-billion and 75 cents.
“Incorporating latest reads on fuel margins, FX, and fuel prices and tweaking assumptions around SSS [same-store sales], GM% and SSG [same-store sales growth] leaves our forecasts broadly unchanged ahead of FQ1,” she said.
Ms. Nattel kept an “outperform” rating and $87 target. The current average is $79.05.
Elsewhere, BMO’s Tamy Chen raised her quarterly EPS projection to 77 cents from 69 cents, keeping an “outperform” rating and $75 target.
“The largest factor behind the increase is a higher U.S. fuel margin based on the quarter-over-quarter trend in industry data,” she said. “In addition, we lowered our SG&A expense after incorporating our estimates for electronic payment fees and FX rates during the quarter. Lastly, we nudged up our U.S. merchandise comp, primarily based on IRI data.”
“We believe the company continues to have several growth opportunities going forward, including the fuel rebrand initiative, improving the profitability of the fresh food program, and the global M&A roll-up element where we believe there remains significant opportunities in Asia and Europe.”
=====
Despite Canadian Solar Inc. (CSIQ-Q) reporting a “large” second-quarter earnings beat, Citi analyst Vikram Bagri emphasized “heightened” uncertainty surrounding average selling prices has significantly clouded its outlook moving forward
Shares of the Guelph, Ont.-based company plummeted 12.9 per cent on Tuesday after it lowered its full-year 2023 revenue guidance by US$0.5-billion to a range of US$8.5-$9-billion based a “rapid decline in solar module prices,” missing the Street’s US$9.35-billion forecast. Sales of US$1.9-$2.1-billion was also below the consensus estimate of US$2.51-billion.
Those reductions overshadowed an earnings per share beat for its second quarter of US$2.39, blowing past analysts’ projection of US$1.90.
“The company missed GM guidance for the second consecutive quarter while also missing module shipment guidance,” said Mr. Bagri. “Higher-than-expected reduction in FY23 revenue guidance combined with weak 3Q margin outlook pressured the shares. Lower demand from residential (channel destocking) and order hold-offs from utility scale customers (sharp ASP declines) slowed order intake, leaving a larger-than-expected portion of FY23 ASP exposed. Updated FY23 guidance implies high-single-digit module ASP decline in 2H vs. 1H. While 3Q module orders are fully booked and management sees potential for sequential ASP improvement in 4Q, orders are only partially booked in 4Q.”
After lowering his forecast, the analyst dropped his target for Canadian Solar shares to US$30 from US$42, maintaining a “neutral” rating. The current average is US$47.08.
“Despite operating in a rapidly growing industry and despite being one of two vertically integrated players in our coverage, we remain sidelined on the stock,” Mr. Bagri said. “Heavy manufacturing capacity expansion (the first phase of 14GW in wafer/cell capacity expansion commences in 2H23; potential polysilicon capacity) should mean that FCF could get sequentially more negative.”
=====
Stifel analyst Cole McGill reaffirmed his constructive outlook on Western Hemisphere lithium developers, seeing “potential opportunistic bids in the space.”
Also highlighting “lower commodity pricing, 12 month low valuations, heavy domestic downstream EV investments, a desire to develop farm-to-table supply chains, and increasing size/relevance of the lithium industry,” Mr. McGill predicts notable M&A activity is likely on the horizon as both incumbents and new entrants adjust their capital allocation plans to maintain and grow market share.
“This is largely evidenced by recent premium deals, executive commentary through 2Q23 quarterlies, and the structural desire to develop localized supply chains ex-China,” he said. “Amongst our coverage, lower pricing has resulted in valuations now trading approximately 2σ below 12 month average on a P/NAV basis. While lithium prices have the possibility to provide pressure on valuations, we continue to see incumbents of scale taking a long-term, secular view of the space driven by an expected 450kt LCE (50 per cent of current market size) supply deficit by 2030, informed by our proprietary supply and demand model.”
In a research report released Tuesday, Mr. McGill said he favours Western Hemisphere lithium developers of scale, naming Lithium Americas Corp. (LAC-N, LAC-T) and Lithium Ionic Corp. (LTH-X) as his “top picks” in the sector.
Mr. McGill has a “buy” rating and US$37 target for Lithium Americas shares and a “speculative buy” rating and $5 (Canadian) target for Lithium Ionic. The averages on the Street are US$34.48 and $5.42, respectively.
“Bids are beginning to migrate towards the Western Hemisphere as supply chain diversification ex China gains momentum. Canada, Brazil and Argentina host the largest and highest grade conventional lithium assets in the Western Hemisphere, and these assets trade at significantly lower valuations than Australian counterparts favoured by Chinese refiners,” he said. “Albemarle recently invested $109-million for 4.9 per cent of PMET, and this investment represents what we believe to be the early innings of further potential bids for Western lithium developers as incumbents look to secure resources to feed the emerging US-based EV supply chain. Select lithium majors are now sitting on a combined cash balance of $8-billion.”
“We believe M&A activity in the near-term will continue to be strong, particularly for those seeking vertical integration in Western supply chains as the global EV supply chain undergoes a bifurcation. OEMs and integrated producers are investing heavily on this assumption, as seen most recently by Ford’s partnering with South Korean cathode maker EcoPro to build a $1.2-villion cathode facility in Becancour, Quebec. Developers with logistically-favourable routes to feed this developing hub will be particularly desirable targets.”
=====
In other analyst actions:
* Veritas Research’s Jacob Liu initiated coverage of Dentalcorp Holdings Ltd. (DNTL-T) with a “sell” recommendation.
* National Bank’s Tal Woolley trimmed his Invesque Inc. (IVQ.U-T, IVQ-T) target to 80 US cents from US$1 with a “sector perform” rating. The average is US$1.73.
* As “cyclical headwinds hinder the digital advertising market,” CIBC World Markets’ Todd Coupland initiated coverage of VerticalScope Holdings Inc. (FORA-T) with a “neutral” rating and $6 target, below the $7.53 average on the Street.
“VerticalScope’s large addressable market in digital advertising, market position with 100 million monthly active users (MAU), and organic growth strategy support our forecast for revenue to return to growth of 10 per cent in 2024, EBITDA margins of approximately 40 per cent, and free cash flow margins of 23 per cent,” he said. “We expect the company to benefit from its growth investments, including the 2023 introduction and availability of digital video ads that have 4x-5x higher monetization potential over static display ads, as well as the Fora mobile app. We expect these initiatives to improve user engagement, thereby benefiting advertisers and leading to higher average revenue per user (ARPU) and MAU.
“While we believe VerticalScope is an excellent company, it is too early, in our opinion, to pay for our upside scenario. We await further evidence of rising ARPU and/or MAU growth before pricing in our upside scenario of $12.”
David Leeder