Inside the Market’s roundup of some of today’s key analyst actions
National Bank analyst John Shao thinks Copperleaf Technologies Inc.’s (CPLF-T) $1-billion takeover by Sweden’s IFS AB “looks like a done deal.”
“On the surface and based on recent Tech deals, the 18-per-cent premium based on [Monday’s] closing price is not very high,” he said. “That said, we’d also note that the premium is paid on top of the stock’s recent rally with a year-to-date return of 68 per cent. From a valuation perspective, at the implied 8.5 times EV/Sales multiple, this deal is pricing CPLF as one of the most expensive Tech names within our coverage. That view when paired with the collective group in favor of the deal has us believe this proposed transaction will likely be approved.”
Following Tuesday morning’s announcement of the deal for the Vancouver-based tech company at a bid of $12 a share, Mr. Shao moved his recommendation for Copperleaf shares to “tender” from “outperform” previously, seeing little likelihood of a competing bid and emphasizing the bid is friendly with a unanimous recommendation by a committee of independent members of its board of directors.
“Investors following our research would recall that we like Copperleaf for its niche vertical focus with virtually no competitors other than MS Excel,” he said in a note titled Another One Gone. “While this niche focus has been a bonus when CPLF remains a public company, it also reduces the likelihood of a competitive bid from competitors looking to consolidate their market share. The next logical buyer would be big ERP system providers such as SAP. On that note, SAP recently executed a similarly sized deal through the acquisition of a Digital Adoption Platform called WalkMe for $1.5 billion. If anything, a bid might be coming from that space.
“Lastly, on potential PE bidders, we think it’s unlikely because CPLF’s loss position and robust valuation might not justify a strong IRR [internal rate of return] in the absence of product synergies.”
Mr. Shao moved his target for Copperleaf shares to $12 from $9 to reflect the deal. The average target on the Street is $11.25, according to LSEG data.
Elsewhere, calling it “another bittersweet end for a Canadian small cap software stock” and believing “Canadian public investors lose out on a compelling small cap software growth story,” RBC’s Paul Treiber cut Copperleaf to “sector perform” from “outperform” and raised his target to $12 from $11.
“Copperleaf’s takeout comes just as the company is seeing accelerating momentum, with ARR growth of more than 30 per cent year-over-year for two consecutive quarters and improved visibility to profitability,” said Mr. Treiber. “We believe Copperleaf is well positioned to sustain growth as the company executes against its large market opportunity.”
“Copperleaf adds to the growing trend of takeouts in the Canadian small cap software space, which includes Magnet (Apr 2023) and Q4 (Feb 2024). As we noted in our Feb 2023 report, Canadian small cap tech has entered a period of consolidation. Within our coverage, we believe that Coveo (TSX: CVO) and D2L (TSX: DTOL) are potential takeout candidates.”
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In response to its stock-swap deal to be acquired by National Bank of Canada (NA-T), BMO’s Sohrab Movahedi downgraded Canadian Western Bank (CWB-T) to “market perform” from “outperform” previously.
“CWB is currently trading at 0.7 times BVPS [book value per share] as of [Tuesday’s] closing price and 6.6 times our 2025 EPS estimate,” he said. “The stock has been the laggard among the Canadian banks, with a calendar year-to-date total return of negative 17.3 per cent (underperforming the bank index by about 1,800 basis points).
“The $5-billion offer price is about 1.41 times book value per share and 13.9 times our 2025 EPS estimates.”
His target for Canadian Western shares rose to $52 from $35 and above the $33 average on the Street.
“CWB has outlined a plan to deliver 12-per-cent-plus ROE driven by higher revenues and capital optimization levers; however, loan growth is expected to be in the low-single-digit range in the near term,” he said. “The bank’s focus on geographic diversification and increased traction in lower-cost franchise deposits should help offset higher expenses and bring the NIX ratio down to historical averages.”
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While the sentiment surrounding the renewable energy sector becoming “more positive” and resulting in recent share price appreciation, Scotia Capital analyst Robert Hope sees a number of tailwinds for further gains “from a more visible growth outlook driven by increasing power demand, the stabilization of interest rates, and improving supply chains.”
“Over the last two months, it appears that the news flow for the renewables group has shifted positive, which is a stark contrast to the numerous negative updates through 2023,” he said. “These favourable updates have turned sentiment more positive on the sector, though we note that prior sentiment for the group was tepid at best. When we assumed coverage of BLX, INE, and NPI mid-April, we questioned what catalysts there were to improve sentiment and get investors to re-engage in the space. It appears the updates below were the spark to get investors interested in the space.”
In a report released Wednesday, Mr. Hope pointed to the recent “landmark” deal between Brookfield Asset Management Ltd. (BAM-T) and Microsoft Corp. (MSFT-Q) to develop renewable power capacity as a “key turning point for sentiment for the entire renewable sector as it highlighted the group’s direct exposure to rising power demand and the technology sector’s desire for clean power.”
Also pointing to the impact of stabilizing interest rates and a “robust” outlook for wind in Quebec, the analyst increased his valuation multiples across the sector.
“As such, our target prices move higher by a median of 8 per cent, driven by a 0.2 times (range of 0.1-0.5 times) increase in our target valuations,” he said. “That said, valuations still remain well below their longer-term averages, and we believe they could still be conservative. While we believe that sentiment has shifted more positive on the group, we note that fund flows remain limited. Looking at U.S. renewable ETF flows (Canadian data is less applicable), we have seen fund flows turn positive over the last five weeks. That said, the magnitude remains limited and only a fraction of what was seen during the renewable boom of 2020/2021. If capital allocated to this sector increases, we could see further upside to valuations.”
His target changes are:
- Boralex Inc. (BLX-T, “sector outperform”) to $42 from $38. The average on the Street is $39.50.
- Brookfield Renewable Partners LP (BEP-N/BEP.UN-T, “sector outperform”) to US$32 from US$31. Average: US$28.98.
- Capital Power Corp. (CPX-T, “sector perform”) to $43 from $40. Average: $41.91.
- Innergex Renewable Energy Inc. (INE-T, “sector outperform”) to $12.50 from $10.50. Average: $11.28.
- Northland Power Inc. (NPI-T, “sector perform”) to $28 from $27. Average: $29.92.
“Our favourite renewable power names remain BEP, INE, and BLX,” said Mr. Hope. “Given its size, liquidity, and strong growth profile, we believe BEP should be a go-to name for investors in the renewable space. Based on our conversations, it appears that the rate of change of sentiment is most positive for INE following its dividend cut and renewed capital allocation framework outlined this spring.”
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CIBC World Markets utilities analyst Mark Jarvi admits he was surprised the recent jump in renewable energy stocks, which has now left valuations discounted.
“The renewable/power companies we cover have seen a share price recovery over the last two months (up 18 per cent on average vs. TSX down 1 per cent and S&P 500 up 3 per cent),” he said. “The recovery hasn’t happened as we expected—it was more abrupt and came without a material change in the 10-year bond yield outlook which defied the general narrative that these stocks wouldn’t perform well unless yields/rates went lower. Rather, data centre/AI power demand hype has helped sentiment, plus the stocks rebounded from what we viewed as overly discounted conditions. Investors should realize the rally may pause and that fundamental, longer-term investors are not yet bullish on the sector outlook.”
In a research report titled False dawn or a potential sustained rally - revisiting the recovery in renewables, Mr. Jarvi said sector-wide “fundamentals have stabilized and are improving (albeit not all factors are trending positive).”
“The recovery in renewable stocks that started in mid-April was likely driven by 1) excitement of data centre/ GenAI load demand, 2) a peaking out in the 10-year bond yield as rate cut expectations were reset, and 3) a potential rally off oversold conditions,” he said. “Modestly better-than-expected Q1 results, easing short interest and announcements like BEP’s 10.5GW offtake agreement with Microsoft helped sustain the rally through May. However, fundamental investors seem skeptical on the rally (haven’t really participated in our view) and we could see a pause as expectations re-adjust (might need signs of lower yield/rates for stocks to push materially higher).”
“While the forecasts for the number of rate cuts have moderated, the 10-year bond yield forecasts haven’t really moved, which have more influence on renewable stocks (impact discount rates, return hurdles and funding). We’ve seen progress on supply chains, build costs have stabilized, weather looks better for H2/24, and PPA prices/returns are holding at higher levels. Power prices were trending lower but have inflected up recently. There are signs of better infra fundraising, ETF fund flows and M&A activity/valuations.”
That view led Mr. Jarvi to raise his target prices for a group of power producers in his coverage universe on Wednesday. His changes include:
- Boralex Inc. (BLX-T, “outperformer”) to $41 from $39. The average on the Street is $39.50.
- Capital Power Corp. (CPX-T, “neutral”) to $41 from $39. Average: $41.91.
- Innergex Renewable Energy Inc. (INE-T, “neutral”) to $11 from $10. Average: $11.28.
- Northland Power Inc. (NPI-T, “outperformer”) to $31 from $30. Average: $29.92.
- TransAlta Corp. (TA-T, “outperformer”) to $16.50 from $16. Average: $13.75.
“We estimate renewable/power names are currently trading at an average implied cost of equity of 10.8 per cent vs. 12.0 per cent and 9.2 per cent, exiting 2023 and 2022, respectively,” he said.. “The implied spread to the 10-year bond yield is now 6.4 per cent vs. 8.1 per cent at the end of 2023 and 5.5 per cent 18 months ago. We still believe risk premiums can compress further as headwinds fade and with consistent execution. There could also be more upside (5-10 per cent) from greater recognition of medium-term growth potential.”
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Desjardins Securities analyst Doug Young thinks Manulife Financial Corp.’s (MFC-T) Asia unit can grow core earnings by 15 per cent or more annually over the seven years.
“We believe Asia and GWAM [global wealth and asset management] could account for 70 per cent of MFC’s core earnings by 2030 vs just over 50 per cent in 2023,” he said. “We believe this could result in an expansion of the valuation multiple and an attractive potential total return annually over the next seven years. By 2030, the valuation for MFC’s Asia business could very well exceed MFC’s market cap today. Nothing in the equity markets travels in a straight line though, and there are various things that could derail MFC, including bumps at its legacy businesses, geopolitical events in Asia specifically, along with tougher macro and equity market conditions.”
In a research note previewing the company’s investor day in Hong Kong and Jakarta from June 25–27, Mr. Young predicts the Toronto-based insurance company and financial services provider is likely to increase its return on equity target to 16 per cent or more from 15 per cent, currently.
“Why is Asia such an exciting region to operate in? The Asian countries in which MFC operates have (1) a population of 3.6 billion vs 381 million in Canada and the U.S.; (2) the potential for faster GDP growth, and the emergence of a material and growing middle class which will want insurance and wealth management services; (3) a small percentage of the world life insurance market; (4) a relatively low penetration of life insurance premiums per capita; and (5) a larger work to retire ratio (percentage of the population aged 15–59 vs those aged 60+) vs Canada and the U.S..,” he said.
“We believe MFC’s Asian segment can grow core earnings at a 15-per-cent-plus CAGR [compound annual growth rate] over the next 5+ years and generate core ROEs above the consolidated MFC target, and we are looking for data to cement our views. Yes, NBV margins are below peers’ in various regions outside of Japan; however, we believe therein lie the opportunities. How will management close the gap? What are the drivers? In Section 10 of this comment, we compare core/operating earnings growth, APE sales growth, NBV growth and NBV margins for MFC’s Asian division vs AIA Group (AIA) and Prudential Plc (PRU). We are also interested in other topics that tie into this thought process, such as capital allocation, cash remittances, digital adoption, distribution focus, agent productivity, client penetration and whether any of this might be enhanced through acquisitions.”
Mr. Young reiterated a “buy” recommendation and $39 target for Manulife shares. The average on the Street is $36.76.
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In other analyst actions:
* Following it sales of Northwestel to Sixty North Unity, a consortium of Indigenous communities from the Northwest Territories, Yukon and Nunavut, for $1-billion and the close of its $410-million acquisition of outdoor advertising company Outfront Media Inc.’s Canadian operations, National Bank’s Adam Shine trimmed his BCE Inc. (BCE-T) target by $1 to $52, keeping an “outperform” rating, while BMO’s Tim Casey bumped his target to $47 from $46 with a “market perform” rating. The average on the Street is $50.18.
* With its $135-million acquisition of Jacob Bros Construction, CIBC’s Jacob Bout raised his Bird Construction Inc. (BDT-T) target to $25.20 from $22, maintaining a “neutral” recommendation. Other changes include: ATB Capital Markets’ Chris Murray to $29 from $25 with an “outperform” rating and TD Cowen’s Michael Tupholme to $30 from $25 with a “buy” rating. The average is $26.81.
“Jacob is a self-perform contractor specializing in large civil infrastructure, providing Bird with a more diversified revenue profile and a foothold in the growing BC infrastructure market,” said Mr. Murray. “The transaction is being completed at an accretive valuation and is expected to support 10.0-per-cent EPS accretion in 2024, with Jacob’s stronger margin profile and opportunity to realize cross-selling synergies offering longer-term upside. We are constructive on the acquisition as it is consistent with management’s focus on expanding Bird’s self-perform capabilities, was completed at a highly accretive valuation, and is expected to support margin expansion and growth in BDT’s infrastructure capabilities.”
* Eight Capital’s Christian Sgro increased his HEALWELL AI Inc. (AIDX-T) target to $4 from $2.50 with a “buy” rating. The average is $2.61.
“HEALWELL announced the $24.5-million acquisition of VeroSource, an innovative, cloud-based digital health tool that services the public sector,” he said. “The deal is accretive at up to 3.1 times estimated 2024 revenue, building on HEALWELL’s digital footprint and software operating profile. With more data points around pharma commercialization, and AI valuations at premiums (Cohere raised at 142 times TTM [trailing 12-month] revenue), we expect continued momentum in HEALWELL’s share price as the company attacks a unique opportunity in healthcare AI. With much of the VeroSource consideration to be issued as equity, we model over $20-milllion of cash for HEALWELL to continue scaling its top-line, with $50-million-plus of runrate revenue in sight with more deals like VeroSource.”
* CIBC’s Kevin Chiang cut his target for TFI International Inc. (TFII-N, TFII-T) to US$167 from US$172, below the US$169.18 average, with an “outperformer” rating.
“We have adjusted our estimates to reflect additional conservatism in our U.S. LTL [less-than truckload] recovery timeline reflecting the elongated freight recession,” he said. “We do expect sequential improvement in TForce Freight (TFF) with margin and weight per shipment improving on a quarter-over-quarter basis. Our 2024 and 2025 EPS estimates fell by 3 per cent and 2 per cent respectively. We expect TFII to maintain its 2024 EPS guidance of $6.75-$7.00. We continue to like the risk/reward setup for TFII.”
David Leeder