Inside the Market’s roundup of some of today’s key analyst actions
MTY Food Group Inc. (MTY-T) is “continuing to navigate consumer fatigue,” according to National Bank Financial analyst Vishal Shreedhar, who emphasized its “limited acquisition interest in fiscal 2024 coupled with a threshold on capital return could partially dampen investor appetite in the shares, at least until organic growth accelerates.”
In a research note released Wednesday previewing the early July release of the Montreal-based restaurant franchisor and operator’s second-quarter results, Mr. Shreedhar said he is modelling “pressured overall trends, reflecting tapering industry demand, partly offset by organic growth initiatives across the business (broad-based digital/technology enhancements, new marketing approaches, new menu/store concepts, etc.), and operating efficiency initiatives.”
He’s currently projecting adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $69.1-million, falling from $74.6-million a year ago and narrowly below the consensus expectation of $69.7-million. That comes alongside year-over-year declines in system sales ($1.428-billion versus $1.470-billion) and revenue ($295-million versus $305-million).
“We project negative same-store sales growth reflecting continued pressured industry sales trends,” said Mr. Shreedhar. “MTY’s sales cadence improved partway into Q2/F24; we understand sales rebounded in the back half of February and in March as weather normalized. Further, we expect a lower year-over-year sequential impact from the end of emergency allotments under the U.S. Supplemental Nutrition Assistance Program (SNAP; ended March 2023).
“We expect higher pricing in California (12 per cent of system sales in F2023) reflecting a minimum wage increase, and modest pricing otherwise. Peer commentary suggests higher pricing year-over-year is largely a function of carryover effects. Traffic data remains uninspiring.”
Expecting capital allocation to prioritize debt deduction given its elevated leverage and seeing investor returns as limited, Mr. Shreedhar reduced his target for MTY shares to $52 from $57 after reducing both his estimates and multiple to reflect macroeconomic challenges. The average target on the Street is $54.17.
“Investors will, in our view, focus on: (i) traction with sssg, (ii) organic store network stability (MTY still sees a slightly longer time to build and finalize new stores), and (iii) outlook commentary and the consumer backdrop given ongoing macroeconomic concerns,” said Mr. Shreedhar, who maintained his “outperform” recommendation.
=====
While emphasizing Advantage Energy Ltd.‘s (AAV-T) “complexion of its assets, fundamentals and value drivers (i.e., FCF) are universally improved” through its $450-million acquisition of assets in the Charlie Lake and Montney from Longshore Resources Ltd., National Bank Financial’s Dan Payne thinks the perception of the transaction from investors has “lagged that reality.”
One of several analysts on the Street to resume coverage of the Calgary-based company following the close of the transaction, which was following by a $190-million bought deal financing, Mr. Payne thinks “no doubt there is a disconnect between the perception (micro drivers of a trade; gas and buyback) and reality (macro drivers of a business; per share growth) of its recently announced acquisition.”
“The outlook of the pro-forma will be to high-grade its development program in both its natural gas and liquids assets, with a view towards optimizing production towards maximizing free cash in support of de-leveraging (likely until its renewed $450-million or less than 1.0 times D/CF debt target is achieved in Q4/25; potentially sooner with outperformance potential, as noted), to which it will look to hedge 30-50 per cent of its production in support,”
“To that end, we believe there has been a disconnect between its strategy, which was always focused on maximizing PER SHARE growth (to which, this acquisition is directly on strategy) and the Street’s perception of its strategy, which was heavily focused on the underlying drivers (rather than outcome) of compounding returns through gas leverage (still top ranked) and expanding buyback (but each arguably diluted for the time).”
Mr. Payne thinks the long-term prospects of the business have improved, “as reflected through its comparability to the broader peers; offering a 12-per-cent aggregate FCF yield (vs. peers 8 per cent) on leverage of 0.9 times D/CF (vs. peers 0.2 times).”
“Moreover, few hold the quantum of option value that is embedded within AAV to backstop its value proposition, including; a) Incremental Montney lands (i.e., 86 sections of BC land) that could be worth at least $0.50 per share, b) Expansive infrastructure value amounting to at least $4 per share in value (across its expansive regional network), and c) Entropy (last but not least) that we have recently pegged the value of at $2.00 net to shareholders,” he added.
Touting its expanded footprint, Mr. Payne reaffirmed an “outperform” recommendation with a $13 target, up from $12.50. The average target on the Street is $13.85.
“AAV is poised for a 20-per-cent return profile (vs. peers 16 per cent) on leverage of 0.9 times (vs. peers 0.2 times), while trading at 4.1 times 2025 estimated EV/DACF [enterprise value to debt-adjusted cash flow] (vs. peers 3.6 times),” he said.
Elsewhere, others making target changes include:
* ATB Capital Markets’ Amir Arif to $13.50 from $13 with an “outperform” rating.
“We believe that the acquisition itself was a very good acquisition for the Company,” said Mr. Arif. “Strategically, the acquisition reduces cashflow volatility with the higher liquids mix and improves the sustainable FCF profile from the limited capital needed to hold production flat. From a valuation perspective, strip 2024 and 2025 EV/DACF improves from 9.3 times and 5.4 times standalone at the time of the announcement to 6.9 times and 4.0 times currently. For an upside perspective, we believe that the Company could surprise to the upside in terms of capital efficiency and operating cost improvements on the acquired asset. The key points for some investors on the negative front are the reduced gas weighting, timing of adding oil production, and reduced buyback activity as the focus shifts to debt reduction following the deal. We believe that some of these concerns led to the 12-per-cent selloff post the acquisition announcement. In our view, the timing and buybacks are not a key issue and the lower gas weighting, while it might not be to some investors’ liking, positions the Company better longer-term as can be seen in our valuation and leverage improvements over time at strip.”
* Scotia’s Cameron Bean to $20 (Street high) from $19 with a “sector outperform” rating.
“AAV’s $450-million acquisition of the Longshore Resources (Private) Northwest Alberta Charlie Lake assets was met with a negative reaction in the market, with stock down 12 per cent from the pre-announcement close and 8 per cent from the equity offering price,” he said. “Market feedback was generally positive on the geographic fit, potential synergies, and accretion metrics, but negative on the perceived strategic departure (i.e., buying unfamiliar oil-weighted assets), debt added to fund the deal, use of convertible debentures, and paused share repurchase program. In contrast to the consensus reaction, we think the asset fit is great on both play type and commodity mix (flexibility to grow oil volumes has long been part of AAV’s strategy), are not bothered by the buyback pause, and believe the company will be able to rapidly reduce debt in a ~strip commodity price environment. Importantly, we see the deal as consistent with AAV’s strategy, accretive to valuation metrics, and additive to the company’s ability to navigate a volatile natural gas price environment. While the stock needs to find a floor in the midst of negative vibes around the deal (not uncommon with recent deals), we see the weakness as a buying opportunity.”
* RBC’s Michael Harvey to $12 from $11 with a “sector perform” rating.
* CIBC’s Jamie Kubik to $12 from $11 with a “neutral” rating.
=====
In response to its launch of a strategic review process, Stifel analyst Ian Gillies raised his recommendation for Neo Performance Materials Inc. (NEO-T’) to “buy” from “hold” previously.
“This rating change is predicated upon a successful conclusion, rather than continuing on as the status quo,” he cautioned.
“We believe the assets of NEO will be very attractive to a wide range of strategic buyers and financial sponsors as critical rare earth metals are becoming an investment strategy for private equity enterprises. NEO has approximately 50-55 per cent market share for NdFeB powders, and has an emerging rare earth business in Europe that is likely to grow with EV production.”
Mr. Gillies said his sum-of-the-parts analysts suggests the Toronto-based rare earths company is “significantly undervalued.”
“Using our 2025 estimates and the peer group averages for NEO’s business segments, we arrive at a value of $18.33 per share,” he said. “We have discounted the 2029 run rate EBITDA from the company’s Estonia expansion, as we believe it will be a key driver of value in any transaction. We have assumed run rate EBITDA of $15-million in 2029, discounted back to 2025 using a rate of 10 per cent.
“Using ‘close-ish’ peers suggests a value of $29.44 per share: MP Materials and Lynas are similar to NEO, albeit imperfect comps. The 2025 estimated EV/EBITDA for MP and Lynas are 15.3 times and 14.3 times. Using the average of these two multiples in 2025 indicate a value of $29.44/sh. Moreover, this is a reflection of potential accretion in the event of M&A with a strategic acquirer.”
Also emphasizing more traditional valuation metrics “still indicate significant potential upside.” Mr. Gillies hiked his target for Neo shares to a Street high of $13 from $7.50. The average is $11.36.
“We believe Neo is well positioned to generate organic growth through increasing use of magnets in all types of automobiles and electronics; continued demand for emission reduction technology in ICE light duty vehicles; and pursuit of new end markets. We expect this growth to be augmented by deployment of a sizable cash position on M&A or new growth projects. In our view, Neo will likely evolve into a larger, better diversified company, and we will reevaluate our investment thesis as these events are announced,” he concluded.
=====
In a research note released Wednesday, Scotia Capital analyst Meny Grauman said Canadian Western Bank’s (CWB-T) proposed acquisition by National Bank of Canada (NA-T) provides “significant upside to the pre-announcement share price, but the take-out valuation pales in comparison to the stock’s glory years.”
“Although we expect the deal to close despite some elevated political risk, and don’t see any competing offers coming over the top, we can’t help but think that ‘this was not the way this story was supposed to end’,” said Mr. Grauman. “That said, we are many years removed from the days when CWB traded at a big premium to its much larger peers. The Canadian banking landscape has changed since then, and in many ways this transaction is the logical conclusion of that.”
Expecting the deal to go through, he moved his target for CWB shares to $52 from $30 to reflect the price at announcement with a “sector outperform” recommendation. The average is $45.98.
=====
Bitfarms Ltd.’s (BITF-T) agreement to lease a facility and develop up to 120 megawatts of power capacity in Pennsylvania is a “positive,” according to ATB Capital Markets analyst Martin Toner, pointing to “more capacity in a safe and stable geography, with access to low-cost power and optionality from curtailment.”
“The location offers opportunities to participate in demand response and other curtailment programs,” he saud. “With the site’s ability to support 8 EH/s [exahashes per second], along with the Company’s recent acquisition of an additional 100 MW in Paraguay, the Company now projects 2025 guidance of over 35 EH/s.”
“The deal is also a positive given the value of U.S. power infrastructure has increased recently following the Core Scientific/CoreWeave deal announced in early June. We are very interested to determine the suitability of this location for HPC.”
After raising his forecast to align with both the company’s new guidance and an increase to his hash rate projections, Mr. Toner increased his Street-high target for Bitfarms shares to $7.50 from $5, reaffirming an “outperform” recommendation. The average is $5.92.
“We change our FY25 estimates to reflect BITF’s 2025 guidance, and increase our year-end2025 hash rate estimate from 24 EH/s to just under 35 EH/s,” he said. “Since the 2025 growth in hash rate is expected to be back-half weighted, the increase only results in a 9-per-cent increase in BTC production and increase in revenue of $53-million. As the Company continues to increase its fleet efficiency through the additions of newer, more efficient miners, and disposals of less efficient miners, we believe the Company’s direct costs per BTC will also improve, resulting in an increase in gross profit of $59-million.”
=====
In other analyst actions:
* Raymond James’ Frederic Bastien raised his AtkinsRéalis Group Inc. (ATRL-T) target to $70 from $62, exceeding the $66 average on the Street with an “outperform” rating in a note titled Investor Day 2024: Pivot Complete; Profitable Growth Now In Focus.
“AtkinsRéalis’ predominantly Canadian investor base spent so much time focusing on the firm’s myriad problems domestically that it was oblivious to its momentum abroad,” he said. “Not anymore. We returned from last week’s Investor Day in Toronto impressed with ATRL’s 2025–2027 Strategic Plan to Deliver Excellence and Drive Growth, and confident in the leadership team’s ability to build further shareholder value from here. In our opinion, AtkinsRéalis can leverage its highly connected global organization and end-to-end capabilities to drive above-average organic growth and margin gains in Engineering Services. There are also opportunities for the firm to roll up small engineering firms to accelerate its ‘Land and Expand’ strategy in the US. On the nuclear side, ATRL is entering a super cycle in enviable position, with exclusive rights to service CANDU reactors and its global reputation as a leader for asset performance. For all these reasons, we reaffirm our constructive recommendation on the stock.”
* BMO initiated coverage of Collective Mining Ltd. (CNL-T) with an “outperform” rating and $8.25 target, below the $10.25 average on the Street.
* TD Cowen’s Brian Morrison increased his target for Aritzia Inc. (ATZ-T) to $46 from $43, maintaining a “buy” rating. The average is $44.38.
* BMO’s Fadi Chamoun cut his Canadian National Railway Co. (CNR-T) target to $188 from $195 with an “outperform” rating. The average is $182.62.
David Leeder