Inside the Market’s roundup of some of today’s key analyst actions
Seeing its current valuation as “compelling,” BMO Nesbitt Burns’ Jackie Przybylowski raised Lundin Mining Corp. (LUN-T) to “outperform” from “market perform” on Wednesday, believing it is now “well-aligned with investor preferences.”
In a research report coinciding to the firm’s revised commodity outlook, the equity analyst emphasized the Vancouver-based company’s “near-term defensive positioning [is] aligned with market caution.”
“Lundin Mining was historically considered a ‘defensive’ base metals mining company – plenty of cash after the sale of its Tenke stake, stable operations, and the generous NCIB in place,” said Ms. Przybylowski. “After a period of operating challenges, Lundin’s base of mature producing assets is again expected to produce at steady state and should generate strong cash flows in 2024.”
She also pointed to the importance of Lundin’s longer-term leverage to copper “through the future development of some of the industry’s best potential major growth projects of the next generation” and its recent derisking actions.
“Acquisitions of Josemaria and Caserones between 2021 and 2023 provide the company with growth optionality,” the analyst said. “We prefer the new slower approach to development, and we believe the company’s growth plan is increasingly credible. Lundin management is now completing tradeoff studies at Josemaria, which will inform a future feasibility study – potentially to be released later in 2024 or in 2025. Fiscal stability discussions with new governments at the provincial and federal levels are ongoing. Discussions with potential financial partners are also ongoing; and the future Josemaria partner could influence the fiscal stability discussions as well as scope and design of the updated feasibility study.
“The market is increasingly cautious on greenfields projects on concerns over escalation of scope, scale, and budget of projects in general. In our view, taking time to derisk all aspects of the Josemaria project will increase the market’s confidence in future project success. Adding a joint venture partner with experience in project design, construction, government relations, and with deeper financial and technical resources would be positive de-risking milestones for the project. A more fulsome investigation of synergy opportunities between Josemaria and other Vicuña district properties as well as nearby Caserones and Candelaria could add further value to both the district and the company.”
Ms. Przybylowski raised her 12-month target for Lundin shares to $16 from $12. The average target on the Street is currently $12.95, according to LSEG data.
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While National Bank Financial analyst Cameron Doerksen remains “constructive” on TFI International Inc. (TFII-T), he is maintaining his “more neutral view” on its stock, seeing it as “close to fair valuation, at least in the near term.”
“Trucking industry peer group multiples based on current year forecasts are running near peak levels (especially for U.S. LTL [less-than truckload] peers) as the stocks anticipate a more constructive freight market later this year and into 2025,” he said. “Indeed, the current FY1 EV/EBITDA multiple for the U.S. LTL peer group is 14.9 times, which is well-above the five-year average of 11.4 times and among the highest we’ve seen for the group in the past ten years (FY1 EV/EBITDA multiples during the peaks of 2021 were 16.0 times-17.0 times). Similarly, TFII currently trades at 10.8 times consensus 2024 EV/EBITDA versus the stock’s five-year average of 9.0 times and close to the 11.0-13.0 times that TFII traded at throughout 2021.
“TFII shares are trading at 21.4 times the 2024 consensus EPS estimate, which is below the weighted average peers (based on TFII’s revenue exposure by segment) of 23.8 times, but above the stock’s five-year average of 16.3 times.”
In a research report released Wednesday, Mr. Doerksen warned the Montreal-based transportation and logistics company’s first quarter of 2024 could come in “soft,” however he thinks it could be poised to benefit from an improving freight market as 2024 progresses and also pointed to several potential earnings drivers.
“Most freight and trucking industry data is still pointing to relatively soft (albeit stabilizing) market conditions in the near term (and we expect a relatively soft Q1 for TFII), but we believe a better freight market backdrop could materialize in the second half of 2024,” he said. “Although recent shipment and tonnage data has been mixed, the U.S. LTL market is showing some signs of strengthening yields as highlighted by the mid-quarter updates from several of the large LTL players as well as the recent data from the BLS.”
“TFII should benefit in 2024 and through 2025 from some company-specific earnings growth drivers. For 2024, management is targeting a U.S. LTL operating ratio of approximately 88 per cent (vs 91.0 per cent in Q4/23) driven by ongoing cost reductions, efficiency improvements and higher quality revenue. The pending acquisition of specialty truckload carrier Daseke will only have a small impact on 2024 results, but management has targeted $0.50+ in EPS accretion for 2025 from the acquisition, which we believe could be a conservative estimate.”
The analyst also expects improvements to TFII’s valuation if the management moves forward with a plan to split into two separate publicly traded companies, separating its LTL/Logistics and Truckload operations.
“Further upside for the standalone Truckload segment could also be realized if TFII can roll in additional specialty TL assets into the business ahead of or in-conjunction with a spin-off,” he said. “Our caution is that we are not convinced the market will necessarily ascribe a peer average multiple to the LTL/Logistics business in a spin-off and overall market valuations could moderate, so potential upside may be more muted. Furthermore, we do not expect a spin-off transaction to occur before mid-to-late 2025 so a company split is not going to be a near-term catalyst.”
Maintaining a “sector perform” recommendation for TFI shares, Mr. Doerksen increased his target to $222 from $209 based on his 2025 forecast. The average on the Street is $212.62.
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RBC Dominion Securities analyst Irene Nattel is reiterating her “constructive” stance on Dollarama Inc. (DOL-T) ahead of the April 4 release of its fourth-quarter financial results, believing it will continue to benefit from difficult macroeconomic conditions for Canadian consumers.
“Narrative during the latest round of earnings releases reinforces our thesis that DOL is the best positioned of any Canadian retailer with an offering and price point that resonates particularly well with the value-oriented consumer spending and sentiment backdrop,” she said. “In our view, the stock remains attractive with excellent visibility and sustainability of growth runway, Dollarcity optionality, and perennial return of capital to shareholders through both dividend growth and share buyback.”
Ms. Nattel is now forecasting quarterly earnings per share $1.06, up 17 per cent year-over-year and in line wit the consensus on the Street of $1.04.
“Our forecasts for FQ4 and beyond are predicated on SSS [same-store
sales] consistent with long-term target range 4-5 percent with F25/26 at the low-mid point, normalizing from doubledigit increases last six quarters,” she said. “We anticipate annual dividend increase 7 per cent and F25 guidance in conjunction with Q4 results.
She raised her SSS estimate by 0.5 per cent to 4.5 per cent, which brings her full year average to 12.1 per cent which is at the high-end of the company’s guidance range of 11-12 per cent.
“Selling strength in Halloween seasonals during FQ3 could be a modest tailwind to this year’s FQ4 that started October 30, a day earlier than prior year,” she said. “Reminder: Over the course of F24, management raised SSS guidance twice, from 5-6 per cent to 10-11 per cent after Q2 and 11-12 per cent after Q3, implying Q4 0.25-4.25 per cent, a notable step-down from the year-to-date average of 14.6 per cent as DOL laps six consecutive quarters of double-digit comps.”
“We anticipate that (modestly) rising unemployment and higher cost of living, notably debt service costs, will sustain consumer value-seeking behaviour in CY2024.”
She added: “The common theme in calendar Q4 reporting is that overall consumer spending remains under pressure, driving enhanced consumer value-seeking behaviour. RBC Cardholder data insights consistent, with weakness in discretionary goods and homerelated spending flat in anticipation of BoC policy pivot.”
With that change, Ms. Nattel bumped her target to $118 from $114, exceeding the $104.92 average, with an “outperform” rating.
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While the fourth-quarter 2023 financial results from Westport Fuel Systems Inc. (WPRT-Q, WPRT-T) fell short of expectations due largely to underperformance from its original equipment manufacturer (OEM) segment, RBC Capital Markets analyst Chris Dendrinos sees “improvements in-progress.”
“No formal guidance was issued but the new CEO, Dan Sceli, introduced three initiatives that will be the focus for 2024 and going forward 1) drive success via the HPDI [High Pressure Direct Injection] JV, 2) improve operational excellence, and 3) reimagine a hydrogen powered future,” he said. “Some progress on costcutting initiatives is already underway with headcount reductions during 2023 from reductions at a facility in Argentina, consolidation efforts in Italy, and the closing of the production plant in India. The company expects additional headcount reductions in 2024. We think WPRT initiates more material changes with the closing of the Volvo JV and could also look to further consolidate the manufacturing footprint in Europe. The closing of the JV will also come with additional disclosures on operations, which will provide greater detail on the underlying performance of the JV and standalone OEM segment.”
After the bell on Monday, the Vancouver-based company reported quarterly revenue of US$87.2-million, up 11.7 per cent and above the Street’s expectation of US$83.9-million. However, an adjusted EBITDA loss of US$10.0-million was lower the consensus of a US$5.4-million loss.
Stressing cash burn is a “focal point,” Mr. Dendrinos said liquified petroleum gas (LPG) pricing “remains a point of strength.”
“Shipments of Euro 6 fuel systems started earlier this year and the company continues to anticipate its Euro 6 and Euro 7 deliveries will generate EUR 255 million in revenue through 2028,” he said. “LPG pricing remains supportive for sales and on average the cost of LPG in Europe is less than half the cost of gas/diesel. IAM sales were up 7 per cent sequentially but down year-over-year on lower sales in Africa and South America, but the company saw higher sales in Europe while gross margins increased to 28 per cent (approximately $7-million) on the positive sales mix and lower electronic component costs. Separately, diesel/natural gas spreads continue to widen, which we think could be a positive precursor to improving LNG truck demand.”
Reducing his 2024 and 2025 financial projections, Mr. Dendrinos lowered his target to US$9 from US$10 with a “sector perform” rating. The average is US$17.40.
Elsewhere, TD Cowen’s Jeffrey Osborne cut his target to US$7.50 from US$8 with a “market perform” recommendation.
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BMO Nesbitt Burns analyst Joel Jackson warns Sigma Lithium Corp.’s (SGML-Q, SGML-X) fourth-quarter update on Monday is likely to be “noisy.”
“Q4 won’t be pretty because of industry-wide multi-month delays in finalizing spodumene price realizations including one Q3 SGML shipment’s provisional price trued up in Q4 - we now model Q4E EBITDA of negative $37-million,” he said.
“First, we assume Q4 spodumene shipments (64kt) are priced US$1k/t (end-of-quarter pricing). Second, we assume the second Q3 shipment (22kt) was also repriced at US$1k/t (vs. Q3 ASP US$2.5k/t) resulting in a $45-million negative retroactive hit in Q4. Third, we assume US$553/t fob port cash costs, slightly better than US$577/t in Q3 (while October was indicated US$485/t, November costs were higher with magnetic separation added). Fourth, we assume G&A stayed high at $15-million.”
Also modifying his expansion schedule for the Vancouver-based company, Mr. Jackson lowered his target for Sigma Lithium’s Nasdaq-listed shares to US$30 from US$38, reiterating an “outperform” recommendation. The average is $47.74 (Canadian).
“Despite continued noise around Sigma, we still see upside as SGML (with sizable Brazilian spodumene assets) continues to re-rate to lithium feedstock producer, and ramps production over subsequent years,” he said. “While an imminent takeout now seems unlikely, there is ample upside if SGML delivers on targets.”
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In other analyst actions:
* Believing “setbacks [are] largely in rearview mirror,” TD Securities’ Menno Hulshof upgraded Vermilion Energy Inc. (VET-T) to “buy” from “hold” and raised his target to $20 from $18. The average target on the Street is $20.58.
“They included material technical reserves revisions (12 per cent of year-end2022 2P reserves, given shifting priorities; note), extended Wandoo downtime, and European windfall taxes (plus the subsequent correction in NBP/TTF prices),” he said. “However, VET is now on a stronger operational footing and has taken its lumps on reserves revisions for the foreseeable future, in our view.”
“On a more competitive return-of-capital footing: VET just migrated to 50 per cent returnof-FCF through base dividends/buybacks. On strip, dividends consume $71-million of 2024 estimated FCF, and we model $256-million of buybacks (10 per cent of current float) vs. $96-million in 2023. We expect it to be fairly aggressive, given the current share entry-point. It also recently increased the quarterly dividend by 20 per cent effective Q1/24, following a 25-per-cent hike in 2023—it now appears committed to ratable-dividend-increases.”
* Jefferies’ Surinder Thind raised his Aimia Inc. (AIM-T) target to $4.50 from $3.25 with a “buy” rating, while the other analyst currently covering the stock, TD Securities’ Brian Morrison, reduced his target to $4 from $5 with a “speculative buy” recommendation. The average on the Street is $4.75.
“The Q4/23 release was disappointing,” said Mr. Morrison. “As management stated on the call, it provides a base from which to build upon going forward. From an operating subsidiary perspective, Bozzetto achieved results in line with expectations, while Cortland was well below management’s fall outlook. Furthermore, while we remain positive on the outlook for Clear Media, the turnaround is taking longer then previously forecast. Lastly, we have incorporated the write-down of Trade X to zero following it entering receivership in December. Overall, the Q4/23 release we summarize as negative.”
“We see a path to attractive upside to Aimia’s share price, but acknowledge our thesis has been pushed out, largely due to the operational performance at Clear Media/Courtland. Having updated our SOTP to incorporate these items, we are lowering our target price.”
* Haywood Securities’ Gianluca Tucci cut his Bragg Gaming Group Inc. (BRAG-T) target to $14 from $15, above the $11.63 average, with a “buy rating.
* CIBC’s Kevin Chiang raised his targets for Canadian National Railway Co. (CNR-T) to $183 from $177 with a “neutral” rating and Canadian Pacific Kansas City Ltd. (CP-T) to $130 from $124 with an “outperformer” recommendation. The averages are $177.58 and $118.68, respectively.
“We have adjusted our estimates for the Canadian rails as we mark to market current volume trends, which are better than we had expected,” said Mr. Chiang. “Our full-year EPS estimates are broadly unchanged. For Q1/24, our EPS expectations are modestly below consensus estimates, reflecting a tougher winter versus last year and higher stock-based comp for CPKC. We have raised our target multiples to reflect the volume momentum exiting the first quarter ... While CPKC trades at a premium valuation, we view this as deserved given its industry-leading earnings growth as we look out through the balance of this decade.”
* RBC’s Andrew Wong cut his target for Largo Inc. (LGO-T) to $5 from $8 with an “outperform” rating. The average is $6.40.
“We continue to see significant potential value in Largo if the company can execute on operational improvements and successfully ramp-up long-term value-add projects (pigments, LCE). Additionally, while we see continued near-term challenges to vanadium prices, we expect long-term prices to recover as macro conditions improve,” said Mr. Wong.
* Berenberg’s Richard Hatch raised his Wheaton Precious Metals Corp. (WPM-N, WPM-T) target to US$54 from US$52 with a “buy” rating. The average is US$56.20.
David Leeder