Inside the Market’s roundup of some of today’s key analyst actions
BoA Securities analyst Ebrahim Poonawala upgraded a trio of Canadian bank stocks on Monday.
Touting its recent “steady execution” and believing macroeconomic visibility “should help,” he raised Canadian Imperial Bank of Commerce (CM-T) to “neutral” from “underperform,” pointing to a “reduced probability of tail risk events for the Canadian consumer/economy on the back of declining interest rates (70 per cent of revenues indexed to Canada).”
“Our recent investor meeting with CFO Hratch Panossian increased our confidence in the pre-tax pre-provision (PTPP) defensibility driven by relative margin stability and a laser focus on extracting franchise efficiencies,” he added. “These should enable necessary investments while driving positive operating leverage. We forecast FY24 revenue growth of 3.3 per cent vs. expenses up 3 per cent. We revise FY24/25 estimated EPS to $6.61/$7.12 from $6.50/6.65.”
Mr. Poonawala raised his target for CIBC shares to $66 from $63. The average target on the Street is $59.68, according to Refinitiv data.
“We believe that the Canadian Imperial Bank of Commerce - CM offers a balanced risk/reward with our expectations for a strong capital position, consistent execution (in what has been a difficult macro backdrop), offset by our cautious view on the industry-wide operating environment and potential growth headwinds from consumer credit,” he said.
Citing a return on equity (ROE) defensibility and accelerating EPS growth, he raised Royal Bank of Canada (RY-T) to “buy” from “neutral” previously.
“Best-in-class ROE, not just in Canada but vs. global GSIB peers – provides significant cushion to navigate an uncertain macro backdrop,” he said. “Although our forecast implies a ROE of approximately 14 per cent we see potential that mgmt. could achieve its 16-per-cent-plus ROE target over the medium term despite higher regulatory capital requirements. During the 5yrs prepandemic RY generated an avg. ROE of 17.3 per cent while operating with a CET1 capital ratio of 11.2 per cent vs. 12 per cent plus expected on a go forward basis.”
Mr. Poonawala thinks synergies from RBC’s deal to acquire HSBC Bank Canada “provide timely self-help.”
“The transaction should further cement Royal’s #1 market share in Canadian banking and offers significant expense synergies with management outlining expectation for 50-per-cent cost saves,” he said. “We note that potential concessions to the federal government in order to secure deal approval could dilute deal synergies, but we don’t expect this to be a game changer with regards to the medium-to-long-term EPS/ROE trajectories.”
“While 2024 is likely to be subdued on the earnings growth front for Royal and its peers, we forecast EPS growth accelerating in FY25 to 10 per cent or more (6 per cent above consensus) driven by rebounding GDP growth starting 2H24, improving investment banking and wealth management revenues, declining credit costs (PCLs), relatively defensible margin despite potential for BoC rate-cuts. Revenue diversification across fee/NII 50 per cent/50 per cent and retail/capital markets/wealth, Canada/foreign (60 per cent/40 per cent) are also positives.”
His target for RBC shares jumped to $146 from $130, implying 11-per-cent upside from current levels, plus 4.3-per-cent dividend yield. The average is $134.85.
“We view risk/reward for RY as attractive given best-in-class execution, strong positioning to compete in a digital first banking world, and our expectations for growth tailwinds following the acquisition of HSBC Canada,” he concluded.
Seeing it “headed towards terminal velocity,” the analyst also raised Bank of Montreal (BMO-T) to “buy” from a “neutral” recommendation.
“In addition to having idiosyncratic drivers for EPS growth, we view the stock as a secular re-rating story given the ongoing franchise transformation,” he said. “We revise FY25 EPS to $13.46 from $12.75 on outlook for improved efficiency, lower credit costs.”
“Our meeting last week with CEO Darryl White and CFO Tayfun Tuzun highlighted the laser focus with which mgmt. is pursuing its strategy to gain market share, boost franchise efficiency and optimize capital allocation. Mr. White has rejuvenated the franchise since taking over as CEO (2017), prioritizing narrowing the efficiency gap vs. peers, striking strategic deals to improve market share, refreshing leadership team.”
Seeing its geographic diversity as a “significant positive” and also pointing to the gains as synergies from its Bank of the West deal emerge, Mr. Poonawala increased his target to $145 from $120, implying 16-per-cent upside. The average is $129.21.
“BMO offers an attractive risk/reward given deal synergies (Bank of the West), strong execution, geographic diversification (55-per-cent Canada / 45-per-cent US), and conservative underwriting (positive heading into a slowing macro backdrop),” he concluded.
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Stifel analyst Martin Landry is “moving to the sidelines” on Gildan Activewear Inc. (GIL-N, GIL-T) until the “drama” around the departure of founder and CEO Glenn Charmandy “abates,” downgraded his recommendation to “hold” from “buy” previously.
Gildan Activewear ousted CEO after showdown with board over grand expansion plan, director says
“Last week, several shareholders announced publicly their disagreement with the company’s decision to terminate Glenn Chamandy the founder and previous CEO of Gildan,” he said. “[Sunday], Gildan announced the appointment on Gildan’s BOD of Chris Shackelton, Managing Partner of Coliseum Capital Management and a large shareholder of Gildan, who is in favor of the changes made by the BOD. This appointment suggests that Gildan’s BOD is unlikely to reinstate previous CEO Glenn Chamandy. In our view, these events create significant distraction for the BOD and the management team and could result in a proxy fight. This situation creates uncertainty for investors and shareholders, several of which could stay on the sidelines until things get clarified. Hence, Gildan’s shares could be range bound near-term, prompting us to change our rating.”
Mr. Landry estimates at least 25 per cent of the company’s shareholder base has already supported the request to reinstate Mr. Chamandy and expects that number to rise, which could result in a proxy fight.
“The announcement of Vince Tyra as new CEO of Gildan effective February 12, 2024 raises questions,” he said. “In our discussions, investors have expressed concerns about Mr. Tyra’s limited experience running a public company, which could be useful given the very public situation currently. In our discussions, investors also have raised Mr. Tyra’s limited manufacturing experience, something surprising given that Gildan has a significant manufacturing base, which has been an integral part of the strategy and success of the company. We have not had a chance to speak with Mr. Tyra yet.
“Uncertainty is likely to keep investors on the sidelines. We believe that most investors will be hesitant to invest in Gildan until the situation gets resolved. Given that there is a potential scenario of a proxy fight, we believe the current uncertainty could be prolonged. In our view, this will impact the company’s share price and valuation.”
Mr. Landry lowered his target by US$3 to US$34. The average is currently US$38.69.
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National Bank Financial analyst Rupert Merer said an early reading on the fourth quarter for Boralex Inc. (BLX-T) looks “good” and sees falling yields bringing “tailwinds back to renewable developers.”
“We updated Q4 estimates with a slight reduction in our generation forecast to 2,245 GWh (was 2,271 GWh) with weaker wind anticipated in Quebec and Ontario, offset by strong wind in France,” he said. “We plan to refine our forecasts after the end of the month. However, with solid performance so far in Q4E, our adj. EBITDA forecast is $199-million (was $201-million), ahead of consensus at $195-million.”
In a research note released Monday, Mr. Merer predicted Montreal-based company could be poised for contract wins on both sides of the border as well as internationally in the months to come.
“In Canada, we believe BLX submitted a bid in the LT1 battery call in Ontario on Dec. 12th, where we should hear results in Q2′24,” he said. “BLX won contracts for 380 MW of batteries in Ontario earlier this year, which could move towards financial close soon. BLX has a number of developments in Quebec, including its 200 MW Apuiat project (under construction), 365 MW of wind bid into a recent RFP and 1,200 MW of wind it is building with Hydro Quebec and Energir over the next few years. The Canadian ITC for renewable energy could get passed soon, and would support BLX’s plans. It also has an opportunity in New York to re-bid some of its 740 MW of solar projects with an upcoming expedited RFP, where results could come in April. BLX is also building its 106 MW Limekiln project in Scotland, with future potential there and in France too.”
“In its last five-year plan, BLX targeted $240-260-million in FCF and 4.4 GW by 2025. With delays to its NY solar plans, it may be late to this target without M&A. However, with an active pipeline of opportunities, we believe it should have visibility on getting there relatively soon after its original timeline. We have yet to see much M&A this cycle, and although BLX has good liquidity, we believe it would need to recycle more assets to get deals done, though a rising share price could help.”
In response to a recent drop in the Canada 10-year bond yield, Mr. Merer lowered his risk-free rate to 3.2 per cent (was 3.9 per cent), leading him to raise his target for Boralex shares to $41 from $38, maintaining an “outperform” recommendation. The average on the Street is $39.30.
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In a separate report, Mr. Merer said he sees investor sentiment toward Northland Power Inc. (NPI-T) “shifting,” predicting a “solid” fourth quarter and emphasizing the importance of lower interest rates as well as “continued progression” at its Hai Long offshore wind project in Taiwan and Baltic Power joint venture project in Poland.
“With financing closed on Baltic Power and Hai Long, investor focus has shifted to construction execution,” he said. “Alongside its investor update to come in February, we should get a detailed construction update on NPI’s offshore projects. With contractors and suppliers secured and a history of solid execution on large offshore builds, we believe NPI should deliver $15.5-billion (including partner’s share) of construction projects by the end of 2026, representing more than $500-million (net) in adj. EBITDA annually. NPI is also making progress in its onshore portfolio, with its Oneida battery facility to come online in 2025, and 1.2 GW of solar in Alberta progressing.”
Seeing funding catalysts “coming,” he added: “Recently, NPI extended the maturity of its $500 mln short-term credit facility related to Hai Long to December 31st, to bridge its financing until it closes a sell-down of 29.4 per cent of its stake in the project to Gentari. This could now come in Q1, though NPI could further extend the credit facility if needed. We believe the deal has been delayed largely by paperwork. Longer term, other sell-downs could come in NPI’s non-core markets to fund growth, namely its 130 MW La Lucha solar facility in Mexico and regulated electric utility in Colombia.”
Trimming his renewable generation forecast for the quarter based on “weaker weather resource in NPI’s onshore assets in Ontario, Quebec and New York,” Mr. Merer lowered his adjusted EBITDA forecast by $8-million to $361-million, remaining above the Street’s forecast of $354-million.
However, he increased his target for Northland shares to $32 from $30 after adding its offshore projects to his valuation with an “outperform” recommendation. The average is $31.83.
“With NPI trading at a 10.3-per-cent implied IRR, we believe there is compelling upside potential for the long-term investor,” he said.
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Stifel analyst Michael Dunn thinks Canadian Natural Resources Ltd.’s (CNQ-T) “unparalleled oil and natural gas scale, reserve life, land base, unbooked inventory, cost structure, and FCF generation continue to set it apart from peers.”
In a research note released Monday, he raised his adjusted funds from operations estimates for the Calgary-based company for both 2024 and 2025 in response to last week’s release of its 2024 guidance.
“Notables from the update included another 12 mbbl/d [thousand barrels per day] of upgrader capacity debottlenecking, 5.6 mbbl/d of which should be online by year-end 2024, and a busy year for abandonment spending and turnarounds,” he said. “CNQ remains on track to reach the 100-per-cent FCF payout threshold net debt level of $10 billion in 1Q24. At recent strip prices ($72/bbl WTI) for 2024, we forecast FCF exceeding capex and the current dividend by $2.2 billion ($2.00 per share).”
In response to the recent pullback in oil prices, Mr. Dunn trimmed his target for Canadian Natural shares to $100 from $106 with a “buy” rating. The average is $98.20.
“The list of major global oil and gas companies with long-term track records of value creation rivaling CNQ is scarce to zero,” he said. “Its FCF generation is driven by its low-cost structure, long-life assets, and low decline rate, while its Management and Board have a long track record of execution on operational, strategic, and M&A initiatives. It seems clear that elements within CNQ that have contributed to its long-term success over the years (i.e., management and corporate governance structures, corporate culture, succession planning success, lean operations, strategic astuteness) are difficult, if not impossible, for the rest of industry to replicate. The company has raised its dividend for 24 consecutive years, and expects to start returning 100 per cent of FCF to shareholders starting in early 2024.”
Elsewhere, Jefferies’ Lloyd Byrne cut his target to $96 from $98 with a “hold” rating.
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Stifel analyst Cody Kwong thinks Lucero Energy Corp.’s (LOU-X) 2024 budget “preserves cash and financial flexibility for future opportunities.”
“There were no surprises in Lucero’s 2024 budget that was laid out to achieve modest growth in efforts to optimize FCF from the business,” he said.
On Thursday, the Calgary-based producer said it expects annual average production of 10,100 barrels of oil equivalent per day next year following the sale of its non-core assets, falling in line with the Street’s expectation and implying 3-4-per-cent growth year-over-year. Its capital budget of $88-million also met projections.
“With our updated outlook forecasting FCF of over $25-million, the company is able to execute the full balance of its 5-per-cent NCIB and still build a cash position that will aid in the financing of any strategic acquisition opportunities that arrive,” said Mr. Dunn.
With the response drop in oil prices, he cut his target for Lucero shares to 85 cents from 90 cents with a “buy” rating. The average is 92 cents.
“With cash in hand, we now look forward to the company deploying this on assets the company will deem as core with higher working interests and operational control,” he concluded. “Further, Lucero introducing a return of capital element should capture favor amongst investors that are now high grading companies that are moving in this direction. We believe the market is waiting for the company to deploy its cash position on strategic acquisition opportunities that would build critical mass to its production outlook while also replenishing its drilling inventory that would elevate the sustainability characteristics of LOU.”
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CIBC World Markets ‘ Stephanie Price expects the Canadian telecommunications sector to outperform in 2024, pointing to moderating interest rates , more regulatory “certainty,” and a “stabilizing” average revenue per user environment.
In a research report released Monday, the equity analyst said she’s projecting “flattish” year-over-year ARPU with 6-per-cent adjusted EBITDA growth.
“We regard the telecom sector as attractive from a valuation perspective, trading at a 0.3 times discount to five-year average EV/EBITDA,” said Ms. Price. “We expect that moderating interest rates should help valuation. CIBC Economics expects interest rates to stabilize in 2024 and a 75 bps reduction in the year. The historical relationship between telecom valuations and interest rates suggests our coverage could see an average 0.2 times increase in EV/EBITDA from falling rates.”
“Our top picks are Rogers, Quebecor, and TELUS,” she addded. “We foresee upside from Rogers’ Shaw synergies, with faster-than-expected integration to date. Post-Freedom acquisition, we expect Quebecor to perform well in 2024 as it increases its wireless share. TELUS’ recent restructuring has positioned it well for EBITDA and FCF growth heading into 2024.”
After adjusting her 2024 estimates and introducing her projections for fiscal 2025, Ms. Price made target changes to the sector’s stocks. They are:
* Quebecor Inc. (QBR.B-T, “outperformer”) to $43 from $38. Average: $39.21.
Analyst: “We regard Quebecor as the most attractively valued stock within our telecom coverage. The stock is trading at 6.4 times EV/EBITDA, a 60 bps discount to its five-year average and a 180 bps discount to the Big 3 despite its national footprint. We expect the valuation discount to narrow as the company continues to fulfil its national strategy.”
* Rogers Communications Inc. (RCI.B-T, “outperformer”) to $79 from $69. Average: $75.25.
Analyst: “We regard Rogers as well positioned heading into 2024. In a more competitive wireless market, Rogers continues to gain share, with its share of net adds increasing to 39 per cent in Q3, up 200 bps sequentially. We expect flattish industry ARPU growth in 2024 and wireless service revenue driven by subscriber growth, so we believe Rogers’ strength amongst immigrants and new Canadians will allow it to continue to lead the market in net adds.”
“We view Rogers as undervalued relative to the other two of the Big 3, trading at a discount, compared to a historical valuation that has been relatively in line ... despite its new, national footprint. As the company realizes Shaw synergies and the market gains greater comfort on leverage, we expect this discount to narrow.”
* Telus Corp. (T-T, “outperformer”) to $28 from $26. Average: $26.99.
Analyst: “TELUS will benefit from its recent restructuring, which the company expects to lead to $325-million in annualized cost savings by mid-2024. We expect TELUS’ FCF to ramp up significantly next year and forecast FCF of $2.2-billion in 2024, up from $1.5-billion this year given the completed fibre rollout, the impact of the recent restructuring and fewer headwinds at TELUS International (TI). FCF growth supports TELUS’ 7-10-per-cent dividend growth target through 2025 and we estimate 7-per-cent dividend growth in 2024, with a payout ratio of 82 per cent.”
* BCE Inc. (BCE-T, “neutral”) to $56 from $55. The average on the Street is $57.30.
* Cogeco Communications Inc. (CCA-T, “neutral”) to $63 from $65. Average: $71.20.
* Cogeco Inc. (CGO-T, “neutral”) to $58 from $57. Average: $75.
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While acknowledging “heightened caution on the outlook for IT spending near-term” remains a near-term investor concern, Stifel analyst Suthan Sukumar thinks CGI Inc.’s (GIB.A-T) “solid forward visibility with recent bookings/backlog strength, margin expansion potential with an improving business mix/ongoing cost optimization, and share buy-backs, continue to provide a resilient outlook for double-digit EPS growth.”
“CGI is seeing growth in IT budgets, offset by more caution on spending near-term given macro uncertainty, as reflected in a slowdown in shorter-term consulting work,” he added. “That said, larger managed services deal cycles were said to be moving faster given high-ROI potential, with CGI noting opportunity to share a portion of cost savings upfront with clients to close longer-term deals (10-years). A 114-per-cent TTM [trailing 12-month] book-to-bill (up 120 per cent in managed services) and $26-billion backlog (nearly 2 times revenues) exiting F23 provides solid forward visibility, though delayed project starts could impact near-term revenue conversion. Notably, CGI sees low cancellation risk for contracted backlog given strong business cases/client urgency, with break-fees serving as a deterrent.”
After hosting investor meetings in Chicago last week with the Montreal-based company’s President and CEO George Schindler, Mr. Sukumar sees organic growth “in play” with it poised to “unlock” further expansion.
“CGI has made strides pivoting from a historical inorganic growth focus to more of an organic growth focus, as reflected in the 11-per-cent (8-per-cent organic CC) growth seen last year (ahead of average growth rates in the low to mid-single-digits),” he said. “Structural improvements in the company’s operating model and go-to-market strategy, from de-emphasizing low-margin infrastructure services (now 10 per cent of revenues vs. more than 22 per cent 6+ years ago), complementing a local client proximity-based go-to-market model with both near-shore and global off-shore delivery, to leveraging software-based IP and global alliances with the likes of Google, Amazon, Salesforce, etc, have enhanced the company’s organic growth profile and opportunity over time, as reflected in management compensation, which is now tied to both organic growth and margin expansion. CGI is targeting a revenue mix of 70-per-cent managed services/30-per-cent SI&C (20-per-cent systems integration and 10 per cent consulting), vs. current 54 per cent/46 per cent (41 per cent/5 per cent), with 30-per-cent IP penetration (up from 23 per cent currently), which it expects to drive the highest growth and margin expansion potential ahead.”
Also touting “generally positive” client and end-markets trends and a “stronger” outlook for the second half of 2024, he raised his target for CGI shares to $160 from $145 in response to recent multiple expansion of its global IT services peers, keeping a “buy” recommendation. The average is $157.25.
“We believe the structural improvements to CGI’s differentiated operating model and go-to-market strategy positions the company well to capture a greater share of IT budgets, particularly in light of increasing vendor consolidation, thus keeping us constructive on stronger organic growth prospects ahead, with further growth upside from an M&A environment that appears poised for more activity,” said Mr. Sukumar.
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In other analyst actions:
* JP Morgan’s Tien-Tsin Huang upgraded Lightspeed Commerce Inc. (LSPD-T) to “neutral” from “underweight” with a US$19 target. The average is US$19.83.
* JP Morgan’s Reginald Smith raised his Nuvei Corp. (NVEI-Q, NVEI-T) target to US$32 from US$27 with an “overweight” recommendation. The average is US$27.19.
* CIBC’s Stephanie Price bumped her Enghouse Systems Ltd. (ENGH-T) target to $37 from $34.50 with a “neutral” rating, while TD Securities’ Daniel Chan moved his target to $38 from $36 with a “hold” rating. The average is $39.33.
“We view Enghouse’s M&A integration as best-in-class and see an attractive M&A environment for the company, which ended FQ4 with $240-million in net cash,” Ms. Price said. “That said, organic headwinds remain, with the company continuing to ramp up its SaaS offerings amid changing customer preferences. We retain our Neutral rating, increasing our price target.”
* RBC’s Geoffrey Kwan increased his target for TMX Group Ltd. (X-T) to $34 from $33 with a “sector perform” rating. The average is $32.63.
“We forecast the VettaFi acquisition to be marginally accretive to our 2024 EPS forecast and 4-per-cent accretive in 2025,” he said. “While we like the acquisition for its business mix diversification and growth potential standpoint, with an acquisition multiple of 19.0 times EV/EBITDA (2024 estimates) (16.3 times including the tax benefit), we think it is important for the TMX to successfully execute on VettaFi’s growth strategy. We note that Trayport has delivered strong growth since the TMX acquired it in 2017. We estimate pro forma leverage is 2.8 times net debt/NTM [next 12-month] EBITDA, which we think is manageable and does leave some capacity to complete bolt-on acquisition(s).”