Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Patrick Kenny thinks Capital Power Corp.’s (CPX-T) early U.S. re-contracting has unlocked an “early valuation re-rate.”
Shares of the Edmonton-based independent power generation company surged 7.7 per cent on Thursday after it reported third-quarter adjusted earnings before interest, taxes, depreciation and amortization(EBITDA) of $401-million, topping the analyst’s $368-million estimate as well as the Street’s forecast of $373-milion, which he attributed to “strong contributions from its U.S. facilities as it completed operational integration of Harquahala while on track to fully integrate La Paloma, partially offset by lower realized Alberta power pricing.” Capital Power also reiterated its 2024 adj. EBITDA guidance range of $1.310-$1.410-bilion (versus Mr. Kenny’s $1.371-billion projection).
“The company’s strategic expansion into key U.S. markets (WECC, MISO, PJM) is paying dividends with rising capacity factors at its U.S. natural gas-fired facilities as power demand continues to rise and baseload thermal capacity remains largely stagnant,” he said. “With an average weighted contract length of 5-7 years, the company is in discussions to extend U.S. facility contracts well ahead of previous timelines with new terms expected to reflect the heightened value of dispatchable facilities in addition to upgrade/expansion opportunities. Meanwhile, in Canada, the Genesee Repowering project remains on time and within budget ($1.55-$1.65-billion) to achieve combined cycle in Q4/24, while CPX is working towards developing up to 1.5 GW of additional capacity at the facility to accommodate potential data center customers.”
After making “modest” adjustments to his forecast to reflect the firm’s updated commodity price deck, including “tempered” Alberta power and natural gas pricing, Mr. Kenny raised his target for Capital Power shares to $56 from $47, reiterating an “outperform” recommendation. The average is $50.60.
“We highlight a refreshed sum-of-the-parts valuation of $57 (was $47), driven largely by a revised 10.0 times multiple for the U.S. Contracted segment (was 8.0 times) reflecting the early recontracting discussions and upgrade/expansion opportunities,” he said. “As such, our cost of equity assumption declines by 100 basis points, with our target moving up $9 to $56, which is based on a risk-adjusted dividend yield of 4.5 per cent (was 5.5 per cent) applied to our 2025 dividend estimate of $2.69/sh, a 10.0 times multiple (was 9.5 times) of our 2025e Free-EBITDA and our DCF/sh valuation of $56.50 (was $48.50).”
Elsewhere, Scotia Capital’s Robert Hope upgraded Capital Power to “sector outperform” from “sector perform” and raised his target to $60 from $46.
“Power’s Q3 call was, in our mind, one of the most bullish calls across our coverage in recent history and highlighted numerous upside catalysts,” he said. “Power demand is increasing across the continent with users looking to recontract capacity and support new investments. Capital Power is in discussions to extend contracts in the U.S. that expire towards the end of the decade at higher rates to better reflect the market environment. This provides another avenue of upside for the shares. While Alberta pricing remains depressed (trough levels), data center announcements (90 MW announced recently) could add contracting opportunities and support overall higher pricing. We continue to see the valuation of gas power assets re-rate higher as visibility on the level and duration of their cash flows improve. As such, we have increased our valuation multiple on Capital Power’s gas assets, which increases our target price to $60 from $46. Capital Power is currently trading at 8.8 times 2025E EV/EBITDA, and as such, we expect some multiple expansion as our target implies a 9.3 times multiple. Given room for further valuation expansion and numerous positive catalysts, we upgrade the shares to Sector Outperform.”
Other analysts making adjustments include:
* Desjardins Securities’ Brent Stadler to $60 from $56 with a “buy” rating.
“The 3Q24 results and call gave us further confidence in the recontracting outlook for CPX’s thermal fleet; upon recontracting, it is likely that CPX will be able to (1) recontract for a longer term, (2) increase the price, (3) utilize more of the existing capacity, and (4) potentially expand facilities,” he said. “Taking a more bullish view on recontracting potential increases our target ... CPX has increased confidence in the potential to power data centres both north and south of the border, which is also positive.”
* ATB Capital Markets’ Chris Murray to $55 from $52 with a “sector perform” rating.
“The conference call focused on fundamental tailwinds for the US business and commentary around data center opportunities for the fleet. US fundamentals are showing an increase in gas generation capacity factors as firm reliable power continues to increase in demand. The data center conversation pointed to opportunities for CPX across the fleet, but highlighted Alberta and Genesee as a unique spot to meet near-term demand and offer reliable power on a competitive timeline. CPX has a total of 1.5 GW of potential data center load demand currently set in the AESO queue, but indicated this is its internal view and not tied directly to negotiations or a single customer. Management also indicated on the call that renewable dispositions or sell downs could be utilized as a source of funding new projects. With this update we are increasing our price target,” said Mr. Murray.
* TD Cowen’s John Mould to $61 from $57 with a “buy” rating.
“We attribute [Wednesday’s] share price reaction (up 7.7 per cent) to optimism around the data centre opportunity, with CPX highlighting the 1.5 GW of load connection requests it submitted to Alberta’s grid operator in recent months,” said Mr. Mould. “We view CPX’s Genesee site as well situated to participate in this potential growth.”
* BMO’s Ben Pham to $56 from $47 with a “market perform” rating.
“The Q3/24 earnings report reinforced the benefit of CPX’s diversified asset footprint,” he said. “Lower Alberta power prices weighed on Alberta Commercial results, but its U.S. contracted gas plants more than offset, with stronger utilization. Also, the value of CPX’s thermal fleet is rising with increased ability to recontract, extend asset life, and potentially benefit from data center co-location deals (particularly in Alberta).”
* RBC’s Maurice Choy to $53 from $44 with a “sector perform” rating.
* CIBC’s Mark Jarvi to $54 from $52 with a “neutral” rating.
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Secure Energy Services Inc. (SES-T) is “continuing to surprise to the upside,” said Raymond James analyst Michael Barth in response to better-than-expected third-quarter results.
The Calgary-based company’s shares soared 9.8 per cent on Wednesday after it reported adjusted EBITDA of $127-million, topping the analyst’s expectation by 8 per cent ($118-milion) and the Street’s forecast by 6 per cent ($120-million). The beat was driven by gains in both its Waste Management and Energy Infrastructure segments.
“In our view, the biggest standout within Waste Management this quarter was industrial landfill volume, which was up 1 per cent year-over-year despite the lost volumes from six divested landfills earlier this year,” he said. “While the MD&A attributed that volume growth to a combination of strength from ‘remediation and drilling’ activity, our conversation with the company suggests that the bulk of higher volumes was coming from remediation work. That should be more permanent in nature (although lumpy) than we first thought, and drives both our near-term and long-term estimates slightly higher.”
While Secure reaffirmed its full-year 2024 guidance, Mr. Barth said management is indicating that adjusted EBITDA should come in at the high end of the previous $470-$490-million range.
“The less cyclical parts of the business are continuing to show positive same-store-sales (like produced water and waste volumes), and its worth noting SES also indicated that they would be increasing prices by 5 per cent again starting near the end of 2024 (similar to what we saw in 4Q23,” he said “The cyclical part of the business, while less impactful today, is also likely experiencing tailwinds with a pick-up in drilling activity following the TMX in-service and ramp-up at LNG Canada.
“As such, our FY2024 Adj. EBITDA estimates are revised higher to $495-million ($482-million prior); recall that initial guidance at the beginning of the year called for FY2024 Adj. EBITDA of $440-$465-milllion, so we’re essentially modeling a 10-per-cent positive revision versus those initial estimates. Given the strength we’re seeing across the business, we’ve also revised our 2025+ estimates higher in tandem.”
Also seeing “excess” liquidity persisting and emphasizing “that comes with lots of optionality,” Mr. Barth raised his target for Secure shares to $15.75 from $14.25, reaffirming an “outperform” recommendation The average is $17.18.
“Our return-to-target has compressed meaningfully from when we initiated in January with SES up 60 per cent year-to-date (vs. the TSX at up 17 per cent), but we still see reasonable value today,” he said. “The under-levered balance sheet, relative stability in cash flows, organic volume tailwinds, M&A roll-up opportunity, and organic capital deployment initiatives all support that view. SES is far from our highest-return idea, and we also see some better risk-adjusted returns elsewhere in our coverage universe, but on a stand-alone basis we still believe SES offers a decent risk-adjusted return at these levels and reiterate our Outperform rating.”
Elsewhere, others making changes include:
* ATB Capital Markets’ Nate Heywood to $18 from $17 with an “outperform” rating.
“SES continues to see the benefits and relief following the alleviation of the overhang tied to the TEV acquisition and related Competition Tribunal decision. With roughly two-thirds of the acquired TEV business remaining with SES, the pro forma entity continues to offer a resilient cash flow base and attractive returns to shareholders. In the near term, Secure is proceeding with modest growth initiatives, largely directed at contracted/production-based cash flows. This follows a recent emphasis on free cash flow generation, returns to shareholders and the repayment of current indebtedness. With the new-found flexibility following the $1.1-billion asset sale, SES has prioritized the repayment of debt and has been actively repurchasing shares with its NCIB, the $150-milion repurchase agreement, and the completion of a $250-million SIB (tender: $11.40 | range: $11.40-$13.00). Going forward, we expect SES to maintain a healthy balance sheet (targeting 2.0-2.5 times total debt/EBITDA ATBe 2024: 0.9 times ) while evaluating growth opportunities across the basin, including M&A opportunities around predictable and stable cash flow generating assets.”
* Eight Capital’s Jamie Somerville to $22 from $20 with a “buy” rating.
“SES remains our top pick in the sector due to its attractive relative valuation, with re-rating potential, as well as balance sheet strength, operating margins, technical factors, and growth potential,” he said.
* National Bank’s Patrick Kenny to $17 from $14 with an “outperform” rating.
“Of note, with an established leverage target of 2.0-2.5 times, we highlight ample dry powder of more than $500-milllion to pursue further organic growth and M&A opportunities as well as incremental share repurchases,” he said.
* Scotia’s Konark Gupta to $18 from $16 with a “sector outperform” rating.
“Although EBITDA has been declining year-over-year this year due to prior divestitures, the underlying trends are solid, recent tuck-ins are contributing nicely and SES is wisely deploying capital for future growth,” said Mr. Gupta. “This sets the stage well for 2025 when the company not only starts lapping divestitures but also likely deploys incremental capital on organic and inorganic opportunities. In the near term, it remains focused on creating shareholder value through buybacks with its conservative balance sheet. Despite a significant year-to-date gain, SES is attractively trading at 7.6 times EV/EBITDA on 2025 estimates vs. Big4 peers at 14.5 times and niche peers at 10 times, along with a stronger FCF yield of 6.5 per cent.”
* BMO’s John Gibson to $20 from $17 with an “outperform” rating.
“Secure’s Q3/24 results were once again strong, with higher landfill volumes and Clearwater growth driving the financial beat. The company continues to aggressively repurchase its shares, while we await its upcoming 2025 guide in December. In our view, this strategy is largely working, with investors beginning to realize the significant valuation disconnect vs. waste/energy infrastructure peers,” said Mr. Gibson.
* CIBC’s Jamie Kubik to $16 from $15 with a “neutral” rating.
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MDA Space Ltd. (MDA-T) is “primed to attract investor interest, offering what we see as an asymmetric pure-play bet with limited downside,” said Desjardins Securities analyst Benoit Poirier.
In a report released Thursday titled Pure-play entry into “Space Race 2.0″, he initiated coverage of the Brampton, Ont.-based provider of space technologies with a “buy” rating, seeing it benefitting from rising demand in key segments such as satellite manufacturing, driving a backlog approaching $5-billion, in an industry “set to outpace global GDP growth.”
“MDA Space stands out as one of the few publicly traded pure-play space companies, uniquely positioned to capitalize on the growing space ecosystem,” said Mr. Poirier. “We forecast that MDA should be able to grow revenue at a 26-per-cent CAGR [compound annual growth rate] from 2023–26, reaching $1.6-billion. The company is rapidly advancing in important markets such as LEO (low Earth orbit) satellite manufacturing, with key contracts in place from major players such as Globalstar and Telesat, driving a strong backlog which is approaching the $5.0-billion level. Positioned in an industry set to outpace global GDP growth, MDA benefits from rising demand for space solutions, particularly in its three business segments: Satellite Systems; (2) Robotics & Space Operations; and (3) Geointelligence.
“With ample production capacity coming online, it is set to scale quickly to meet demand — a critical differentiator. In our view, the market remains overly focused on near-term cash flow, and we see a mispriced investment opportunity as we believe the company’s elevated growth potential is underappreciated. If MDA’s growth continues as projected, we expect EBITDA to double over the next three years, likely driving a multiple re-rating. As the only pure-play space company on the TSX, MDA is primed to attract investor interest, offering what we see as an asymmetric pure-play bet with limited downside (105-per-cent potential upside vs only 18-per-cent downside in our bull vs bear scenario analysis), exposure to a rapidly expanding sector with high barriers to entry and myriad catalysts on the horizon.”
Mr. Poirier outlined five reasons why he likes MDA: “(1) It will benefit from its position in an industry set to grow at GDP+, propelled by secular tailwinds. (2) The recent space industry trend toward greater commercialization/privatization. (3) A surplus of capacity is set to come online in late 2025; MDA is well-positioned to attack the high-growth LEO constellation market. (4) MDA is nearing the end of its heavy capex investment cycle. (5) It should generate significant investor interest as one of the only ways to play the industry.”
Believing net leverage has “now peaked” and believing the market is “currently underestimating the positive cash-conversion cycle dynamics (payments exceeding/front-running revenue uptick) that come with the Telesat contract and recent government funding,” the analyst set a Street-high 12-month target price of $26 per share. The current average is $19.13.
“In a bull-case scenario (based on 2026 estimates), we calculate the stock could be worth $43 per share, translating into an attractive two-year CAGR of 43 per cent,” he concluded.
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After the late Wednesday release of weaker-than-anticipated third-quarter results and a reduction to its full-year guidance, TD Cowen analyst Michael Van Aelst is expected investors to react negatively to Parkland Corp. (PKI-T).
“Weak Refining capture rates left Q3 earnings short of already reduced estimates, while low crack spreads and International wholesale volumes led PKI to cut 2024 adj. EBITDA guidance to $1.70-$1.75-billion (from $1.9-$2.0-billion),” he said. “Our estimate drops to $1.72-billlion and consensus (currently 1 per cent above the top end) should follow.”
The Calgary-based company reported adjusted EBITDA for the quarter of $431-milllion, down from $585-million during the same period a year ago and 4 per cent below the recently lowered estimates of both Mr. Van Aelst ($450-million) and the Street ($451-million).
“Retail and Commercial adj. EBITDA increased 1 per cent (excluding last year’s insurance recoveries and forex gains) as expected, with each of the marketing divisions coming generally in line,” he said. “Canada delivered the strongest performance (EBITDA up 5 per cent) with generally solid all-around execution and healthy fuel margins offsetting a meaningful drop in tobacco sales and a soft consumer (despite lower industry demand, PKI seems to be gaining share). International profit was the weakest, down 8 per cent year-over-year, as it faced increased competition for the less stable spot wholesale volumes.
“Refining is having a difficult year — only 2020 (year-one of COVID-19) was worse. With the unexpected Q1 shutdown, weak refinery margins year-to-date, and Q4 not looking much better, we see Refining profits coming in $232-million below last year’s more typical level. The declining commodity price environment and weaker carbon credit markets (amid cheap renewable diesel imports) have compressed H2 capture rates more than anticipated.”
Suggesting another guidance reduction could “give a momentum boost to activists,” Mr. Van Aelst trimmed his target for Parkland shares by $1 to $52, keeping a “buy” rating, to reflect his lower forecast. The average target on the Street is $49.83.
“PKI now trades at 6.4 times our NTM [next 12-month] EBITDA, a material discount to the 8.5 times weighted peer-group average as elevated leverage and temporary profit headwinds taint investor optimism,” he concluded. “Much of the weakness is caused by weak crack spreads and capture rates, which should recover once industry-wide refinery downtime normalizes, although soft demand is also magnifying the oversupply challenges. 2024 guidance has been cut to $1.70-$1.75-billion, but management will likely look for alternative avenues to achieve its $2.5-billion EBITDA target by 2028. Support for activists or Simpson could get a boost from the additional near-term challenges, though the latter may have to await the court’s decision on the validity of its governance agreement (expected in Q1/25) before supporting a proxy battle or another takeover attempt. FCF yields of 9 per cent/12 per cent (pre-divestitures) in 2025/2026 look attractive, and we see this ultimately allowing valuation to return closer to historical averages as PKI deleverages”
Elsewhere, BMO’s John Gibson cut his target to $44 from $46 with an “outperform” rating.
“PKI’s Q3/24 results were softer due to weaker refinery margins and pressures in commercial operations. As expected, the company reduced its EBITDA guidance to a range of $1.7-1.75 billion ($1.9-2.0 billion prior). We continue to believe longer-term upside lies in its shares, particularly given its compressed valuation, although the company will need to find a way to resolve current shareholder issues,” he said.
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Citing its valuation, comfort in its growth trajectory and U.S. consumer resilience, RBC Dominion Securities analyst Irene Nattel upgraded Aritzia Inc. (ATZ-T) to “outperform” from “sector perform” previously.
Following two “well-attended” investor meetings with the Vancouver-based retailer’s management, she expressed “greater confidence in US backdrop and associated consumer spending, and Aritzia’s ability to leverage its growth algorithm, control.”
Accordingly, she sees the 11-per-cent drop in share price since the release of its quarterly results two weeks ago as “unjustified given underlying momentum and outlook communicated with the quarter.”
“As per commentary on the Q2 call, read mid-Q3 suggests U.S. top line momentum continues, albeit a tick lighter than Q2 20-per-cent-plus given unusually warm weather late summer/early fall,” said Ms. Nattel. “Addition of 9-10 boutiques including Chicago flagship, repositions including NYC flagships in SoHo and at 5th, and easier comps through January underpin H2E revenue growth 13 per cent (52-week basis), F26E 14 per cent. Importantly, i) new stores open close to maturity with payback less than 12 months, ii) GM [gross margin] accretion (F25E up 460 basis points) largely underpinned by elements within company control (IMU improvements, lower warehousing costs, lower markdowns, favourable mix, cost optimization), and iii) scaling should drive SG&A leverage starting late F25. Management also highlighted sizable opportunity to convert single channel shoppers to omni (currently only 20 per cent) that typically spend 3 times more on average. Development of an app slated next year could reaccelerate ecommerce growth, and accelerate omni penetration.
Ms. Nattel maintained a $56 target. The average target on the Street is $57.94.
“ATZ has had a good run in the last year, with the shares doubling year-over-year (TSX 31 per cent), exceeding the $41 one-year target we articulated 12-months ago,” she said. “Our caution and SP rating has been rooted in uncertainty over consumer spending trends. While Canadian consumer spending has clearly softened, a marked bifurcation in performance and outlooks between the U.S. and Canadian consumers has emerged, with rising evidence of a feather soft landing south of the border, the key engine of growth underpinned by annual NTIs 15-25 per cent through F27, associated rise in ecommerce penetration and consumer awareness, tailwind on gross margins, and scaling.”
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In other analyst actions:
* CIBC’s Anita Soni raised her Agnico Eagle Mines Ltd. (AEM-N, AEM-T) target to US$102 from US$101 with an “outperformer” rating, while Eight Capital’s Ralph Profiti increased his target to $135 from $125 with a “buy” rating. The average is US$93.42.
* In a report previewing its third-quarter earnings release on Nov. 6 titled If you build it, beds will come (in 2025), Desjardins Securities’ Gary Ho trimmed his CareRx Corp. (CRRX-T) target to $3.75 from $4 with a “buy” rating. The average is $3.89.
“We maintained our 3Q estimates, but pushed 4Q bed onboarding into 2025,” he said. “We expect 2025 to be an exciting year for bed wins/RFPs, which should support margin expansion to 10 per cent (targeting mid-25 [er cent). The North Burnaby megasite should start servicing beds imminently. Management has been active with its NCIB. However, we trimmed our target ... on a lower multiple given recent contraction in peer valuations.”
* Stifel’s Daryl Young hiked his Colliers International Group Inc. (CIGI-Q, CIGI-T) target to US$180 from US$160 with a “buy” rating. The average is US$155.83.
“We expect a solid quarter, led by leasing and O&A services but have somewhat more tempered expectations for capital markets and IM fundraising,” he said. “We are still in the early stages of the broader CRE recovery and U.S. transaction volumes were effectively flat y/y (with potential for the election to stall activity in Q4/24), while the IM fundraising flywheel is just getting started industry-wide, with a resurgence in asset monetizations. However, broadly speaking we think markets have inflected and results should keep progressively improving. The outlook for Engineering services continues to be simply awesome, underpinned by robust government spending in Canada and the U.S.”
* CIBC’s Paul Holden increased his target for Element Fleet Management Corp. (EFN-T) to $33 from $30, keeping an “outperformer” rating. The average is $31.84.
* Scotia’s Orest Wowkodaw trimmed his Ivanhoe Mines Ltd. (IVN-T) target to $21.50 from $22 with a “sector outperform” rating. The average is $25.92.
“IVN reported largely in line Q3/24 financial results,” he said. “Although all the company’s major growth projects remain on track, we have modestly reduced our estimates to reflect a slightly slower expected near-term ramp-up at Kamoa-Kakula. Overall, we view the update as largely neutral for the shares.
“Although geopolitical risk is elevated, we rate IVN shares SO based on the company’s world-class asset base, strong growth profile, and impressive management track record.”
* CIBC’s Nik Priebe hiked his TMX Group Ltd. (X-T) target to $46 from $43 with a “neutral” rating, while TD Cowen’s Graham Ryding raised his target to $44 from $43 with a “hold” rating. The average is $45.38.
“TMX beat our forecast (and consensus) due to higher-than-expected revenue, and lower expense growth,” said Mr. Ryding. “All sources of revenue were either stronger than expected, or largely inline (although Vettafi was a bit light). FCF was a bit light, but leverage ticked down quarter-over-quarter. Fundamentals remain strong, but valuation appears fair, to full, in our view.”