Inside the Market’s roundup of some of today’s key analyst actions
Executive changes at DRI Healthcare Trust (DHT-UN-T) on the back of a misconduct investigation have National Bank Financial analyst Zachary Evershed slashing his price target on the stock.
On Monday, DRI’s board appointed Gary Collins as interim CEO of the trust, while DRI Healthcare - the managing entity - named Ali Hedayat as its interim CEO. The changes came following Behzad Khosrowshahi’s resignation as CEO as a result of an ongoing investigation of irregularities related to certain alleged consulting expenses presented by Mr. Khosrowshahi for reimbursement, currently said to be $7.5-million.
DRI Healthcare Trust invests in pharmaceutical royalties.
“This development likely puts a damper on future growth prospects through some mix of deal expertise lost with Mr. Khosrowshahi, reticence of royalty counterparties, and more difficult access to capital markets in the future,” Mr. Evershed said in a note to clients. “There is no denying Mr. Khosrowshahi provided a depth of expertise at the intersection of the medical industry and royalty deals, though we believe much of the day-to-day has been shouldered by CIO Navin Jacob and his team in recent quarters, and we view the appointment of Trustee Ali Hedayat as interim CEO of DRI Capital in a positive light given his strong record. That said, counterparties’ propensity to transact with the trust after the misconduct could potentially act as a limiter on future capital deployment opportunities, and we believe caution is warranted,” he said.
Following the latest news, Mr. Evershed said he is slashing his deployment assumptions within the growth portion of his net asset value estimates for the company.
His price target was cut to C$17.50 from C$23.50. “As the existing portfolio alone (and book value at about C$13/unit) supports upside from current levels (at a 19% FCF yield), we maintain our outperform rating. We hope for a substantive update to reassure investors that the trust’s growth trajectory remains feasible, at the latest when DHT reports Q2/24 results on August 6,” the analyst added.
DRI Healthcare Trust plunged 26 per cent in TSX trading on Monday to C$11.17.
Nevertheless, Raymond James analyst Rahul Sarugaser said he’s maintaining his C$24 target price for now.
“While resignation of DRI’s CEO is surprising, DRI’s deal funnel and operational team remain intact -specifically, CIO Navin Jacob, and interim CEO, Ali Hedayat, have long been embedded with DRI’s operational team and have been key engines behind the recent deal cadence - so we maintain our conviction in the long-term potential for shareholder value creation,” Mr. Sarugaser said in a note to clients.
“We do, however, expect that uncertainty around the sudden and unexpected management shuffle (with the non-zero probability of future fallout) will give investors pause in the near-term, that will likely lead to material short-term weakness in the stock price. This said, we would view this potential weakness and likely volume as an opportunity for long-term-oriented investors to add positions,” he added.
In balancing this “tension between short-term weakness and long-term opportunity,” he lowered his rating to “outperform” from “strong buy”.
Elsewhere, CIBC cut its target price to C$18.5 from C$20; RBC cut its target price to C$16 from C$20; and Stifel cut its target price to C$15 from C$22 while downgrading its rating to “hold” from “buy”.
The average analyst target is now C$19.27, down from C$21.60 a month ago, according to LSEG data.
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Canaccord Genuity is cutting its price targets on the three big Canadian telecoms heading into the second quarter earnings season, with Rogers Communications in particular taking a hit.
Canadian Telecoms are down 15 per cent so far this year on a total return basis, a terrible performance considering the S&P/TSX Composite Index is up 5 per cent over that same period. The sector is also sharply underperforming other yield-oriented sectors, which Canaccord notes suggests “this is much more than an interest rate problem.”
“The central issue remains promotional intensity in the market as the weight of sustained discounting bouts by Freedom and the incumbents is likely to show up more meaningfully in financial results come Q2. In fact, we now estimate that wireless service revenue growth (for the Big 3), which stood at 5% exiting 2023 and was 4% in Q1/24, falls to 2% by Q2/24, the lowest since the height of the pandemic. Moreover, our surveillance of the market suggests little sign of this competitive intensity easing with the incumbent’s flanker brands responding to Quebecor’s launch of Fizz nationally,” Canaccord analyst Aravinda Galappatthige said in a note.
“Even on the wireline front, we continue to see areas of sustained discounting, in particular, in Quebec and the West,” the analyst added.
In light of these conditions, he cut his price target on BCE Inc. (BCE-T) to C$50 from C$53, Rogers Communications Inc. (RCI-B-T) to C$59 from C$71, and Telus Corp. (T-T) to C$23 from $25.
The analyst said the sharper cut to Rogers “is due to proportionate downward adjustments to target multiples having a greater impact on equity value owing to the higher debt load.”
Nevertheless, the Canaccord analyst thinks a compelling buying opportunity exists in the sector.
“While there are clearly near-term risks, we have opted to remain constructive on the sector with BUY ratings on BCE, Rogers, Telus, and Quebecor. This is due to several factors. First, we see increased focus on cost containment serving to mitigate the impact on profitability, even with meaningful reductions to service revenue growth expectations. In fact, our downward revisions to EBITDA estimates (F2024E) pre-Q2 is 0.5% (average). We believe that in the present environment, well-planned cost rationalisation, alongside broad-based digital transformation within various business functions, is key to the investment thesis of the Telecoms. Second, while we still see significant promos in the market and the sector is stepping into the seasonally more active period of H2, we observe a backdrop for all players to step back in terms of pricing action. From Freedom’s perspective, there is greater breadth in its offerings (i.e., Fizz, internet + wireless bundles, new territories under MVNO), as opposed to the situation even three months ago, and thus the impetus to lean exclusively on price to drive sub growth is reduced. On the incumbent side, management comments suggest increased sensitivity around wireless economics, and given the balance sheet positions, one is persuaded to believe that the companies would lean towards rationality at the first possible opportunity, in our view.
“Finally, from a valuation perspective, the multiples and yields are quite attractive, in our view. From an EV/EBITDA perspective, the gap vs. the US Big 3 (historically US was 1-2x cheaper) has closed. Meanwhile, the dividend yield to 10-year bond yield spread is at decade highs (3.5% spread), if you exclude the pandemic period (when rates dived sharply). Nonetheless, on a FCF basis, the international telecoms remain cheaper than the Canadian Big 3.”
In terms of stock selection, “We believe Quebecor Inc. (QBR-B-T) offers good risk return at this point, trading at a 14.4% FCF yield (2025E), and the prospect of a re-rating if its national wireless operation gains greater traction. We continue to believe there is no change to BCE’s and TELUS’ dividend policy, which also increases the attractiveness of those stocks given the current dividend yields on offer. In the case of Telus, while it is a compelling longer-term pick, risk related to TIXT [Telus International] and competitive pressure to its core in the West is likely to represent headwinds in the near term. For Rogers, stabilizing cable returns and real estate divestitures could be catalysts.”
Separately, RBC analyst Drew McReynolds adjusted his estimates and price targets on the telecom stocks ahead of their earnings.
BCE’s target went from C$54 to C$51, Cogeco Communications (CCA-T) from C$79 to C$73 and Rogers from C$67 to C$65.
“Our scenario analysis points to more upside than downside for Canadian telecom stocks at current levels. But the ball is in the court of each operator with respect to pricing discipline, lowering the cost to serve and executing on generating new revenue streams. Our two outperform-rated stocks are Telus and Rogers,” Mr. McReynolds said.
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BMO analyst Devin Dodge downgraded his rating on GFL Environmental Inc. (GFL-N, GFL-T) to “market perform” from “outperform”, commenting that the risk-reward appears balanced.
“With the shares up about 25% since early June, we believe there is significant optimism for the potential sale of the Environmental Services division already reflected in the stock,” Mr. Dodge said. “Should a transaction not materialize, we suspect the stock could give back some of its recent gains.”
His target price was trimmed to US$42 from US$43, reflecting relatively modest adjustments to the multiples in his net asset value modeling.
GFL is believed to be evaluating multiple strategic options, with the two most likely scenarios being the sale of its ES division and a private equity consortium displacing the current group of private equity funds.
“The ES segment valuation floated in the media reports (C$6.5-7.0B) implied upside of C$3-5 per GFL share, well below the ~C$10/sh rise in the stock. Meanwhile, we believe the potential PE ownership transfer option would have limited benefit to public shareholders and the stock could give back much of its gains from the last 4-5 weeks,” the analyst commented.
The average analyst target is US$44.47.
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Canaccord analyst Yuri Lynk is curbing his enthusiasm for Badger Infrastructure Solutions Ltd. (BDGI-T) ahead of the company’s second quarter results.
He cut his price target to C$55 from C$60, but reiterated a “buy” rating.
“We are moderating our Q2 expectations as we believe the quarter was impacted by continued weakness in Canada and, to a lesser extent, project delays in the U.S.,” Mr. Lynk said. “As a result of these short-term headwinds, we expect 8% revenue growth in 2024 before recovering to 12% in 2025, which is more in line with the company’s 3-4 year targets calling for a 12-14% compounded annual growth rate from 2023.”
“In our view, Badger enjoys one of the best organic growth profiles in the capital goods sector backstopped by a supportive macro backdrop for hydrovac excavation with secular growth drivers that include infrastructure renewal and expansion, the energy transition, and the trend towards safe digging. As followers of this stock over the years know, however, Badger’s growth path does not follow a straight line. We expect Q2/2024 results to represent another kink in the road,” he said.
The Canaccord analyst did add, however, that the headwinds facing the company is reflected in its valuation.
“Badger trades at 17x 2024E EPS vs. peers at 20x, including Federal Signal at 27x, and its 19x 10-year average. We set our target price by applying a 17x multiple to our 2025 EPS estimate converted to CAD at US$0.73,” he said.
The average analyst target is C$53.75.
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CIBC Capital Markets analyst Dean Wilkinson initiated coverage of Flagship Communities REIT (MHC-UN-T) with an “outperformer” rating and a C$19.50 price target. Flagship provides Canadian investors with direct exposure to the U.S. Manufactured Housing Communities (MHC) sector, with a current focus on markets within Kentucky, Indiana, Ohio, Tennessee, Arkansas, Illinois, Missouri and West Virginia.
“Our rating reflects Flagship’s attractive long-term growth potential, the defensive characteristics of the MHC asset class (which proved resilient during both the Global Financial Crisis and the pandemic), and a valuation that we consider compelling on both a relative and an absolute basis,” Mr. Wilkinson said in a note to clients.
According to the analyst, at current unit prices, Flagship trades at about a 34 per cent discount to consensus net asset value, which compares to about a 12 per cent discount for the U.S. MHC peers. On a forward price to funds from operations basis, the REIT trades at about a 6 times discount to the peer group, he said.
“Given that Flagship’s growth profile largely mirrors that of the peer group, we believe that the relative discount is unwarranted and is reminiscent of a dynamic we have seen before with Canadian-listed U.S. housing REITs that was ultimately recognized by private equity, resulting in outsized returns,” Mr. Wilkinson said.
The average analyst target is C$19.67.
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In other analyst actions:
Alphabet Inc (GOOGL-Q): Jefferies raises target price to $220 from $215
Amazon.com Inc. (AMZN-Q): Jefferies raises target price to US$235 from $225
Apple Inc (AAPL-Q): Piper Sandler raises target price to $225 from $190
Bank of America Corp (BAC-N): Piper Sandler raises target price to US$42 from US$37 and upgrades rating to “neutral” from “underweight”
Canopy Growth Corp (CGC-Q): Piper Sandler cuts target price to $2 from $3
Domino’s Pizza Inc (DPZ-N): Baird raises to “outperform”; raises target to $580 from $530
D2L Inc (DTOL-T): Raymond James raises target price to C$15 from C$12
G2 Goldfields Inc (GTWO-T): Stifel raises target price to C$2.4 from C$1.85