Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Adam Shine dropped his target price for shares of Corus Entertainment Inc. (CJR.B-T) to a penny in response to its lower-than-anticipated third-quarter results and “weak” outlook for the current period.
“Based on our revised estimates, projected values in our NAV [net asset value] have turned negative, and it’s hard for us to ascribe any remaining value for equity holders,” he said.
The Toronto-based media company plummeted 22.5 per cent on Monday after it warned that it may no longer be able to meet its debt commitments, which “may cast significant doubt about the company’s ability to continue as a going concern.”
The company reported $331.8-million in third-quarter revenue, a nearly 17-per-cent drop from the same period in 2023 and below both Mr. Shine’s $335-million estimate and the $344-million expectation on the Street.. It generated $18-million in cash during the third quarter, representing a 29-per-cent year-over-year decline. On an adjusted per-share basis, Corus lost 10 cents in the quarter, dropping from the nine-cent-per-share adjusted profit the company reported for the third quarter of 2023 and well below the 7-cent profit expecting from the analyst and Street.
Despite aggressive cost-cutting initiatives, further reductions and regulatory relief is now being pursued.
“Two AM radio stations were closed,” said Mr. Shine. “In terms of WBD content/trademarks going to Rogers in 2025, OWN will shut down, Food & Magnolia may not continue, and HGTV & Food will get rebranded with new program supply sought. Corus is exploring legal & regulatory efforts in regard to the WBD dynamic. While news efficiencies are being explored, CRTC relief is being pursued.”
Maintaining his “underperform” recommendation, Mr. Shine’s 1-cent target is down from 25 cents previously. The average is currently 14 cents, according to LSEG data.
Elsewhere, TD Cowen’s Vince Valentini cut Corus to “sell” from “hold” with a 5-cent target, falling from 35 cents.
“Well before the loss of WBD/NBC-U content and brands (that headwind should escalate in calendar 2025), results have fallen to arguably unsustainable levels in Q3, and guidance is for revenue declines to be just as bad in Q4,” he said. “There are going concern and covenant breach warnings in the MD&A.”
“We lowered our estimates to reflect both weak revenue trends in Q3/Q4 , and the likely loss of some revenue related to content supply deals with WBD and NBC-U. When the announcement of losing the output deals occurred, we outlined the risk, but we did not change our official forecasts because we were waiting to see if there would be clarity on either what Rogers intends to do with the content/channels, and/or legal/regulatory options for Corus. We believe that Corus is still weighing various options, but we have no certainty on what or when, so we are now attempting to incorporate the loss of these content/brand output deals into our forecasts. Even with incremental cost reduction efforts by management (the headcount reduction plan is now up to about 800, or 25 per cent of the beginning of 2025 level, versus about 500 in the prior plan), we believe consolidated EBITDA could fall into a range of $175- $200-milllion in fiscal 2025 (we set our estimate at the bottom of this range out of an abundance of caution amidst the current uncertainty).”
Others making target adjustments include:
* Scotia’s Maher Yaghi to 5 cents from 37 cents with a “sector underperform” rating.
“We continue to have a Sector Underperform rating on Corus shares,” said Mr. Yaghi. “While the company remains cash flow positive, the debt level being held on the balance sheet is disproportionately too high. We expect the company to be in breach of its leverage covenants later this year, and as a result we expect management to work on recapitalizing the balance sheet. As we expect very little in terms of recovery to unsecured debt holders, the company could work on converting this debt into equity, diluting existing equity holders in the process but reducing ongoing interest expenses and providing a faster way to repay the revolver and bank debt. We have assessed a valuation of $0.05 on the shares at this point as a placeholder pending a refinancing of the debt, but we think dilution to current equity holders could be even more elevated in the near term.”
* RBC’s Drew McReynolds to 30 cents from 50 cents with a “sector perform” rating.
“Given the step-back in earnings visibility following the non-renewal of WBD programming and in light of an underwhelming television advertising recovery and recent CEO transition, we believe Corus’ back is against the wall with channel rebranding, cost reductions, balance sheet/liquidity management and regulatory relief being four near-term priorities. Until more progress is demonstrated on each of these fronts, we expect equity value to be under considerable pressure and the risk profile of the stock to remain notably elevated,” said Mr. McReynolds.
* Canaccord Genuity’s Aravinda Galappatthige to 10 cents from 25 cents with a “sell” rating.
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Cleveland-Cliffs Inc.’s (CLF-N) $3.85-billion deal to acquire Canadian steelmaker Stelco Holdings Inc. (STLC-T) is a “logical industry development,” according to National Bank Financial analyst Maxim Sytchev, who calls the price tag “more than fair.”
“Over the last year, there has been plenty of M&A chatter pertaining to the steel industry, beginning with CLF’s offer for U.S. Steel (NYSE: X; Not Rated) back in August (CLF / U.S. Steel combination), a potential offer from Steclo itself (Going after U.S. Steel?), and the pending (and politically contentious) proposed buyout of U.S. Steel by larger Japanese competitor Nippon Steel (TYO: 5401; Not Rated – our initial take on the transaction here: U.S. Steel acquired by Nippon Steel; implications for CAD players are positive),” he said.
“We fully expect the deal to be reviewed, but one would assume that the backdrop would be less contentious than US Steel / Nippon given the already integrated nature of the North American supply chain, NAFTA, etc. Recall that we upgraded STLC in Feb (Upgrading to OP), and CLF’s offer affirmed our view of STLC’s attractive valuation. Further industry consolidation should provide support for HRC prices, with RUS being a beneficiary.”
Citing the “significant premium” being offered for Stelco shares and the support from major shareholders, Mr. Sytchev moved his recommendation to “tender” from “outperform” previously.
David Milstead: The sale of Stelco continues billion-dollar windfall for its owners, CEO
On Monday, shares of the Hamilton-based company jumped almost 74 per cent following the premarket announcement of the deal, which sees the second-biggest steelmaker in the United States offering $60 in cash and 0.454 of its shares for each Stelco share. The buyout is worth $70 a share, an 89-per-cent premium to Stelco’s closing price on the Toronto Stock Exchange last Friday.
“The takeout multiple comes out to approximately 7.1 times EV/EBITDA on 2024 consensus EBITDA (excluding any CLF synergies), slightly below U.S. peers (7.6 times median),” said Mr. Sytchev. “Nippon offered 7.8 times for U.S. Steel (a 40-per-cent premium), but that price reflects a larger asset with more challenges for approval. With HRC [hot-rolled coil] having come down to its (likely) floor at $650 per ton (down 41 per cent year-to-date; STLC shares down 26 per cent YTD), the multiple is based on more of a slightly suppressed earnings dynamic. STLC was trading at an attractive 2.9 times EV/EBITDA on our 2024 estimates preannouncement, which explains the sizeable premium from CLF’s perspective.”
Expecting the deal to close by the fourth quarter given the regulatory hurdles, Mr. Sytchev hiked his target for Stelco shares to $70 from $52 to reflect the deal. The average is currently $67.70.
Elsewhere, Stifel’s Ian Gillies moved his recommendation to “hold” from “buy” with a $70 target, up from $47.
“We believe that shareholders should tender to the offer,” said Mr. Gillies. “Based on our estimates and definition of net debt, the EV/EBITDA transaction multiples are at 8.2 times and 6.2 times (post synergies) compared to our prior target multiple of 6.0 times and the stock’s valuation prior to the announcement at 4.5 times. We acknowledge that there is modest regulatory risk, but we are of the view that this deal will be consummated. Lastly, management, the board and employees of STLC deserve a hat tip for the 2017 IPO price to CLF transaction price CAGR of 32 per cent.”
Meanwhile, RBC’s James McGarragle raised his target to $70 from $43 with a “sector perform” rating.
“We expect the offer to materialize given the high premium (87 per cent), the board and union’s support, and support agreements entered into by shareholders collectively holding approximately 45 per cent of the shares outstanding. We view approval risk as low, with Cliffs’ management expecting the deal to close in Q4,” he said.
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In a separate report previewing earnings season for Canadian industrial products companies, Mr. Sytchev said investor positioning appears “less uniform than in past periods,” noting “the dispersion of returns has widened materially year-to-date for our coverage (up 12 per cent mean vs. TSX at up 9 per cent) vs. a more uniform 2023 advance.”
“Rebounding construction names (BDT and, until recently, ARE) and the ones shedding it (ATRL) are at the top of the list,” he said. “Our top ideas from the beginning of the year (RBA and WSP) are outperforming (up 22 per cent and up 19 per cent) while ATS (down 20 per cent) has been challenged by a negative backlog dynamic due to a lackluster EV backdrop. With a potential Republican Presidency victory upon us, the EV space is likely to get worse, not better in the short-term. We got the steel trade completely wrong so far, though the $70 take-out offer for STLC quickly reversed that dynamic. Despite good volumes, compressing scrap and HRC pricing continue to hamper results. Staying away from consumer (ACQ) and interest rate sensitivity (CIGI) has been the right approach.”
Mr. Sytchev said he now has four long ideas in the space: Rb Global Inc (RBA-T, “outperform” and $87 target); ATS Corp. (ATS-T, “outperform” and $65); Finning International Inc. (FTT-T, “outperform” and $47) and WSP Global Inc. (WSP-T, “outperform” and $234).
“In terms of high(er) visibility of beats, we see the consulting cohort (WSP, STN, ATRL) being well positioned for Q2/24E,” he said. “In the equipment-related space, we have high conviction in RBA while FTT / TIH are facing some tougher comps (hence less belief in a ‘beat’). In the diversified space, SJ looks good to us as Poles pricing concerns appear to be pushed out. We wish AFN would have cut its guide with its Q1/24 release as the market remains skeptical about H2/24E. BDT should deliver another good quarter, but we are looking for a better entry point. NOA on the other hand, having slid due to oil sands concerns (now 35% of EBIT) is hardly expensive at 3.1 times EV/2024E EBITDA with a much more diversified footprint.”
The analyst added: “All-in, the big themes around infra spending, water, rebounding commodities (gold, copper, WTI in good spot) – ex steel and ag, energy infrastructure (let’s see who mentions AI on the upcoming calls) are somewhat balanced by higher valuations. But we are staying balanced, not counter-balanced; as a result, having a net positive tilt towards our coverage remains our base-case scenario.”
Mr. Sytchev made a pair of target price adjustments. They are:
* Stella-Jones Inc. (SJ-T, “outperform”) to $99 from $91 “on higher margin projections in 2025 (from 16.2 per cent to 17.1 per cent) as our channel-checking work points to stickier pricing in the short-term than feared by the market.” The average on the Street is $96.50.
* Russel Metals Inc. (RUS-T, “outperform”) to $47 from $48 “due to steel pricing headwinds while also marginally moderating RBA forecasts as equipment pricing indexes have continued to retrench (while still being structurally bullish on the vertical, IAA turnaround, and attractive valuation vs. peers and own history).” The average is $47.50.
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Scotia Capital analyst Ovais Habib thinks Alamos Gold Inc.’s (AGI-N, AGI-T) acquisition of Argonaut Gold is “logical given the proximity of both assets and the opportunity to unlock significant value for shareholders through the optimization of the combined operations, realization of synergies through shared infrastructure and long-term exploration potential.”
Resuming coverage following the close of the deal, he sees it solidifying Alamos’ “position as a leading mid-tier gold producer with one of the lowest political risk exposures.”
“The transaction is expected to create one of the largest, lowest cost and most profitable gold mines in Canada, with a combined Magino and Island Gold production profile of 280 koz in 2024, increasing to more than 400 koz per year at first quartile costs, following the completion of the Phase 3+ Expansion in 2026,” he said.
“We believe AGI offers investors exposure to high quality, long-life assets 18-year mine life) in a premier jurisdiction (with approximately 88-per-cent NAV domiciled in Canada), fully-funded organic growth with declining cost profile and significant exploration upside within its portfolio.”
Reiterating his “sector outperform” recommendation for Alamos shares, Mr. Habib increased his target to US$20 from US$16. The average is US$19.77.
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While BRP Inc. (DOO-T) is striking a “cautious near-term tone,” Citi analyst James Hardiman raised his target for its shares on “the increased likelihood of a September rate cut and the tailwind it should provide.”
That change comes despite a warning about short-term results following a virtual fireside chat with the Valcourt, Que.-based recreational vehicle manufacturer’s CFO Sébastien Martel and head of Investor Relations Philippe Deschenes
“The general sentiment was one of near-term caution amidst macro pressures, balanced with long-term confidence in the company’s products and business,” Mr. Hardiman said. “When asked what a reasonable expectation for retail in 2Q25 might be given their previous guidance and exceedingly difficult comparisons, DOO management acknowledged that while there are a few weeks to go in the quarter they are lapping an exceptional retail quarter in 2Q24 (powersports NA retail up 41 per cent vs. just up 3 per cent in 1Q24), so it is reasonable to expect significantly softer retail year-over-year.
“After factoring in consumer demand and loss of market share from rebalancing of supply, management noted that retail could be down more than people would like to see or are expecting this year.”
The management team said the reduction of its guidance in May, including a decline shipments further, was meant to protect dealer margins.
“Management believes that by proactively scaling back shipments, they will mitigate dealers’ reliance on discounting, helping them to sell units closer to MSRP,” said the analyst. “And while the current guide incorporates the best assessment of conditions on the ground as of late May, management made no assurances that the outlook has in fact bottomed, with a number of unknowables that have yet to play out.
“To that end, management noted that there are competing OEMs (PII) that are not cutting shipments as much as DOO, which is putting a lot of pressure on the dealers to move units.”
Reiterating a “buy” recommendation for BRP shares, Mr. Hardiman increased his target to $110 from $100. The average is $101.11.
“There is a great deal to like about the BRP story, as the company’s powersports portfolio features both defensible leadership positions and substantial market share opportunities. In both cases, BRP’s long track record of high-quality products and consistent innovation should (in our view) allow it to gain share for the foreseeable future, even if the market itself is difficult to handicap,” he said.
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In response to the completion of various strategic asset sales, including rental suite privatizations, for €129-mln in total gross proceeds, Raymond James analyst Brad Sturges raised his rating for European Residential REIT (ERE.UN-T) to “outperform” from “market perform” previously, emphasizing its strategic Dutch multi-family residential building divestiture activity is beginning to accelerate.
“We believe there is increasing potential that ERES could further narrow its NAV/unit discount valuation by: 1) executing more asset sales that allow ERES to further strengthen its balance sheet; and/or 2) revisit another en bloc Dutch MFR portfolio sales process at some point in the next 12-18 months, particularly if market conditions for private market Dutch MFR transactions further improve and if European interest rates fall, reducing the average cost of capital for prospective buyers,” he said.
Mr. Sturges’s target rose to $3.25 per unit from $2.75. The average is $3.06.
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In other analyst actions:
* National Bank’s Ahmed Abdullah cut his AirBoss of America Corp. (BOS-T) target to $5.75 from $6.25, which is the current average with a “sector perform” rating.
“We tempered our estimates as macro factors continue to drive softness across a number of customer segments for both ARS and AMP. Major tire manufacturers are highlighting softer demand across truck and specialty tire segments, while auto OEMs are coping with elevated inventory levels. Higher interest rates and subdued wage increases are all contributing to these aforementioned factors. As such, we opted to be more conservative with our forecast and now expect 2Q revenues to be $103.8-million (was $110.2-million), Adj. EBITDA $5.8-million (was $6.2-million), and Adj. EPS -$0.03 (unchanged). We also lowered our full year estimates for 2024E & 2025E, however, 2H24 should see slightly better traction as the AMP segment starts to benefit from the Bandolier contract deliveries (announced 4/29/24, $45-million over 18 months) and auto OEMs deal with inventory levels.”
* Jefferies’ Alejandro Demichelis raised his Canacol Energy Ltd. (CNE-T) target to $5.50 from $5.40 with a “hold” rating. The average is $7.79.
* Barclays’ Brandon Oglenski cut his targets for Canadian National Railway Co. (CNI-N, CNR-T) to US$128 from US$130 with an “equalweight” rating and Canadian Pacific Kansas City Ltd. (CP-N, CP-T) to US$95 from US$96 with an “overweight” rating. The averages are US$134.11 and US$94.53.
“While truck freight rates remain stubbornly low, non-coal rail volume growth is impressive and rail yields could surprise to the upside following a challenging quarter for broad transport equity performance; we like CPKC, UNP, XPO and look for relatively more favorable commentary from KNX,” said Mr. Oglenski.
* Jefferies’ Surinder Thind bumped his CGI Inc. (GIB-N, GIB.A-T) target to US$121 from US$120 with a “buy” rating. The average is $159.98 (Canadian).
* In reaction to its acquisition of a gold stream on SolGold plc’s Cascabel copper-gold project in Ecuador for US$525-million, BMO’s Jackie Przybylowski raised her Franco-Nevada Corp. (FNV-T) target to $210 from $200 with an “outperform” rating. The average is $199.37.
“This stream provides Franco-Nevada with an attractive use of cash, further growth optionality, and increased future exposure to gold and precious metals. We estimate the IRR of this stream (including staged payments) at 6 per cent and with further upside,” she said.
* TD Cowen’s Michael Van Aelst raised his North West Company Inc. (NWC-T) target to $52 from $47, above the $45.33 average, with a “buy” rating.
“Substantial government spending in northern communities and large settlement payments to individuals/communities are expected in the coming years, which should drive elevated (although potentially lumpy) earnings growth through the end of the decade,” he said. “Since we see NWC as the retailer positioned to benefit most, we bump valuation to 14-15 times (in line with 5-/10-year averages) and our target to $52.”
* National Bank’s Rupert Merer bumped his Polaris Renewable Energy Inc. (PIF-T) target to $20 from $19 with an “outperform” rating. The average is $22.58.