Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Maurice Choy expects investors to react favourably to TransAlta Corp.’s (TA-T) “more balanced and disciplined capital allocation approach,” which features a share buyback program of up to $150-million for 2024.
“We believe the introduction of the share repurchase program will also lead management to ensure that future capital that is intended to be deployed for growth projects will compete with alternative uses, including buying back the company’s shares,” he said. “To this end, we like management’s commentary that TransAlta “not grow simply for the sake of growth and to meet targets”, and we would even welcome a decision by the company to keep an active repurchase program beyond 2024. We believe the market will be seeking evidence of this more balanced capital allocation approach being taken in the coming quarters/years, and while we acknowledge that not every project will deliver a FCF yield that is superior to the yield implied by TransAlta’s share price, we anticipate the market will expect future projects (when assessed on a portfolio basis) to have a weighted average FCF yield that is at or above the yield offered via buying back the company’s shares.”
In a research report released Monday titled Putting money where your mouth is that followed last week’s release of “mixed” fourth-quarter 2023 results and a reaffirmation of its 2024 guidance, Mr. Choy said the “enhanced” share repurchase program “offers tangible way for shareholders to benefit from TransAlta’s solid cash flow generation,” however he also emphasized “clean electricity-oriented growth remains firmly on the table (as it should, in our view).”
“While we acknowledge the attractiveness of buying back shares at the current share price level, which we anticipate can deliver immediate accretion to the company’s FCF/share, we believe it is important for energy transition-related growth to remain a material part of TransAlta’s long-term investment thesis,” he said “To this end, the company has reaffirmed its Clean Electricity Growth Plan (CEGP) that was introduced as part of the 2023 Investor Day, including the potential of investing $3.5 billion to add up to 1.75 GW of new capacity and bring in $350 million of cumulative annual EBITDA by the end of 2028. The company is also focused on expanding its development pipeline to 10 GW by 2028, up from 5.3 GW currently.”
However, pointing to a “modestly weaker power price environment” and lower valuations for assets with merchant power exposure in Alberta, Mr. Choy lowered his earnings and cash flow expectations for 2024 and 2025, prompting him to trim his target for TransAlta shares by $1 to 14, keeping an “outperform” recommendation. The average target on the Street is $14.20.
“The company’s portfolio of assets consists of a number of thermal generation facilities that range from baseload to peaker assets that allow TransAlta to support the Alberta electricity grid across a range of market conditions. Further, its hydro fleet continues to deliver clean energy while providing much-needed ancillary services to the province. Along with its Clean Electricity Growth Plan through 2028, and the final coal unit shutdown scheduled in 2025, we see potential for investors to better appreciate TransAlta’s positive exposure to the energy transition trends, leading to its stock trading closer to its pure-play renewable peers,” he said.
Elsewhere, other analysts making adjustments include:
* TD Securities’ John Mould to $14 from $15 with a “buy” rating.
“We attribute Friday’s 5-per-cent share-price increase to TA’s newly announced buyback plans for 2024, following a mixed Q4/23 release and reaffirmed 2024 guidance,” said Mr. Mould. “As Alberta’s largest generator by capacity, we believe TA’s leading position in Canada’s only deregulated power market cannot be easily duplicated. In our view, the benefit of TransAlta’s diverse Alberta asset portfolio and optimization expertise has been demonstrated in recent quarters. We view the current share price as a good entry point, given TransAlta’s discounted valuation, renewable power growth strategy, near-term opportunities in the Alberta market, and quality hydro assets.”
* CIBC’s Mark Jarvi to $18.50 from $18 with an “outperformer” rating.
“TA’s new commitment to more buybacks is the right move, in our view, and can be balanced with continued investment in more contracted, higher-multiple clean power assets. We believe the pending Heartland deal could offer more upside than the market ascribes today. While TA’s re-rating may take a bit more time, we still believe it can happen,” said Mr. Jarvi.
* BMO’s Ben Pham to $16 from $17 with an “outperform” rating
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With its management suggesting a “growth inflection point,” Stifel analyst Daryl Young upgraded CCL Industries Inc. (CCL.B-T) to a “buy” rating from “hold” previously.
“Our upgrade comes somewhat sheepishly on the heels of last week’s 16-per-cent share price increase alongside Q4/23 results,” he said. “However, in our view, the marked change in management’s tone/ commentary that 2024 is shaping up to be the best outlook since 2017/2018 is hard to ignore (particularly given its conservative track record). Demand across effectively all divisions is now poised to inflect from post-COVID troughs (CCL Design/electronics, and Innovia were the major laggards), and will be the first time in years that all divisions are contributing simultaneously. Layer-on the significant B/S flexibility (approximately 1.1 times leverage) and we believe there is a compelling case for 10-per-cent EPS growth. Furthermore, despite the share price move, the stock is still trading towards the low-end of its historical range at 16.1 times P/E, while premium peers are towards their higher-ends, supporting a continued catch-up trade.”
Mr. Young emphasized the Toronto-based label, security and packaging solutions providers “robust” outlook for 2024 with earnings per share growth expected to exceed management’s 5-per-cent goal. He’s now projecting a 7.1-per-cent year-over-year increase.
“Importantly, the mix of revenues coming from higher-quality (and higher margin) businesses such as RFID [Radio Frequency Identification] continues to grind higher and bolster results,” he said. “CCL is investing in capacity around thematically hot end-markets such as GLP-1 drugs (instructional labels in CCL Segment) and the AI revolution (via CCL design), but admittedly these are still relatively immaterial to consolidated results. Innovia is set to see significantly improved profitability this year alongside operating leverage and with the consolidation of its Belgian facilities into the U.K. and Australian operations, which is expected to add $17-$20-million of incremental annualized operating income (commencing in H2/24).”
“We have updated our estimates and now forecast 5.4-per-cent organic growth in 2024, up from 2.0 per cent previously, reflecting anticipated stronger performance from the CCL Segment, Checkpoint, and Innovia. At Innovia the work-down of excess label materials inventory which saw organic results decline 25 per cent in 2023, appears to have come to an abrupt finish in Q4/23, with management noting strong (double-digit) order increases to kick off 2024. Within the core CCL Segment, we now assume a faster recovery from the electronics sub-segment combined with increasing optimism around a volume recovery from the CPG customers. We had previously assumed a more prolonged downturn in end-market demand in Europe and North America but management indicated it expects the CPGs to spur volume growth via promotional activity (and LatAm growth continues at high-teens rates). At Checkpoint the broader adoption cycle for RFID is taking hold, beyond just apparel, and is now inflecting to be a more dominant driver of Checkpoint performance.”
Also seeing potential upside from more active capital allocation, the analyst hiked his target for CCL shares to $79 from $65. The average is $79.50.
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Exchange Income Corp.’s (EIF-T) “solid” fourth-quarter 2023 and reaffirmation of its financial guidance reaffirm a positive outlook for 2024, according to ATB Capital Markets analyst Chris Murray.
“Valuations remain attractive, and we see normalizing conditions at several portfolio companies,” he said. “This, combined with the ramp-up of new medevac contracts and an active M&A environment, positions EIF for accelerated H2/24 and 2025 growth.”
Shares of the Winnipeg-based acquirer of industrial businesses jumped 4.8 per cent on Friday quarterly revenue and adjusted fully diluted earnings per share of $656.7-million and 70 cents, respectively, falling in line with Mr. Murray’s forecast of $657.4-million and 68 cents. He said the results were “highlighted by M&A-led growth and a positive impact from recent contract wins in Aviation, which led to 15.8-per-cent year-over-year EBITDA growth despite facing a challenging comp in Manufacturing.”
Exchange Income also reiterated its expectation for adjusted EBITDA of $600-million to $635-million in the current fiscal year, which implies double-digit growth across its existing asset base “with M&A providing potential upside.”
“Management expects the impact of supply chain challenges and inflationary pressure to continue to challenge performance at certain portfolio companies, particularly in manufacturing, albeit to a moderating degree,” said Mr. Murray. “The Company continues to see positive demand trends across its portfolio, with passenger volumes in some regions exceeding 2019 levels. We continue to view the Company as positioned to deliver significant growth in 2024 and 2025, led by normalizing operating/demand conditions at larger operating companies, namely Regional One and Quest, recent contract wins in aviation, and a meaningful contribution from acquisitions completed in 2023, including BV Glazing, Hansen Industries, and DryAir.
“Management was constructive on trends it is seeing across its portfolio companies. Management is anticipating a gradual increase in leasing activities at Regional One throughout 2024 and expects to exit the year at a pre-pandemic level run rate, boding well for margin trends in H2/24 and 2025 as incremental activity comes with very high margin contribution (more than 80 per cent). The Company continues to see strong demand for quoting at Quest and remains bullish on the longer-term outlook but acknowledged that rate pressures are causing some project delays and slowing conversion to backlog. While Northern Mat is set to lap a challenging comp in Q1/24, management remained constructive on current levels of profitability (i.e., $75-million in annualized EBITDA) and the overall outlook for the business, expecting the remainder of 2024 to be similar to comparable 2023 quarters.”
Raising his forecast for both 2024 and 2025, Mr. Murray increased his target for Exchange Income shares, which possess an unanimous buy-equivalent recommendation from analysts on the Street, to $63 from $60, keeping his own “outperform” rating. The average target on the Street is $63.55, according to LSEG data.
Others making target adjustments include:
* Raymond James’ Steve Hansen to $73 from $70 with a “strong buy” rating.
“By all accounts, 2024 is shaping up as a pivotal year for EIF’s Essential Aviation & Aerospace segments, with a flurry of marquee contracts already in-flight or beginning to ramp (BC & Manitoba medevac, Air Canada, UK surveillance),” said Mr. Hansen. “Despite this flurry of ‘embedded growth’, management still has additional growth opportunities in their sights, including adjacent medevac tenders, a long-term UK surveillance opportunity (2 times scope), and Canada’s Future Aircrew program, just to name a few.”
“We continue to recommend shares of Exchange Income Corp. (EIC) based upon our constructive view of the firm’s: 1) robust embedded growth prospects; 2) M&A optionality; 3) longstanding track record for value creation; and 4) compelling valuation & total return prospects.”
* TD Securities’ Tim James to $65 from $63 with a “buy” rating.
* Canaccord Genuity’s Matthew Lee to $65 from $63 with a “buy” rating.
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Pet Valu Holdings Ltd. (PET-T) is “well-positioned to capitalize on a growing pet economy,” according to Mr. Murray, who also touted a “long runway for growth.”
“PET’s smaller store footprint supports a wide range of locations, offering a franchise-led model with local owner/operator knowledge focused on premium product offerings and services for dedicated pet owners backed by a national distribution network,” he said. “Pet Valu has delivered mid to high single-digit same-store sales for several years, reflecting a well-established operating model and secular tailwinds supporting pet ownership and spending levels. We expect same-store growth rates to mirror the industry’s historical mid-single-digit growth rate in the coming years.”
“PET operates a network of 766 stores, with management highlighting whitespace to expand to 1,200 stores over the next decade. We expect PET to maintain a 40 to 45 store per year run-rate in coming years consistent with historical levels, skewing heavily toward franchise stores as the Company executes a capital-light growth strategy focused on local franchises. PET is in the middle of a multi-year investment ($110-million) to bolster its distribution and IT capabilities, which we expect to translate into margin benefits through efficiency gains and cost absorption while providing the necessary capacity to support its next leg of store and ecommerce growth. We believe favourable secular growth trends and new unit expansion provide a compelling opportunity for longerterm growth that comes with limited execution risk and capital requirements.”
In a research report released Monday titled A Basket of Warm Valu, Mr. Murray initiated coverage of the Markham, Ont.-based retailer with an “outperform” recommendation, downplaying recent investor concerns about intensifying competition in the industry.
“Shares pulled back meaningfully in 2023 on concerns surrounding consumer spending and competitive pressures after Canadian Tire announced an expanded partnership with U.S.-based Petco and pet-focused, ecommerce player Chewy announced plans to enter the Canadian market,” he said. “While the developments are worth monitoring, we believe Pet Valu’s differentiated model, particularly its higher-touch experience, adaptable store format, and expanding omnichannel capabilities, allows the Company to maintain its leadership position in the domestic market.”
Calling it a “capital-light compounder,” the analyst set a target of $41 per share. The average target on the Street is $36.70.
“Pet Valu trades in line with Canada’s grocery stores despite operating as a specialty retailer and leveraging a capital-light growth model in an attractive category set to benefit from secular tailwinds,” Mr. Murray said. “We believe Pet Valu should trade closer to 13.0 times EV/EBITDA, in line with higher growth specialty retailers and franchise operators, providing upside to current valuations. We expect franchise-led growth to support a gradual increase in ROIC, positioning the Company for a re-rating over the medium term.”
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When Empire Company Ltd. (EMP.A-T) reports its third-quarter 2024 financial results on March 14, National Bank Financial analyst Vishal Shreedhar expects to see evidence of conventional grocery stores lagging the growth of their discount peers as “pressured consumer spending continues to weigh.”
“We remain cautious as we look for confirmation that EMP can sustainably build business momentum,” he said in a Monday note. “Our review of peer commentary indicates trends are a continuation of prior quarters, which could weigh on EMP’s near-term performance (lower discount mix).
“Specifically, our review suggests: (i) A continued focus on value (private label, high promotional penetration and shift to discount); and (ii) A moderation in cost increase requests from suppliers (our view is that it remains higher than historical levels).”
Mr. Shreedhar is currently projecting consolidated earnings per share for the quarter of 63 cents, which is 5 cents lower than the consensus on the Street and a penny less than the same period a year ago. He attributes that 2-per-cent year-over-year decline largely to higher expenses, particularly retail labour costs.
“We consider Food Retailing (FR) segment results to be more meaningful than total company results for the purposes of evaluating recurring earnings power (total company results include contribution from the Investments/Other income segment),” he said. “For reference, we model FR EPS of $0.58, lower by 0.4 per cent year-over-year. We forecast core FR sssg [same-store sales growth], excluding fuel, of 1.5 per cent versus 0.1 per cent last year. This is below recent peer reporting with Loblaw delivering sssg at 2.0% and Metro delivering sssg of 3.4 per cent, adjusted for a Christmas shift. Empire’s sssg is expected to underperform peers due to a lower mix in the better performing discount grocery stores as well as timing differences.”
While Mr. Shreedhar sees “moderating” food inflation, he warned “the shift towards discount is expected to endure.
“We analyze thousands of customer reviews gathered from social media for the major grocers (Loblaw, Metro and Empire),” he said. “In our opinion, customer reviews are a concrete, measurable indicator of customer satisfaction and loyalty — attributes that ultimately drive sales and profitability. We view these insights to be akin to net promoter scores, which are amongst the most important metrics evaluated by many retailers.
“Our data indicates that the average score gap between conventional and discount has increasingly favoured discount, suggesting that consumers are increasingly amenable to shopping at discount banners. We view the trend to be reflective of a longer-term shift from conventional to discount. This data also suggests that even as inflation abates, consumers are continuing to prefer discount stores.”
Reducing his earnings expectations for both 2024 and 2025, Mr. Shreedhar trimmed his target for Empire shares to $41 from $42, maintaining a “sector perform” recommendation. The average is $40.13.
“The lower price target reflects lower estimates,” he said. “Looking forward, we believe that EMP has opportunity related to ongoing improvement initiatives and inexpensive valuation. That said, it has structural deficiencies versus peers including an elevated mix of lower growth conventional stores and less pharmacy exposure.”
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In other analyst actions:
* TD Securities’ Graham Ryding downgraded Onex Corp. (ONEX-T) to “hold” from “buy” with a $115 target. Elsewhere, others making changes include: Scotia’s Phil Hardie to $129 from $125 with a “sector outperform” rating and RBC’s Geoffrey Kwan to $119 from $115 with a “sector perform” rating. The average is $119.67.
“We would view this as an in-line quarter,” said Mr. Ryding. “The hard NAV/share beat was a positive, but fundraising updates and/or targets for 2024 were limited. The outlook for fundraising around the PE platform remains muted, which will likely keep profitability for the asset manager challenged. Credit continues to perform well from a fundraising and FRE perspective. Valuation, in our view, now appears more reasonable at 0.70 times P/ NAV (slightly below the L5Y average of 0.76 times). We are maintaining our $115.00 target price, but moving to HOLD, given the limited share-price upside and what we view as a lack of near-term catalysts.”
* Mr. Ryding upgraded CI Financial Corp. (CIX-T) to “action list buy” from “buy” with a $23 target, up from $21. Other tweaks include: Scotia’s Phil Hardie to $20 from $19 with a “sector perform” rating, Jefferies’ Aria Samarzadeh to $20 from $19 with a “buy” rating, BMO’s Tom MacKinnon to $18 from $17 with a “market perform” rating, Raymond James’ Stephen Boland to $20 from $19 with a “market perform” rating and RBC’s Geoffrey Kwan to $19 from $18 with a “sector perform” rating. The average is $19.56.
“This was a constructive quarterly result, in our view,” said Mr. Ryding. “Results came in slightly above expectations (and consensus). Although leverage moved higher quarter-over-quarter (contingent liability payments), we expect this ratio to trend lower in 2024 (EBITDA growth) and 2025 (EBITDA growth and debt repayments). Share buybacks continue to be material. Lastly, we were encouraged with the improved disclosure around capital deployment (contingent liabilities and buybacks in 2024, deleveraging and buybacks in 2025). Our target price moves to $23.00 (from $21.00) on our higher estimates, and we are moving to an ACTION LIST BUY rating (from Buy), given the constructive fundamentals across asset management and wealth, and strong FCF.”
“We see solid share-price upside potential, given CI’s improving fundamentals. We believe the asset management business appears stable. The Canadian and U.S. wealth platforms are delivering asset growth and margin expansion. We are encouraged with the increased visibility around FCF deployment.”
* CIBC’S Nik Priebe downgraded Guardian Capital Group Ltd. (GCG.A-T) to “neutral” from “outperformer” with a $54 target. The average target on the Street is $58.
“Guardian reported what we interpreted to be a relatively uneventful quarter. Operating earnings missed our estimate, but it is important to keep in mind that quarterly variability is largely driven by the asset management segment, which we believe represents only 16 per cent of GCG.A’s market value. Guardian’s share price has performed very well over time and now trades at the narrowest discount to our sum-of-the-parts value that we have seen in our time covering the name. The implied upside is more consistent with a Neutral rating and as a result we are downgrading the stock,” he said.
* Ahead of Tuesday’s release of its fourth-quarter results, Raymond James’ Michael Glen raised his 5N Plus Inc. (VNP-T) target to $6 from $5 with a “strong buy” rating. The average is $5.50.
“We expect the biggest focal point for the 4Q result will be the 2024 and 2025 EBITDA guidance,” said Mr. Glen. “Current 2024 EBITDA guidance is $45-50-million (consensus $48.7-million) and we anticipate management will reiterate this outlook. We are anticipating that the company will introduce 2025 EBITDA guidance, and we are introducing our initial estimate of $55.8 mln (inline with consensus with a range of $54.8-57.1-million).”
* RBC’s Jimmy Shan moved his Boardwalk REIT (BEI.UN-T) target to $86 from $82 with an “outperform " rating. Other changes include: Scotia’s Mario Saric to $82 from $77.50 with a “sector perform” rating, TD Securities’ Jonathan Kelcher to $89 from $84 with a “buy” rating and BMO’s Michael Markidis to $84 from $78 with an “outperform” rating, Desjardins Securities’ Kyle Stanley to $86 from $81 with a “buy” rating, CIBC’s Dean Wilkinson to $81 from $74.50 with a “neutral” rating and National Bank’s Matt Kornack to $87 from $82 with an “outperform” rating. The average is $82.06.
* CIBC’s Dean Wilkinson increased his Canadian Apartment REIT (CAR.UN-T) target to $55 from $50 with a “neutral” rating. Other changes include: TD Securities’ Jonathan Kelcher to $62 from $61 with an “action list buy” rating, BMO’s Michael Markidis to $57 from $52 with an “outperform” rating and National Bank’s Matt Kornack raised his target to $60 from $55.50 with an “outperform” recommendation. The average is $58.33.
* RBC’s Walter Spracklin cut his Chorus Aviation Inc. (CHR-T) target to $3.50 from $3.75 with an “outperform” rating. Other changes include: Scotia’s Konark Gupta to $3 from $3.30 with a “sector perform” rating and CIBC’s Kevin Chiang to $3.75 from $4.25 with an “outperformer” rating. The average is $3.62.
“CHR ended 2023 on a strong note, topping guidance and expectations,” said Mr. Gupta. “However, the stock pulled back 6.6 per cent as the market likely focused on EPS miss and underwhelming 2024 guidance relative to consensus, while likely ignoring that cash flow conversion will accelerate this year. Management noted that consistent with its asset light strategy, revenue and earnings are expected to decline, but cash flows remain strong. This is due to ongoing deleveraging, driven by asset sales and re-leasing of some aircraft with reduced or no debt. Management also provided more visibility on Fund III closing. We have trimmed our EBITDA and EPS estimates while improving FCF forecasts, which resulted in a net reduction in our target.”
* Canaccord Genuity’s Robert Young hiked his Docebo Inc. (DCBO-Q, DCBO-T) target to US$65 from US$50 with a “buy” rating. Other changes include: Scotia’s Kevin Krishnaratne to US$65 from US$60 with a “sector outperform” rating, Cormark Securities’ Gavin Fairweather to $82 from $77 with a “buy” rating, ATB Capital Markets’ Martin Toner to $100 from $95 with an “outperform” rating, Stifel’s Suthan Sukumar to US$70 from US$60 with a “buy” rating and Eight Capital’s Christian Sgro to US$65 from $75 with a “buy” rating. The average is US$56.25.
“Docebo reported strong year-end results with forward guidance on growth and profitability,” said Mr. Sgro. “We think the enterprise learning opportunity remains in the early stages, and that Docebo is an established leader in a market that is evolving rapidly in terms of size and complexity. We believe the company has now proven it has the scale to both protect its innovative edge and flex margins higher each quarter, delivering on growth and profitability for shareholders.”
* TD Securities’ Steven Green cut his Eldorado Gold Corp. (EGO-N, ELD-T) target to US$13 from US$14.50 with a “hold” rating, while National Bank’s Shane Nagle lowered his target to $19 from $21 with an “outperform” rating. The average is $19.81 (Canadian).
* TD Securities’ Michael Van Aelst raised his George Weston Ltd. (WN-T) target to $215 from $205 with a “buy” rating. The average is $196.43.
* TD Cowen’s James Schumm moved his GFL Environmental Inc. (GFL-T) target to $57 from $55 with an “outperform” rating. The average is $50.04.
* BMO’s Nevan Yochim raised his High Liner Foods Inc. (HLF-T) target to $13.50 from $11.50 with a “market perform” rating. The average is $14.50.
* National Bank’s Shane Nagle raised his Hudbay Minerals Inc. (HBM-T) target to $8.75 from $8.50, keeping a “sector perform” rating. The average is $9.98.
* CIBC’s Sumayya Syed cut her Melcor Real Estate Investment Trust (MR.UN-T) target to $3.75 from $5.25 with a “neutral” recommendation. The average is $4.13.
* CIBC’s Robert Catellier increased his Pembina Pipeline Corp. (PPL-T) target to $56 from $55 with an “outperformer” rating, while ATB Capital Markets’ Nate Heywood raised his target to $55 from $53 with an “outperform” rating. The average is $52.79.
* Raymond James’ Steve Hansen hiked his RB Global Inc. (RBA-N, RBA-T) target to US$90 from US$78 with an “outperform” rating. Other changes include: Scotia’s Michael Doumet to US$88 from US$76 with a “sector outperform” rating and RBC’s Sabahat Khan to US$93 from US$75 with an “outperform” rating. The average is US$80.50.
“To us, RBA is showing better execution (than ever), delivering faster growth, while also driving cost efficiencies. We believe the focus on ‘efficient growth’ has legs into 2024. While expectations have risen following several beats, we still view RBA as a low-expectation/low-multiple stock,” said Mr. Doumet.
* RBC’s Pammi Bir bumped his Sienna Senior Living Inc. (SIA-T) target to $14 from $13 with a “sector perform” rating. The average is $14.20.
David Leeder