Inside the Market’s roundup of some of today’s key analyst actions
Scotia Capital analyst Ben Isaacson is “moving to the sidelines” on Lithium Americas Corp. (LAC-T), downgrading his recommendation for its shares to “sector perform” from “sector outperform” on Monday based on a funding gap at its Thacker Pass mine in Nevada as well as lower price expectations for the metal and a “lack” of near-term catalysts.
“We’ve made several revisions to our LAC model, which sees a material step down to equity value,” said Mr. Isaacson in a research note. “First, and consistent with our Q4 reporting moves across our universe, we’ve reduced our deck to $20k per ton LCE [lithium carbonate equivalent] from $25k and have moved to a 10-per-cent discount rate from 8 per cent. Second, we’ve updated our NAV for the 30-per-cent cost overrun at Thacker (to $2.93-billion from $2.27-billion) + some SG&A savings. The $660-million capex creep alone will cost LAC’s NAV $4 per share. Third, we have updated our model for the DOE financing, with terms that are slightly better than expected. Fourth, we estimate that a $300-million funding gap has emerged to complete Phase 1, or about one-third of the company’s market cap. This could be expensive capital to raise, considering the rate environment vs. how the market is valuing LAC’s paper. Fifth, we have updated GM financing assumptions for the $330-million final tranche. Even if we assume an $8 issuance (the stock is $6), shares dilute significantly vs. previous expectations. GM won’t fund this tranche until the gap has been solved. Sixth, we’ve updated Phase 2 economics, which provides significant scale benefits to the portfolio NAV. Our revised NAV is $7 per share.”
The analyst cut his target for Lithium Americas’ U.S.-listed shares to US$7 from US$15. The average target on the Street is US$10.94, according to LSEG data.
Elsewhere, JP Morgan’s Bill Peterson bumped his target to US$7 from US$5.50 with a “neutral” rating.
=====
The fourth-quarter 2023 financial results from Premium Brands Holdings Corp. (PBH-T) reflect “consumer softness in Canada (temporary) and continued strong growth in the U.S., supported by healthy demand and new programs as more capacity comes online,” according to Desjardins Securities analyst Chris Li.
Shares of the Vancouver-based company slid 2.2 per cent on Friday after it reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $137-million, below both Mr. Li’s $150-million estimate and the consensus forecast on the Street of $154-million. The miss was attributed to “a challenging consumer environment in Canada (trade-down) resulting in Specialty Foods (SF) volume declining by 4.3 per cent year-over-year.”
“This is in line with comments by the grocers,” said Mr. Li.
“Management expects the weakness to persist in 1Q, with improvement in 2Q. If the weakness persists, PBH plans to redirect capacity to the US, where it continues to see strong demand. In 4Q, US SF achieved strong volume growth of 9.3 per cent (12.5 per cent ex transitory items), with new capacity supporting healthy demand and new programs. Management expects volume growth to accelerate in 2024. The Distribution business met our cautious expectations, with the softness expected to persist in 1H due to consumer trade-down in Canada and lobster supply challenges.”
While he thinks the company’s outlook for 2024 “reflects solid growth,” he warned it is “skewed” to the second half of the year.
“Based on the guidance mid-point, PBH expects revenue, EBITDA and gross margin to increase by 8 per cent, 14 per cent and 60 basis points, respectively,” he said. “Growth will be weighted toward 2H, predicated on macro improvement as interest rates decline. Management assumes a largely stable commodity outlook. SF in the U.S. will drive most of the growth, with a strong margin contribution (25–45 per cent). Our revenue/EBITDA growth estimates of 5 per cent/10 per cent are moderately conservative vs guidance.”
To reflect the near-term macro headwinds, Mr. Li cut his revenue and earnings expectations through fiscal 2025, leading him to lower his target for Premium Brands shares to $105 from $110, reiterating a “buy” recommendation. The average target on the Street is $112.33.
“We expect the shares to be range-bound in the near term until there is better visibility on macroeconomic conditions, but we believe these risks are largely reflected in PBH’s near-trough valuation (approximately 10.4 times forward EBITDA),” he said. “PBH remains well-positioned for long-term growth, in our view.”
Other analysts making changes include:
* Stifel’s Martin Landry to $104 from $108 with a “buy” rating.
“Management introduced a 2024 guidance which came in-line with expectations and calls for a healthy EBITDA growth of 14 per cent year-over-year,” said Mr. Landry. “However, we may see negative earnings revisions on 2024 estimates despite the guidance being in-line given management missed its guidance in the last two years. With that said, PBH has significant capacity coming online within its Specialty Food’s segment following a large CAPEX cycle, which should support revenue growth in 2024. This should also lead to a faster EBITDA growth as contribution margin within the SF are high. Despite a sizeable earnings miss, PBH’s shares have been resilient on Friday, down 2 per cent, suggesting that the recent share price decline already reflects most of the near-term issues faced by the company.”
* RBC’s Sabahat Khan to $99 from $103 with a “sector perform” rating.
“Premium Brands reported Q4 revenue/Adjusted EBITDA below RBC/ consensus estimates and initiated 2024 guidance, which was broadly in line with Street estimates. Looking forward, our cautious stance on the company remains unchanged and reflects the weaker consumer macro backdrop (reflected in soft recent quarterly results),” said Mr. Khan.
* BMO’s Stephen MacLeod to $115 from $117 with an “outperform” rating.
“Q4/23 was below forecast, but newly introduced 2024E guidance was in line. Organic volume growth was below 4-6-per-cent range; 9.3-per-cent growth in core U.S. sales initiatives were offset by transitory impacts in SF, Canadian consumer tradedown, and lobster harvesting challenges,” he said. “Capacity expansion projects and new initiatives within Specialty Foods (more than $1.6-billion invested last five years) are expected to drive volume growth and improved margins through 2024E. Acquisition pipeline robust.”
* TD Securities’ Derek Lessard to $120 from $130 with a “buy” rating.
“We urge investors to stay the course, as we see normalizing operating conditions and incremental margin contributions from PBH’s investments pushing margins up over time, while improving FCF should also allow PBH to deleverage more materially. All of this should push valuation back up closer to its historical average,” said Mr. Lessard.
* CIBC’s John Zamparo to $97 from $102 with a “neutral” rating.
=====
While acknowledging Transcontinental Inc. (TCL.A-T) has “more to do amid progress,” National Bank analyst Adam Shine sees its EBITDA outlook as “conservative” following recent meetings with new chief executive officer Thomas Morin.
“Post-Q1, we marketed TCL’s CEO who was promoted to the role in June 2023,” he said. “Since then, the company scaled fiscal 2023 cost savings to over $40-million exiting Q3 (skew to Printing) and announced in December a balance sheet & profitability improvement program to get $20-$40-million in recurring savings in f2025 (early impact in H2/24).
“This is going well: 1) fixed costs coming out (6-per-cent headcount reduction by Q2), 2) less profitable activities & plants being reviewed (closing Saint-Hyacinthe printing plant in April, closed packaging facility in Tomah, Wisconsin in February), 3) COGS being targeted for biggest savings opportunity (procurement, process improvements), and 4) initially targeted $100-million worth of real estate sales evolving (Quebec City building sold for $12-million in Q4, 4 other properties now up for sale).”
Mr. Shine emphasized the Montreal-based company faces a tougher Packaging comparable in the second quarter, but he’s forecasting the “quarterly cadence of fiscal 2024 where our flat Adj. EBITDA estimate appears to have upside (guidance is for ‘at the very least’ flat).”
Projecting leveraging to continue to fall and free cash flow “resuscitating strongly,” he added: “We see leverage at 1.6 times in f2024 and 1.2 times in f2025 (these both now include negative 12 basis points impact assuming next 4 properties get sold). FCF was $263-million in f2020, fell to $119-million in f2021 and then $26-million in f2022 on resin-related inventory issues, but rose to $229-million in f2023 (we forecast growth) as working capital improves and capex comes down. While M&A continues to get explored, we’ll see if leverage near 1.6 times triggers share repurchases and renewed dividend raises.”
Expecting $75-million in real estate proceeds in fiscal 2024 and reducing his capital expenditure projection following the year to $100-million from $125-million, Mr. Shine raised his target for Transcontinental shares to $18.50 from $18, reaffirming an “outperform” recommendation. The average target on the Street
=====
Heading toward first-quarter 2024 earnings season, Citi analyst Itay Michaeli expressed a preference for North American automakers over parts suppliers.
In a research note released Monday, he said the setup for suppliers is “not very compelling” and suggests investors stay “selective.”
“The Q1 supplier setup looks tricky for a number of reasons — China customer mix, U.S. trim mix risk, seasonally lower margins,” said Mr. Michaeli. “There are some positives like the strengthening production outlook in Europe, the potential for strong bookings and a case that supplier shares already bake-in low expectations post year-to-date underperformance. Tactically, we still prefer select secular growth exposures (MBLY, APTV, VC) on compelling long-term trends and our call for improving sentiment around spring/summer.”
Mr. Michaeli opened a pair trade on Monday, going overweight on Aurora, Ont.-based Magna International Inc. (MGA-N, MG-T) and underweight on Lear Corp. (LEA-N).
“Key points: (1) LEA has outperformed MGA by 10 points year-to-date to trade at a more than 1 times ‘24 P/E premium. Historically these stocks have traded somewhat in lockstep and at similar multiples; (2) From a revenue exposure perspective, MGA actually seems somewhat more de-risked having less exposure to China/AP, slightly more exposure to Europe and somewhat less trim-mix exposure by our estimate (though LEA North American platform exposure a benefit); (3) Both companies provided mixed/soft 2024 guides, but we’d note two factors in MGA’s favor: (a) Consensus estimates seem a bit more aggressive for LEA than for MGA; (b) With LEA having provided a softer 2025 backlog (albeit possibly conservative), consensus 2025-26 revenue growth estimates are now similar for both companies—questioning the recent multiple divergence. (4) If MGA can execute on margins in the coming quarters, sentiment should improve as peaking 2024 capex bring the 2025/6 revenue growth + FCF improvement story into view. Risks to the trade: (1) If LEA outexecutes MGA on margins and/or acknowledges backlog/GoM upside. (2) Fisker-related headline risks for MGA,” the analyst said.
Mr. Michaeli reaffirmed a “neutral” recommendation and US$58 target, below the US$63.11 average, for Magna shares. His Lear target remains US$150 (versus US$166.08) also with a “neutral” rating.
For automakers, he thinks General Motors Co. (GM-N) is “looking most compelling right now” He has a Street-high US$95 target and a “buy” rating. The average is US$49.69.
“Fresh datapoints support this stance: (1) March U.S. retail demand appears off to a decent start with volume running ahead of our expectation (more than 16 million SAAR) though pricing somewhat below—netting to OEM retail revenue running 6 per cent ahead of our estimate. (2) S&P Global raised Q1 NA production forecasts for GM & Ford—including for Pickup Trucks. Ford Pro looks particularly well-positioned into Q1 on strong Super Duty production. Also notable is that S&P slightly raised 2024 GM Ultium EV production. (3) GM’s early-March U.S. pricing continues to look encouraging. (4) On the auto cycle, fresh data suggests the 2023 scrap rate fell to 4.2 per cent from 4.3 per cent in 2022, even as miles-driven-per-vehicle rose. This suggests room for scrap to move higher, which if combined with further vehicle density gains (as our 2023 survey suggested), should drive continued auto demand resilience. Lastly, the Cox/Moody’s auto affordability index declined to its best level since July 2021. Stepping back, while numerous headwinds still exist (softer pricing, inventory), recent data paints a more resilient picture vs. what GM/F are pricing in,” he said.
=====
Seeing Spin Master Corp. (TOY-T) “deploying a more powerful playbook,” RBC Dominion Securities analyst Drew McReynolds assumed coverage with an “outperform” rating on Monday.
“We see value in the stock reflecting what we believe is the accelerating deployment of a more powerful playbook whereby: (i) Spin Master is among the best positioned in our coverage to profitably scale a true IP flywheel with synergistic Entertainment and Digital Games creative centres; (ii) we see earnings upside should early promising Unicorn Academy franchise traction be sustained; (iii) we see the potential for Digital Games upside given strong secular tailwinds; and (iv) we see diversifying, recurring and margin accreting revenue growth as a catalyst for renewed multiple expansion from near historic lows,” he said.
In a research report released Monday, Mr. McReynolds touted what he sees for the Toronto-based toy make as “an attractive set-up with better alignment.”
“Acknowledging inherent business model volatility, we view current levels as an attractive and timely buying opportunity reflecting the alignment of: (i) recalibrated expectations following the provision of 2024 guidance including the lower than expected Melissa & Doug contribution that could very well prove transitory; (ii) the positive flow-through impact of $25-million-$30-million in Melissa & Doug net cost synergies on adjusted EBITDA volatility/ visibility through 2026/2027; (iii) easier year-over-year comps with the lapping of the more challenged macro environment that emerged in 2023, with the potential for improving macro conditions through 2024/2025; (iv) a strengthening IP pipeline underpinned by PAW Patrol Universe, Unicorn Academy and Vida the Vet, new digital game launches and growing digital game MAUs/subscribers, and the recently created New Brand Group; and (v) a near historically low valuation (FTM [forward 12-month] EV/EBITDA of 6.9 times versus an average for toy peers of 9.3x) alongside a strong balance sheet (0.7 times as of Q1/24), consistent FCF generation ($2.01/share for 2024E) and what is likely to be a very active 3 milllion share NCIB,” he said.
Mr. McReynolds lowered the firm’s target for Spin Master shares to $46 from $50 with an “outperform” rating. The average is $45.25.
=====
While Neo Performance Materials Inc. (NEO-T) fourth-quarter results disappointed, capping a “challenging” 2023, Raymond James analyst Frederic Bastien thinks a inflection point is approaching.
“Neo Performance Materials’ 2023 results showed the firm is navigating waters made choppy by shifting consumer behaviors in China, the dragging Ukraine-Russia conflict and still fragile auto and semiconductor supply chains,” he said. “None of these dynamics take our attention away from NEO’s attractive long-term secular prospects, strong balance sheet, healthy dividend yield and attractive valuation. With earnings poised to improve and rare earth prices about bottom, we believe now is the right time for investors to be adding to positions in the stock.”
Maintaining an “outperform” rating, Mr. Bastien cut his target to $11 from $13. The average is $10.90.
Elsewhere, Stifel’s Ian Gillies lowered his target to $7.50 from $9 with a “hold” rating.
“We expect 2024 to be another challenging year as commodity prices continue to worsen for NEO’s key products,” said Mr. Gilllies. We have taken down our 2024 and 2025 EBITDA estimates by 23 per cent and 19 per cent to $42-million and $49-million, respectively. Our target price is therefore lowered to $7.50 from $9.00 previously. We are maintaining our HOLD rating despite an implied return of 24.5 per cent to NEO’s current share price. We remain on the sidelines despite the favorable return to our target price as we believe there are increased risks to NEO’s earnings due to the significant volatility of commodity prices and the stock’s market capitalization and illiquidity would require a higher return in order to warrant a Buy rating, in our view.”
=====
In other analyst actions:
* Touting its new dividend policy that saw an increase to its quarterly payout and a pledge for annual raises, TD Securities’ Greg Barnes upgraded Wheaton Precious Metals Corp. (WPM-N, WPM-T) to “buy” from “hold” with a US$53 target, rising from US$51. Elsewhere, Stifel’s Ingrid Rico lowered her target to $72 from $75 with a “buy” rating. The average target on the Street is US$56.20.
“In our view, WPM has the better GEO growth profile over the next several years relative to its closest peer, Franco-Nevada, and we like the move to a progressive dividend policy,” said Mr. Barnes
* Emphasizing its “high-grade” assets and near-term growth potential, CIBC’s Allison Carson initiated coverage of Wesdome Gold Mines Ltd. (WDO-T) with an “outperformer” recommendation and $12 target. The average target on the Street is $9.91.
“Wesdome is a Canadian mid‑tier gold producer with two high-grade mines in the Tier 1 jurisdictions of Ontario and Quebec,” she said. “With significant de-risking completed over the past two years, the company is focused on optimizing assets and filling mills under the new management of CEO Anthea Bath, who joined Wesdome in mid-2023. We expect the company to deliver peer-leading production growth, pay down debt and produce significant free cash flow over the next two years.
“Our price target is based on a 50/50 net asset value (NAV) and cash flow (CF) valuation methodology. We use 1.2 times P/NAV and 8.5 times P/CF target multiples, which are above the peer group averages of 0.5 times and 5.3 times respectively, reflecting the high-grade nature of Wesdome’s reserves in low‑risk jurisdictions. We believe the stock could continue to re-rate upwards as the company delivers production growth to over 200koz/year over the next two years and as it continues to grow reserves and resources.”
* In reaction to a technical report update on its Fekola mine in Mali, Scotia’s Ovais Habib cut his B2Gold Corp. (BTO-T) target by $1 to $5.50 with a “sector outperform” rating. The average is $6.09.
“We view the results of the study as mixed for BTO shares as the FS fell short of our expectations, particularly on operating costs and NPV, although the Fekola mine continues to host underground upside potential not yet studied in the latest technical report,” he said. “Following model updates, we expect BTO could generate FCF of negative $150-million in 2024 (after adjusting for $500-million gold prepay) and $200-million in 2025 (6-per-cent yield) at current spot prices.”
* Jefferies’ Stephanie Moore raised her targets for GFL Environmental Inc. (GFL-N, GFL-T) to US$51 from US$46 and Waste Connections Inc. (WCN-N, WCN-T) to US$217 from US$195 with “buy” recommendations for both. The averages are US$44.16 and US$183.15, respectively.
* RBC’s Jimmy Shan cut his Nexus Industrial REIT (NXR.UN-T) target to $8.50 from $9, which is the current average, with a “sector perform” recommendation.
* CIBC’s Todd Coupland increased his Quarterhill Inc. (QTRH-T) target to $2.50 from $2 with an “outperformer” rating, while Raymond James’ Steven Li bumped his target to $2.25 from $1.80 with an “outperform” rating. The average is $2.21.
“Solid 4Q revenue and A-EBITDA beat. R&D investment and temporary dip in gross margin before projects going into operational phase will keep a lid on A-EBITDA margin near-term. Fundamentals are improving, and we like the strategy towards stronger software mix with the acquisition of Red Fox,” said Mr. Li.
David Leeder