Inside the Market’s roundup of some of today’s key analyst actions
The benefits of an integrated system are materializing for Keyera Corp. (KEY-T), according to Citi analyst Spiro Dounis.
He raised his target price for shares of the Calgary-based midstream oil and gas operator following stronger-than-expected 2023 results and to reflect new commercial activity on the KAPS pipeline system and the expectation for “slightly stronger” dividend growth.
“On KAPS, management announced a new 30kbpd [thousand barrels per day] contract, a significant step since the pipeline was first sanctioned back in 2019,” Mr. Dounis said. “We suspect over 80 per cent of the initial capacity has now been contracted with considerable upside to 350kbpd of capacity with low-cost pump additions. KEY remains in commercial discussions for more contracts and also appears to closer to a Zone 4 expansion with the NEBC Connector Pipe receiving approval. With Pipestone full, KEY may be able to leverage a processing expansion into more KAPS volumes. Simonette and Wapiti also benefit from spare capacity and operational leverage. With frac’s filling, the need to expand downstream also appears increasingly likely with Frac 3.”
In a research note released late Tuesday, the analyst did lowered his earnings per share projection for 2024 to $1.84 from $1.90 with his 2025 and 2026 forecast sliding to $2.11 and $2.30, respectively, from $2.12 and $2.33.
“We modestly reduce ‘24 estimate EBITDA to reflect the AEF [Alberta EnviroFuels] turnaround this spring that results in a $40-million impact,” he said. “Outer-year EBITDA estimates slightly increase to reflect KAPS potentially needing to expand (with pumps) sooner than expected, which would accelerate the need for more fractionation capacity. We forecast a 6-per-cent CAGR [compound annual growth rate] in the fee-based EBITDA through ‘28 with the FCF yield averaging 10 per cent over that time period. We also increase our dividend CAGR to 5 per cent from 4 per cent with KEY now targeting the higher-end of its 6-7-per-cent EBITDA CAGR through ‘25. Through ‘28 we expect KEY to return over 55 per cent of its CFO to shareholders.”
Reaffirming a “buy” recommendation for Keyera shares, Mr. Dounis bumped his target to $37 from $35. The average target on the Street is $36.36.
“KEY trades at a discount to historical levels despite an imminent FCF inflection,” he said. “We expect above-average EBITDA growth. Importantly, capital deployed over the last several years underwrites this organic growth with limited spending from here to achieve growth targets. Accordingly, we expect KEY to generate excess FCF that can be used to repurchase shares, increase its dividend at an accelerated rate, or reinvest in growth – a stark contrast from several years of a cash flow deficit.”
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In a separate report, Mr. Dounis lifted his valuation for Pembina Pipeline Corp. (PPL-T) to reflect the “ripple effect” from recently announced commercial success, including a 50,000 barrels per day ethane supply and transport agreement with Dow Chemical Canada and incremental Nipisi Pipeline contracts.
“Another capex reduction on Peace [Pipeline] Phase VIII expansion also positively impacts our valuation,” he said. “The 50kbpd ethane agreement could lead to a suite of low cost expansion projects at Empress, RFS III, and Alliance in order to extract more ethane. AEGS [Alberta Ethane Gathering System] and the Vantage pipeline benefit from additional volumes with an expansion opportunity on AEGS to fully supply the cracker (even from third party sources). The ethylene cracker (commencing in ‘27) could require over 100kbpd of ethane feedstock once fully operational in ‘29. Incremental ethane supply likely means more C3+ supply, which could catalyze low cost expansions on the Peace Pipeline where we believe more than 20 per cent of capacity could be added through a combination of optimization and low-cost pump station additions.”
The analyst maintained his near-term estimates for Pembina, but he increased his EBITDA expectations for 2025 through 2028 to “reflect the newly announced commercial agreements and potential for a suite of incremental low-cost, high-return opportunities to emerge as a result.”
“Our estimates imply a 7-per-cent EBITDA CAGR [compound annual growth rate] between ‘23-’28 on the fee-based business, consistent with the prior 5-year CAGR of 6 per cent but below the company’s 10-per-cent, 10-year EBITDA per share CAGR,” said Mr. Dounis. “We estimate an annual average FCF yield of 9 per cent through ‘28 and more than 50 per cent of CFO being returned to investors largely via the dividend (5-per-cent CAGR through ‘28).”
With a “neutral” recommendation (unchanged), he moved his target to $50 from $47. The average is $53.
“PPL boasts a growth backlog of high-quality and low-carbon projects; however, the company already trades at a premium to peers and likely reflects most of these positive attributes,” said Mr. Dounis. “PPL offers investors a unique dual track: a low-risk growing base business and one of the most holistic approaches to low-carbon growth among our coverage. PPL’s base business take-or-pay earnings profile bests its peers. Its growth backlog of low-carbon projects also stands out.”
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Desjardins Securities analyst Benoit Poirier said he’s “pleased” by Calian Group Ltd.’s (CGY-T) deal for assets associated with MDA Ltd.’s (MDA-T) nuclear services, calling it “another accretive acquisition in an attractive market that is benefiting from secular growth trends.”
“While the size of this acquisition is not overly material (contribution represents only 3.5 per cent of CGY’s TTM [trailing 12-month] EBITDA), we believe CGY could scale the business up (see early success of the HPT acquisition),” he said. “Combined with Decisive, this latest deal means CGY has already executed on more than 25 per cent of its three-year M&A EBITDA target ($36–43-million) released at its investor day.”
Mr. Poirier said the deal, announced Tuesday after the bell, clearly strengthens Calian’s nuclear capability and thinks an “attractive” multiple was paid.
“MDA has expertise in refurbishments and operational support, which is complementary to CGY’s consulting expertise,” he said. “MDA’s assets come with a specialized team of engineers providing system engineering and operations support for nuclear outage tooling and refurbishment projects (CGY has locked in MDA’s key employees). MDA’s nuclear team will be integrated into CGY’s existing nuclear business within the AT [Advanced Technologies] segment. The acquisition will close immediately.
“Subsequent to a follow-up with management, we understand that historically the business generates $2.5-million of annual EBITDA from $8.0-million of annual revenue, which implies an attractive margin of 31 per cent (vs CGY at 10–11 per cent). When considering closing costs, CGY paid $8.0-million for the asset carve-out, which implies an attractive multiple paid of 3.2 times EBITDA (vs CGY trading at 8.2 times).”
Reiterating his bullish stance and “buy” recommendation for Calian, he raised his target to $87 from $86 following increases to his revenue and earnings expectations through 2026. The average on the Street is $78.13.
“We encourage investors to revisit the CGY story given the potential for significant value creation associated with the company’s growth aspirations, recurring revenue and proven M&A strategy,” Mr. Poirier said.
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Desjardins Securities analyst Chris Li is maintaining his “favourable” view of Pet Valu Holdings Ltd. (PET-T) despite Tuesday’s release of fourth-quarter 2023 results and an outlook for the current fiscal year that “reflect transitory headwinds from macro pressures and higher lease expenses. "
“We believe PET is well-positioned to achieve low-double-digit EPS growth over the longer term, supported by attractive mid-single-digit industry growth, new store openings, market share gains (loyalty, proprietary brands, assortment enhancement, etc),” he said. “PET’s valuation is supported by strong ROIC and FCF conversion in FY25 as capex normalizes, supporting an increase in capital returns.”
Before the bell on Tuesday, the retailer reported fourth-quarter revenue of $287-million, up 7.8 per cent year-over-year and above the $285-million estimate of both Mr. Li and the Street. Adjusted earnings per share of 54 cents was 3 cents above projections, due largely to “good” expense control.
However, Pet Valu’s outlook for fiscal 2024 was weaker than anticipated with EPS expected to come in at $1.57-$1.63. Mr. Li was projecting $1.65 and the consensus sat at $1.68.
“Prior to the results, the Street was expecting muted growth this year due to ongoing macro pressures weighing on consumer spending (especially discretionary) and incremental lease expenses (depreciation and interest) related to new DCs,” he said. “Management’s FY24 adjusted EPS guidance ... confirmed this view. While investors will take heed of an increase in pricing investments, we believe it is largely transitory vs structural. There is no change to our positive long-term view. As discussed in our recent initiation report, we believe PET is well-positioned to achieve low-double-digit EPS growth from FY25.
“We have revised our FY24 estimates to the low end of management’s guidance: SSSG [same-store sales growth] of 2.3 per cent vs 2–5 per cent; revenue of $1.11-billion vs $1.11–1.14-billion; adjusted EBITDA of $248-million vs $248–254-million; and adjusted EPS of $1.57 vs $1.57–1.63. There is upside from improvement in macro conditions in 2H. While our FY24 revisions have a flowthrough impact on FY25, we expect solid EPS growth of 14 per cent, mainly driven by 5.6-per-cent SSSG (structural tailwinds from humanization and premiumization and company-specific initiatives aimed at increasing market share); new store openings (approximately 40); incremental wholesale revenue to Chico; supply chain efficiencies; and cost optimization.”
After trimming his projections through 2025, Mr. Li reduced his target for Pet Valu shares to $36 from $38, maintaining a “buy” recommendation. The average target on the Street is $37.54.
“Despite near-term headwinds, our favourable view reflects PET as well-positioned to achieve attractive low-double-digit organic EPS growth over the longer term, its resilient business model and high ROIC,” he said.
Elsewhere, others making changes include:
* ATB Capital Markets’ Chris Murray to $42 from $41 with an “outperform” rating.
“While same-store growth in Q4/23 and the 2024 outlook was below ATBe, we remain constructive on PET’s overall growth/margin outlook and expect moderating CapEx requirements and franchise-led growth to support a strong FCF profile over the near term,” said Mr. Murray.
* CIBC’s Mark Petrie to $34 from $31 with an “outperformer” rating.
“Though Pet Valu closed 2023 with strong results, the 2024 outlook calls for another year of muted EPS growth, this time weighted by slower samestore sales (SSS) growth, accelerated price investments, and higher D&A and I/E. This will likely defer upside, though we remain confident in PET’s ability to outpace the industry,” said Mr. Petrie.
* National Bank’s Vishal Shreedhar to $34 from $35 with an “outperform” rating.
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In a separate report, Mr. Li lowered his estimates for Empire Co. Ltd. (EMP.A-T) ahead of the March 14 release of its third-quarter 2024 financial results, seeing results from its retail peers indicating “ongoing pressures on consumer spending will continue to weigh on [its]results in the near term given its limited exposure to discount.”
He’s now projecting adjusted earnings per share for the quarter of 61 cents, which is 4 cents below the consensus on the Street, on same-store sales growth of 1.2 per cent.
“Despite lapping last year’s low comp of 0.1 per cent (partly impacted by a cybersecurity event), we expect pressure on SSSG from the continuing shift to discount,” he said. “We also note that adjusted SSSG for both L and MRU fell 250–300 basis points quarter-over-quarter due to a slowdown in food inflation.”
Reducing his forecast through 2025, Mr. Li trimmed his target for Empire shares by $1 to $39, keeping a “buy” recommendation. The average is currently $39.50.
“EMP has limited near-term catalysts,” he said. “We expect the shares to be range-bound until the consumer improves. Our positive view is based on EMP’s large discount to peers (approximately 11 times forward P/E vs 16–17 times for L and MRU), which we believe is unwarranted assuming it can achieve 8–11-per-cent EPS growth in the longer term once market conditions normalize.”
Elsewhere, BMO’s Tamy Chen lowered her target to $37 from $39 with a “market perform” rating.
“A number of Canadian retailers have reported continued weakness in the consumer over calendar Q4/23. In particular, both L and MRU have reported gains in their discount businesses while CTC reported a challenging Q4/23. Due to EMP’s under-emphasis in the discount grocery segment and an apparent worsening of the consumer with little signs of trade-up, we have made downward revisions to our EMP estimates,” said Ms. Chen.
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Following “strong in-line results with continued growth in Software & Cloud,” National Bank Financial analyst John Shao sees a “healthy organic growth/AI roadmap taking shape” for Softchoice Corp. (SFTC-T).
“On a year-over-year basis, Q4 gross sales were up 5.9 per cent to $604.5-million, mainly driven by an 11.1-per-cent increase in the Software & Cloud sales (to $459.9-million), and partially offset by the expected decline in Hardware sales (down 10.6 per cent to $115.8-million),” he said. “Gross profit on the other hand was up slightly by 1.3 per cent to $87.3-million. We’d note the disconnection between gross sales growth and the gross profit growth was from a non-recurring bonus reversal in Q4 last year. Had we excluded this item, gross profit on a year-over-year basis would have been up 4.6 per cent. The key takeaway here is despite the concern around a soft spending environment since last year, the Company was still able to drive healthy organic growth in the core business segment (software & cloud) – should the environment improve in the coming year, we expect further upside in operating leverage within this business segment.
“As discussed in the previous notes, we like Softchoice for its direct exposure to Microsoft’s AI pivot. While Softchoice is still at an early stage of scaling that opportunity, we believe the roadmap is now clearer. For instance, the Company has been working with its customers to explore AI’s use case in automation, cost reduction and business process optimization. Additionally, it seems Microsoft AI is not the only option – Softchoice’s vendor-agnostic approach essentially opens the door to all of the three major hyperscalers, thus effectively diversifying the exposure to different AI capabilities based on the client’s infrastructures and needs. If anything, we maintain our previous view that AI is a meaningful optionality that’s not priced in.”
On Tuesday, the shares of the Toronto-based software-focused IT solutions provider soared 19.3 per cent after it reported net sales for its fourth quarter of 2023 of US$218-million, matching the Street’s expectation and narrowly higher than Mr. Shao’s US$212-million estimate. Adjusted earnings per share of 31 US cents topped the consensus projection by 4 US cents and the analyst’s expectation by 2 US cents.
“The improved operating leverage and cost optimization also resulted in steady margin expansions and should position the Company for further upside if the spending environment improves in 2024,” said Mr. Shao. “If anything, we believe the performance this quarter proved the resilience of Softchoice’s customers and the Company’s execution despite macro uncertainties. Additionally, the Company leveraged its strong cash flow to enhance shareholder returns with an 18-per-cent increase in quarterly dividends and a declaration of a special dividend of $4 per share. While this move will increase the leverage ratio, our understanding of its business model has us believe it can consistently generate cash flow to reduce debt, as it has already demonstrated from 2021 to 2023. Our investment thesis remains unchanged as we continue to like Softchoice for its asset-light business model paired with the optionality of AI.”
Seeing Softchoice continuing to “execute with attractive shareholder returns,” he raised his target to $25 from $23, keeping an “outperform” recommendation. The average is $21.79.
“While there are still some uncertainties on the macro, the simple but efficient business model with a focus on Software & Cloud sales suggests SFTC would weather through those difficulties and still deliver meaningful values through its robust cash generation. This quarter’s strong results support our investment thesis,” Mr. Shao concluded.
Elsewhere, other analysts making adjustments include:
* ATB Capital Markets’ Martin Toner to $20 from $21 with a “sector perform” rating.
“Despite a soft top line in FY23, SFTC displayed its operating leverage and an efficient capital allocation model,” said Mr. Toner. “The impact of an increase in the target debt level in our WACC [weighted average cost of capital], rolling the DCF forward, and incorporating debt to fund the special dividend drives a decrease in our target.”
* CIBC’s Stephanie Price to $19.50 from $17.50 with a “neutral” rating.
“We continue to see GenAI as a longer-term growth opportunity, with Softchoice’s Microsoft relationship leading to demand for Copilot use cases. The company is targeting “closer to historical gross profit growth” in 2024, driven by a potential enterprise hardware demand recovery in H2. We are forecasting 7-per-cent year-over-year gross profit growth in 2024. We retain our Neutral rating and increase our price target ... as we value Softchoice in line with peers and see upside if the enterprise hardware market improves more quickly than anticipated,” she said.
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In other analyst actions:
* In response to “strong” quarterly results, Raymond James’ Frederic Bastien increased his target for Bird Construction Inc. (BDT-T) to $20.50 from $18.50, keeping an “outperform” rating. The average is $17.81.
“We maintain our positive bias on Bird Construction after the company handed the Street another beat, grew its combined backlog and pending backlog to a new high of $6.46-billion, and bolstered its industry-leading balance sheet in 4Q23,” he said. “The stock may no longer fall in the value camp after a torrid 12-month run, but it still looks attractive to us from a momentum standpoint. With revenue projected to grow at double-digit percentages this year and margins firmly on an upward trend, we recommend investors let the good times roll.”
* Jefferies’ Lloyd Byrne raised his Cenovus Energy Inc. (CVE-T) target to $28 from $27 with a “buy” rating. The average is $29.81.
* BMO’s Tim Casey reinstated coverage of Cineplex Inc. (CGX-T) with a “market perform” rating and $12.50 target, up from $11.50, following a balance sheet restructuring. The average is $12.83.
“CGX effectively extended maturity dates on high yield notes and convertible debentures, redeemed one third of outstanding convertible debentures and secured a covenant-lite credit facility,” he said. “Q4 revenues and EBITDAaL missed expectations by 2 per cent and 22 per cent, respectively. Box office performance should improve through 2024 as the release
schedule normalizes, with Q4 offering easy comps. The company is planning to open three LBE locations and one theatre in 2H/24.”
* JP Morgan’s Patrick Jones increased his First Quantum Minerals Ltd. (FM-T) target to $12 from $11, keeping a “neutral” rating. The average is $16.13.
* Stifel’s Michael Dunn trimmed his Journey Energy Inc. (JOY-T) target to $5 from $5.50 with a “buy” rating. The average is $5.40.
“The issuance of $38.0-million, five-year, 10.25-per-cent convertible debentures at a $5.00 per share conversion price, together with projected FCF and current cash on hand, looks more than sufficient to fund JOY’s near-term debt repayments,” said Mr. Dunn. “With near-term liquidity concerns now addressed, this should lift a big overhang on the stock, which has underperformed the TTEN [S&P/TSX Capped Energy Index] by over 42 per cent in the past 12 months. We are reducing our target price ... on a 5-per-cent reduction to our go-forward AFFO [adjusted funds from operations] estimates (higher interest), and a lower target multiple given the potential for 11-per-cent share dilution above $5.00/sh. We continue to like the stock as a relatively high torque play on oil and natural gas price recovery, with a low decline asset base and growing Alberta power generation capacity.”
* Raymond James’ Rahul Sarugaser bumped his Knight Therapeutics Inc. (GUD-T) target to $7.50 from $7 with an “outperform” rating. The average is $6.56.
“GUD is situating itself as the go-to LATAM partner for U.S.- and EU-focused pharma companies looking to capture value from their best-in-class drugs in the region (one of the world’s fastest growing pharma markets), potentially driving material (and, importantly, non-binary) positive returns for shareholders,” he said. “We believe GUD’s trusted governance (oversight by Canadian regulators), its formidable on-the-ground infrastructure (more than 650 LATAM FTEs, 3 manufacturing plants, plus R&D and distribution centres), alongside the strong track record GUD is accruing in the region (winning marketing approvals with 11 disparate regulators, securing large contracts from national Ministries of Health) advantages GUD in licensing discussions with future and current pharma/biotech partners seeking to participate in LATAM markets.”
* Stifel’s Cody Kwong cut his Pine Cliff Energy Ltd. (PNE-T) target to $1.40 from $1.50, below the $1.61 average, with a “hold” rating.
“With the depressed natural gas prices that have come as a result of ample North American supply meeting an abnormally warm winter, Pine Cliff took the conservative route when rolling out its 2024 plans. A modest $17.5-million capital program, while also cutting its dividend by 54 per cent, shows a strong commitment to protect its balance sheet in the case of further weakness in gas prices. With our updated estimates showing a modest reduction in forward cash flow, but also a decrease in anticipated debt trajectories, we are paring our target,” said Mr. Kwong.
* Believing its outlook “remains very positive” following its fourth-quarter 2023 financial release, Raymond James’ Stephen Boland hiked his Pollard Banknote Ltd. (PBL-T) target to $43 from $37, reiterating an “outperform” rating. The average is $40.75.
“The impact of recent price increases are becoming more apparent every quarter,” said Mr. Boland. “In their outlook, management noted that customers have been accepting of recent price increases, and the majority of customer contracts have now been repriced. That said, many of these contracts are negotiated well in advance, and it may be later in 2024 before some of these increases become visible in results. Regardless, we expect a steady improvement in the margin throughout 2024 and into 2025, with the potential for further expansion should input costs fall next year (management noted a minor decrease in certain inputs this quarter). Coupled with a consistently strong growth outlook for the higher margin iLottery segment, we now expect annual EBITDA to grow close to 50 per cent from current levels in 2025.”
* Jefferies’ John Aiken increased his target for Sun Life Financial Inc. (SLF-T) to $83 from $82, maintaining a “buy” rating. The average is $76.23.
* Canaccord Genuity’s Yuri Zoreda assumed coverage of Titanium Transportation Group Inc. (TTNM-T) with a “buy” rating and $4.25 target. The average is $5.11.
“As a leading North American trucking and logistics company with a successful operational and M&A track record that has been able to remain profitable across the cycles, we think Titanium is poised to continue to expand its share of this highly fragmented industry,” she said. “After having completed its largest acquisition, and first in the U.S. (Crane in July 2023), having just refreshed its fleet, and with the industry’s turnaround in sight, likely in 2H/2024, the company is positioned to generate $19-million or $0.42/sh in FCF in 2024 and $28-million or $0.63/sh in 2025. This, combined with a solid balance sheet, should allow it to pursue its growth targets profitably, in our view. Trading at 4.8 times EV/EBITDA (2024 estimates) versus peers in trucking at 8.2 times and peers in logistics at 16.9 times, we feel Titanium’s valuation does not reflect its attractive growth prospects.”
* Scotia’s Michael Doumet raised his Wajax Corp. (WJX-T) target to $37 from $36 with a “sector outperform” rating, while BMO’s Devin Dodge increased his target to $34 from $31 with a “market perform” recommendation. The average is $35.
“4Q23 profits and cash flows were below our and Street expectations,” said Mr. Doumet. “The higher SG&A, which drove the EBIT and EPS misses, was described as ‘lumpy’ in 4Q23; management instead highlighted that the 2023 SG&A rate came in at the low end of the guided range. In terms of cash flow, WJX expanded its inventories in 2023 as it was light in the previous two years due to supply conditions (and the previous Deere/Hitachi JV terms).
“Similar to the other Canadian dealers, we expect underlying growth to moderate in 2024 but believe WJX has incremental opportunities to outperform with Hitachi and M&A (in IP/ERS). In terms of M&A, management highlighted the company’s pipeline remains robust and its desire to close a few tuck-ins per year (some larger ones too). While we do not disagree with the softness in the shares following the 4Q23 results, we believe the re-rating in the shares over the LTM [last 12 months] is well-supported by WJX’s structural improvements in IP/ERS, Ontario, and with Hitachi, and believe there is further room for multiple expansion as WJX executes its growth strategy. Along those lines, we raised our valuation multiple to 9.5 times P/E on our 2025E (below its historical average of 10.0 times).”
David Leeder