Inside the Market’s roundup of some of today’s key analyst actions
Air Canada (AC-T) is currently screening as a “deep value stock,” according to Scotia Capital analyst Konark Gupta, who called it “one of the most compelling opportunities” in his coverage universe.
“Valuation is at all-time lows, with a wider-than-historical discount to U.S. comps,” he said. “It can be argued that AC deserves to trade in line, considering it has a stronger balance sheet than most peers, has closed the EBITDAR margin gap (in fact now ahead), has significantly grown the loyalty program since re-acquiring in 2019, and had resolved its unique labour and pension issues by 2014. However, we think some discount is still warranted given investors are sensitive about the three C’s - cost, capex and competition - amid macro risks. While competition is becoming less noisy with the recent shut down of Lynx Air and issues at Flair Airlines, cost and capex are still concerning for some. Thus, the renewal of pilot contract and any disclosures on capex offsets should be catalysts for re-rating over the next year. In addition, the ongoing push for Canadian pension funds to invest domestically and low foreign ownership of AC (23 per cent vs. 49-per-cent limit) could potentially aid the re-rating process.”
In a research report released Thursday, Mr. Gupta increased his earnings before interest, taxes, depreciation and amortization (EBITDA) forecast for the first quarter of the current fiscal year to $467-million from $447-million, a rise of 14 per cent year-over-year, due to “slightly better-than-expected traffic and jet fuel price trends.”
“Still, we remain conservative vs. latest EBITDA consensus of $513-million with our revenue estimate 1 per cent ahead but our EBITDA margin estimate of 8.9 per cent (up 50 basis points year-over-year and down 420 bp vs. Q1/19) below consensus,” he said. “We continue to assume 9-per-cent capacity growth (down 8 per cent vs. Q1/19) vs. AC’s guidance of 10 per cent, reflecting ongoing supply chain issues (Airbus, Boeing and MRO). Our tracking suggests Canadian airline traffic (RPMs) exceeded pre-pandemic levels in January for only the third time since the pandemic began . It appears that the total number of passengers screened at Canada’s top airports during January-February was flat vs. pre-pandemic levels, led by international (up 11 per cent) while domestic (down 5 per cent) has slowed since October 2023 and transborder (down 4 per cent) has yet to fully recover. We continue to assume 9-per-cent traffic growth for AC (down 5 per cent vs. Q1/19), implying a steady load factor year-over-year (up 310 bp vs. Q1/19). We maintain our assumption of year-over-year moderation in yield and PRASM (though more 20 per cent above Q1/19) as last month AC noted relatively tough comps in some leisure and sun markets. Our conservatism on yield and margins is also supported by Transat’s latest results (mid-March). For the full-year, our EBITDA estimate has slightly increased to $3.8-billion (was $3.75-billion) vs. guidance of $3.7-billion-$4.2-billion (Street $3.85-billion), driven largely by our modestly reduced fuel price assumption.”
Following adjustments to his working capital assumptions, Mr. Gupta trimmed his target for Air Canada shares to $29 from $30, keeping a “sector outperform” recommendation. The average target on the Street is $27.99, according to LSEG data.
“We view Air Canada as our top contrarian pick as earnings, cash flows and leverage ratio are either marching toward or exceeding pre-pandemic levels, while valuation remains highly attractive relative to history and peers,” he concluded. “The airline is finally catching up with its U.S. peers after a slower recovery from the pandemic due to Canada’s delayed reopening. While inflationary factors are weighing on margins in the near term, air travel demand remains strong and yields are holding up at elevated levels.”
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Desjardins Securities analyst Frederic Tremblay thinks Cascades Inc. (CAS-T) appears poised to benefit from a turnaround in the Tissue market and a “better-than-expected” ramp-up at its Bear Island plant in Virginia.
However, after meetings with executives from Kingsey Falls, Que.-based company, he warned its Containerboard business is “heavily exposed” to the continued rise in old corrugated containers (OCC) costs, leading him to reduce his forecast for the first quarter of fiscal 2024.
“On the positive front, box demand in 2024 looks decent and the ramp-up phase of Cascades’ Bear Island recycled containerboard facility is progressing ahead of expectations,” said Mr. Tremblay. “While there are still some normal fluctuations, it was encouraging to hear that Bear Island recently broke its daily production record.
“On the other hand, while we expect Cascades to increase its integration rate through greenfield box plants or M&A once leverage reaches targeted levels, the near-term risk associated with temporarily reducing the business’ integration rate is now visible as OCC cost inflation overlaps increased sales of jumbo rolls coming from Bear Island. The cost of Old Corrugated Containers (OCC) was a major headwind in 4Q23 and has continued to rise in 1Q24 on the back of increased demand from the start-up of new recycled containerboard capacity (including Bear Island) and soft OCC generation/supply. We note that Cascades feels the effect of changes in OCC costs almost immediately, but that its selling prices for linerboard and corrugating medium are slower to adjust (typically 3–6 months after a change in the index price published by RISI). This means that 1Q24 will reflect the November 2023 index price decline, not the February 2024 price increase”
Believing “the current environment warrants a more cautious approach,” the analyst is now projecting first-quarter adjusted EBITDA from its Containerboard segment of $43-million, down from $57-million. That led to a drop in his total adjusted EBITDA estimate to $90-million from $108-milion (on a margin of 8.0 per cent, sliding from 9.6 per cent).
Also cutting his full-year 2024 and 2025 forecast, Mr. Tremblay trimmed his target for Cascades shares to $13 from $14.50, reiterating a “hold” rating. The average is $13.67.
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Calling Crombie Real Estate Investment Trust (CRR.UN-T) “a ‘safeway’ to gain exposure to the Canadian grocery-anchored retail real estate sector,” Raymond James analyst Brad Sturges initiated coverage with an “outperform” recommendation on Thursday.
He thinks the New Glasgow, N.S.-based REIT’s long duration, triple-net lease structures “provide predictable, gradual, and high credit quality cash flow growth year-over-year with time.”
“We note that Empire’s wholly-owned subsidiary, Sobeys, is an investment-grade tenant with a credit rating of BBB (stable) by Morningstar DBRS (DBRS), and BBB- (stable) by S&P Global (S&P),” said Mr. Sturges. “Further, many of the REIT’s largest 3rd-party national and regional retailing tenants have also been provided investment-grade credit ratings. The majority of Crombie’s in-places leases are generally structured as triple-net, with the tenant responsible for all costs relating to repair and maintenance, realty taxes, property insurance, and non-structural capital improvements. We note that Crombie’s anchor, triple-net leases with Empire contain various periodic contractual rent escalation clauses, mainly 7.5 per cent every 5 years, which equals approximately 1.5 per cent year-over-year on an annualized basis. Reflecting the REIT’s embedded contractual annual rent increases year-over-year, its stable average economic occupancy rate of 95-96 per cent and positive rent spreads achieved within executed lease renewal activity, Crombie has generated average cash SP-NOI growth of 2.4 per cent year-over-year since the start of 2018.”
He also emphasized Crombie has benefitted from its strategic relationship with Empire Co. Ltd. (EMP.A-T), seeing “continued access to a possible acquisition and development growth pipeline.”
“Crombie intends to allocate up to $250-million of growth capital per annum to its various growth initiatives, which generally includes 3 major buckets: 1) Crombie’s planned major development project timeline over a 15+ year timeframe; 2) non-major development activity including land intensification, property redevelopments and store modernization on behalf of its tenant base; and 3) opportunistically executing Canadian retail property acquisitions, which could benefit from the REIT’s strategic relationship with Empire,” said the analyst. “Importantly, Crombie’s near-term development exposure (timeline: less than 2 years) is prudently limited to a few projects (10 per cent of expected costs), while 22 identified development sites (90 per cent of budgeted costs) of its potential $5-$7-billlion pipeline hold medium to long-term timeframes (i.e., 2-15+ years).”
Also touting its “strong” balance sheet metrics, he set a target of $16 per unit. The current average on the Street is $15.50.
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While emphasizing Pivotree Inc. (PVT-X) continues to face short-term “challenges,” National Bank Financial’s John Shao continues to see Mississauga-based company as “well positioned to harvest long-term opportunities given its deep expertise in eCommerce, a base of stable enterprise customers, and a growing partnership ecosystem.”
The analyst reiterated his bullish stance and “outperform” recommendation for Pivotree following weaker-than-anticipated fourth-quarter 2023 results before the bell on Wednesday that sent its shares lower by 4.7 per cent. Revenue came in at $21-million, below both Mr. Shao’s $22-million estimate and the consensus forecast of $22.2-million. Adjusted EBITDA of $0.6-million matched the analyst’s projection but missed the Street’s expectation of $0.9-million.
“Pivotree reported its Q4 results with soft top-line performance care of macro-related project delays and the continued transition away from legacy solutions,” he said. “That said, the Company was able to offset that softness with cost optimizations and still delivered a positive adj. EBITDA. The sequential growth in the leading indicator PS [Professional Services] bookings suggests the Company might be at an early stage of a market recovery. When it comes to the MS [Managed Services] business, the new segmentation to carve out the high-growing Managed & IP business from the declining legacy managed services provided better clarity on the growth driver as Pivotree positions itself to become a product-oriented company.”
Pointing to its growth investments, Mr. Shao trimmed his near-term projections, leading him to cut his target to $3 from $3.50. The average target is $3.63.
Elsewhere, Canaccord Genuity’s Robert Young downgraded the company’s shares to “hold” from “speculative buy” with a $1.50 target, down from $3.
“Pivotree reported soft Q4 results that missed on revenue and EBITDA,” said Mr. Young. “The macro continues to challenge conversion of tactical PS into longer duration and higher margin MS. Shorter, high ROI projects, such as SKU Builder solution continue to show strength. While a 20-per-cent top-line decline year-over-year is a concern, Q4 marked the fifth consecutive positive adjusted EBITDA quarter at $0.6-million, underscoring management’s commitment to profitability and ability to control costs. We believe management will continue to be prudent on OpEx given its stated target of positive adjusted EBITDA in F2024 on a full year basis. Given weak top-line growth and lack of visibility on recovery, we are moving to the sidelines and reducing our rating to HOLD from SPEC BUY.”
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Seeing growth and profitability at “an attractive price” and touting its “leading-edge” technology and validation from important industry peers, Echelon Capital analyst Mike Stevens initiated coverage of Kraken Robotics Inc. (PNG-X) with a “buy” recommendation.
“Despite playing in a global sandbox with multibillion-dollar giants, Kraken’s leading-edge SAS technology helps it punch well above its weight in setting the industry standard,” he said. “Owning a customer and partnership list that boasts several NATO navies (e.g., Denmark, Canada, Poland, Australia, U.S.) along with behemoth defense contractors (e.g., HII (formerly Huntington Ingalls Industries) (HII-NYSE, not rated), Lockheed Martin (LMT-NYSE, NR), Teledyne Technologies (TDY-NYSE, NR)), there is no shortage of heavyweight industry validation supporting the Company’s technology and momentum.
“Management’s recent 2024 guidance communicating a midpoint of $95.0-milllion in annual revenues (with an associated 22-per-cent EBITDA margin) is multiples ahead of the $12.3-million generated in 2020 alongside negative EBITDA, building from a three-year compounded annual growth rate (CAGR) of nearly 80 per cent. With a towering sales pipeline in excess of $900-million in total contract value (TCV) and the Company firmly entrenched in multiple late-stage competitive bids representing substantial value, there is good reason to believe this lofty growth trajectory has considerable room to run. While Kraken shares have surged 200 per cent since August 2023, they remain attractively valued versus peers given the Company’s outsized growth and profitability.”
In a research report titled ‘Kraken’ the Code to Superior Underwater Imaging. Marine Robotics Demand Presents Whale of an Opportunity, Mr. Stevens said the St. John’s-based marine technology company is likely to benefit “compelling” industry dynamics and its ”high quality, defensive” customer base, noting 80 per cent of revenues come from defence agencies that possess non-cyclical budgets and the other 20 per cent stem from high repeat sales.
“The Company’s success and swelling scale have been aided by industry tailwinds seamlessly timed with Kraken’s investment and product development roadmap toward innovative new subsea offerings,” he said. “Furthermore, the vast marine robotics and services market is poised for long-run, sustained growth as technology advancements are enabling enriched subsea intelligence of largely unexplored oceans. Additionally, major inherent challenges operating underwater at depth contribute to meaningfully high barriers to entry and consequently, limited competition.”
Mr. Stevens set a Street-high target of $1.60 per share, implying total return upside of 52.4 per cent from the stock’s closing price on Wednesday of $1.05. The average is $1.43.
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Eight Capital analyst Christian Sgro sees Quisitive Technology Solutions Inc. (QUIS-X) decision to exit the payments business as a “healthy reset.”
After the bell on Wednesday, the Toronto-based Microsoft Cloud and AI solutions provider announced the dale of its BankCard USA Merchant Services Inc. business unit to BUSA Acquisition Co., a Nevada incorporated entity owned by a consortium of current employees of BankCard. The deal includes $40-million in cash and the balance in cancelled shares and released earn-outs with Mr. Sgro estimating total consideration comes in at $87-million.
“The sale price is fair in context and we like the transaction for two key reasons,” he said. “First, Quisitive is paying down significant debt and reducing leverage. Second, this creates an undivided focus on the Microsoft cloud business, streamlining the operational model. In terms of valuation, this reduces the complexity of the consolidated profile and makes Quisitive’s discount to peers more clear as a pure play cloud business.”
He said Quisitive now has a “Cloud focus,” adding: “Quisitive sees the same AI-associated opportunities as peers, looking to double down on efforts to engage clients in Microsoft AI applications. The Healthcare and Manufacturing sectors are two key verticals for the business. The company is intent on growing its higher-margin recurring segment (Managed services, IP, etc.) that now comprises near 40 per cent of total revenue.”
“We have updated our model to align with the guidance provided for the Cloud business. We have reduced Q4/23 estimates and are setting pro forma 2024 and 2025 Cloud revenue growth at 4 per cent and 7 per cent, respectively. Consolidated 2025 revenues will show a decrease given the Q2/24 timing of the divestment. We model 40-per-cent GM and 13-per-cent adj. EBITDA margins going forward, a more attractive margin profile than most peers.”
Keeping a “buy” recommendation for the company’s shares, Mr. Sgro cut his target to 75 cents from $1. The average is 69 cents.
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In other analyst actions:
* Scotia’s Ovais Habib upgraded MAG Silver Corp. (MAG-T) to “sector outperform” from “sector perform” while cutting his target to US$13.50 from US$15. Others making changes include: Stifel’s Stephen Soock to $19.50 from $19 with a “buy” rating and Raymond James’ Brian MacArthur to $19.50 from $21 with an “outperform” rating. The average is $19.94.
“MAG Silver released an updated technical report for their 44-per-cent owned Juanicipio mine in Mexico which also includes an inaugural reserve estimate of 15.4Mt at an average 599 g/t AgEq [silver equivalent] over 13-year mine life plus base metal grades from the inferred resource higher than we anticipated,” Mr. Soock said. “The LOM [life-of-mine] average site level AISC shown of $12.35/oz AgEq was 3.2 per cent lower than we had modeled. Production is lower in the near term due to lower than previously expected recoveries and payabilities. MAG trades at a spot P/NAV of 0.66 times and a 3-year forward spot FCF yield of 6.8 per cent. We are adjusting our target price to $19.50 per share based on our NAV increasing 3 per cent and an unchanged target P/NAV multiple of 1.05 times (driven by the exceptionally strong near term cash flows). We believe the stock offers great value here with the ‘de-risking data point’ of the updated study now in hand.”
* In response to its acquisition of Canadian competitor Argonaut Gold Inc. (AR-T), BMO’s Brian Quast raised his Alamos Gold Inc. (AGI-T) target to $26, above the $22.35 average, from $23 with an “outperform” rating. He also lowered Argonaut to “market perform” from an “outperform” recommendation and his target to 40 cents from 75 cents, expecting the transaction to proceed.
“Adding Argonaut Gold’s Magino Gold Project, located in Ontario, and immediately adjacent to the Island Gold Mine, provides significant integration of resources, furthers the company’s exposure to a top jurisdiction (with 88 per cent of assets with Canada) and adds a long life asset to its portfolio,” he said.
* RBC’s Wayne Lam cut his target for B2Gold Corp. (BTG-N, BTO-T) to US$3.50 from US$4 with a “sector perform” rating. The average is US$4.23.
* Morgan Stanley’s Ioannis Masvoulas raised his targets for First Quantum Minerals Ltd. (FM-T) to $18.90 from $17 and Lundin Mining Corp. (LUN-T) to $16.30 from $12.60 with an “overweight” rating for both. The averages are $16.53 and $13.13, respectively.
* RBC’s Michael Siperco raised his Gatos Silver Inc. (GATO-N, GATO-T) target to US$7 from US$6.50 with a “sector perform” rating. The average is US$7.44.
* In response to updated R&R estimates for its Fruta del Norte mine in Ecuador, Scotia’s Ovais Habib moved his Lundin Gold Inc. (LUG-T) target to $21, above the $20.57 average, from $20 with a “sector perform” rating.
“We ascribe a positive bias to this update as the reserves base increased year-over-year, largely highlighting the success of the conversion drilling program, and offsetting depletion in 2023 at a rate of 79 per cent,” said Mr. Habib. “It is also worth noting that Lundin Gold plans to carry out its largest exploration program in the company’s history with a planned 56,000m of drilling in 2024 using at least nine rigs at a cost of $42-million. We look forward to exploration updates throughout 2024.”
David Leeder