Inside the Market’s roundup of some of today’s key analyst actions
Russel Metals Inc.’s (RUS-T) $225-million deal to acquire seven service centres from Samuel, Son & Co. Ltd. “noticeably” diversifies its revenue base, according to National Bank Financial analyst Maxim Sytchev, touting a “significant” expansion in the footprint of its Metals Service Centers vertical in Western Canada and the United States as well as long-term margin expansion opportunities through synergies.
In a research report reviewing Monday’s transaction, he raised his recommendation for the Toronto-based company to “outperform” from “sector perform” previously, pointing its strategy of deploying its net cash position “amid rising commodities prices.”
“Russel is a well-managed company that historically has timed capital deployment well (as well as exits),” said Mr. Sytchev. “While we are not privy to the exact state of the acquired assets, we have full confidence in RUS management doing the right thing by shareholders. Samuel has historically focused on auto OEM clients (market that RUS does not touch), making the deal a net-net positive for both parties. Deploying a net cash balance sheet amid spiking HRC and plate pricing makes sense to us from a cyclical/timing perspective, if one subscribes to infra spending in North America staying stronger for longer. We have been neutral on RUS shares since the launch as the steel commodity backdrop has stayed relatively lumpy, although we are upgrading now given the acquisition and cyclical dynamic of steel pricing; for tactically minded investors, buying into likely strong H1/24E would make sense (as higher pricing works through the revenue and COGS of metal players – both producers and distributors, and the acquisition should provide a bump after synergies flow through in 12 months timeframe).”
The analyst emphasized the deal with Oakville, Ont.-based Samuel, a metals distributor and industrial products manufacturer, emphasized the deal will be immediately accretive on an earnings basis and combines “$5 to $7-million of integration costs expected to be incurred in H2/24; real estate and working capital optimization should be realized 12 to 24 months after closing, with synergies significantly outweighing one-time costs.”
“The assets generated $704-million in revenue and $33-million in EBITDA in 2022, providing a 6-per-cent lift to consolidated 2022 EBITDA (year-to-date margin of 4.2 per cent vs. RUS at 9.5 per cent in 2023 — caveat being future synergies and 2022 being a volatile commodity year — recall RUS’ own EBITDA margin stepped down to 11.4 per cent from 2021 level of 15.8 per cent), which implies a 6.8 times EV/EBITDA multiple for 2022 which is in line with historic acquisitions by RUS, although the valuation metric would be lower once low-hanging fruit cost synergies flow through,” said Mr. Sytchev.
The analyst raised his target price for Russel shares to $45 from $42, “presenting 20-per-cent potential upside (due to adding [Monday’s] M&A + dividends), a fair risk-adjusted return, in our view relative to the market.” The average target on the Street is $44.31.
Elsewhere, others making changes include:
* Raymond James’ Frederic Bastien to $47 from $44 with an “outperform” rating.
“Management is acting on opportunities to enhance returns and compound shareholder value,” he said. “The good news is that with a liquidity position of $740-million pro-forma Samuel, Russel still has significant capacity to attack a range of capital deployment options. So stay tuned, the fun may not be over yet.”
* Scotia Capital’s Michael Doumet to $46.50 from $43 with a “sector perform” rating.
“We expect the deal to be $0.35 to $0.40 accretive to EPS on a full year basis. Using our mid-cycle estimate (equivalent to our 2025E), RUS trades at 6.7 times EV/EBITDA and 11 times P/E,” he said. “The deal uses 20 per cent of RUS’s available capital, but we estimate RUS will be able to rebuild its available capital/liquidity to more than $1 billion by the end of 2024, providing it with ample room to ramp its capital deployment strategy.”
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National Bank Financial analyst Gabriel Dechaine thinks fourth-quarter earnings season for Canadian banks was “an oddly satisfying finish to a difficult year,” seeing the sector “poised for a short-term rally.”
“Despite Q4/23 results that were generally well received (i.e., 4/6 stocks rose in reaction to results), the sector is still underperforming the market on a year-to-date basis,” he said. “We believe momentum behind the group is positive, at least in the short-term. With negative EPS revisions tied to NIM [net interest margin] and expense growth in the rear-view mirror, and with the outlook for Central Bank rate cuts generating confidence around a ‘soft landing’ scenario, we believe investor sentiment is turning positive.
“Although bank stocks typically underperform the market in first halves of the year, they have outperformed during the month of January 70 per cent of the time over the past decade. Our top pick in the space is RY [Royal Bank of Canada], which we believe is positioned for excellent operating metrics in 2024 (esp. due to “easy comps”), growth enhancement provided by the HSBC Canada acquisition, and internal capital generation strength that could lead to an earlier-than-peer elimination of the DRIP discount. We also believe CM [Canadian Imperial Bank of Commerce] is relatively attractive at this point, namely because we believe the stock will track rate cut expectations. In short, anything that lessens the Canadian housing overhang will benefit CM’s stock price.”
In a research note released Tuesday, Mr. Dechaine predicted banks will see a “modest” expansion in margins in 2024 following the emergence of signs of stabilization. He also expects “steady performing” growth in allowance for credit losses (ACL).
“4 of 6 banks reported stable/rising all-bank NIM (excl. Trading) this quarter,” he said. “Heading into 2024, most banks are guiding to a similar outcome, reflecting higher re-investment yields on maturing securities, stabilization of funding mix shifts, and higher margin originations. Rate cut potential muddies the water, though would likely act as a net benefit to bank stock performance.”
“Banks added to performing provisions for the 6th consecutive quarter. During that span the sector’s Performing ACL ratio has increased to 55 basis points from 46 basis points. BNS was an outlier, in recording a very large (i.e., 23bps) Performing provision, though we view the move as ‘catch-up’ in nature as the bank was the lone one with a ratio below its pre-pandemic level (now it is in line).”
Also seeing banks “poised for some exceptional operating leverage in 2024,” Mr. Dechaine reaffirmed his recommendation and target prices for stocks for the sector. They are:
- Bank of Montreal (BMO-T) with a “sector perform” rating and $117 target. The average target on the Street is $126.75.
- Bank of Nova Scotia (BNS-T) with a “sector perform” rating and a $60 target. Average: $62.34.
- Canadian Imperial Bank of Commerce (CM-T) with a “sector perform” rating and a $62 target. Average: $59.68.
- Canadian Western Bank (CWB-T) with an “outperform” rating and a $33 target. Average: $32.55.
- Laurentian Bank of Canada (LB-T) with an “underperform” rating and a $27 target. Average: $31.55.
- Royal Bank of Canada (RY-T) with an “outperform” rating and a $135 target. Average: $133.52.
- Toronto-Dominion Bank (TD-T) with a “sector perform” rating and a $86 target. Average: $89.26.
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BMO Capital Markets analyst Sohrab Movahedi expects Canadian bank valuations to “remain depressed” in the near term, citing “uncertainties of macro factors such as interest rates, GDP growth, inflation, and regulatory capital minimums, all of which are outside of bank management teams’ control.”
“We do, however, expect a more meaningful rerating of the sector once investors have greater clarity on macro factors and the earnings growth prospects for the banks beyond FY2024; Q4/23 results did not change this expectation for us,” he said in a Tuesday report.
“Q4 earnings for the ‘Big 6′ wrapped up on December 1 with NA, RY, and CM exceeding consensus expectations (most at NA with an 8-per-cent beat), while BNS, TD, and unrated BMO fell shy (most at BNS with a 24-per-cent miss). Cash operating net income to common shareholders across the ‘Big 6′ was $13.0 billion in Q4/23, down 9 per cent from a year ago (marking the sixth consecutive quarter of lower year-over-year industry earnings). We made no changes to ratings, but lowered our 2024 estimated EPS by 2 per cent for NA and RY, 3 per cent for TD, and 6 per cent for CM and BNS.”
Over the course of the earnings season Mr. Movahedi made a series of target price adjustments. He lowered his target for Bank of Nova Scotia (BNS-T, “market perform”) by 7 per cent to $68 from $73. The average on the Street is $62.34.
He raised his targets for these stocks:
- Canadian Imperial Bank of Commerce (CM-T, “outperform”) by 3 per cent to $67 from $65. Average: $59.68.
- Toronto-Dominion Bank (TD-T, “market perform”) by 4 per cent to $86 from $83. Average: $89.26.
- Royal Bank of Canada (RY-T, “market perform”) by 6 per cent to $140 from $132. Average: $133.52.
“Based on our revised 2024 estimated EPS (and using consensus for BMO) the Canadian bank index is now trading at approximately 9.9 times; our target prices are based on 11.0 times our revised 2024 estimates or 10.2 times our newly introduced 2025 estimates,” said the analyst. “By individual bank and relative to the bank index, we have RY and NA at a premium, TD in line, and CM and BNS at a discount to the index.”
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RBC Dominion Securities analyst Sam Crittenden reduced his forecast for First Quantum Minerals Ltd. (FM-T) to reflect the shutdown of Cobre Panama, removing production through the first half of 2024 “as uncertainty remains if and when the mine can resume production while the Presidential Election next May could provide more clarity.”
In a research note released Tuesday, he added a “speculative risk” qualifier to his “sector perform” recommendation for the Vancouver-based company’s shares.
“The lead up and outcome of the Presidential election in Panama on May 5, 2024 could provide some clarity on the longer term prospects,” said Mr. Crittenden. “Recent comments from presidential candidates range from a desire to negotiate better terms for Panama to the mine remaining closed. This takes our NAVPS [net asset value per share] estimate down to $16.49 from $30.38 (removing CP completely would take our NAVPS to $7.25).”
The analyst now thinks the company’s balance sheet is “in focus” and suggested a potential merger would help alleviate investor concerns.
“As of Q3/2024 First Quantum had total debt of $6.9-billion, $1.3-billion of cash and $1.0-billion of available credit and subsequently made a $0.6-billion tax payment to Panama,” he said. “The line of credit has a 3.5 times net debt to EBITDA covenant tested in June and December. If Cobre Panama remains offline, we believe the Company could be close to the 3.5 times covenant level by next June and liquidity could become constrained in H2/2024. We expect the company to take near term cost reduction measures and more drastic decisions could be made in H1/2024.”
“First Quantum’s CFO was quoted last week (via Reuters) saying it was too early to bring in partner to provide balance sheet relief. We expect First Quantum to attempt to negotiate a restart in Panama and explore other options; however, a partnership or merger could provide more time to recover value in Panama.”
Mr. Crittenden dropped his 2024 earnings per share estimate to a loss of 3 cents from a profit of 68 cents previously. His 2025 projection is now $2.04, up from $1.89.
Keeping his “sector perform” rating, he reduced his target for First Quantum shares to $15 from $38. The average on the Street is $20.69.
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RBC Capital Markets’ Head of Equity Strategy Lori Calvasina thinks U.S. small-caps stocks are oversold and “now is a good time to add exposure looking into 2024.”
“Our work points to bottoming sentiment with relative valuations near the low-end of their historical range (even dating back to the dot-com bubble) and much improved balance sheets having taken advantage of the earlier lower rate environment, something we feel the group is not getting credit for,” she said. “And importantly, now there’s a catalyst for small caps, the Fed. Small Caps typically outperform when the Fed starts cutting, an event reflected in consensus forecasts, but which seemed far off while investors were still debating a December hike. The worse than expected pickup in the unemployment rate and the better-than-expected moderation in inflation finally seemed to convince investors that the Fed was done and provide the spark that Small Caps needed to generate increased interest. Flows will be key to monitor, particularly in the 1st quarter of 2024 when we often see big changes in funds flow trends. It’s worth noting that while flows for Small Cap have generally been improving since mid-October, they have softened a tiny bit recently and bear watching. The push back to our call is that the economy of course still matters and should fears of a hard landing return, they’ll take their toll on the group while a better-than-expected economy in the year ahead could help to pull in more buyers.”
In a research report released Tuesday, the firm updated its “U.S. Small Cap Growth Idea List,” adding four stocks, including Montreal-based commerce software vendor Lightspeed Commerce Inc. (LSPD-N, LSPD-T). The list is now comprised of 32 companies across its coverage universe.
“A cleaner, better positioned Lightspeed is emerging, as original skepticism around its ability to drive higher payment penetration without higher churn and pricing discounts for software has being disproven in recent quarters, with payments penetration increasing to 25 per cent (up from 21.8 per cent sequentially) and software ARPU growing in the high single digits, all coupled with a focus on profitability heading into FY24,” analyst Daniel Perlin said.
He has an “outperform” recommendation and US$21 target for Lightspeed shares. The average on the Street is currently US$18.79.
“Our Outperform rating reflects: 1) the company streamlining its business to focus on two large verticals, retail & hospitality, with two consolidated tech platforms; 2) increased focus on unified payments, which has seen a recent acceleration in payments penetration to 25 per cent up from 19 per cent prior to its more aggressive strategy and is designed to drive higher aggregate ARPU; 3) Software ARPU increased in the HSD in 3Q23, despite the salesforce’s focus on payment adoption, which is driven by an increasing focus on larger more sophisticated clients and its new flagship products coming with a higher percentage of software attachment; and 4) renewed focus on profitability with a goal of achieving adj EBITDA breakeven by FY24 and accelerating thereafter,” he said.
The other Canadian company on the list is Toronto-based Tricon Residential Inc. (TCN-N, TCN-T) with an “outperform” recommendation and US$9.50 target. The average is US$9.70.
“We have a favorable view of the single-family rental sector given available rent growth that will likely be above the multi-family average and a significant opportunity for greater scale,” said analyst Brad Heffern. “TCN’s strategy of targeting relatively lower-rent homes, mainly in the U.S. Southeast, has generated higher rent growth and lower turnover than peers over time. The significant amount of joint venture capital at TCN’s disposal should also enable the company to grow its portfolio more quickly than peers. While the JVs and nonSFR [single-family rental] businesses add complication, we expect TCN to simplify over time, and fee income is likely to grow faster than the portfolio when acquisition pace picks up again. Leverage is elevated, but we think higher leverage is acceptable in the SFR space.”
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A day after Lululemon Athletica Inc. (LULU-Q) shares dropped 1.3 per cent on a downgrade from Wells Fargo, Raymond James analyst lowered his recommendation for the Vancouver-based activewear company to “outperform” from “strong buy” with a US$495 target, rising from US$440. The average target on the Street is US$444.32.
Analysts making target adjustments include:
* Evercore ISI’s Michael Binetti to US$540 from US$475 with an “outperform” rating.
* TD Cowen’s John Kernan to US$545 from US$540 with an “outperform” rating.
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In other analyst actions:
* Following Gibson Energy Inc.’s (GEI-T) late Monday release of its 2024 capital budget and two additions to its Board, CIBC’s Robert Catellier bumped his target for its shares to $26 from $25 with an “outperformer” rating, while Stifel’s Cole Pereira cut his target to $26.50 from $27 with a “buy” rating. The average is $25.
“GEI announced a 2024 capital plan of $190-195-million ($150-million growth, $40-45-million maintenance), above our prior estimate of $155-million and the Street at $146-million,” said Mr. Pereira. “We believe 2024 maintenance capex is a reasonable go-forward run rate, with the year-over-year increase relating to the core business as opposed to STGT. Additionally, 2023 growth capex is expected to be $125-million, below our prior estimate of $149-million. Our 2024 DCFPS [distributable cash flow per share] estimate declines 3 per cent to $2.65 per shares, which sees our target price decline to $26.50 per share (from $27.00 per share) while we reiterate our Buy rating. Moreover, the program remains fully self-funded with 2024E FCF of $280-million vs. dividends of $272million. GEI offers attractive DCFPS growth in 2024E (4 per cent, or 14 per cent normalizing for Marketing) which is likely to be attractive to investors once the STGT contract profile is de-risked. Meanwhile, the stock trades attractively at 7.8 times 2024 estimated P/DCFPS vs. its peers at 8.3-10.0 times.”
* Ahead of Wednesday’s release of its third-quarter results, RBC’s Sabahat Khan increased his North West Company Inc. (NWC-T) target to $38 from $36 with a “sector perform” rating. The average is $39.25.
“We expect areas of focus to include: 1) consumer demand and pricing trends given the evolving operating backdrop; 2) any notable impact in International segment results from the softer macro backdrop and its impact on travel & tourism to the region; 3) any notable shift in food vs. general merchandise mix; and, 4) any outlook commentary on expected F2024 trends,” he said.
* Assuming coverage of Nuvei Corp. (NVEI-Q, NVEI-T), BMO’s Rufus Hone trimmed the firm’s target to US$30 from US$45, reiterating an “outperform” rating. The average is US$33.91.
“Following a series of tricky quarters, NVEI reported solid 3Q results,” he said. “We believe consistency is the key demand from investors, who will need to see a string of solid quarterly reports demonstrating: (1) 20-per-cent-plus growth in Global Commerce (with no additional large customer churn), (2) improved revenue traction from Paya, and (3) EBITDA margin expansion. We see early signs that NVEI will be able to execute across these fronts, and we expect investors will become significantly more comfortable with NVEI’s growth trajectory — and re-rate the equity during 2024.”
“Our model suggests that NVEI trades at less than 9 times FCF (2025 estimate), implying a 12-per-cent levered FCF yield. We think this affords investors an excellent entry point — and highlight the significant equity accretion from debt paydown (NVEI’s top capital management priority).”
David Leeder