Inside the Market’s roundup of some of today’s key analyst actions
A day after it announced the sanction of two new tanks at its Edmonton Terminal and increased its 2023 capital guidance, a pair of equity analysts on the Street raised their ratings for Gibson Energy Inc. (GEI-T).
The Calgary-based company said the construction represents 870,000 barrels of new tankage and is underpinned by a 15 year take-or-pay and stable fee-based contract agreement with Cenovus Energy Inc. (CVE-T).
Gibson increased its 2023 growth capital expenditure guidance to be up to $150-million, up from $100-125-million previously and representing its largest growth capital program since 2020, “with the strong majority of the underlying projects having already been sanctioned.”
Citing “an improving growth trajectory in combination with recent pullback,” Stifel’s Cole Pereira moved his recommendation for Gibson shares to “buy” from “hold” on Tuesday.
“Our near-term GEI DCFPS [discretionary cash flow per share] estimates are largely unchanged with this update, with the new tanks not contributing materially until 2025,” he said. “Our 2023 DCFPS forecast is unchanged at $2.47/sh, while 2024 increases 2 per cent to $2.44/sh. Our capex forecasts increase to $182-million in 2023 (prior: $93-million) and to $155-million in 2024 (prior: $95-million), though adjusted net debt/EBITDA remains very low at 2.8 times in both 2023 and 2024. Our NAVPS value increases only 1 per cent to $26.31/sh due to the longer-dated cadence of the EBITDA contributions.
“However, this signals a stronger growth opportunity set to the market. While this announcement was largely telegraphed in recent company updates, we believe it will reinforce market confidence in its medium-term opportunity set. Furthermore, this tailwind could be extrapolated further if the company is successful in contracting another two tanks in the next 6-12 months. Therefore, we view this announcement as a catalyst to reinforce the company’s ability to modestly grow its Infrastructure EBITDA, and in turn its dividend. We now model an Infrastructure EBITDA CAGR [compound annual growth rate] of 4 per cent from 2022-2025 vs. 2 per cent prior, and would highlight this could be increased further with both additional share buybacks and incremental tankage.”
Mr. Pereira’s target for Gibson shares is now $26, up from $25. The average target on the Street is $24.96, according to Refinitiv data.
“We have increased our target price to $26.00 per share to reflect its improving growth trajectory, which in combination with its recent pullback (down 9 per cent year-to-date vs. the TSX Composite 4 per cent) sees us upgrade the stock to Buy from Hold. While we continue to favour Keyera (KEY-TSX, Buy, $32.30) for sector exposure, we would highlight GEI’s valuation at 8.8 times 2024 estimated P/DCPFS and a 7.3-per-cent yield vs. KEY 9.6 times/5.9 per cent.”
Elsewhere, citing an “excess potential return” and seeing “an attractive risk-reward, Credit Suisse analyst Andrew Kuske upgraded the company to “outperform” from “neutral” previously.
“Coming off an impressive Q1 2023 print that beat both our and the Street expectations, we like the set-up for GEI’s continued capital discipline, some market fundamentals along with potential growth projects later in the year,” he said. “The marketing environment looks to be constructive in a window until Trans Mountain Expansion Pipeline line fill and operations start along with the potential for SPR replacement purchases accelerating. Such cash flows could provide upside to buybacks ahead of the Canadian share repurchase tax in 2024.”
“As per GEI’s past comments of an ‘increasing line of sight to exceeding the high end of our $100 million to $125 million growth capital target for the year,’ core capital looks to be well positioned. Other areas like selected M&A and diluent recovery unit capital could provide additional upside not within our existing estimates.”
Mr. Kuske maintained a target of $25.50 per share.
“We believe GEI’s core business is well positioned in Alberta with high returning capital opportunities on the horizon,” he said. “Beyond Alberta, growth remains more elusive, but several near-term dynamics are positive for the Marketing business with wider Western Canadian differentials - albeit that should tructurally change in time.”
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Calling it “an under-the-radar small cap idea,” BMO Nesbitt Burns analyst Devin Dodge raised his recommendation for Aecon Group Inc. (ARE-T) to “outperform” from “market perform” after coming off research restriction.
“In our view, there is an improving risk/reward for the shares underpinned by strong demand fundamentals, moderating financial leverage and legacy fixed-price projects nearing completion, with potential claims recoveries representing incremental upside,” he said.
Mr. Dodge thinks the sales of its Ontario roadbuilding business and a minority stake in its concession for the Bermuda airport “highlight underappreciated value.”
“ARE (ex. concessions) is trading at 4.8 times its forward EBITDA estimate, which is well below its historical average of 7.5 times and at the low end of its historical range (4.2 times to 11 times),” he added. “Moreover, Aecon’s multiple is near the low-end of the range of its global peers. As headwinds from its fixed-price projects begin to ease, we expect Aecon’s multiple to gradually shift higher.”
Believing its current valuation “appears an attractive entry point,” Mr. Dodge raised his target to $15 from $12. The current average is $16.09.
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Ahead of the expected conclusion of its strategic review in the second quarter, Raymond James analyst Stephen Boland lowered ECN Capital Corp. (ECN-T) to “market perform” from “outperform” previously.
“While recent quarters have been more challenged — reflecting tougher industry conditions — the strategic review remains the overarching theme at play. That said, the slowdown in growth recently has been material,” he said. “While the strategic review could result in upside from current levels, we expect the stock to be negatively impacted should no solution arise. Furthermore, we expect management could reduce guidance in the near future which could put further pressure on the stock. For these reasons, we are downgrading ECN.”
On Monday, the Toronto-based firm reported first-quarter earnings per share of 1 cents, below both Mr. Boland’s 3-cent estimate and the consensus projection on the Street of 2 cents.
“Operationally, this was a tougher quarter with a number of one-time items impacting results,” he said. “Triad’s gain on sale margins (originations revenue) were impacted by the recent pace of rate increases along with extended industry backlogs. Specifically, Triad’s originations revenue was reduced by approximately $6.3-million relating to the sale of $134-million in assets. Management believes these issues are one-time in nature and while there may be some further impact in 2Q23, margins should return to more normalized levels in 2H23. GAAP earnings were impacted by $11.4million in restructuring costs as ECN embarked on its previously announced cost reduction plan. ECN expects these initiatives will result in annualized cost savings of $10-$13 million by 3Q23. ECN also announced a small tuck-in acquisition this quarter. The company acquired Wake Lending — an RV + Marine finance company — for cash consideration of $2.5-million. Management continues to evaluate further tuck-in opportunities across its manufactured housing, Marine/RV and inventory financing businesses.
“In another notable shift, ECN has signed an agreement to sell up to $300-million in floorplan assets to an institutional investor partner. Triad will sell $110-million in MH floorplan loans in 2Q and will execute monthly transactions thereafter. We believe this is a positive development. ECN’s debtload — predominately variable — has become increasingly burdensome as interest rates increased. By moving these assets to a funding partner with a lower cost of capital, origination capacity across the floorplan business is increased. This should drive deeper relationships with dealers and lead to more flow in the future. This increasingly asset-light approach across the inventory financing business is consistent with ECN’s strategy across other verticals.”
Mr. Boland lowered his target for ECN shares to $3 from $4. The average is currently $3.54.
Elsewhere, Cormark Securities’ Jeff Fenwick cut his target to $2.75 from $3.25 with a “market perform” rating.
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Desjardins Securities analyst Brent Stadler called Boralex Inc. (BLX-T) and Capital Power Corp. (CPX-T) “the big winners” from the Ontario Independent Electric System Operator (IESO) expedited long-term requests for proposal selections.
On Tuesday, the Crown corporation awarded Boralex 380 megawatts of storage projects, while Capital Power gained 226 megawatts across a battery and gas project bid.
“Both companies expect their projects to be online in 2025,” said Mr. Stadler. “This was a catalyst we were waiting for and we are pleased that BLX and CPX were successful on their bids.”
He estimates the projects add approximately $1 per share in value for each company, leading him to raise his targets by that amount.
For Boralex, he now has a $51 target, up from $50, with a “buy” rating. The average target is $46.81.
Mr. Stadler’s Capital Power target is now $58, up from $57 and exceeding the $52 average, also with a “buy” recommendation.
“Based on our math, we do not see the need for either company to raise equity near-term, and we see ample funding flexibility,” he said. “However, we acknowledge that the opportunity set for both companies is enormous, and that the timing of project equity outflows, additional expected project success, ability to accelerate projects in the pipeline and desire to lean on the revolver all play into the decision. Therefore, while we highlight funding flexibility, it is possible that either company could look to opportunistically raise equity.”
Other analysts raising their targets for Capital Power include:
* Scotia’s Robert Hope to $52 from $51 with a “sector perform” rating.
“e view the long-term, contracted projects as value accretive for Capital Power, and increase our target price to $52.00 from $51.00 to reflect the stronger growth outlook for its natural gas assets,” said Mr. Hope. “That said, details are limited at this point, and there could be another $0.50-$1.00 of potential upside. We estimate the projects could be 3 per cent accretive to cash flow once in service. Capital Power is currently trading at 7.9 times 2024 EV/EBITDA, and as such, we expect some multiple expansion as our target implies an 8.0 times multiple. Given the continued strength in the Alberta power market and potential upside to our estimates, we have a positive bias on the name.”
* National Bank’s Patrick Kenny to $53 from $52 with an “outperform” rating.
“Of note, the successful projects are in addition to the recently inked six-year contract extension (2029-2035) between CPX and the IESO for Goreway related to its efficiency upgrade bid of 40 MW in the competitive capacity procurement process,” said Mr. Kenny.
“Combined with a likely FID on Genesee CCS as well as several renewable developments expected by year-end, we maintain our Outperform rating alongside a total return opportunity of over 20 per cent.”
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While he acknowledged lingering short-term headwinds, National Bank Financial analyst Zachary Evershed thinks the first-quarter beat from Adentra Inc. (ADEN-T) “complements” his bullish long-term thesis and reaffirmed as his “top pick” in the sector.
On May 11, the Langley, B.C.-based company, formerly known as Hardwoods Distribution Inc. prior to a re-branding in December of 2022, reported revenues of $579.9-million, down 10.1 per cent year-over-year but ahead of Mr. Evershed’s $572.1-million estimate. Adjusted earnings before interest, taxes, depreciation and amortization dropped 46.3 per cent to $42.9-million, also topping his forecast ($40.4-million).
“Headwinds in both volumes and pricing for ADEN’s products were a year-over-year drag during the quarter, though management notes slight sequential improvements in volume in recent months, compensating for some pricing softness despite pressure on end-market demand attributable to rising interest rates,” said Mr. Evershed. “As the company works through short-term turbulence, we reduce our organic growth assumption in Q2 to reflect management’s commentary implying similar revenue quarter-to-date to levels in Q1/23, with potential for upside should the pace pick up in the back half of the quarter. Long term, our view remains unchanged as ADEN is nicely positioned to capture multi-year tailwinds in the housing industry.”
To align Adentra with “other strong performers” in his coverage universe, he cut his Street-high target for its shares to $61 from $65, reiterating an “outperform” recommendation. The average target is $43.79.
“This adjustment to right-size FCF yield at our target was taken solely considering the relative risk and return of 4.5-per-cent-plus GIC rates and should not be interpreted as a reduction in confidence in the execution, outlook or quality of the name,” said Mr. Evershed. “We believe the 118-per-cent return to our target speaks for itself, and ADEN remains our top pick. Despite the short-term turbulence induced by higher interest rates and the associated macroeconomic uncertainty, we rate ADEN Outperform supported by our long-term bullish outlook on the U.S. and Canadian housing markets, driven by under-building exhibited over the last decade, and diversification into repair & remodel and commercial markets.”
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In a separate report, Mr. Evershed lowered his our organic growth assumptions for the remainder of Park Lawn Corp.’s (PLC-T) fiscal year to align with guidance for a “roughly flat performance,” despite a stronger-than-anticipated top line in the first quarter.
He thinks the Toronto-based funeral home operator has seen difficult COVID-19-driven comps “quietly pass” and emphasized an outlook for a year-over-year decrease in mortality.
“PLC is now beginning to lap relatively easier comps in Q2 and onwards as COVID-19 entered a mostly steady endemic state a year ago,” he said. “Volume headwinds in the quarters ahead should thus be more muted, aligning with guidance for roughly flat performance.”
“Subsequent to quarter end, PLC acquired Speaks in Missouri, joining the mid-March addition of Meyer in Iowa and Nebraska. The two acquisitions represent eight new standalone funeral homes and one cemetery generating roughly $4-million in Adj. EBITDA. Management noted a robust pipeline, and with $127-million in available credit and access to capital if necessary, we believe PLC is in a prime position to accelerate out of the industry’s post-pandemic haze.”
Pointing to higher borrowing costs and a rise in net debt, Mr. Evershed trimmed his target for Park Lawn shares to $32 from $32.50 with an “outperform” recommendation. The average is $34.83.
“We rate PLC Outperform, as with the toughest comps in the rearview mirror and a plethora of levers available to management to push margins higher, we believe operations should trend positively from here,” he said.
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As displayed by its stronger-than-anticipated first-quarter results, Quisitive Technology Solutions Inc. (QUIS-X) is “executing against [a] slowing macro,” according to Eight Capital analyst Christian Sgro.
After the bell on Monday, the Toronto-based Microsoft solutions provider and payments solutions provider reported revenue of $48.3-million for the quarter, topping the Street’s expectation of $47.2-million driven by outperformance in the payments segment. While gross margin fell below estimates, adjusted EBITDA of $7.0-million topped the consensus estimate of $6.6-million.
“Quisitive reported Q1/23 results ahead of consensus, however echoed commentary from peers related to a less clear operating environment and delays in purchasing decisions,” said Mr. Sgro. “From a more conservative base in Q1/23, we see the Cloud segment improving sequentially as delayed engagements move forward and higher touch opportunities (AI, cybersecurity) help score more complex deals. The Payments business drove growth, while PayiQ’s commercialization timelines remain unchanged. We see Quisitive as pushing through a tough macro with stable performance, with the June investor day being the next key touchpoint.”
The analyst is now projecting flat revenue in the second quarter “as the Cloud segment builds sequentially and the Payments segment normalizes from Q1 outperformance.”
“For the full year, we have reduced our overall revenue estimates with more conservative Cloud figures,” he said. “We model improving GM as the Cloud and Payments segments revert back to historical 40-per-cent-plus ranges. Our adj. EBITDA estimates have decreased with the smaller scale.”
That led Mr. Sgro to trim his target for Quisitive shares to $1.50 from $1.70, maintaining a “buy” rating. The current average is $1.37.
Elsewhere, others making adjustments include:
* Canaccord Genuity’s Robert Young to $1.25 from $1.50 with a “buy” rating.
* Cormark Securities’ Gavin Fairweather to $1.15 from $1.20 with a “buy” rating.
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In other analyst actions:
* Berenberg’s Aron Ceccarelli downgraded Nutrien Ltd. (NTR-N, NTR-T) to “hold” from “buy” and dropped his target to US$49 from US$92. The average target on the Street is US$85.59.
* Canaccord Genuity’s Mark Rothschild trimmed his Dream Office REIT (D.UN-T) target to $15.50 from $16 with a “buy” rating. Other changes include: Scotia’s Mario Saric to $18 from $19.50 with a “sector perform” rating and TD Securities’ Sam Damiani to $18 from $19.50 with a “buy” rating. The average is $17.31.
“The way we think about it = the potential near-term unit price upside is lower (i.e., $18 vs. $19.50) but we have greater confidence that our revised target price is achievable based on recent capital allocation decisions,” said Mr. Saric.
“Bottom-line, we appreciate D’s innovative capital recycling strategy, which we believe will ultimately yield strong NAVPU growth, as D’s residential re-development portfolio becomes a bigger-and-bigger part of the story.”
* Canaccord Genuity’s Dalton Baretto lowered his target for Fortuna Silver Mines Inc. (FVI-T) to $6, below the average by 6 cents, from $7 with a “buy” rating.
* Scotia Capital’s Phil Hardie raised his Guardian Capital Group Ltd. (GCG-A-T) target by $1 to $57 with a “sector outperform” rating. The average is $52
“We believe the value proposition for owning Guardian shares continues to be strong.,” said Mr. Hardie. “Over the last decade, Guardian has delivered outsized compound annual shareholder returns in the mid-teens, yet the stock continues to fly under the radar of most investors despite what we view as a high level of optionality and steeply discounted valuation.”
“Guardian’s sizeable corporate investment portfolio likely provides a high degree of optionality for value creation that includes levers ranging from M&A strategies to share buybacks which could potentially double the share price over the next few years.”
* Citing “increased uncertainty” following the announced departure of president Philippe Lapointe last week, Scotia Capital’s Mario Saric cut his H&R REIT (HR.UN-T) target to $14.25 from $16.75 with a “sector perform” rating. The average is $14.33.
“H&R is down 11 per cent post the announced departure (vs. up 1 per cent for sector), the worst performing CAD REIT in our coverage during that time, as the market has clearly decided the news is a step backwards in H&R’s recent evolution,” he said. “Now, do we think H&R’s asset value has eroded 11 per cent since then (would imply 25-per-cent erosion in Lantower, all else constant)? No, we don’t. As a result, the sell-off creates a notably better entry point for long-term investors that see the underlying real estate value. That said, we very much believe that H&R will trade as a ‘show-me’ story, barring material dispositions in excess of the $300-million discussed for 2H/23. This uncertainty, combined with us wanting more comfort over H&R AFFOPU growth potential amidst the Transformation Plan (our 22A-24 CAGR = 1.3 per cent) anchors our SP rating.”
* National Bank’s Michael Parkin bumped his Kinross Gold Corp. (K-T) target to $10 from $9.75 with an “outperform” rating, while he cut his Iamgold Corp. (IMG-T) target to $4.75 from $5 with a “sector perform” rating. The averages are $8.09 and $4.40, respectively.
* TD Securities’ Derek Lessard raised his K-Bro Linen Inc. (KBL-T) target to $39 from $37 with a “buy” rating, while Cormark Securities’ Kyle McPhee raised his target to $42 from $38 with a “buy” rating. The average is $38.39.
* Eight Capital’s Anoop Prihar reduced his Lithium Americas Corp. (LAC-N, LAC-T) target to US$36 from US$37 with a “buy” rating. The average is US$36.17.
* CIBC’s Anita Soni cut her New Gold Inc. (NGD-N, NGD-T) target to US$1.40, remaining above the US$1.35 average, from US$1.50 with a “neutral” rating.
David Leeder