Inside the Market’s roundup of some of today’s key analyst actions
After a period of outperformance, RBC Dominion Securities analyst Josh Wolfson thinks Wheaton Precious Metals Corp. (WPM-N, WPM-T) is now “fairly priced ahead of growth,” leading him to lower his recommendation for its shares to “sector perform” from “outperform” previously.
“Combined with WPM’s relative outperformance, WPM now trades at the upper end of the royalty group valuation ranges, and we view the company’s sector-leading short-term growth profile as appropriately priced into shares,” he said in a note released Tuesday.
Mr. Wolfson emphasized the significant impact of the approaching implementation of an Organisation for Economic Co-operation and Development (OECD) proposal of a global minimum tax rate. It is expected to be introduced by Jan. 1, 2014 at a rate of 15 per cent for companies which generate revenues more than €750-million.
“We expect the introduction of this tax to have material consequences for offshore streaming, which generally benefits from 0-per-cent taxes,” he said. “RBC forecasts have delayed incorporating these tax changes given timing and implementation questions, although in our view these uncertainties are now diminishing, following the 2023 Canadian Federal Budget and 1Q royalty sector disclosures.
“GMT is well understood, but not reflected within consensus estimates, and is material. WPM’s overall business is 88 per cent contributed by offshore streaming that pays no material taxes via the Cayman Islands (2022 taxes: 0 per cent). A tax gross-up to 15 per cent for WPM reduces our NAV valuation by 10 per cent and our 2024/25 OCF by 10 per cent (as compared to FNV down 4-per-cent NAV and down 2-per-cent OCF). The impact of this change is already well understood and has been confirmed by management at various points since 2021, but it is generally not reflected within consensus forecasts and represents a risk to downward estimate revisions. We calculate that 1/3 of consensus estimates include WPM taxes increasing in 2024+ to the GMT rate.”
Also reducing his forecasts for the company’s development portfolio based on “varying degrees of uncertainty with WPM forecasts for upside” over the long term, Mr. Wolfson cut his target for Wheaton shares to US$45 from US$50. The average on the Street is US$56.79, according to Refinitiv data.
=====
Bullish on heavy oil, Scotia Capital analyst Jason Bouvier raised his recommendation for MEG Energy Corp. (MEG-T) to “sector outperform” from “sector perform,” believing its “strong balance sheet sets the stage for increased shareholder returns.”
“In our view, the short and long-term outlook for WCS is structurally positive,” he said. “We expect the differential to continue narrowing on the back of (1) improved egress with TMX; (2) midwest refinery restarts and 1,280 mbbl/d of incremental refining capacity (geared towards heavy) coming online in 2023; and (3) further inventory declines heading into the Q2-Q3 turnaround season. MEG has meaningful torque to tightening WCS differentials and WTI prices. Further, the completion of TMX will increase MEG’s tidewater access from 65 per cent in 2023 to 80 per cent in 2024.”
“As at Q1/23, MEG’s net debt was US$1.0-billion, and we model 2023 ND/CF at 0.7 times (strip). Currently, free cash flow is split 50/50 between debt repayment and share buybacks. 100 per cent of free cash flow will be allocated to buybacks when net debt hits US$600-million. On strip, we model MEG achieving its net debt target in H2/24.”
Also touting its capital efficient growth and its cogen electricity sales creating “a niche offset to natural gas exposure,” Mr. Bouvier maintained a target of $26 per share. The average is $26.21.
=====
National Bank Financial analyst Jaeme Gloyn reaffirmed his “favourable view” of the Canadian property and casualty (P&C) insurance sector following the conclusion of first-quarter earnings season.
In a research note released Tuesday, he raised his earnings per share projections for 2023 and 2024 and said Fairfax Financial Holdings Ltd. (FFH-T) remains atop his pecking order, following by Definity Financial Corp. (DFY-T), Trisura Group Ltd. (TSU-T) and Intact Financial Corp. (IFC-T).
“Trading at approximately 0.9 times, the market is pricing FFH at an ROE [return on equity] of 7 per cent,” said Mr. Gloyn. “We believe FFH can deliver midteen ROE in 2023 and 2024 through a combination of consistently strong underwriting growth/ profits and improving total investment return performance, particularly in a higher interest rate environment. We estimate Fairfax will generate at least $1.5 billion in interest and dividend income in 2023, which translates to 8.0-per-cent ROE on its own. Meaning, you are buying FFH’s interest income stream and getting the rest of the business for FREE. Given the current trading multiple, we believe the market has yet to reflect this attractive risk-reward setup.”
He increased his target price for Fairfax Financial shares to $1,600 from $1,350, keeping an “outperform” recommendation. The average target on the Street is $1,246.74, according to Refinitiv data.
Mr. Gloyn also made these target adjustments:
* Definity to $52 from $51 with an “outperform” rating. The average is $42.86.
Analyst: “We continue to like DFY’s land grab and ROE expansion story. Our premium target multiple reflects the potential early conversion to CBCA, which would allow DFY to optimize its capital structure and pursue larger-scale accretive M&A sooner than previously expected. We believe valuation upside will materialize as DFY proves out execution to drive ROE to 13 per cent or more.”
* Intact Financial to $235 from $242 with an “outperform” rating. The average is $221.31.
Analyst: “Intact trades at and merits a premium valuation given the track record of consistent execution to deliver 10-per-cent EPS growth and outperform its competitors on ROE. Successful integration of RSA, profit improvement plans in the UK&I business, and the recent pension buy-in transaction significantly de-risk the growth and profitability outlook for IFC. While the 2.6 times P/B valuation multiple is deserved, it leaves less upside share price potential than its Canadian P&C peers.”
* Trisura to $60 from $62 with an “outperform” rating. The average is $54.
Analyst: “While we remain long-term positive on one of our 2023 Top Picks, Trisura, we believe share price upside will be somewhat constrained near term as management proves out the stability and consistency of strong core operating performance. Solid, and clean, Q1-23 results marked an important first step. The risk-reward is attractive as TSU trades cheaper than both DFY and IFC, not to mention its U.S. specialty insurance peers.”
=====
Eight Capital analyst Ty Collin thinks a recent decline in Pet Valu Holdings Ltd.’s (PET-T) share price presents “an opportunity for investors to buy into this long-term profitable growth story with valuation upside.”
He initiated coverage of the Markham, Ont.-based company with a “buy” rating on Tuesday, touting both its expansion opportunities and room to grow within its existing footprint.
“PET reminds us of Dollarama coming out of its IPO, with plans to grow its store footprint by 60 per cent (approximately 5 per cent per annum and significant whitespace to do so,” said Mr. Collin. “The Company is focusing on rural markets, which it is uniquely positioned to serve, and can leverage its strong franchise model to grow rapidly with minimal capital investment.
“The Canadian pet industry has grown at a long-term CAGR [compound annual growth rate] of 6 per cent and is expected to grow at 5-7 per cent through 2027, with long-term tailwinds that should continue to drive strong same-store sales growth. Other internal initiatives, including an ongoing supply chain transformation and higher private label penetration, could potentially add $30-million-plus of EBITDA over the medium term. All told, we believe PET can sustainably deliver low-double-digit EPS growth.”
Seeing “insulated” from online competitors, Mr. Collin thinks Pet Valu’s “attractive economics justify a premium valuation.”
“PET currently trades like a retailer but deserves to trade like a franchisor, which commands a 3-7 times EBITDA multiple premium,” he said. “We believe the Company is misclassified among retailers due to its core of corporate-owned stores, but we expect that it will potentially re-rate as the store mix skews towards franchises over time. Franchise stores have helped drive high and stable profitability, with exceptional returns on capital as PET grows using franchisee capital and collects royalty fees with minimal cost exposure. A recession-resistant industry, and PET’s focus on consumable/nondiscretionary products, further de-risk the business and justify a valuation premium.”
He set a target of $47 per share. The average on the Street is $44.14.
=====
Citi analyst Christian Wetherbee lowered his recommendation for Canadian National Railway Co. (CNI-N, CNR-T) to “neutral” to “buy,” expecting “volume weakness to compress the valuation premium with U.S. carriers.”
His change came alongside upgrades to a trio of CN’s U.S. peers as well as truckload carrier Knight-Swift Transportation Holdings Inc. (KNX-N), believing “Transport fundamentals are running at/near lows for this cycle and second-derivative improvement in 2H23 will be a catalyst.”
“We are also upgrading U.S. rails CSX, Norfolk Southern and Union Pacific to Buy, as we think the evolution of rails from PSR/efficiency stories to more cyclical companies means that they are likely to react more positively to improving TL dynamics (better supply/demand = better rates = more competitive intermodal),” said Mr. Wetherbee in a note released Monday. “With this in mind, we think the 2024 outlook is constructive with volume and service facing easy comps, pricing remaining above inflation, and the headcount vs. volume relationship trending more favorably. Add in historically low relative valuations, and we think investors will be attracted to rotate back into the group. We are more constructive on US vs. Canada, as we see the multiple spread narrowing, thus we are downgrading CN to Neutral.”
“Our move ... to lean into early cycle is an evolution from our previous, more defensive positioning. That said, our stock preferences remain somewhat levered to self-help or special situations, with FedEx and XPO among our top picks. We now add Knight to that list and while clearly levered to the TL cycle, we’d argue Knight’s opportunity from improving US Xpress adds a self-help component that augments its cyclical exposure. Rails move up on our preference, but we see less upside than the previously mentioned names, so they would sit behind FDX, XPO, KNX in our preference. Within the U.S. rails we see the best catalyst path at Norfolk Southern as we expect better service/volume in June and a steadily diminishing overhang from the OH derailment.”
Mr. Wetherbee lowered his target for CN shares to US$125 from US$139. The average on the Street is US$130.86.
His other target adjustments were:
- CSX Corp. (CSX-Q, “buy” from “neutral”) to US$37 from US$33. Average: US$35.10.
- Knight-Swift Transportation Holdings Inc. (KNX-N, “buy” from “neutral”) to US$66 from US$58. Average: US$65.53.
- Norfolk Southern Corp. (NSC-N, “buy” from “neutral”) to US$257 from US$226. Average: US$236.88.
- Union Pacific Corp. (UNP-N, “buy” from “neutral”) to US$237 from US$229. Average: US$219.04.
=====
Ahead of the June 1 release of its first-quarter 2024 financial results, Stifel analyst Martin Landry thinks BRP Inc. (DOO-T) “offers an appealing risk/reward trade-off.”
“Current valuation at 7 times forward EPS, 45 per cent below historical levels, creates a buffer for a potential industry slowdown and offers investors with a good entry point into a high quality business with a strong track record and several growth drivers,” he said.
For the quarter, Mr. Landry is projecting earnings per share of $2.38, up 44 per cent year-over-year and 6 cents above the consensus forecast on the Street, and sees further upside after “strong” results from peer Polaris Inc. (PII-N).
“Despite a challenging economic backdrop, consumer behavior appears unchanged with Polaris maintaining its full year guidance and expectation for flat industry volumes at retail. BRP will benefit from several tailwinds in FY24, including the introduction of the new Manitou pontoon and from strong market share gains realized in FY23,” he said. “Full year guidance is front-end loaded, reducing the risk around FY24 guidance.”
Mr. Landry thinks the Valcourt, Que.-based company’s “strong” free cash flow generation could result in capital returns to shareholders through a substantial issuer bid (SIB), calling it a potential catalyst which could boost earnings growth.
“FY24 should be a strong cash generation year for BRP with over $400-million in working capital unwind in the second half of FY24,” he said. “This could bring BRP’s free cash flow generation near $1 billion in FY24, which should provide flexibility for continued return of capital to shareholders. Given the company’s history with substantial issuer bids (SIB) we see a potential for an SIB in the coming months, which should be well-received by investors given its positive impact on earnings growth. Recall that BRP has completed an SIB on May 11th, 2022 at a price of $103 per share for a total consideration of $250-million and on July 28th, 2021 at a price of $103.50 share for $350-million.”
Touting its “track record of operational excellence” and “long growth runway,” the analyst reiterated his “buy” rating and $150 target for BRP shares. The current average on the Street is $135.89.
“BRP’s valuation contracted significantly from its high in July 2020,” he said. “BRP trades at approximately 7 times our FY25 EPS estimate, which is below the average forward P/E of 13 times since it became public. We see limited downside risk from current valuation levels and believe that over time the company’s valuation multiple will return to historical levels, providing investors with a strong tailwind.”
=====
In other analyst actions:
* JP Morgan’s Michael Glick initiated coverage of Stelco Holdings Inc. (STLC-T) with a “neutral” rating and $48 target. The average on the Street is $51.69.
* Seeing “positive momentum across the board,” Scotia’s Michael Doumet raised his ATS Corp. (ATS-T) target to $71 from $67 with a “sector outperform” rating. The average is $70.
“ATS beat Street EBITDA in 11 of the last 12 Qs,” he said. “In each of those beats, sales exceeded Street expectations. 4QF23 was the same (but more pronounced). Sales topped consensus by 10 per cent, driven by strong program execution. Cumulative organic growth in the last two fiscal years come out to more than 30 per cent and the revenue guide for 1QF24 implies organic growth of 12 per cent at the mid-point, showing continued pace. Despite strong program execution, backlog remains at a record, with what we believe to be a healthy pipeline of opportunities in Life Sciences, Transportation (potential new EV wins with existing and new OEMs), and other areas. Further, we expect easing supply chains, the benefits of the recent restructuring, and operating leverage to gradually provide margin tailwinds in the NTM [next 12 months].
“Despite the recent strong share price performance, we see several reasons to remain bullish. ATS continues to benefit from secular and structural growth drivers; we expect Life Sciences and Transportation to drive upside versus our/consensus estimates. ATS shares trade at 14.4 times EV/EBITDA, below its Industrial Technology peer average (17.9 times) and E&C peer average (15.5 times).”
* Eight Capital’s Felix Shafigullin trimmed his GoGold Resources Inc. (GGD-T) target to $4.50 from $5 with a “buy” rating. The average is $4.13.
* Barclays’ John Aiken raised his Power Corporation of Canada (POW-T) target to $40 from $39 with an “equalweight” recommendation. The average is $40.13.
“POW reported earnings that were below expectations, once again on the back of poor performance from its investment platforms, which continue to exhibit volatility,” said Mr. Aiken. “POW’s discount to NAV widened during the quarter as its share price increased at a slower rate than the flow-through contribution of its subsidiaries.”