Inside the Market’s roundup of some of today’s key analyst actions
Pointing to its current valuation, CIBC World Markets’ Stephanie Price upgraded BCE Inc. (BCE-T) to “buy” from “hold” previously.
“BCE is trading at a five-year trough multiple amid heightened competitive intensity, volatile interest rates and concerns around FCF growth,” she said in a research note released Tuesday. “While we recognize these concerns, we believe that they have been priced into the name at these levels. We do not foresee any change to the dividend growth model through 2024, expect improving FCF in H2 post restructuring, and expect the TPIA final decision to be relatively benign,” she said.
Ms. Price maintained a $52 target for BCE shares, which is 7 cents below the average on the Street, according to LSEG data.
“One of the market concerns has been the final TPIA rate decision, which is expected sometime in 2024 and, in its interim form, disproportionately impacts BCE. Based on the February committee hearings, we believe that the final rate is more likely to clarify the definition of ‘reseller’ to exclude incumbents operating in other geographies,” she said. “If the final TPIA rate can only be accessed by traditional resellers at a rate similar to the interim rate, we believe that the impact to BCE should be relatively benign, given consolidation within the reseller space and the competitive wireline market.”
Ms Price added: “Dividend growth sustainability has been an investor concern post weaker-than-expected F2024 FCF guidance, with BCE’s dividend yield now at 9 per cent. We see no change to the dividend growth through 2024, with the dividend assessed annually by BCE’s board. We expect dividend growth to continue to be a longer-term focus given the pace of FCF growth amid a more competitive environment and continued fibre rollout, and we would not be surprised to see dividend growth adjusted post 2024.”
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Desjardins Securities analyst Chris MacCulloch admits the recent strong run in Canadian oil & gas equities in has defied his “wildest expectations.”
“After a slow start to the year, Canadian oil & gas equities are seemingly moving from strength to strength, posting the best sector performance on the TSX (by far) on the back of rising oil prices and TMX linefill, which has propelled large-cap integrated and oil sands‒weighted stocks toward new heights,” he said. “Perhaps the only thing working against the sector right now is natural gas prices, but even there, the market is largely inclined to look through near-term weakness toward brighter days ahead with upcoming commissioning of the first phase of LNG Canada expected to begin later this year.
“While fully acknowledging that sector balance sheets and capital return frameworks have never been healthier or more generous to shareholders, we are growing more cautious on valuations after an extended period of outperformance, which has stretched industry multiples to a five-year high (after correcting for the abnormalities of the COVID-19 pandemic). Put another way, both the industry FCF yield and the equity risk premium for holding Canadian oil & equities has now returned to pre-pandemic levels, which should at the very least be a source of caution.”
As the sector heads into earnings season, Mr. MacCulloch thinks the primary driver of further sector outperformance will be commodity prices, however he emphasizes “the forecasting of which has been, and will remain, a mug’s game.”
“But for what it’s worth, we have walked up our 2024 oil price forecast by US$10 per barrel while trimming our 2025 deck by US$5/bbl (to US$70/bbl WTI),” he said. “On the natural gas side, we have trimmed our 2025 NYMEX and AECO price forecast to US$3.50/mcf and C$3.50/mcf, respectively. Meanwhile, we have expanded target multiples for every producer under coverage, which is partially a reflection of the aforementioned shift in sector multiples. However, there is no question that returns to target are thinning, as reflected in our three downgrades. In our view, we are likely entering the late innings of what has been a phenomenal run for the ages in Canadian oil & gas equities over the last four years coming out of the depths of the pandemic, particularly among large-cap integrated and oil sands‒weighted stocks, where we are struggling to see attractive opportunities. To that end, we believe investors should be rotating exposure down cap and toward natural gas‒weighted stocks, where we see greater opportunities for alpha generation; however, we’ll be the first to admit that the next 3–6 months will be a challenging period for the latter given current market oversupply. Tread carefully.”
Citing limited potential returns to his targets, Mr. MacCulloch downgraded three stocks on Tuesday:
* Athabasca Oil Corp. (ATH-T) to “hold” from “buy” with a $5.75 target (unchanged). The average on the Street is $6.06.
Analyst: “Although we remain optimistic on the longer-term corporate outlook, including the recent emergence of Duvernay Energy Corporation, corporate cash flow is still primarily driven by heavy oil production, the value of which has appreciated considerably in recent weeks with WCS differentials tightening as TMX linefill commences. However, the stock has been one of the best-performing names in the sector since we upgraded it last December, and we are increasingly cautious that most of the upside has been fully discounted into the current valuation, which could result in downside if further narrowing of WCS differentials fails to materialize. Moreover, we expect oil prices to correct from current levels moving into 2025, which would disproportionately impact ATH relative to peers to the extent that it retains the highest cash flow sensitivity (to oil prices) in the Desjardins E&P coverage universe. That said, the company has done a commendable job fortifying the balance sheet in recent years, even while pursuing an aggressive share buyback program, which should help put a floor under the stock in a downside scenario.”
* Canadian Natural Resources Ltd. (CNQ-T) to “hold” from “buy” with a $110 target, rising from $104. Average: $110.87.
Analyst: “The stock has consistently screened among the top-performing companies in recent months as generalist and international investors flock to the story for commodity price exposure from one of the best-run companies in the Canadian energy sector, with an unparalleled track record of operational execution and disciplined capital allocation. As a result, the valuation has begun to stretch beyond our comfort zone, which limits the potential for further upside, from our perspective. And while acknowledging that CNQ will likely remain the ‘go to’ name for generalists, we believe this also opens the door for capital flight if oil prices deteriorate as we anticipate heading into 2025. Meanwhile, we see limited near-term catalysts for the story both from an M&A perspective given renewed strength in sector valuations and from a return-of-capital perspective after the company’s recent achievement of its $10-billion net debt target in February, which received universal market applause. That said, we have every confidence that CNQ will continue delivering superior operational performance and we would look for opportunities to build positions during periods of weakness”
* Spartan Delta Corp. (SDE-T) to “hold” from “buy” with a $4.50 target (unchanged). Average: $4.90.
Analyst: “Although the stock languished in 2H23 following its transformative disposition of the Alberta Montney assets, it has posted a vigorous recovery through the opening months of 2024, trading up more than 40 per cent to date this year as the best-performing name in the Desjardins E&P coverage universe. However, we remain cautious on the company’s nearterm cash flow generation capability given its elevated exposure to the AECO natural gas market, where we expect pricing to remain subdued through the summer months. We are also taking a ‘wait and see’ approach with respect to the West Shale Basin Duvernay assets, development plans for which are expected to be unveiled later this spring on the back of additional land acquisitions, potentially including the former Bonavista Energy Duvernay rights from TOU that are currently being marketed in a public process. Historically, the play has struggled to compete for capital given elevated well costs, although we understand that the company (and some of its peers) has made significant advances on this front through refinements in drilling and completion techniques. We will also be the first to acknowledge the management team’s previous technical prowess unlocking value from the Alberta Montney oil window, the Cardium and southeast Saskatchewan conventional oil plays (among others). Simply put, we need to see more results before we start ascribing significant value to the Duvernay assets.”
For large-cap stocks, he made these target changes
- Cenovus Energy Inc. (CVE-T, “buy”) to $31.50 from $29.50. Average: $32.92.
- Imperial Oil Ltd. (IMO-T, “hold”) to $92 from $88. Average: $95.67.
- Suncor Energy Inc. (SU-T, “hold”) to $54 from $48.50. Average: $55.06.
- Tourmaline Oil Corp. (TOU-T, “buy”) to $74 from $75. Average: $76.94.
For dividend-paying stocks, his changes are:
- Crescent Point Energy Corp. (CPG-T, “buy”) to $14 from $12.50. Average: $14.18.
- Enerplus Corp. (ERF-T, “tender”) to $20 from $19.25. Average: $24.94.
- Peyto Exploration & Development Corp. (PEY-T, “hold”) to $13.50 from $14. Average: $17.
- Pine Cliff Energy Ltd. (PNE-T, “buy”) to $1.20 from $1.25. Average: $1.51.
- Vermilion Energy Inc. (VET-T, “buy”) to $21 from $20. Average: $20.83.
“From a high level, we believe investors should begin rotating exposure down cap and toward natural gas‒weighted stocks, where we see greater opportunities for alpha generation. Our top picks are CVE (large-cap oil), TOU (large-cap natural gas), CPG (small/midcap oil), AAV (small/mid-cap natural gas), VET (special situation) and FRU (royalty),” he concluded.
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In a research note released Tuesday titled On the Cusp of Egress Growth, Stifel analysts Cody Kwong and Michael Dunn updated their estimates for Canadian energy exploration and production companies ahead of what they expect to be a “drama-free” first-quarter earnings season.
“Outside modest winter storm impacts for some in January, we gauge activity in the quarter was still relatively robust, with most executing a quarterly capital program that will be the highest in the 2024 plan,” they said. “With that said, given moves in the crude oil and natural gas prices, we anticipate cash flows in our universe to be down 20 per cent quarter-over-quarter. Since our last formal update, we have observed spot/futures oil prices move meaningfully higher (with tightening heavy oil differentials), while the forward natural gas curve has been relatively static. With this as the backdrop, we are elevating our target prices across our universe by 9 per cent on average in this update and believe momentum into the start-up of TMX and LNG Canada will continue to attract investor attention to the Canadian E&P space.”
The analysts expect few surprises over the next couple of weeks, believing companies in their coverage universe are “largely captured in sell-side estimates.
“The notable outliers in our 1Q24 CFPS estimates vs consensus to the downside (appreciating FACTSET consensus estimates are sometimes stale-dated) are CNQ, ATH, BIR and KEL (10 per cent below consensus), while we are notably above consensus for IPCO and SDE (14 per cent above consensus),” they said.
“Don’t expect many changes to 2024 capital budgets alongside 1Q24 earnings. Between a volatile commodity price picture and many companies already fine-tuning their capital plans earlier this year, we don’t believe there will be much in the way of changes to 2024 capital plans. Rather, we believe the 2Q/3Q24 earnings reports will have more to offer in this regard, as companies can better evaluate corporate production performance coming out of spring break-up while having more time to see how cash uses match up with anticipated cash flows for the year.”
Mr. Kwong made one rating change, downgrading Petrus Resources Ltd. (PRQ-T) to “hold” from “buy” with a $1.50 target, down from $1.75, which is the current average on the Street.
“we are reducing our target price to $1.50 per share with a cash flow stream that is impacted by the recent softness in natural gas prices,” he said. “We have modestly reduced our capital forecast to the mid-range of company guidance with average annual 2024 production volumes falling 2 per cent from our prior view. As we anticipate weakness in gas prices to persist through the summer, the company’s leverage position will appear higher than average, particularly when paired with a newly implemented dividend policy. With lower-than-average implied target price returns versus its peers, we are moving to a HOLD recommendation.”
For large cap and intermediate E&Ps, their target changes are:
- Arc Resources Ltd. (ARX-T, “buy”) to $31 from $29. The average is $28.69.
- Baytex Energy Corp. (BTE-T, “buy”) to $7 from $6.25. Average: $6.32.
- Canadian Natural Resources Ltd. (CNQ-T, “buy”) to $126 from $110. Average: $111.17.
- Crescent Point Energy Corp. (CPG-T, “buy”) to $16 from $14.25. Average: $14.29.
- Enerplus Corp. (ERF-T, “buy”) to $32 from $27.25. Average: $25.02.
- Peyto Exploration & Development Corp. (PEY-T, “buy”) to $18 from $16.50. Average: $16.95.
- Paramount Resources Ltd. (POU-T, “buy”) to $36 from $33. Average: $36.45.
- PrairieSky Royalty Ltd. (PSK-T, “buy”) to $30 from $27. Average: $28.44.
- Tourmaline Oil Corp. (TOU-T, “buy”) to $80 from $75. Average: $76.88.
- Topaz Energy Corp. (TPZ-T, “buy”) to $27 from $25. Average: $27.25.
- Vermilion Energy Inc. (VET-T, “buy”) to $22 from $20.25. Average: $20.92.
- Whitecap Resources Inc. (WCP-T, “buy”) to $13.75 from $12.75. Average: $12.90.
The analysts said: “Best Ideas. We believe the oil price momentum and earnings power of our oil-weighted entities will continue to surge. On the flip side, we suspect we will be in for some daunting headwinds with Canadian natural gas prices into the summer which could offer a more compelling entry point into the gassier names. Our favourite oil-weighted names heading into the quarter are CPG, PXT and TVE, while of the natural gas-weighted entities, we most favour CR, KEC, KEL and SDE.”
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As Thomson Reuters Corp. (TRI-T) moves through “this year of investment and get beyond [its] latest $1-billion NCIB [normal-course issuer bid],” National Bank Financial analyst Adam Shine said he will “continue to look for a better buying opportunity for a stock that overshot into mid-February and has since underperformed market indices.”
Accordingly, after adding in the positive impact of changes to his foreign exchange forecast to his projections, he raised his recommendation for Thomson Reuters shares to “sector perform” from “underperform” ahead of the May 2 release of its first-quarter results.
The analyst expects the release to exhibit the benefits from further artificial licensing deals from Reuters. He’s currently projecting revenue of US$1.85-billion, up 6.5 per cent year-over-year and 8.2 per cent organically but narrowly lower than the Street’s expectation of US$1.86-billion. However, he now sees adjusted earnings per share of 97 US cents, up 16.5 per cent from fiscal 2023 and topping the consensus by 10 US cents.
“TRI telegraphed organic Q1 revs growth of up 8 per cent and Adj. EBITDA margin of approximately 40 per cent,” said Mr. Shine in a research note. Net growth impacted by sale of Elite (closed 6/1/23) but helped by purchase of Pagero (closed 2/26/24, consolidated since 1/17/24) and second consecutive quarter of Reuters licensing deals to third parties to drive their AI LLMs [large language models] which will boost segment revs growth to mid-to-high teens and drive 75 per cent of expected consolidated margin expansion. Unless guidance changes in 2024, 9-per-cent growth in Adj. EBITDA in Q1 will give way to low single digit quarterly gains through the rest of 2024 due to M&A dilution and the year being characterized as one of investment.”
Mr. Shine also noted the quarterly results coincide with anniversary of the surge in interest in generative AI, which he calls both a “key theme” and “future growth vector” for the Toronto-based company.
“GenAI has been a focus of TRI disclosures and anchored its Investor Day on 3/12/24 where it was noted that the Big 3 did $5.5-billion of revs in 2023 out of total $26-billion vended market,” he noted. “TAM’s estimated at $71-billion (Legal $19-billion, Corporates $37-billion, T&A $16-billion) with GenAI lifting this to $84-billion for 7-10-per-cent CAGR [compound annual growth rate] opportunity. Critical to TAM are expectations that customers will steadily spend more on products of TRI and its peers to gain efficiencies as they potentially reduce headcount and their real estate footprint. It remains to be seen how this process will evolve. Some of the GenAI product roadmap was outlined in November, which helped stimulate a material move in the stock, while further disclosures were made on 4/17/24 (Westlaw Edge UK with CoCounsel available to U.K. customers, Checkpoint Edge with CoCounsel starting initially with U.S. accounts this summer, and CoCounsel Integrations with Microsoft 365 available in beta to U.S./U.K. customers this summer).”
The analyst raised his target for Thomson Reuters shares to $217 from $210. The average on the Street is $210.
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Desjardins Securities analyst Doug Young initiated coverage of Trisura Group Ltd. (TSU-T) with a “buy” recommendation on Tuesday, pointing to its “Canadian specialty businesses, zero exposure to Canadian personal auto insurance, and potential to organically deploy excess capital and debt capacity (in the U.S. surety and corporate insurance business) to drive operating EPS growth and ROE expansion.”
“In our opinion: 1. TSU has a very attractive Canadian specialty insurance business which has generated above-average-industry growth and ROE, coupled with consistently positive PYRD [prior‐year reserve development], ROE on this business is likely to normalize over time, but we believe 20 per cent or more is achievable in 2024/25 (vs 29 per cent in 2023 and 31 per cent in 2022; 2. It does not operate in the Canadian personal auto insurance market; 3. Hard market conditions across most of its businesses will likely persist; 4. It has a conservative 11-per-cent debt-to-capital ratio, and putting its US$59-million of excess debt capacity to work (in the U.S. surety and corporate insurance markets) could add 5–10 per cent to operating EPS and 1–2 percentage points to ROE over 3+ years,” he said.
Mr. Young acknowledged concerns about its U.S. fronting business, including the level of growth through managing general agents (MGAs) and the steady increase in negative PYRDs (for risks retained) over the past three years.
“There were hiccups at this division in 2022/23 ... However, TSU is working to high-grade the business, growth should slow and it is focused on profitability over growth,” he noted.
With his bullish view, he set a target of $48 per share, which is below the average on the Street of $54.50.
“Valuation seems interesting,” he said. “TSU trades at 13.5 times our 2025 operating EPS estimate (vs 14.2 times for IFC and 15.8 times for DFY) and 3.2x book value—yes, a premium to IFC and DFY, but we believe this is warranted given TSU’s ROE outperformance vs these Canadian comps. We see three near- to mid-term catalysts that could drive multiple expansion: (i) the recent (April 18) AM Best outlook change to stable (from negative) should help; (ii) a few quarters of clean results at its U.S. fronting business; and (iii) less US fronting industry noise.”
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Heading into earnings season, precious metals analysts at Canaccord Genuity remain bullish on gold despite its recent surge.
“Our gold macro view is unchanged since we published our 2024 Precious Metals Outlook a few months ago,” they said. “We’ve showed that past Fed easing cycles over the last 20+ years have corresponded with higher gold prices, and we expected to see gold set new record highs in 2024. While Fed cut expectations have recently diminished, we expect the FOMC to still cut this year. We also believe U.S. debt levels are an increasing concern with the annualized US Federal interest payment at more $1-trillion annualized, up 24 per cent year-over-year, and almost doubling since the end of 2019; U.S. federal debt has increased 50 per cent since the end of 2019. Central banks continue to buy gold at near record levels, purchasing 1,037t in 2023, just 45t shy of the 2022 record. Global gold production remains sluggish, increasing 0.5 per cent in 2023 and still below its 2018 peak of 3,656t.”
The analysts raised their target prices for stocks in their coverage universe on Tuesday in response to the strong performance for both gold and silver prices. Changes include:
- Agnico Eagle Mines Ltd. (AEM-T, “buy”) to $105 from $92. The average is $94.16.
- Barrick Gold Corp. (ABX-T, “buy”) to $30 from $27. Average: $29.
- B2Gold Corp. (BTO-T, “buy”) to $7.50 from $7.25. Average: $6.
- Franco-Nevada Corp. (FNV-T, “hold”) to $177 from $168. Average: $193.26.
- Kinross Gold Corp. (K-T, “buy”) to $12.50 from $11. Average: $10.46.
- Osisko Gold Royalties Ltd. (OR-T, “buy”) to $30 from $28. Average: $24.42.
- Pan American Silver Corp. (PAAS-N/PAAS-T, “buy”) to US$25 from US$20. Average: US$22.06.
- Triple Flag Precious Metals Corp. (TFPM-T, “buy”) to $25 from $23.50. Average: $24.93.
- Wheaton Precious Metals Corp. (WPM-T, “buy”) to $90 from $80. Average: $79.05.
“CG precious metal top picks: · Senior producers: EDV, K, AEM; Intermediate/Junior producers: CXB, TXG, ARIS; Royalty/streaming companies: WPM, OR,” they said.
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National Bank Financial analyst Ahmed Abdullah expects AirBoss of America Corp. (BOS-T) to exhibit sequential revenue and earnings gains after a difficult end to the last fiscal year when it reports its first-quarter results on May 8.
“[AirBoss Rubber Solutions] saw a significant pullback in orders towards the end of 4Q as customers focused on destocking, with some of that softness spilling into the early part of January,” he said. “Since then, February & March orders saw sequential improvements. We still expect 1Q ARS revs to be down 10 per cent year-over-year but a 10-per-cent quarter-over-quarter improvement. ARS EBITDA should be relatively flat year-over-year at $6.0-milllion as better margins (11.0 per cent vs. 10.0 per cent) will help offset top-line pressure. Results should improve for the segment as the year unfolds with the onboarding of 23 new customers in 2024. At [AirBoss Manufactured Products], the UAW strike was resolved in 4Q, however, 1Q customer volumes within the auto sector remain impacted by higher interest rates, and no new defense contracts have been awarded. As such, we see AMP revs down 25 per cent year-over-year or down 1.4 per cent quarter-over-quarter, and EBITDA of $2.2-million down 69 per cent year-over-year as 1Q23 featured catch-up payments as a result of renegotiated customer agreements.”
Mr. Abdullah currently projecting total net sales for the quarter of $96.9-million, down 17.2 per cent from the same period a year ago and below the Street’s forecast of $105.3-million. His total adjusted EBITDA estimate of $5.4-million is a drop of 47.5 per cent and also under the consensus of $6.2-million.
“On March 27, BOS announced that it amended its senior secured revolving credit facilities, which included a downsizing of the facility, a dividend cut and capex limits in 2024/2025,” he said. “With this amendment, the Company also replaced its covenant ratios in 2024 with minimum Adj. EBITDA and liquidity requirements. Per the amended agreement, consolidated Adj. EBITDA needs to be higher than $3.9-milllion in 1Q, $5.6-milllion in 2Q, $7.6-milllion in 3Q and $6.9-milllion in 4Q. Our current quarterly forecast sits higher than these minimums. Additionally, BOS is to maintain minimum liquidity of $20-milllion throughout 2024. In 2025, covenants will get reinstated with leverage not to exceed 4.75 times at 1Q25, 4.25 times at 2Q25 and 3.75 times thereafter until the facilities’ maturity date (9/23/26).”
With changes to his capex and dividend estimates in response to the amended credit agreement, Mr. Abdulash bumped his target for the Newmarket, Ont.-based company’s shares to $6.25 from $6 with a “sector perform” recommendation. The average is $6.47.
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In other analyst actions:
* Citing uncertainty around the Supplemental Environmental Impact Statement (SEIS) on its Ambler Access Project, Raymond James’ Brian MacArthur downgraded Trilogy Metals Inc. (TMQ-T) to “market perform” from “outperform” and cut his target to $1, matching the average on the Street, from $1.25.
* RBC’s Douglas Miehm cut his Bausch Health Companies Inc. (BHC-N, BHC-T) target to US$11 from US$12, remaining above the US$10.17 average, with a “sector perform” rating.
“BHC will report Q1/24 results on May 2nd, one day after BLCO’s Q1 results,” said Mr. Miehm. “We estimate Q1/24 revenue of $2.13-billion (vs. FactSet cons. $2.15-billion) and adj. EBITDA of $682-million (vs. FactSet cons. $730-million). We expect the focus to be on a potential BLCO distribution to BHC shareholders and the factors influencing such a decision. We believe that following the Appellate Court’s ruling, BHC stands in a stronger position to move forward with a potential BLCO distribution. However, Amneal’s ANDA submission has likely added additional complexity to the situation.”
* Scotia’s Himanshu Gupta and Mario Saric lowered their targets for these REITs on Tuesday: Boardwalk REIT (BEI.UN-T, “sector perform”) to $80 from $80.25, Dream Office REIT (D.UN-T, “sector perform”) to $19 from $20 and American Hotel Income Properties REIT LP (HOT.UN-T, “sector perform”) to 90 cents from $1. The averages are $85.22, $18.11 and 62 US cents.
* ATB Capital Markets’ Chris Murray trimmed his Boyd Group Services Inc. (BYD-T) target to $345 from $350, maintaining an “outperform” rating. The average is $323.21.
“We recently had a discussion with Boyd management to review expectations for Q1/24 reporting and the Company’s outlook in light of the recent announcement that TPG Capital (TPG-O, NR), was acquiring Classic Collision, an operator of 262 repair locations across 16 states, which is one of the larger MSO transactions we have seen in some time. As part of the discussion, we also reviewed guidance provided with the Q4/23 call late in March and management’s thoughts on the early part of April and whether the trends were extending into Q2/24. While near-term margins may see some pressure, we think the long-term outlook for the Company is intact and see the risk-reward setup as interesting,” said Mr. Murray.
* Jefferies’ Anthony Linton raised his Crescent Point Energy Corp. (CPG-T) target to $14 from $12 with a “buy” rating. The average is $14.18.
* In a quarterly preview for Canadian grocers, RBC’s Irene Nattel hiked his Loblaw Companies Ltd. (L-T, “outperform”) target to $183 from $172. Her target for George Weston Ltd. (WN-T, “outperform”) rose to $230 from $218, while her Empire Co. Ltd. (EMP.A-T, “sector perform”) target declined by $1 to $42. The averages are $156.36, $206.50 and $37.63, respectively.
“We reiterate our ‘stronger for longer’ view of the sector and Loblaw as top pick, price target to $183 (+$11),” she said. “Based on our channel checks/analysis, the backdrop of three-year cumulative inflation in excess of 20 per cent continues to drive cost-conscious consumer behaviours including: meals at home over meals away, category trade-down, and rising discount channel penetration; and with the tailwind of 3-per-cent population growth further supporting food retailer tonnage and drug retailer Rx count. Given a store base that skews to discount, industry-leading private label penetration and powerful loyalty program, in our view Loblaw is best positioned to benefit from the secular shift in purchasing patterns.
“Loblaw valuation gap to Metro narrowing and currently at pre-pandemic levels. Moderated near-term earnings visibility at Metro as the company undertakes/commissions multiple at-scale supply chain investments likely to sustain relative valuation momentum. At 9.2 times our C24E EBITDA, Loblaw (TSX:L) trades at 0.8 times discount to Metro (TSX:MRU). While Metro has earned its premium valuation, in our view, multiples should converge over time, underpinned by what we view as greater torque on Loblaw’s financial performance.”
* Following in-line first-quarter results, RBC’s Luke Davis bumped his target for PrairieSky Royalty Ltd. (PSK-T) to $27 from $26 with a “sector perform” recommendation. Others making changes include: National Bank’s Travis Wood to $31 from $30 with a “sector perform” rating, BMO’s Jeremy McCrea to $33 from $30 with an “outperform” rating, ATB Capital Markets’ Patrick O’Rourke to $28.50 from $27 with a “sector perform” rating and Stifel’s Michael Dunn to $30 from $27 with a “buy” rating. The average on the Street is $28.44.
“Overall we expect a neutral reaction,” said Mr. Dunn. “PSK reported FFO of $0.35/sh(d) in line with consensus and slightly behind Stifel’s $0.36/sh(d) estimate. Total production of 26,027 boe/d beat consensus by 1.9 per cent, as oil volumes grew another 2.3 per cent quarter-over-quarter while gas volumes were up 2.8 per cent q/q. Oil well spuds were down 21 per cent year-over-year, as Clearwater drilling was down significantly (Spur Petroleum) but is expected to pick up. PSK spent $8.8-million to acquire GORRs on Mannville light and heavy oil lands, and entered 50 new leasing arrangements targeting Mannville and Duvernay oil in the quarter. We suspect 2Q24 Street estimates for oil production will get tempered somewhat given the recent outage of a gas plant impacting PSK’s royalty production in the Clearwater. That said, we see no reason to diverge from our prior view that consensus estimates for oil production in 2025 look too low.”
* Desjardins Securities’ Benoit Poirier raised his WSP Global Inc. (WSP-T) target to $245 from $243 with a “buy” rating. The average is $238.50.
“The company has completed four tuck-in acquisitions so far this year, adding a total of 450 employees — Communica Public Affairs (50 in Canada), Proxion Plan and Proxion Pro (150 in Finland) and 1A Ingenieros (250 in Spain). While no financials were disclosed, we have used historical metrics for WSP and standard industry assumptions to include the contribution from these acquisitions in our forecasts (eg $140,000–150,000 net revenue contribution per employee). Consequently, our target price has increased,” he said.
On his broader engineering and construction coverage universe, Mr. Poirier added: “Looking at our E&C coverage on a three-year potential return CAGR basis, ATRL [AtkinsRéalis] remains the most attractive at 13.8-per-cent CAGR [compound annual growth rate] assuming some multiple expansion to 13 times EV/EBITDA. Based on our current exit multiples and assuming no announced M&A, WSP is the most attractive at 11.0-per-cent CAGR. That said, ATRL remains our preferred E&C name given the several catalysts ahead for this turnaround story (nuclear, completion of LSTK work, monetization of non-core assets, re-rating opportunity) and its more defensive nature (70-per-cent exposure to government clients).”
David Leeder