Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Jon Tower thinks the key pieces for Restaurant Brands International Inc.’s (QSR-N, QSR-T) “puzzle for shareholder value creation are falling neatly into place” following its earnings release on Tuesday, pointing to share gains at Tim Hortons in Canada, the turnaround in Burger King south of the border and a “strong relative” performance internationally.
While he also thinks the company’s “tone around global demand was relatively upbeat,” particularly in the context of a less-enthusiastic message from rival McDonald’s Corp. (MCD-N), he warned “questions regarding the outlook in China (small piece of EBIT, but larger piece of future unit growth) and concerns about how BK U.S. would fare in a more value-driven environment will make multiple expansion from here difficult in the near term.”
TSX-listed shares of the Toronto-based company rose 3.5 per cent after it reported first-quarter revenue of US$1.738-billion, up 9.3 per cent year-over-year and exceeding both Mr. Tower’s US$1.69-billion estimate and the consensus projection of US$1.695-billion. Adjusted EBITDA and diluted earnings per share of US$627-million and 73 US cents, respectively). were also better than anticipated (US$596-million and 69 US cents and US$616-million and 72 US cents.
“Investors are likely to breath a sigh of relief post 1Q update and push shares higher in the near term on the back of a strong top & bottom-line beat, with TH driving comp upside and BK providing the majority of the AOI [adjusted operating income] upside,” said Mr. Tower. “Unit growth remained subdued (up 3.9 per cent year-over-year, well-below the 5-per-cent long-term target) though management stuck to its long-term targets and offered some guidance on ‘24 that suggests Street AOI may need to move higher.”
Mr. Tower said the focus remains on the “challenging” industry backdrop, however he noted Restaurant Brands “expressed confidence” in its ability to reach a goal of 3-per-cent comparable same-store sales growth in fiscal 2024.
“The strong start to ‘24 helps, and new product news across core markets (e.g., TH Can flatbreads, beverages), continued benefits from ops/remodels/marketing (e.g., BK U.S.) and consistent value messaging (across the globe) has set the brands up well to compete,” he said. “QSR plans to stay the course on value, holding to the framework that’s yielding improving relative traffic gains across markets (and avoid deep discounts).
“China remains in a holding pattern. While less than 2 per cent of consolidated AOI, so not a significant driver of near-term performance, China is expected to contribute 20 per cent of NROs [net restaurant openings] by 2028 and has been a weight on year-over-year growth rates (the company endorsed reaching mid-4-per cents by year end despite the slow start).”
Pointing to “slightly higher comp expectations and lower SG&A,” the analyst raised his 2024 and 2025 EPS projections to US$3.40 and US$3.77, respectively, from US$3.29 and US$3.71. That led him to bump his target for the company’s shares to US$79 from US$78, reiterating a “neutral” rating. The average target on the Street is US$85.55, according to LSEG data.
“The company has demonstrated an ability to improve franchisee profitability in core home markets across the portfolio and we expect this broadly continues, along with strong unit growth for Burger King International, ramping of PLK brand globally and solid comp growth at TH Canada,” he said. “However, limited visibility into the economics of nascent businesses outside core markets (e.g., PLK INTL, TH INTL, FHS) means its difficult to underwrite NRG (new restaurant growth) returning to more than 5 per cent and layering this into valuation. At the same time, we see above average room for near- to medium-term estimate volatility related to the Burger King U.S. brand repositioning/reinvestment (including the integration of the TAST business) particularly as the competitive set struggles to drive traffic.”
Elsewhere, others making target adjustments include:
* Scotia’s George Doumet to US$82.50 from US$81 with a “sector outperform” rating.
“Q1 marks the second consecutive quarter where home market performance internals came in solid (while international earnings contribution came in below expectations),” said Mr. Doumet. “The highlights of the quarter: Home market TH and BK continue to outperform and gain share. The pressure points: TH supply chain margins continue to underwhelm and International NRG and margins were softer than expected.
“QSR shares are trading in-line with historical averages, but at an 11-per-cent discount vs IHF peers (on 24 estimated EBITDA). We expect the valuation gap to close as QSR continues to deliver above industry/average internals and its 4.5-per-cent NRG growth target (5-per-cent longer-term).”
* Barclays’ Jeffrey Bernstein to US$89 from US$87 with an “overweight” rating.
“1Q24 comp was impressive, with upside at TH & PLKI [Popeyes Louisiana Kitchen Inc.] home markets as well as the broader International segment, along with an in-line result at BK home market. Such drove modest adj. EBITDA & EPS upside. Looking ahead, management confident in sustained comp momentum despite slowing macro, along with re-acceleration in net unit growth in ‘25.”
* TD Cowen’s Andrew Charles to US$88 from US$84 with a “buy” rating.
* Piper Sandler’s Brian Mullan to US$82 from US$84 with a “neutral” rating.
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Citing its current valuation and lower free cash flow outlook over the medium term, National Bank Financial analyst Mike Parkin downgraded Newmont Corp. (NGT-T) to “sector perform” from “outperform” following a recent run of steep share price appreciation.
“Last Thursday, Newmont reported Q1 operating and financials results, posting a strong Adj. EPS beat to both NBF estimates and consensus,” he said. “The stock reacted very well to the beat, rising 12 per cent on Thursday. We followed up with management to better understand the working capital outflows over the medium term and adjusted our estimates to better reflect these commitments, which weighed on our FCF outlook for the company.”
“We continue to believe Newmont is a quality name to own; however, with the recent rally in the share price and current valuation we see Newmont shifting to trade more in line with peers.”
In a research note released Wednesday, Mr. Parkin adjusted his forecast for the Denver-based miner, including changes to his “production cadence across several assets to continue to align with a back-half-weighted year after a strong operational start to 2024.”
“After following up with management, we added in the sizable working capital outflows related to the reclamation of Yanacocha and the construction of the water treatment facilities. With today’s update, we now include US$600-million (prev. US$550-million) of working capital outflows in 2024, US$700-million (prev. nil) in 2025, US$400-million (prev. nil) in 2026,” he said. “We expect additional outflows in later years and will revisit our assumptions as more clarity on the timing and magnitude of these costs comes to light with the completion of the closure feasibility study. Given the additional follow-up questions regarding this reclamation liability on the conference call, we expect this FCF impact was not largely captured in other analysts’ models, likely resulting in a negative impact to consensus FCF estimates going forward.”
With those changes, Mr. Parkin’s net asset value projection dropped by 3 per cent to $59.27 per share, while his target price slid by $1 to $68. The average on the Street is $64.
“Given our NTM [next 12-month] constructive view on the spot gold price, we believe Newmont is likely to participate more in line with the sector vs. higher beta names based on this NAV sensitivity analysis, which further supports our downgrade of Newmont to Sector Perform from Outperform,” he said.
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While acknowledging its guidance is at risk after weaker-than-expected first-quarter results, which he called a “choppy start of the year,” National Bank Financial analyst Maxim Sytchev thinks shares of Ag Growth International Inc. (AFN-T) remain undervalued “from [an] absolute vantage point,” especially following a 13.7-per-cent drop in price on Tuesday.
“This is the third share price rollover that we are seeing since early 2023,” he said. “Yes, the print was not great, especially in light of lowering the bar ahead of the quarter. Yes, all growth is now H2/24E-weighted, which always raises a spectrum of skepticism. Yes, AFN shares were up 22 per cent year-to-date before the print – now up 6 per cent (vs. up 5 per cent for the TSX) and Deere & Company (NYSE: DE; Not Rated) shares flat year-to-date; we will be hearing again about the difficulty of decoupling from the ag cycle.
“One can also take apart the guide and the language around 18-19-per-cent EBITDA margins in 2024 and likely a more challenging path towards $310-million in EBITDA. At the same time, this is a more focused entity now, with a much stronger balance sheet and organic capital deployment optionality (as we are seeing in India). Farm/food is not a spectacular market but defensive (over the long term, depending on where soft commodities land). At 11 times 2024 estimated P/E, we believe AFN shares represent a good value now.”
In a research note titled Tactically, not a great look; from an absolute perspective, we see value AFN, Mr. Sytchev thinks the Winnipeg-based company’s “transition in the business mix” is likely to weigh on results through the first half of the year, but he says “a 200 basis points structural margin improvement and thematic tailwinds” reaffirmed his positive stance on the future.
“Management reiterated its target of at least $310-million of EBITDA for the full year with a margin of close to 19 per cent (implying mid-single-digit revenue growth), with the year-over-year-increase expected to materialize entirely in H2/24 (implying a moderate year-over-year decline in Q2/24 vs. $88-million in Q2/23); we are below the guide now,” he said. “The improvement in the back half of the year is contingent on the delivery of Commercial portfolio projects, though we should note that margins here are structurally lower, suggesting some measure of downside risk to guidance (we have trimmed our estimates to relatively conservative levels; a higher mix of permanent vs. portable sales in Farm is likely to weigh on margins). All in, management expects slightly more than 54 per cent of 2024 earnings to come from the back half of the year. Longer-term operational improvements in the business suggest that 18 per cent to 19 per cent is a reasonable through-the-cycle EBITDA margin.
“The breadth of organic growth avenues remains attractive. India continues to be the most attractive avenue for organic growth initiatives as product transfers accelerate and accelerating portable grain handling equipment sales improve margins further. Parts and service offerings are being rolled out in North America and are expected to begin in Brazil over the next few years, which should improve revenue visibility as well as the magnitude and predictability of margins. AFN has also begun to roll out its digital offerings in Brazil and management cites positive customer feedback in the early stages of the initiative”
Maintaining his “outperform” recommendation for Ag Growth shares, Mr. Sytchev trimmed his target to $77 from $82. The average on the Street is $79.11.
“We reiterate our Outperform rating given the 40-per-cent upside (even though we adjusted the NAV down on higher capex assumptions and working capital movements that are impacting 2025E net cash balance),” he said.
Elsewhere, other changes include:
* ATB Capital Markets’ Tim Monachello to $81 from $85 with an “outperform” rating.
“While AFN’s H1/24 results are expected to be impacted by shifting Commercial project schedules and softness in U.S. Farm activity, we believe AFN continues to benefit from longer-term structural tailwinds including product transfers, operational excellence initiatives, and deleveraging that we believe underpin its long-term value proposition for investors,” he said. “Still, AFN shares could face pressure as investors weigh the implications of its weakened near-term outlook. Given reduced near-term estimates we adjust our price target ... We maintain our Outperform rating given AFN’s attractive valuation and long-term positioning.”
* Desjardins Securities’ Gary Ho to $78 from $86 with a “buy” rating.
“While 1Q was noisy (softer North American Farm and Commercial project delays), we believe the negative 11–12-per-cent share price reaction is unwarranted given AFN’s robust order book (provides 2H visibility) and 2025 growth initiatives (which are gaining momentum),” said Mr. Ho.
* Scotia’s Michael Doumet to $75 from $88 with a “sector outperform” rating.
“In 2023, AFN guided for 2023 EBITDA growth of more than 13 per cent and instead grew EBITDA by 25 per cent — highlighting the conservative approach management takes with its initial guide,” said Mr. Doumet .”For 2024, we believe the embedded conservatism in the guide will be able to “absorb” the incremental headwinds. While we appreciate that investors may need to wait until 3Q for evidence that AFN remains ‘on track’, we believe medium-term opportunity for a meaningful re-rate remains intact.”
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After updating his forecast in response to last week’s quarterly earnings release, RBC Dominion Securities analyst Greg Pardy reaffirmed his “constructive stance” on Imperial Oil Ltd. (IMO-T), pointing to its longlife, low-decline upstream portfolio, cash flow diversification via its refining and chemical segments, strong balance sheet, free cash flow generation, commitment to shareholder returns and solid operating performance.”
“The company delivered mixed first-quarter results amid inline upstream production of 421,000 boe/d [barrels of oil equivalent per day] —including record quarterly production at Kearl of 196,000 bbl/d (net), 17-per-cent higher capital spending of $496 million, and higher R&M (after-tax) earnings of $631 million which benefitted from wider light oil differentials,” he said.
Mr. Pardy’s base outlook now includes earnings and cash flow per share estimates for 2024 to $9.40 and $13.11, respectively, rising from $8.96 and $12.80 previously. His 2025 projections increased to $9.06 and $13.32 from $9.04 and $13.29.
“Our 2024 total equivalent production estimate sits at 427,800 boe/d, slightly below the mid-point of IMO’s 420,000-442,000 boe/d annual production guidance range; this outlook factors in Kearl production of 198,400 bbl/d (net), Cold Lake volumes of 144,500 bbl/d, and Syncrude production of 74,900 bbl/d (net).”
Seeing “shareholder returns aplenty,” he added: “Our 2024 outlook factors in share repurchases of $2.7 billion in the second-half of the year, executed through IMO’s NCIB (5 per cent) which is eligible for renewal in late June. It would not surprise us to see IMO pursue a shareholder returns strategy similar to last year, punctuated by an accelerated NCIB in the second-half of 2024 with a SIB tucked into the fourth-quarter. For reference, IMO’s outstanding shares have fallen 28 per cent from 743.9 million at the end of 2019 to 535.8 million as of March 31, while its annual dividend has risen nearly three-fold to $2.40 per share over the same timeframe. 1Q Results.
Also touting its “abundant” cash flow, Mr. Pardy hiked his target for Imperial Oil shares by 5 per cent to $105 from $100 with a “sector perform” rating. The average is $97.08.
“Under our base outlook, Imperial is trading at a debt-adjusted cash flow multiple of 7.3 times in 2024 (vs. our global major peer group avg. of 6.1 times) and at a free cash flow yield of 11 per cent in 2024 (vs. our peer group avg. of 8 per cent),” he said. “In our opinion, Imperial should command an above-average multiple given its low decline upstream portfolio, cash flow diversification via its refining and chemical segments, abundant shareholder returns and impressive operating performance, especially at Kearl.”
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Desjardins Securities analyst John Sclodnick is confident in Nevada King Gold Corp.’s (NKG-X) ability to demonstrate its Atlanta project possesses high margins and a “relatively modest” initial capex requirement, resulting in a “strong” internal rate of return.
“Beyond Atlanta, the company is the third largest active claimholder in Nevada after Nevada Gold Mines and Kinross, and we therefore believe it can surface more value for shareholders,” he added.
In a research report released Wednesday, he initiated coverage of the Vancouver-based company with a “buy” recommendation, noting its “aggressive drill program reveals consistently high‐grade intercepts over impressive widths in oxide material.”
“Its Atlanta project has a very high‐grade resource, which we estimate is roughly double the grade of recently acquired Nevada‐based projects — making NKG a strong takeout candidate,” said Mr. Sclodnick. “And given it is oxide material, we believe that the material will be processed via heap leach with a small mill for the high grade, leading to a relatively low‐capex and very financeable project, particularly with the ability to stream the silver production. Once operating, we see a high‐margin project, capable of generating $90-million in annual FCF ($115-million pre‐stream), which could be a foundational asset for Nevada King or a junior or intermediate producer, similar to Camino Rojo for Orla, Marigold for SSR, and Mulatos for Alamos. What’s more, the company has the third largest claims holding in Nevada after Nevada Gold Mines and Kinross, so we expect the claims to be able to continue to drive value as Nevada King spins out these other projects later this year to NKG shareholders. With potential to demonstrate a high‐margin, low‐capex project in the top mining jurisdiction in the world according to the Fraser Institute, we expect the stock to trade at a premium to the gold developer peer group as management continues to advance and derisk the Atlanta project. We see it as a strong takeout candidate.”
The analyst set a 12-month target of $1 per share, implying a potential return of 181 per cent. The average is 83 cents.
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In other analyst actions:
* Ahead of its first-quarter earnings release of May 15, Stifel’s Daryl Young reduced his Boyd Group Services Inc. (BYD-T) target to $335 from $340, remaining above the $322.86 average, with a “buy” rating.
“Q1 has been well telegraphed to be a challenging start to 2024, owing to the unseasonably mild winter (collision claims down 8 per cent year-over-year), combined with the margin drag from the ramp-up of Boyd’s new greenfield/brownfield locations,” he said. “Read-throughs from the automotive aftermarket have been challenging, with participants highlighting potential for softness to carry across Q2/24, including comments by LKQ management that collision claims might be facing incremental headwinds related to the normalization of total write-offs and deferral of non-essential repairs (elevated insurance costs/deductibles). We think these factors are largely transitory, and remain steadfast in our view that Boyd’s growth algorithm will continue compounding value at attractive returns for many years to come, but acknowledge near-term results could be choppy. Our focus for the release is management’s Q2/24 outlook, discussion of potential transitory vs structural collision claims impacts, and commentary around the margin trajectory across 2024.”
* Scotia’s Phil Hardie cut his First National Financial Corp. (FN-T) to $41, below the $42 average, from $45 with a “sector perform” rating., while RBC’s Geoffrey Kwan lowered his target to $41 from $43 with a “sector perform” recommendation.
“Core EPS (ex-fair market value adjustments) was below the Street and our estimates, mainly reflecting a weaker-than-expected top line,” said Mr. Hardie. “However, on a more constructive note, we believe the quarter demonstrated the benefits of First National’s diversified business mix and revenue sources.
“The combination of competitive pressures and a transitioning landscape likely contributed to weaker-than-forecast single-family mortgage volumes and tighter-than-expected mortgage spreads. This was mainly offset by a strong rebound in commercial volumes, resulting in overall origination volumes remaining relatively flat compared to last year, and better-than-forecast placement fees with Core EPS edging up over last year by roughly 5 per cent.”
* Scotia’s Robert Hope bumped his Gibson Energy Inc. (GEI-T) target to $26 from $25 with a “sector outperform” rating. Other changes include: Stifel’s Cole Pereira to $25 from $26 with a “buy” rating and BMO’s Ben Pham to $25 from $22.50 with a “market perform” recommendation. The average is $25.50.
“Gibson Energy’s legacy infrastructure business continues to perform well and the South Texas Gateway Terminal (STGT) saw record volumes in the quarter,” said Mr. Hope. “Management continues to speak favourably about the re-contracting outlook for STGT, and we see this announcement as a catalyst for the shares. We move our 2024 estimates down slightly to reflect a more modest Marketing outlook, though our longer-term estimates are largely unchanged. We also introduce our 2026 estimates, and move forward our valuation by a year. This drives up our target price ... Year-to-date, Gibson’s shares have been the top performer in our coverage universe. We believe there could be further upside as STGT is re-contracted, though we will have to wait a little longer for this. We have a favourable view on Gibson given its (1) strong balance sheet (2024 debt to EBITDA of 3.2 times vs. target of 3.0-3.5 times) and easy-to-execute funding plan, (2) low payout ratio (2024E 61% versus target of 70-80 per cent) and very secure 7.2-per-cent go-forward dividend yield, and (3) improved growth outlook.”
* Haywood Securities’ Christopher Jones cut his Street-high Green Impact Partners Inc. (GIP-X) target to $13.25 from $17 with a “buy” rating. The average is $8.94
* Scotia’s Orest Wowkodaw moved his Ivanhoe Mines Ltd. (IVN-T) target to $19 from $18 with a “sector outperform” rating. Other changes include: BMO’s Andrew Mikitchook to $22 from $18 with an “outperform” rating, Canaccord Genuity’s Dalton Baretto to $22 from $21 with a “buy” rating and RBC’s Sam Crittenden to $22 from $19 with an “outperform” rating. The average is $19.79.
“Ivanhoe reported largely in-line Q1/24 financial results,” said Mr. Wowkodaw. “Previously released 2024 operating guidance was reaffirmed. All the company’s major growth projects remain on track. Overall, we view the update as largely neutral for the shares.
“Although geopolitical risk is elevated, we rate IVN shares SO based on the company’s world-class asset base, strong growth profile, and impressive management track record.”
* In response to its acquisition of U.K.-based Shortridge Ltd, Acumen Capital’s Jim Byrne raised his K-Bro Linen Inc. (KBL-T) target to $47.50 from $46 with a “buy” rating. The average is $44.50.
* Stifel’s Justin Keywood bumped his Knight Therapeutics Inc. (GUD-T) target to $5.40 from $5.25 with a “hold” rating. The average is $6.75.
* Mr. Keywood initiated coverage of Vancouver-based NervGen Pharma Corp. (NGEN-X) with a “buy” rating and $4 target. The average is $4.50.
“NervGen is a biotech and regenerative medicine company in Phase 1B/2A trial for Spinal Cord Injury (SCI) where no approved drugs are available,” he said. “The upside, emerging from successful results could be substantial with 300K people living with the debilitating condition, valued at US$50-billion TAM [total addressable market]. Early-stage trials carry elevated risks but our conversations with doctors and spine surgeons highlight de-risking elements including compelling pre-clinical studies, FDA Fast Track Designation granted post Phase I (Fall 2023) results and new electrophysiological measurements to quantify connectivity. NervGen also has a relatively clean balance sheet and capital structure with no debt, run by a solid management team with a high-profile board including a well-tenured pharma CEO. We launch coverage with a BUY rating and C$4.00 target for SCI only, where expanded indications could be additive upside, highlighting potential substantial reward and providing hope for nervous system damage.”
David Leeder