Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Adam Shine sees BCE Inc. (BCE-T) continuing to battle an “elevated” competitive landscape though the current fiscal year, but he expects the telecommunications giant’s “expense savings and growth to build through the year.”
For its first quarter of 2024, he’s now projecting a revenue decline of 0.4 per cent year-over-year to $6.028-billion, narrowly lower than the Street’s expectation of $6.112-billion. However, he sees earnings before interest, taxes, depreciation and amortization (EBITDA) rising 0.4 per cent to $2.547-billion, also under the consensus of $2.582-billion.
“While we have less Wireless product sales than consensus, our Media estimates for Revs/EBITDA are lower given a $37-million retroactive carriage adjustment in 1Q23 that the Street will need to factor in,” he said. “We expect 1Q CTS [Communication and Technology Services] revs up 0.4 per cent & EBITDA up 1.5 per cent, with Media down 6 per cent and down 20 per cent (down 1.6 per cent and up 10.8 per cent ex-item). In Media, the belated TV season, given last year’s Hollywood strikes, slowly moved toward a full schedule from late January to early March. Restructuring savings should be small in 1Q and skew to 2H.”
For BCE’s wireless business, Mr. Shine expects “solid” subscription additions, but he warned average revenue per user (ARPU) is likely to face pressure and churn will be higher.
“Immigration continues to keep subscriber loading at elevated levels albeit less than 1Q23. Competitive intensity jumped post-1Q23 and 4Q23 promotions returned during 1Q, especially in Quebec, thus adding to pricing pressure,” he said.
Maintaining an “outperform” recommendation, Mr. Shine lowered his target for BCE shares to $53 from $55. The average target on the Street is $54.65, according to LSEG data.
“We opted to reduce the multiple we apply to Wireline in our NAV by 25 basis point s as we await CRTC’s final TPIA decision in coming weeks/months and also contract the terminal growth rate in our DCF by 25 bps given our EBITDA growth assumptions,” he said.
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In a separate note released Monday, Mr. Shine also emphasized the impact of “intense” competition on Telus Corp. (T-T), but he expects its quarterly financial report in early May will come with a 3.5-per-cent increase to its dividend.
“Growth steps down as M&A has been lapped, renewed traction out of verticalization strategy only comes post-1H, and Telus contends with greater competitive intensity in wireline and wireless after Rogers bought Shaw and Quebecor acquired Freedom on 4/3/23,” he said. “Restructuring savings of over $325-million were to be achieved exiting 1Q24 with ongoing efforts to extract M&A synergies.”
Maintaining his “outperform” recommendation for its shares, Mr. Shine reduced his target by $1 to $26. The average is $26.49.
Elsewhere, seeing Telus’ valuation as “stretched,” Scotia Capital analyst Maher Yaghi downgraded its shares to “sector perform” from “sector outperform” previously.
“We continue to believe that TELUS should outgrow most Canadian telcos over the next few years given the company’s high exposure to wireless and superior bundling metrics,” said Mr. Yaghi. “However, as the sector faces increasing ARPU pressure both in wireless and wireline, we believe the stock’s premium multiple will likely come under increased scrutiny. ... Of we remove the value of TIXT, the company’s TTech segment, which includes the telecom, health and Ag businesses, is currently trading at a higher multiple to its justified valuation given its expected growth prospects ($2/share higher). Recent acquisitions by TELUS in the Health and IT services segments have increased leverage without a commensurate bump in overall revenue growth. We expect 1H24 growth metrics to lag the company’s yearly guidance as growth looks to be backend loaded. We are taking a wait-and-see approach until underlying growth returns to levels that can provide a tailwind to valuations.”
Citing “changes in market dynamic expectations on pricing and immigration combined with business operation trends,” Mr. Yaghi thinks Telus’ annual guidance is “achievable, but growth looks to be backend loaded.”
“Wireless pricing intensity in the Canadian telecom landscape remains elevated, putting significant pressure on wireless ARPU while also pushing churn rates up,” he said. “We expect TELUS’ wireless APRU to decline by 1.3 per cent year-over-year in Q1, contributing to overall negative ARPU growth of 0.5 per cent in 2024 and while we hope for lessened ARPU pressure in 2H/24, the turnaround will be contingent upon reduced price competition as we progress through the year and a reduction in churn. Despite lower ARPUs, we think the wireless market remains robust from a subscriber point of view and hence growth in wireless loading is still expected although not at the levels we’ve seen in 2023. Normalization of population growth, driven by government objectives to reduce student visas and immigration has led us to slightly reduce our 1Q24 and 2024 wireless phone net adds.”
The analyst cut his target for Telus shares to $26 from $28.
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Seeing “overheated valuation concerns,” Scotia Capital analyst Konark Gupta downgraded Canadian Pacific Kansas City Limited (CP-T) to “sector perform” from “sector outperform” previously, “expecting potential normalization in the P/E multiple to offset anticipated earnings acceleration in 2025/2026 and resumption of shareholder returns in 2025.”
“We now see a relatively similar risk/reward in both CNR and CP,” he said in a report released Monday.
“Canadian rails have positively surprised us in Q1 by showing a material improvement in year-over-year traffic trends as the quarter progressed. RTMs [revenue ton miles] were down as much as 20 per cent year-over-year in mid-January due to weather challenges, ending the month down 7 per cent year-over-year. Traffic rebounded in February, aided by a milder winter. March has been generally positive so far despite some repeated weather issues. We expect CNR and CP to finish the quarter with RTMs flat year-over-year and up 1.6 per cent year-over-year, respectively, better than our prior assumptions and latest consensus. Autos, energy & chemicals, grain, intermodal and potash are tracking positive in Q1, while coal is the biggest laggard. Networks have generally performed well considering the weather impact. Continued strong pricing could drive Q1 yields higher year-over-year, despite fuel and mix headwinds. However, CNR is facing a tough operating ratio (OR) comp in Q1, while CP is benefitting from the KCS synergy ramp-up.”
With that view, Mr. Gupta raised his first-quarter earnings per share projection for Canadian National Railway Co. (CNR-T) to $1.75, a decline of 4 per cent year-over-year. However, his new CP estimate of 96 cents is a rise of 7 per cent.
“We expect CP to outperform Class 1 rails on year-over-year changes in Q1 revenue, OR [operating ratio] and EPS,” he said. “We continue to forecast full-year EPS growth of 10 per cent for CNR (Street 11 per cent) and 13.5 per cent for CP (Street also 13.5 per cent), consistent with their guidance of 10 per cent and double-digit, respectively. As a reminder, CNR’s guidance of mid single-digit RTM growth assumes a positive macro while CP’s guidance of low single-digit RTM growth reflects caution and doubling of KCS synergy run-rate.”
Citing multiple expansion, his CP target jumped to $126 from $120. The average is $118.68.
Keeping a “sector perform” rating for CN shares, his target rose to $184 from $173. The average target on the Street is $177.58.
Mr. Gupta also raise his TFI International Inc. (TFII-T) target to $235 from $225 with a “sector outperform” rating. The average is $193.88.
“Freight markets are portraying a mixed yet promising picture,” he said. “Rail, air cargo and LTL [less-than truckload] volumes are sustaining year-over-year growth that started in Q3/23. However, LTL tonnage remains weak on declining weight per shipment, while the TL market has yet to find a true bottom (likely mid-2024). The sector remains fragile in light of the ongoing uncertainties, but it has not yet shown any major cracks despite sticky interest rates as perhaps normalizing inflation, rational behaviour and inventory destocking are providing support. Based on QTD trends, we have slightly raised Q1 estimates for CJT, CNR and CP, expecting a beat particularly from CJT. On the flip side, we have trimmed Q1 estimates for MTL and TFII to further below consensus. We don’t expect guidance revisions soon as companies are watching the macro, although MTL’s outlook seems conservative due to a pending M&A. TFII is still likely to initiate guidance in April, but it may start conservatively. Overall, we have raised targets for CNR (multiple expansion), CP (multiple expansion) and TFII (latest LTL tuck-in), while downgrading CP to SP from SO on overheated valuation concerns. We have a more favourable view on CJT (valuation), MTL (valuation) and TFII (catalysts).”
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Seeing the growth potential for TMX Group Ltd. (X-T) “shifting higher underpinned by contributions from VettaFi and consistent execution on self-help initiatives,” BMO’s Étienne Ricard upgraded its shares to “outperform” from “market perform” previously.
“The list is exhaustive: an expanded Montréal Exchange offering, asset class & geographic expansion at Trayport, enhanced MoC/dark trading, BOX market share gains, AST Trust synergies and Datalinx’s revenue monetization,” he said.
“Progress against transformational objectives at a turning point with 55-per-cent-plus recurring revenues (2023: 53 per cent; objective: 66 per cent plus) and 45-per-cent-plus revenues outside Canada (2023: 41 per cent; objective: 50 per cent plus). Enhanced diversification is supportive of financial performance resiliency and valuation multiples.
Believing its “peer-leading growth prospects and revenue predictability support a re-rating,” Mr. Ricard’s target is now $41, rising from $36. The average on the Street is $36.25.
“TMX trades at a 20 times adjusted earnings multiple, representing a 2 times discount to global exchange peers and a 4 times discount to exchange peers with a more recurring revenue mix. We argue this discount is unwarranted in light of peer-leading earnings growth prospects (2023-26: 12-per-cent CAGR; peer average: 7 per cent) and relative revenue predictability (56-per-cent recurring; peer average: 35 per cent).”
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Desjardins Securities analyst Benoit Poirier is taking a “more cautious approach” on BRP Inc. (DOO-T) based on a weaker-than-anticipated snowmobile season, however he continues to see an “attractive” valuation for the Quebec-based powersports manufacturer’s shares.
“Winter conditions have been challenging,” he said. “Combined with a tougher consumer spending environment, this translated into lower snowmobile sales, leaving dealers with elevated inventory. We expect BRP to increase promotional activity in 2024 due to the grim snowmobile season, which will hurt FY25 sales (linked to shipments) and margins (operational deleverage combined with more discounts). We now assume normalized fully diluted EPS of $8.46 in FY25, down from $9.06.”
The analyst noted BRP’s closest peer, Polaris Inc. (PII-N), fell short of expectations with sales projected to decline 5-7 per cent year-over-year.
“Moreover, the company expects that the lack of snowfall in most of North America (negative impact on snowmobile retail and parts sales), combined with tough comps for the ORV segment, pushed 1Q sales down 20 per cent year-over-year with EPS around breakeven (significantly below consensus of a 13 per cent year-over-year decline in sales and EPS of US$1.31),” he noted. “The outlook for the marine players is just as bleak, with Malibu Boats, Brunswick and MarineMax all revising (or introducing) 2024 targets below Street expectations. The marine companies pointed to a difficult retail backdrop, which resulted in more aggressive pricing actions, elevated dealer inventories and further reduction in wholesale shipments.”
Mr. Poirier said he now sees a $78-per-share level as “as an attractive entry point in the event of a negative market reaction.”
“We expect some downside given the negative weather implications, but we see a low probability of FY25 EPS falling below the $8.00 level,” he said. “If the FY25 EPS guidance midpoint comes in at $8.50, we calculate potential downside to $78/share using a 9 times multiple, vs the current share price of $85. For reference, the stock found support at the $78/share level after DOO reported poor 3Q results. This further strengthens our confidence in our call on an entry point at $78 given the weak 3Q and guidance cut caught investors by surprise whereas the current share price already bakes in negative market sentiment, in our view.”
With the reductions to his fiscal 2025 outlook, Mr. Poirier trimmed his BRP target to $112 from $117 (previously the high on the Street), keeping a “buy” recommendation. The average is $101.94.
“We are very pleased with the company’s execution to drive profitable growth and recommend investors revisit the story,” he said.
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Following in-line fourth-quarter financial results, National Bank Financial analyst Vishal Shreedhar thinks Lassonde Industries Inc.’s (LAS.A-T) turnaround “remains on track.”
“We consider Q4/23 results to be adequate,” he said. “Importantly, LAS showed sales growth (higher pricing, and higher volumes in the U.S., partly offset by lower Canadian volumes of national brand products), and gross profit improvement in all divisions.”
After the bell on Thursday, the Rougemont, Que.-based juice maker reported revenue of $605-million, up from $556-million during the same period in 2022 and above the Street’s expectation of $603-million. Adjusted EBITDA rose to $52.6-million from $38.3-million, topping the consensus projection of $51.9-million.
“We view the 2024 outlook to indicate the turnaround remains on track,” said Mr. Shreedhar. “LAS issued its 2024 outlook calling for: (i) mid-single digit year-over-year sales growth ex-F/X and ex-Diamond (NBF is 3.7 per cent), mainly reflecting the run-rate effect of pricing, and volume growth in H2/24 (rebuilding U.S. demand, additional volumes from the deployment of a single serve line in North Carolina, and overall demand stabilization), partly offset by a slight year-over-year decline in H1/24 volume, and (ii) capex intensity of up to 5.0 per cent (NBF is 5.0 per cent).
“We have made modest changes to our estimates. Our 2024 EPS goes to $14.93 from $15.26 and 2025 EPS goes to $16.55 from $17.07. Net debt to EBITDA is 0.9 times; we see improvement to 0.7 times by the end of 2024, which we believe is overcapitalized. We remain supportive of LAS’s priority to maximize the performance of existing businesses.”
Maintaining his “favourable view” on Lassonde and his “outperform” recommendation, Mr. Shreedhar bumped his target to $174 from $173 based on his “slightly” higher estimates. The average is $174.67.
“We consider LAS to be a company with meaningful turnaround potential, predominantly within the U.S. operations,” he said. “We estimate LAS’s U.S. operations generated an EBIT margin of 3 per cent in 2023, from flattish in 2022 (historical range of 6-9 per cent; 2012-2017). If the U.S. business returns to historical EBIT margins, we estimate meaningful upside to our 2026 estimates.
“Though there remains near-term uncertainty surrounding consumer health, cost inflation and operational performance, we hold a positive view given favourable valuation and expectations of improving performance (pricing, Project Eagle, etc.).”
Elsewhere, Desjardins Securities’ Frederic Tremblay hiked his target to $175 from $150 with a “hold” rating.
“While pricing remained a key growth driver in 4Q23, management’s outlook indicates we may finally see a sequential volume improvement in 2H24,” he said. “Our target price moves to C$175 (was C$150) as we roll forward our valuation and bump our target multiple to reflect recent execution and a potential volume recovery. That said, our Hold rating is unchanged given limited visibility on near-term catalysts and the many moving pieces of the story (internal initiatives, consumer behaviour, input cost trends, etc).”
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In other analyst actions:
* In a research note on apartment real estate investment trusts, Scotia Capital’s Mario Saric made these target changes: Boardwalk REIT (BEI.UN-T, “sector perform”) to $80.25 from $82, CAP REIT (CAR.UN-T, “sector outperform”) to $53.75 from $55, InterRent REIT (IIP.UN-T, “sector outperform”) to $14.25 from $14.75, Killam Apartment REIT (KMP.UN-T, “sector perform”) to $20.50 from $21, Minto Apartment REIT (MI.UN-T,” sector perform”) to $18.76 from $19.25. The averages are $84.92, $57.32, $15.18, $22.40 and $20.50, respectively.
* Jefferies’ Alejandro Demichelis cut his Canacol Energy Ltd. (CNE-T) Street-low target to $5.40 from $6.70 with a “hold” rating. The average is $11.88.
* CIBC’s Scott Fletcher reduced his Dentalcorp Holdings Ltd. (DNTL-T) target to $10 from $11 with an “outperformer” rating, while Scotia’s George Doumet cut his target to $8 from $8.50 with a “sector outperform” rating.. The average is $9.93.
“Q4 results and 2024 guidance was largely in-line with our/street expectations,” said Mr. Doumet. “That said, largely due to a strong lap (record volumes from a rebound from a heavy flu season), Q1 guidance was soft, with midpoint top-line growth of 5 per cent (street was at 9 per cent).
“We would be buyers on weakness. Shares are trading at 9 times/8 times EBITDA on our 24/25 estimates. FCF is improving, and we see a path to transfer 0.5 times turn of debt to equity holders per year. Furthermore, we believe we can see upside to the company’s trading multiple under a soft landing scenario. DNTL shares are trading at a 50-per-cent discount to U.S. consolidators/practice aggregators (USCPA) peers and 15-per-cent discount to Canadian noncyclical roll-up (CNR) peers.”
* CIBC’s Nik Priebe lowered his target for ECN Capital Corp. (ECN-T) to $1.90, below the $2.50 average, from $3 with a “neutral” rating.
* TD Securities’ Sam Damiani, currently the lone analyst covering Firm Capital Mortgage Investment Corp. (FC-T), raised his target for its shares to $13 from $12 with a “buy” rating.
* Following “solid” fourth-quarter results, including record 15.6-per-cent same-property net operating income growth, Desjardins Securities’ Kyle Stanley raised his target for Flagship Communities REIT (MHC.U-T) to US$21 from US$19.50 with a “buy” rating. The average is US$20.63.
“Flagship is positioned to deliver another year of double-digit SP NOI growth in 2024—well ahead of U.S. MHC [manufactured housing communities] peers, which have guided to 5–6-per-cent growth,” he said. “Moreover, post-quarter financing has improved liquidity to facilitate external growth. In our view, the potential for operational outperformance in 2024 should begin to narrow the deep NAV discount.”
* TD Securities’ Derek Lessard bumped his K-Bro Linen Inc. (KBL-T) target to $45 from $43, reiterating a “buy” rating. The average is $44.21.
* Barclays’ Adrienne Yih dropped her Lululemon Athletica Inc. (LULU-Q) target to US$546 from US$610 with an “overweight” rating. The average is US$485.27.
* JP Morgan’s John Royall raised his Parkland Corp. (PKI-T) target to $56 from $51 with an “overweight” recommendation. The average is $54.50.
David Leeder