Inside the Market’s roundup of some of today’s key analyst actions
Believing its “near-term upside is limited,” Desjardins Securities analyst Kyle Stanley downgraded Canadian Net Real Estate Investment Trust (NET.UN-X) to “hold” from “buy,” believing lower interest rates are necessary before a resumption in transaction activity emerges.
“In the current high-cost-of-capital environment, NET’s external growth program, which generates the bulk of its cash flow growth, has been sidelined — our 2024 FFOPU [funds from operations per unit] outlook calls for 1.5-per-cent growth,” he said.
On Wednesday after the bell, the Montreal-based REIT, which focuses on triple net and management-free commercial properties, reported third-quarter results that fell narrowly below expectations. FFOPU fell 4.7 per cent year-over-year to 15.5 cents, missing the 16-cent projection of both Mr. Stanley and the Street. The variance was attributed to weaker-than-anticipated net operating income and interest expenses, while total occupancy remained unchanged at 100 per cent.
“We expect the portfolio to remain fully occupied through 4Q23 as remaining 2023 lease maturities have all been addressed,” the analyst said. “Management made solid progress on 2024 lease maturities in 3Q23 and has now addressed approximately 74 per cent of maturities (vs 40 per cent at 2Q23). Moreover, tenants representing 24 per cent of 2024 lease maturities that have not yet been renewed are actively undergoing renovations. Leasing spreads achieved on 2024 renewals are in the 10–15-per-cent range.”
“Transaction activity remains muted given the persistently wide bid–ask spreads. However, NET completed the previously announced sale of a single-tenant QSR property in Trois-Rivières, Quebec, for $1.3-million in 3Q23, representing a 5.6-per-cent cap rate and 26-per-cent premium above IFRS value. Assets held for sale at quarter-end totalled $4.8-million (with $2.8-million of associated debt) and represented the last properties to be sold under the REIT’s asset recycling program. Post-quarter, NET closed on the sale of one of these properties in Dartmouth, Nova Scotia, for $1.7-million.”
While he pointed to limited near-term FFO growth, access to capital and trading liquidity for his rating change, Mr. Stanley acknowledged further downside could be limited, pointing to the REIT’s “stable cash flow profile, healthy 7-per-cent distribution yield and cheap relative valuation (7.6 times 2024 FFO vs the retail average of 10.2 times).”
With reductions to his FFO projections through 2025, Mr. Stanley trimmed his target for Canadian Net units to $5.25 from $5.50. The average on the Street is $5.65.
Elsewhere, Echelon Partners analyst David Chrystal lowered his target to $6 from $6.25, reaffirming a “buy” recommendation.
“While the outlook for external growth remains challenging given continued debt market volatility, a wide transaction market bid-ask spread and the REIT’s NAV [net asset value] discount, CNET continues to make progress on its accretive capital recycling program,” said Mr. Chrystal. Though interest rate headwinds are expected to persist, reduction of variable rate debt (approximately 8-per-cent rate) from asset sale proceeds and up-financing activity should provide savings. Operationally, the REIT’s portfolio continues to perform as expected, with modest organic growth to be driven by solid rent lifts on 2024 lease expiries (10-15 per cent on renewals, less than 10 per cent on new leasing) and from high-return property-level capex (9-per-cent unlevered return, $0.8-million aggregate spend).”
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With improvement to its balance sheet being a key focus of investors, Scotia Capital analyst Maher Yaghi thinks Cineplex Inc. (CGX-T) “made great strides on this” through the $155-million sale of its non-core Player One Amusement Group business to Los Angeles-based private equity firm OpenGate Capital.
“While the price tag received is below the value we had previously ascribed to the assets (buyer paid the equivalent of 5 times EBITDAaL versus our previous 7.5 times), the company will likely report an accounting gain given the $90-million balance sheet valuation,” he said. “We believe this asset sale was on strategy to focus on key growth assets and improve the balance sheet in order to potentially begin rolling out investor-friendly actions such as restarting the dividend toward the end of 2024.”
Mr. Yaghi said he views the deal, announced before the bell on Wednesday, “positively” for Cineplex from a longer-term perspective given it will be able to use the proceeds to significantly pay down its $301-million outstanding credit facility, which is set to mature in 2H/24.
“Strong EBITDAaL performance in 1H/23 helped pay $55-million in bank debt; however, FCF production alone between now and the November maturity is not sufficient to cover the debt,” he said. “With the help of the asset sale, the company can reduce leverage at a faster rate than initially anticipated. We now forecast leverage at approximately 2.8 times at 2024 year-end.”
Maintaining a “sector outperform” rating for Cineplex shares, Mr. Yaghi lowered his target to $11.75 from $12.50. The current average on the Street is $13.13.
“When Cineworld entered into an agreement to purchase all issued and outstanding shares of CGX in 2019, the P1AG business was quickly seen as a non-core asset,” he concluded. “Hence, Cineworld’s objective was to quickly sell this asset to focus on the movie theatre business. However, Cineworld’s search for a buyer came to a halt when the pandemic unexpectedly took centre stage in March 2020 and the deal fell through. Although selling P1AG was considered before, we believe that the sale to OpenGate now is positive because it will allow the company to focus on higher revenue-generating assets in its core business. This comes at a good time given that the company has mostly recovered to pre-pandemic levels and the entertainment strikes in Hollywood are behind us. Simply put, we think the sale is an opportunity for CGX to strategically prioritize and execute on what works well, which could make the company more attractive down the road.”
Elsewhere, TD Securities’ Derek Lessard raised his target to $14 from $13, reiterating a “buy” rating.
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While he’s still forecasting “strong” earnings growth, Desjardins Securities analyst Brent Stadler reduced his near-term expectations for EverGen Infrastructure Corp. (EVGN-X), taking a “conservative view” in the ramp-up to full renewable natural gas production.
After the bell on Wednesday, the Vancouver-based company reported third-quarter revenue of $2.3-million, up 17 per cent year-over-year on higher RNG production but lower than Mr. Stadler’s $3.1-million estimate due largely to lower-than-expected feedstock tonnage. That led to adjusted EBITDA falling 31 per cent to $0.4-million, also below the analyst’s forecast of $0.7-million.
“EVGN recently executed on key growth initiatives including completing the GrowTEC expansion, achieving mechanical completion on FVB and acquiring Prairie Sky Organics, which adds immediate cash flow growth,” he said. “While EVGN is executing on the construction side, the ramp-up to full RNG production on GrowTEC and FVB [Fraser Valley Biogas] could take a bit longer than we expected.”
Based on the quarterly results, Mr. Stadler cut his estimates through the end of fiscal 2024. He’s now projecting adjusted EBITDA for 2023 and 2024 of $0.9-million and $5.8-million, respectively, down from $2.5-million and $7.2-million.
“We are incorporating our expectation that the ramp-up to full RNG production at GrowTEC and Fraser Valley Biogas (FVB) could take a bit longer than we expected,” he said . “We now model EBITDA of $5.8-million (from $7.2-million) in 2024 — a healthy 500-per-cent-plus increase from 2023 levels — and believe our estimates could prove to be conservative. We continue to believe EVGN is well-positioned to be a Canadian RNG leader and are impressed by its ability to construct projects on budget in the current environment.”
“VGN has had a solid year so far in terms of executing on key catalysts. Looking ahead, we expect EVGN to (1) finalize the extended and renegotiated 20-year offtake at FVB; (2) flow first gas and ramp production at FVB; (3) announce a partner and FID on Project Radius (about 1Q24); and (4) announce FID and start construction on GrowTEC phase 2. Successfully achieving these milestones should be well-received by investors.”
Seeing the company “well-funded for growth,” Mr. Stadler maintained a “buy” recommendation, trimming his target to $4.25 from $4.50. The average is currently $5.69.
“In our view, EVGN offers investors a unique opportunity to take early advantage of the RNG wave, which we believe is essential to reaching global decarbonization goals. We expect explosive growth as EVGN embarks on becoming a Canadian RNG leader,” he concluded.
Elsewhere, RBC Capital Markets’ Nelson Ng reiterated a “sector perform” recommendation and $3 target.
“Q3/23 results were below our forecast, but the company made good progress achieving some near-term milestones including the completion of the FVB RNG expansion,” said Mr. Ng. “We believe that management has taken the right steps to refocus on near-term EBITDA growth, but expect the shares to be range bound until there is more clarity on the company’s ability to fund growth. We believe liquidity would improve with the receipt of additional grants.”
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Acumen Capital analyst Trevor Reynolds sees the revenue outlook for Questor Technology Inc. (QST-X) remaining “uncertain” given uncertainty surrounding the timing of international sales, which has been a key focus in recent quarters.
“With little clarity or guidance on when expected sales will materialize our estimates are heavily reliant on news flow,” he said. “If successful, the sales do have the potential to materially change our outlook.”
On Thursday, the Calgary-based company, which designs and manufacturers highly efficient waste gas incinerators for both sale and rental, reported third-quarter results that fell short of expectations. Revenue of $1.7-million was in line year-over-year but missed both Mr. Reynolds’s $2.2-million estimate and the consensus forecast of $2.1-million as “marginal improvements in rentals and service/repair were offset by a decline in sales.” An earnings per share loss of 12 cents was higher than the analyst’s projection of a 2-cent loss, due largely to a $3.6-million impairment realized.
“Management continues to highlight numerous growing tailwinds for methane reduction worldwide,” said Mr. Reynolds. “QST highlights a growing public acknowledgement that more methane is being vented and released into the atmosphere than is currently being reported.”
“The company has several international sales orders in the works which they expect to satisfy with the rental fleet. These international sales are expected to be high margin as the units require only minor refurbishment (essentially paint).”
After trimming his full-year 2023 and 2024 forecast, Mr. Reynolds trimmed his target for Questor shares to $1 from $1.10, keeping a “hold” rating. The average on the Street is $1.07.
“Potential catalysts moving forward continue to include increasing rental utilization, sales announcements, and progress on the waste heat to power prototype,” he said.
Elsewhere, ATB Capital Markets’ Tim Monachello kept a “sector perform” rating and $1.10 target.
“We lower our near-term estimates modestly after QST’s Q3/23 results. Following a tumultuous period since 2020, during which EBITDA has stagnated at roughly breakeven, ultimately leading to the displacement, then the rapid, shareholder-backed, reinstatement of long-term President and CEO Audrey Mascarenhas, QST’s 2024 strategy will focus on growing rental fleet utilization in the U.S. and driving improved equipment sales with a focus on international markets,” said Mr. Monachello. “We understand that QST’s focus on international equipment sales is more mature, with established international partnerships in Latin America, India, the Middle East, and Nigeria, and tens of millions of dollars worth of proposals outstanding, some of which look poised to convert to orders imminently. Although we believe there are long-term tailwinds from increased awareness and regulation regarding methane emissions, these tailwinds have failed to drive meaningful demand for QST’s products in recent years. As such, we continue to believe that a sustained increase in firm orders or rental fleet utilization is a likely prerequisite for material upside in QST shares.”
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In other analyst actions:
* BMO’s Joel Jackson lowered his Sigma Lithium Corp. (SGML-Q, SGML-X) target to US$40 from US$44 with an “outperform” recommendation. The average is $62.09 (Canadian).
“Amid a sale or transformative transaction seeming near, we update our model post the Q3 release after scrutinizing costs/opex,” he said.
“SGML seems to be stressing that a takeout or transformative transaction is imminent, which we assume implies disclosure by year-end. Management noted the strategic review process is going very well and on its conference call last week made several references to ‘the next guardian of Sigma.’ It seems the bidding process has finalized into a handful of ‘consortiums,’ all which may seek to produce lithium sulphate from the spodumene to export this intermediate instead of concentrate.”
David Leeder