Though Canaccord Genuity analyst Yuri Lynk thinks the “lingering” impacts of the COVID-19 pandemic are likely to weigh on first-quarter 2021 results for Canadian engineering firms, he sees the macro backdrop improving, “setting the stage for growth in 2022.”
“President Biden’s proposed US$2 trillion, eight-year infrastructure bill could dramatically boost the growth outlook,” said Mr. Lynk in a research note released Monday. “Clearly, there is risk around what the final U.S. infrastructure bill will look like if and when it gets passed. What we can say at this point is that it has the potential to meaningfully boost end-market demand in the U.S. for the engineering companies. Assuming the bill passes as is and the money is spread equally across eight years starting in 2022 it would boost annual spending on transportation by 49 per cent, water/sewer by 32 per cent, education by 16 per cent, road/highway by 17 per cent and power by 14 per cent. In reality, spending likely begins building in 2022 as large projects take a year or more to obtain their social and environment licenses and permits. This would imply an 8 to 10-year upcycle in demand for engineering services.”
Emphasizing the February 2021 Architecture Billings Index moved into positive territory for the first time since February 2020, which he sees as indication of a return to positive growth as early as the second quarter, Mr. Lynk raised his target prices for shares of two of the three firms in his coverage universe and maintained “buy” recommendations for them all.
He hiked his WSP Global Inc. (WSP-T) target to $137 from $122. The average target on the Street is $132.31, according to Refinitiv data.
“With 32 per cent of its business in the U.S., WSP is well positioned to benefit from any forthcoming stimulus spending. WSP is especially exposed to transportation & infrastructure, two potential big winners under President Biden’s infrastructure plan,” said Mr. Lynk. “With the best FCF/sh. growth amongst the global peers in 2020 and arguably the most acquisition upside, we continue to use a premium valuation multiple to value WSP.”
His Stantec Inc. (STN-T) target rose to $69 from $55, exceeding the $56.45 average.
“Our work shows Stantec’s FCF profile is among the best in the global group. Furthermore, it generates 53 per cent of its net revenue in the U.S., where it is particularly well positioned in water, transportation, and urban land. Thus, we have mostly eliminated the valuation discount we previously applied to set our target,” the analyst said.
Mr. Lynk maintained a $40 target for shares of SNC-Lavalin Group Inc. (SNC-T). The average is currently $33.38.
“Its SNCL Engineering Services segment generates a little more than 20 per cent of its revenue in the U.S.. SNC is particularly well positioned in transportation and hazardous waste where ENR ranks it No. 9 and No. 11, respectively, on its Top U.S. Design Firms list,” he said.
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Seeing both its ecommerce and in-store businesses “well positioned” to thrive from the fallout of the COVID-19 pandemic, CIBC World Markets analyst John Zamparo raised the firm’s rating for Sleep Country Canada Holdings Inc. (ZZZ-T) upon assuming coverage of the retailer.
“A confluence of factors—ongoing spending on the home, consumers’ increased focus on health & wellness, compelling partnerships, effective omnichannel execution and social media marketing, and an underleveraged balance sheet — causes us to be more constructive on ZZZ,” he said.
He moved Sleep Country to an “outperformer” recommendation from “neutral,” pointing to its “attractive momentum and prospects.”
“We expect at-home spending will remain strong the next couple quarters, and believe there will be some continuation of investing in the home as travel spending remains restricted and consumers deploy built-up wealth. The ongoing question of how much success has been pulled forward has some validity, but other drivers exist. Endy and ZZZ’s own Dream Line chat provide a fillip for ecommerce sales (more than 20 per cent of total), as consumers appear increasingly happy to complete most of the purchasing process online.”
“Q4′s resounding performance creates questions on sustainability, but partnerships with the likes of Purple and Walmart should continue to build on increased share in 2020, and we view competitors as less interested in the category.”
Mr. Zamparo called M&A activity a “distinct possibility,” expecting increased exposure to both U.S. and European consumers, and expects further share repurchases.
After raising his 2021 and 2022 sales and earnings expectations, he increased the firm’s target to $37 from $32. The average on the Street is $35.
“We concede there is a possibility ZZZ’s strong recent performance normalizes somewhat, but we anticipate spending on the home to remain a material tailwind in 2021. We also find valuation compelling and believe ZZZ’s balance sheet offers the possibility of M&A or a more material capital return program, which could see the stock re-rate,” the analyst said.
Concurrently, Mr. Zamparo also assumed coverage of Jamieson Wellness Inc. (JWEL-T) with an “outperformer” rating and $45 target (both unchanged). The average is $43.97.
“Jamieson’s business aligns with several secular shifts, some of which — a greater focus on health and wellness, ecommerce expansion — were accelerated by the pandemic,” he said. “The namesake brand is as strong as ever, and increased share in a year in which the vitamins, minerals and supplements (VMS) industry posted double-digit growth. Meanwhile, growth prospects internationally, particularly in China, provide the greatest potential for longterm earnings expansion above most consumer stocks.”
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IA Capital Markets analyst Chelsea Stellick expects Dialogue Health Technologies Inc. (CARE-T) to continue to scale up and grow its customer base as the demand for virtual healthcare rapidly expands.
“The healthcare market has been positively disrupted by the introduction of technology, particularly technology that empowers the patient,” she said. “According to the Canadian Attitudes on Healthcare and Telemedicine Report, 66 per cent of Canadians report they would be in favour of using virtual healthcare if it were available to them via company benefit plans. While COVID-19 did not create the market for virtual care, it has accelerated its adoption with an 54-per-cent increase in Primary Care Physician and Specialist visits conducted virtually versus pre-pandemic times (according to the Canadian Health Infoway Report).”
With this trend, Ms. Stellick thinks the Montreal-based company, which provides consumers with online health consultations through employers and insurers, is poised to benefit from its proprietary technology, which has created Canada’s only integrated platform comprised of three programs: Primary Care (PC), Mental Health (MH), and employee assistance programs (EAP).
That led her to initiate coverage of Dialogue with a “buy” rating after coming off research restriction following its March 30 initial public offering.
“Although health technology is increasingly competitive and crowded, we believe the sector’s rapid growth will be a boon for early entrants like Dialogue, which were positioned in this space before the pandemic and immediately capitalized on the accelerated transition to telehealth,” the analyst said. “Dialogue has all the advantages of a market leader, with upside potential for remarkable organic revenue growth given the durable sector expansion through growing both customers and revenue per customer. Costs and operational difficulties of switching software providers for a large organization are meaningful, and in combination with high user satisfaction Dialogue has highly sticky customers. Revenue is both recurring and predictable, which simplifies operational decision making and is desirable for investors. Dialogue’s infrastructure and software are highly scalable with modest expansion of gross margins possible with increasing scale in the coming years. Multiples in the sector are justifiably expansive given the rapid growth profile of the digital healthcare space, and Dialogue will benefit at least as much as its peers from low cost of capital during its scale-up phase; perhaps more given its unique competitive advantages discussed above.”
“Thus far, Dialogue has put even optimistic market projections to shame with 187-per-cent organic revenue growth and 255-per-cent total revenue growth from 2019 to 2020. Lest that be mistaken for a one-time boost from the pandemic, organic growth was 151 per cent from 2018 to 2019. This growth far outpaced not only the mHealth industry, but also Dialogue’s expenses. During the rapid expansion from 2018 to 2020, the Company experienced a 3-times reduction in operating expense as a percentage of revenue.”
Ms. Stellick is projecting 90-per-cent revenue growth in 2021 with the rollout of its internet-based cognitive behavioural therapy (iCBT) mental health platform as well as an increased customer engagement and entrance into new markets through its cloud-based infrastructure.
She set a 12-month target for its shares of $21. They closed Friday at $17, up from its initial IPO price of $12.
Elsewhere, other firms initiating coverage on Monday include:
* RBC Dominion Securities’ Douglas Miehm with a “sector perform” rating and $18 target.
“We believe Dialogue’s Integrated B2B Health Platform with three live programs, strategic partnerships with large insurers, and solid balance sheet position the company to capitalize on demand growth for virtual healthcare in Canada and select other countries,” said Mr. Miehm. “While we see significant fundamental upside potential for the business, we believe this is reflected in Dialogue’s current premium EV/sales valuation vs. most NA peers, which keeps us on the sidelines at this time.”
* Scotia Capital’s Adam Buckham with an “outperform” rating and $21 target.
“Overall, we see CARE as providing investors with unique pure-play exposure to the burgeoning telehealth and virtual wellness market,” he said.
* National Bank Financial with an “outperform” rating and $20.50 target
* TD Securities with a “hold” rating and $18 target
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Goeasy Ltd.’s (GSY-T) $320-million deal for point-of-sale consumer finance provider LendCare Holdings Inc. is a “centre-of-the-fairway acquisition,” said Desjardins Securities analyst Gary Ho after resuming coverage following the transaction and corresponding $172.5-million equity offering.
“We view this on-strategy acquisition favourably as it expands GSY’s product range and customer base while providing diversification benefits,” he said. “The deal is immediately accretive to earnings, growing to 15 per cent by 2023. We raised our estimates, driven by the attractiveness of the LendCare acquisition.”
Mr. Ho said he’s confident the Mississauga-based firm can achieve revenue synergies, “particularly given the amount of analysis and study of loan originations in the past six months pre-acquisition.”
He added: “Cost synergies are equally achievable, in our view, driven by access to low-cost funding and leveraging GSY’s balance sheet, as well as optimizing back-office efficiencies.”
The analyst is now projecting 2021 and 2022 revenue of $788-million and $953-million, respectively, rising from $725-million and $803-million. His earnings per share estimates jumped to $9.46 and $11.69 from $8.81 and $9.91.
Reiterating goeasy as his “top pick,” Mr. Ho hiked his target for its shares to $168 from $139 with a “buy” recommendation. The average target on the Street is $169.50.
“Our investment thesis is predicated on: (1) On-strategy LendCare acquisition should bolster GSY’s growth profile, including meaningful revenue and cost synergies; (2) management has shifted its focus more toward offence, suggesting growth through organic initiatives as well as potential M&A; (3) GSY has been able to successfully weather the pandemic; and (4) with expanding scale, the business consistently generates a mid-20-per-cent ROE [return on equity],” the analyst said.
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In the wake of the late Friday announcement of its acquisition of the B.C.-based Bandstra Group of Companies, a group of equity analysts raised their target prices for shares of Mullen Group Ltd. (MTL-T).
Those making changes include:
* Scotia Capital’s Konark Gupta to $14.25 from $14 with a “sector outperform” rating. The average target on the Street is $13.23.
“Even after two material acquisitions of likely similar sizes, which could together cost $150-million to $175-milion (enterprise value), we believe MTL remains well-positioned for more acquisitions over the next 12 months with continued strong FCF generation and access to an upsized credit facility,” said Mr. Gupta.
* CIBC World Markets’ Kevin Chiang to $14.25 from $13.50 with an “outperformer” rating.
“We view this acquisition as in line with MTL’s strategy of expanding its logistics operations through M&A, and it reflects the company’s deep pipeline of opportunities,” said Mr. Chiang.
* BMO Nesbitt Burns’ John Gibson to $16 from $15 with an “outperform” rating.
“We continue to view MTL stock as appealing given its inexpensive valuation relative to peers combined with its growth strategy. In addition, the company is well positioned for another dividend increase this year,” he said.
* National Bank Financial’s Michael Robertson to $15.25 from $14.50 with an “outperform” rating.
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Boat Rocker Media Inc. (BRMI-T) is “well positioned to re-write the narrative of mixed success for independent content companies in the Canadian public market over the past 20 years,” according to RBC Dominion Securities analyst Drew McReynolds, seeing “multiple points of positive differentiation to peers.”
He initiated coverage of the Toronto-based entertainment company, which began trading on the TSX following a late March IPO, with an “outperform” recommendation.
“With unprecedented global demand for content, we believe the stock is mispriced with delivering on 2021 revenue guidance of $700-million the primary catalyst to surface value,” said Mr. McReynolds. “In addition, we see attractive option value should management hit one or two IP ‘doubles or a triple.’ Longer-term, we expect Boat Rocker to be a structural beneficiary within TMT as demand for mediated content accelerates.”
He set a target price of $12 per share, adding: “Boat Rocker currently trades at F2022E EV/EBITDA multiple of 8.2 times versus WildBrain (10.6 times), Thunderbird (11.6 times) and Lions Gate (8.9 times). As management delivers on the ramp-up in the television production slate in H2/21 and 2022 and renewed revenue growth and positive operating leverage emerge across other segments, we see potential for multiple expansion with each 1.0x multiple point equating to $1.00 per share upside in the stock.”
Elsewhere, TD Securities initiated coverage with a “buy” rating and $11.50 target.
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See multiple potential drivers of share price appreciation over the next several months, Citi analyst J.B. Lowe raised his rating for First Solar Inc. (FSLR-Q) to “buy” from “neutral” and opened a 90-day catalyst watch on Monday.
“We identify five potential catalysts across U.S. tax policy (potential inclusion of a 10-year solar tax credit extension and the revival of the 48C Advanced Manufacturing Tax Credit), U.S. trade policy (extension of Section 201 tariffs on imported Chinese solar panels, potential sanctions against Xinjiang-sourced solar products) and upward estimate revisions related to production and margin outperformance,” said Mr. Lowe. “Any one of the catalysts would cause FSLR to outperform, in our view, resulting in an attractive risk/reward proposition over the next several months.”
The analyst raised his target for Arizona-based company to US$100 from US$88. The average target on the Street is currently US$83.95.
“FSLR shares (down 19 per cent year-to-date) have lagged the solar sector (TAN ETF down 17 per cent) and peers (CSIQ down 14 per cent, LONGi down 7 per cent) year-to-date, but we think have to outperform over the next several months given potential announcements for supportive tax and trade policies from the Biden Administration, as well as the potential for upward estimate revisions driven by production and margin outperformance,” he said.
“As the world’s largest thin film module producer FSLR should benefit from growing solar installations over the next several years. As the only U.S.-based producer of solar panels, FSLR stands to benefit from regulatory and/or tax policies that support U.S. manufacturing of clean energy products. We rate the stock high risk due to its high volatility.”
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After undertaking a quantitative analysis of Village Farms International Inc. (VFF-Q, VFF-T), Raymond James analyst Rahul Sarugaser concluded the Canadian cannabis producer is more than 60 per cent undervalued “using whichever basis for comparison or peer sub-group we throw at it.”
“We don’t limit our analysis to cannabis industry peers, but extend it to large, consistently +EBITDA consumer packaged goods (CPG) industry stalwarts with 40-per-cent gross margins and still find VFF vastly discounted,” he added.
Mr. Sarugaser maintained a “strong buy” recommendation for Village Farms shares, citing its “massive undervaluation relative to both cannabis peers and strong CPG peers,” with a US$26 target (unchanged). The average is US$14.50.
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Equity analysts at Raymond James made a series of target price adjustments to TSX-listed energy stocks in response to declines in the firm’s commodity price deck assumptions.
On Monday, it lowered its WTI projections in response to recent forward price movements. For 2021, its estimate slid to US$58.84 per barrel from US$62.01. Its 2022 forecast fell to US$56.30 from US$57.80.
The firm’s NYMEX assumptions also fell to US$2.70 per thousand cubic feet in 2021 and US$2.65 in 2022 from US$2.79 and US$2.67, respectively.
With those changes, analyst Jeremy McCrea lowered ARC Resources Ltd. (ARX-T) to “outperform” from “strong buy” with a $13.50 target (unchanged). The average is $11.64.
Target changes for senior oil and gas producers were:
- Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $49 from $53. Average: $45.64.
- Cenovus Energy Inc. (CVE-T, “outperform”) to $13.50 from $15. Average: $11.73.
- Imperial Oil Ltd. (IMO-T, “market perform”) to $34 from $36. Average: $31.80.
- Ovintiv Inc. (OVV-N/OVV-T, “market perform”) to US$25 from US$30. Average: US$26.51.
- Suncor Energy Ltd. (SU-T, “outperform”) to $35 from $38. Average: $33.43.
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In other analyst actions:
* Seeing a “power-full opportunity” with limited downside, Morgan Stanley’s Carlos De Alba raised Largo Resources Ltd. (LGO-T) to “overweight” from “equal-weight” with a $36 target, rising from $19.60. The average on the Street is $22.30.
“Largo’s entrance into the clean energy business can be a transformational opportunity for the company, as demand for grid energy storage systems like its vanadium redox flow batteries (VRFBs) is set to increase by 25-30 per cent per annum to 2030,” the analyst said. “Although VRFBs are still an under-penetrated technology today, we think adoption will increase as demand moves to longer-duration systems. Execution is crucial for the company to succeed in this venture, but we think Largo’s vertical integration — both mining the vanadium and making the batteries — gives it a cost advantage vs. most competitors. Moreover, we see scope for a flexible and capital-light approach, which significantly limits the potential downside. We see an attractive risk-reward skew of 2.2 times.”
* CIBC World Markets analyst Krista Friesen raised the firm’s target for Boyd Group Services Inc. (BYD-T) to $270 from $250 with an “outperformer” recommendation upon assuming coverage. The current average is $253.58.
“Given the company’s strong track record and solid balance sheet, we have a high level of confidence in Boyd’s ability to achieve its five-year plan of doubling its revenue. While we see a steady organic growth environment, the majority of its growth will likely come from M&A. With many peers in either distressed financial positions due to COVID19, or unable to invest in the necessary new technologies, we see a robust M&A pipeline for Boyd to help it achieve its target,” she said.
* After adding the Shaw merger into his model, Scotia Capital analyst Jeff Fan hiked his target for shares of Rogers Communications Inc. (RCI.B-T) to $80 from $70, keeping a “sector outperform” rating. The average on the Street is $70.21.
“Beyond the strategic rationale and the financial implications, we believe execution and integration will ultimately define this transaction over the next few years,” he said. “We believe RCI has started the initial stages of the integration plan including the appointment of key leaders to the integration team. As the market gains more comfort about the regulatory approval process, we expect the focus will shift towards integration. RCI should also be prepared that its competitors will take the opportunity to disrupt the integration process.”
* Scotia Capital’s Orest Wowkodaw bumped up his target for Teck Resources Ltd. (TECK.B-T) by $1 to $32, exceeding the $31.07 average. He kept a “sector outperform” rating.
“We anticipate Q1/21 financial results to significantly improve on a quarter-over-quarter and year-over-year basis for the majority of the companies in our coverage, driven by markedly stronger commodity prices,” he said. “Overall, we anticipate quarterly results to be relatively mixed relative to current consensus expectations. We do not anticipate material changes to recently released 2021 guidance. Moreover, we expect few company specific catalysts and no meaningful changes to shareholder return policies this quarter.”
* BMO Nesbitt Burns analyst Andrew Mikitchook initiated coverage of Wallbridge Mining Company Ltd. (WM-T) with an “outperform” rating and $1 target, falling short of the $1.38 average.
“Wallbridge’s Fenelon property discovery, in Northern Quebec Canada, contains a series of deeper underground high-grade structures adjacent to a bulk mining open pit target closer to surface,” he said.
“While it is still in early stages of exploration, in our opinion there appear to be mineable high-grade structures here.”
* RBC’s Irene Nattel bumped up her Canadian Tire Corp. Ltd. (CTC.A-T) target to $215 from $211, keeping an “outperform” rating. The average is $193.55.
* RBC’s Sabahat Khan raised his MTY Food Group Inc. (MTY-T) target to $52 from $47 with a “sector perform” rating. The average is $58.56.
* National Bank Financial analyst Vishal Shreehar raised his Gildan Activewear Inc. (GIL-T) target to $45 from $43, maintaining an “outperform” recommendation. The average is $31.62.
* National Bank’s Zachary Evershed cut his Cascades Inc. (CAS-T) target to $20.50 from $22.50, exceeding the $18.93 consensus, with an “outperform” recommendation.
* National Bank’s Maxim Sytchev hiked his Stelco Holdings Inc. (STLC-T) target to $36 from $26.50, keeping an “outperform” rating. The average is $32.71.
* H.C. Wainwright analyst Heiko Ihle cut his Sierra Metals Inc. (SMT-T) target to US$4.25 from US$4.50 with a “buy” rating. The average is $5.17.
* Bloom Burton analyst David Martin initiated coverage of Toronto-based Titan Medical Inc. (TMDI-Q, TMD-T) with a “buy” rating and US$4 target, matching the current consensus.
“As Titan approaches completion of development of the Enos system, a profile has emerged which should appeal to a sizable segment of the surgeon/hospital market: smaller yet more rugged; simpler to setup and use; motion enhancements which improve camera and instrument dexterity and maneuverability in small spaces,” he said.
David Leeder