Inside the Market’s roundup of some of today’s key analyst actions
Barclays analyst John Aiken sees the Canadian economy poised for “a period of multiyear expansion that sets up well for the financial services companies.”
In a research report released Tuesday, he raised his view on the Canadian Financial Services industry to “positive.”
“As Canada’s roll-out of the COVID vaccines has sped up (56 per cent of the population with a first dose and 6 per cent fully vaccinated), the outlook for the Canadian economy has improved dramatically since last quarter,” said the analyst. “Further, government support programs and the ongoing low interest rates signal that credit losses are unlikely to be as significant as first believed in the depths of the pandemic.”
With that optimism, Mr. Aiken sees the outlook for Bank of Nova Scotia (BNS-T) as “more positive than the market is giving it credit for and we believe that the overhang on its valuation is overdone,” leading him to upgrade his rating for its shares to “equal weight” from “underweight.”
“Given we anticipate that expectations and sentiment are likely to reset positively for Scotia, we would expect it to revert in line with the group and could return to premium territory as the outlook and earnings contribution from Latin America strengthens further,” he said.
Mr. Aiken raised his target for Scotiabank shares to $87 from $82. The average target on the Street is $87.77, according to Refintiv data.
He also made these target adjustments:
- Bank of Montreal (BMO-T, “underweight”) to $126 from $125. Average: $134.20.
- National Bank of Canada (NA-T, “equal-weight”) to $98 from $102. Average: $101.09.
- Royal Bank of Canada (RY-T, “overweight”) to $137 from $140. Average: $134.61.
- Toronto-Dominion Bank (TD-T, “equal-weight”) to $90 from $93. Average: $92.31.
“We believe the tailwinds to the banks’ strong Q2 results, allowance releases and relatively solid markets related revenues will likely moderate over the second half of the year,” said Mr. Aiken. “That said, resiliency of the banks’ earnings should continue, as an improved outlook may still bring forth further releases. And, while the banks continue to prudently manage expenses, as economies begin to reopen, and consumer and business sentiment improves, stronger growth over the second half of the year could help generate stronger top line growth.”
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ATB Capital Markets analyst Martin Toner called Lightspeed POS Inc.’s (LSPD-T) latest US$925-million shopping spree a ”watershed moment” for the merchant point-of-sale software provider, “announcing their larger ambitions in e-commerce and business-to-business (B2B) payments, and setting the stage to prove how important they are to the retail and hospitality eco-systems that they serve.”
Before the bell on Monday, the Montreal-based firm announced it would pay US$500-million for Ecwid Inc., a San Diego-based e-commerce platform, and US$425-million for Los Angeles-based NuORDER Inc., which provides an online platform for 100,000 retailers to automate wholesale product ordering from more than 3,000 brands.
“Lightspeed has a strong track record of integrating acquisitions,” said Mr. Toner in a research note. “We believe the acquisitions of Vend, UpServe, and Shopkeep, are clear demonstrations of Lightspeed’s established strategy of accretive horizontal acquisitions. Lightspeed has created billions in accretive value (on a P/S basis) by acquiring its competitors, who sell to Lightspeed at lower multiples than the currency Lightspeed gives them. Lightspeed is able to integrate the customers, and in some cases incorporate functionality and talent into the solution and organization, while maintaining a strong organic growth rate afterwards.
“It is not lost on Lightspeed that technology markets tend to be ‘winner take most.” The increased ability to invest is why it is critical to grow gross margin rapidly. Since going public, Lightspeed has used acquisitions to accelerate this process. The Company has attained the scale necessary to integrate new functionality into the platform, and ultimately matter to its customers. In 2021, Lightspeed has become so dominant in bike stores that suppliers refuse to deal with retailers that do not use Lightspeed.”
Mr. Toner said the deals offer “modest” accretion on a price-to-sales basis, but they open Lightspeed to “new markets and revenue streams, as well as payments penetration opportunities.”
“Lightspeed has indicated that the two targets are currently operating at a loss, which we incorporate in our forecast, coupled with an increase of approximately 7.0 million shares,” he said.
“Unlike its previous acquisitions of Vend, Upserve, and ShopKeep, where Lightspeed was buying competitors at lower multiples, the Company acquired two targets which will complement it and add e-commerce and B2B functionalities to its solution. Lightspeed improves its ability to penetrate e-commerce, and now matters to offline and online retailers, as well as their suppliers.”
Maintaining an “outperform” rating for Lightspeed shares, Mr. Toner increased his target to $150 from $140. The average on the Street is $107.36.
“We expect a number of drivers to contribute to robust revenue growth, including adding more merchants, average revenue per user growth, adding verticals, and growth in payments revenue,” said the analyst. “While Lightspeed has acquired five companies of significant size in seven months, we see the potential for more accretive M&A and the addition of new services to its integrated platform.
“We expect an economic recovery coming out of the COVID-19 pandemic to benefit Lightspeed’s merchants, especially in Q1/FY22 and Q2/FY22 in the restaurants and hospitality segments. The Company has already seen acceleration in new merchants and GTV in geographies like Australia, where COVID-19 has largely been under control. As lockdowns end in other geographies, we believe GTV, merchant location, and revenue growth will accelerate.”
Other analysts making target price adjustments include:
* Scotia Capital’s Paul Steep to US$83 from US$81 with a “sector perform” rating.
“We view both transactions as more transformational in nature given the onboarding of extensive capabilities in two key areas compared to previous acquisitions aimed at vertical or geographic expansion,” said Mr. Steep. “We view a large part of the opportunity for Ecwid & NuORDER centered around integrating and leveraging Lightspeed Payments. Our view remains that Lightspeed is a strong organic revenue growth name with potential to benefit from a number of organic vectors (e.g., conversion of on-premise POS market to cloud, introduction of Lightspeed Payments into new markets), with the potential to continue actively consolidate the POS market.”
* CIBC’s Todd Coupland to $140 from $135 with an “outperformer” rating.
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Seeing the execution of its integration with Husky Energy progressing well in its early days, JP Morgan’s Phil Gresh upgraded Cenovus Energy Inc. (CVE-T) to “overweight” from “neutral” on Tuesday.
The analyst also thinks the higher oil price environment should allow the Calgary-based company to reach its $10-billion interim leverage target during the fourth quarter of the current fiscal year.
“2021 is going to play out similarly to 2019 for CVE, when the company used the strong oil price environment to show material de-leveraging progress,” he said.
Mr. Gresh raised his target for its shares to $14.50 from $12, exceeding the $12.65 average.
He also made these target adjustments:
- Canadian Natural Resources Ltd. (CNQ-T, “overweight”) to $55 from $50. The average on the Street is $47.48.
- Imperial Oil Ltd. (IMO-T, “neutral”) to $49 from $42. Average: $37.94.
- MEG Energy Corp. (MEG-T, “neutral”) to $11 from $9.50. Average: $8.63.
- Suncor Energy Inc. (SU-T, “neutral”) to $35 from $33. Average: $33.77.
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Well Health Technologies Corp.’s (WELL-T) $206-million acquisition of Toronto-based MyHealth Centres is both a strategic fit and highly accretive, according to Canaccord Genuity analyst Doug Taylor.
Before the bell on Monday, the Vancouver’s Well Health announced the deal, which could grow to $266-million with earnouts, for the specialty care, telehealth services and accredited diagnostic health services provider that owns and operates 48 locations across Ontario.
Well Health shares jumped almost 10 per cent on the news.
“The acquisition dramatically expands WELL’s physical footprint into Ontario and effectively achieves the previously stated near-term goal of a $400-million revenue run-rate,” said Mr. Taylor.
“With WELL drawing new senior secured facilities to finance the acquisition (leveraged on MyHealth), the company holds pro forma cash of $60-millio and significant liquidity on existing credit facilities ($150-million-plus) for additional deal-making. Pro forma MyHealth, the combined WELL business approaches management’s prior target of a $400-million revenue and $100-million EBITDA run rate. However, the company maintains a pipeline of opportunities that will now include MyHealth’s own M&A pipeline of 125 additional opportunities.”
After increased his revenue and earnings projections for 2021 and 2022, Mr. Taylor bumped up his Well Health target to $12 from $11 with a “speculative buy” rating. The average is $11.77.
Elsewhere, CIBC World Markets analyst Scott Fletcher raised his target to $11 from $9, keeping an “outperformer” rating.
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ATB Capital Markets analyst Patrick O’Rourke acknowledges some may be underwhelmed by the $93-million in cash proceeds garnered by Crescent Point Energy Corp. (CPG-T) from the disposition of its remaining non-core southeast Saskatchewan conventional assets.
However, he emphasized the sale, confirmed on Monday after the bell, is the $220-million reduction in the company’s asset retirement obligations, which is almost 25 per cent of its outstanding balance.
“Overall, we view the event as positive, though unsurprising, with the acquirer having press released the acquisition on May 13th, and the assets having been publicly marketed for a considerable length of time,” said Mr. O’Rourke.
Reiterating an “outperform” rating for Crescent Point shares, he raised his target to $7 from $6.75. The average is currently $6.17.
“We believe that Crescent Point holds a significantly undervalued asset base, with the stock currently trading at a 24-per-cent return to our PDP + Risked Upside based target of $7.00,” he said. “With the Company’s transition plan, which began in September 2018, CPG refocused its efforts on its core assets and showed a willingness and ability to dispose of non-core assets in-order to unlock unrecognized value. The Kaybob Duvernay now adds a new core area, expanding the Company’s inventory and further increasing its FCF generation.”
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Peyto Exploration & Development Corp. (PEY-T) is “under the radar and positioned to take flight,” said Canaccord Genuity Anthony Petrucci following two days of virtual marketing meetings with CEO Darren Gee.
“In our view, PEY could be in line for a significant rerating in the market, and we believe it is an excellent way for investors to gain exposure to an improving trend in natural gas prices in North America,” said Mr. Petrucci.
In justifying his optimism, the analyst emphasized “punitive” gas contracts are set to end in the second half of the year.
“As Canadian gas prices capitulated in 2018, Peyto entered into a series of diversification contracts, which in aggregate priced much of PEY’s natural gas at a US$1.45 discount to NYMEX,” he said. As differentials have tightened significantly over the last year, these contracts have dampened PEY’s realized pricing. With these contracts set to expire in Q4/21, we expect a material jump in cashflow in 2022.”
Also expecting well results and capital efficiencies to continue to improve alongside increased corporate production, Mr. Petrucci said Peyto currently possesses an attractive valuation for investors.
“Despite the strong backwardation in the natural gas curve, at 2022 strip pricing we estimate PEY is trading at just 3.3 times, with a FCF yield of 25 per cent,” he said. “This multiple is particularly compelling when you consider PEY has a PDP RLI of 9 years, the highest in its peer group, and well above the average of 6 years. This is reflective of a reduced decline rate (approximately 24 per cent), with PEY therefore having to spend reduced levels of ‘maintenance capital’ each year.”
Seeing the potential for a dividend increase in 2022, he raised his target for Peyto shares by $1 to $9, maintaining a “buy” recommendation. The average target on the Street is $7.19.
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The bid by Exfo Inc.’s (EXFO-Q, EXF-T) founder and majority shareholder Germain Lamonde to take it private “appears positive for shareholders,” said Canaccord Genuity analyst Robert Young.
Under Monday, the Quebec-based company, which makes test, monitoring and analytics equipment for the communications industry, announced the deal, which will see shareholders receive US$6 per subordinate voting share.
“With the exception of a period in 2017, EXFO shares have not traded over US$6.00 since 2012, and so we believe this is an excellent opportunity for investors despite recent positive improvements in EXFO’s financial and bookings performance,” said Mr. Taylor.
“EXFO’s EBITDA margin profile has historically lagged its peer group’s margin profile with gross margins compressing from the 60-65-per-cent range in the period leading up to 2018. EBITDA margins have typically been sub 10 per cent relative to the company’s longer term target of 15 per cent. Low liquidity and a high degree of sales driven by telecom and large data center operators plus low sales visibility has typically led EXFO shares to trade at a discount to peers. Pandemic headwinds and delays in software deals have been a more recent issue although this appears to be relenting. The dual share structure with 10-1 multiple voters held by the founder (at April 7, 2021, EXFO had 31.64 million multiple voting shares outstanding, entitling to 10 votes each and 25.8 million subordinate voting shares outstanding) is another headwind. ... EXFO has traded at a persistent discount with the valuation periodically moving above 10 times EBITDA. The US$6.00 offer price effectively values EXFO more closely with its Monitoring and Analytics peers and historical peak valuation.”
Keeping a “hold” rating with the expectation the deal will close as planned, Mr. Taylor raised his target to US$6 to match the offer from US$4. The average on the Street is US$5.60.
Meanwhile, National Bank Financial’ Richard Tse moved Exfo to “tender” from “sector perform” with a US$6, up from US$4.50, and BMO Nesbitt Burns’ Thanos Moschopoulos raised his target to US$6 from US$5 with a “market perform” rating.
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Stifel analyst Martin Landry expects the August release of the first Paw Patrol movie to “reinvigorate” the franchise and make significant contributions to Spin Master Corp.’s (TOY-T) bottom line.
“Paw Patrol is an important franchise for Spin Master which represents an estimated 20-25 per cent of total sales,” he said. “We expect the launch of the movie will reenergize the franchise and could boost Paw Patrol toy and merchandise sales by 20-40 per cent. Spin Master could also benefit from the box office revenues under a scenario where the movie would be successful and cover production and distribution costs. The movie trailer was released on June 3 and already accumulated 12 million views on YouTube, the first indication of potentially strong interest. Under our base-case scenario, the box office revenues flowing to Spin Master could boost our 2022 EPS by 10 per cent.”
Mr. Landry said Paw Patrol could generate $150-million in box office and streaming revenue, adding 16 cents per share to its EPS.
“Several movie releases expected in 2020 have been delayed into 2021 due to COVID, which could result in increased competition for consumer attention and ticket sales,” he said. “However, we see limited movies that target children in the Paw Patrol age group of 2-7 years old. This could allow Paw Patrol to stand out on its release date and attract a broad audience given the few alternatives.”
Based on his higher earnings forecast, he increased his target for Spin Master shares to $54 from $52, keeping a “buy” rating. The average is $49.36.
“Now with operational issues largely behind the company, we have higher confidence in the ability for TOY to return to historical levels of profitability. Shares of Spin Master are currently trading at a 23-per-cent discount to toy industry peers Mattel and Hasbro on an EV basis, which we think is too wide given Spin Master’s clean balance sheet and our expectation for Spin Master to grow EPS and EBITDA faster,” he said.
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In other analyst actions:
* Scotia Capital analyst Paul Steep reinstated coverage of Nuvei Corp. (NVEI-T) with a “sector outperform” rating and $106 target following its $500-million bought deal secondary equity offering. The average is US$88.48.
“We expect Nuvei will continue to grow through a combination of organic and acquired initiatives and that the company’s primary focus will remain on expanding its client base in new and existing verticals,” said Mr. Steep. “We believe the firm will remain active in evaluating acquisitions that further enhance its product/service capabilities.”
* CIBC’s Kevin Chiang increased his target for TFI International Inc. (TFII-N, TFII-T) to US$100 from US$95 with an “outperformer” rating. The average is US$96.11.
“We had the pleasure of hosting TFII for some virtual marketing,” he said. “With us from the company was David Saperstein (CFO). The biggest takeaway from our marketing is that TFII’s earning stream is less exposed to the broader trucking cycle. While the current cycle is benefiting from an extended peak given the equipment and labour shortages, TFII recognizes that the US dry van market is a hyper-cyclical segment within the ground freight space. For TFII though, its US TL segment accounts for just 10 per cent of revenue with the remainder of its end market exposure being less cyclical, especially when considering the margin expansion opportunities across its LTL, US TL and Logistics segments.”
* CIBC’s Hamir Patel raised his Doman Building Materials Group Ltd. (DBM-T) target by $1 to $13 with an “outperformer” recommendation. The average is $13.07.
David Leeder