Inside the Market’s roundup of some of today’s key analyst actions
Following the release of in-line fourth-quarter results after the bell on Monday, Canaccord Genuity analyst Robert Young thinks shares of Dye & Durham Ltd. (DND-T) “offer a compelling risk-reward opportunity at these levels.”
The Toronto-based provider of software for legal and business professionals reported revenue of $129.7-million, up 53.6 per cent year-over-year but narrowly below the estimates of both Mr. Young ($136.3-million) and the Street ($132.7-million) due largely to headwinds from lower real estate volumes. Adjusted EBITDA of $75.2-million met expectations ($74.2-million and $75.5-million, respectively).
“Given the material rise in mortgage rates in Canada, UK and Australia, and slowing real estate transactions, particularly in purchase, we expect organic growth in the near term to be limited,” said Mr. Young. “We also highlight FX headwind on UK (approximately 30 per cent of revenue) and Australia (15 per cent), whose currencies have weakened in relation to the CAD. We estimate a 3-per-cent top-line headwind in FQ4. As an offset, management continues to see meaningful synergy opportunities still available in past transactions, in line with their 5 times post synergy EBITDA and 5-year return of capital targets. As well, DND notes limited churn and continues to make progress on bundling with minimum volume commitments, which are now signed with customers representing 30 per cent of volume. On balance, we have reduced our FQ1 and F23 estimates to reflect the higher level of risk. We expect synergies with TSFB and an expanding user base toward new pricing bundles to support our $321-million F23 EBITDA estimate, reduced from $351-million.”
Even with rising rates and turbulent real estate transaction volumes, the company’s management maintained his 2023 EBITDA target of $350-million, which Mr. Young said “leans more on unannounced M&A in the wake of the abandoned Link transaction and is higher risk despite Dye & Durham offsetting a steep decline.”
Dye & Durham’s giant Link acquisition dead after Australian seller walks away
He called its M&A pipeline “robust,” noting: Dye & Durham highlighted that it has a strong M&A pipe, and it will look to acquire targets with steady FCF, attractive economics, and significant growth potential. Recall that management is targeting a $1-billion EBITDA quantum driven primarily by acquisitions. During the FQ4 period, Dye & Durham made unannounced tuck-ins in Canada and Ireland for $12-million in consideration underscoring the activity in the background. Based on current cash of $224-million and untapped ARES DDTL and revolver, available capital is $500-million before considering inflow from TM Group (we estimate $100-million vs original outflow of $155-million) and positive cash generation in FQ1 (Sept) less outflow for Link activities which continued into FQ1. The bulk of capital is earmarked for M&A.”
While he sees Dye & Durham’s valuation at a “significant discount,” he cut his target for its shares to $38 from $50, reiterating a “buy” recommendation. The average target on the Street is $36.40, according to Refinitiv data.
“Dye & Durham currently trades at 5.8 times EV/calendar 2023 estimated EBITDA vs legal SaaS peers at 16.0 times and tech consolidator peers at 13.9 times,” he said. “Given that key overhang from the stock, including the Link deal and TM Group decision, are now out of the way, a clean balance sheet with strong FCF implies potential upside for the stock from current levels.”
Elsewhere, others making target changes include:
* Raymond James’ Stephen Boland to $31 from $60 with an “outperform” rating.
“To this point, we have been patient with our target price in 2022 given the volatility in the stock due to the Link saga,” he said.” With this overhang now removed, we are taking this opportunity to revise our current estimates and target price to better reflect the current macro environment. While management has stuck to its guidance of $350 million in adjusted EBITDA, we are slightly more cautious in our numbers. Our conservatism reflects the current level of uncertainty surrounding housing activity in each of DND’s geographies. In addition, we have reduced our target multiple to reflect the higher level of uncertainty regarding future acquisition activity. The result is a reduction in our target price to $31.00 (from $60.00). We believe that the stock is still discounting several of the issues from Link despite these being removed (e.g. leverage risk) and which future verticals they may enter. As such, we remain bullish on DND at these levels despite the downward revision to our target price.”
* BMO Nesbitt Burns’ Thanos Moschopoulos to $23 from $30 with an “outperform” rating.
“We remain Outperform on DND following final Q4/22 results (which had been pre-announced), based on our view that the risk/reward on the stock is attractive given its depressed valuation,” he said. “DND reiterated its FY2023 EBITDA target of $350 million, although this is inclusive of future M&A. We have reduced our estimates (which are below DND’s target), as we see incremental risk to FY2023 given the current macro backdrop. We have also reduced our target multiple and target price, reflecting the recent compression in valuation multiples across the sector.”
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Raymond James analyst Michael Glen lowered his earnings expectations for Magna International Inc. (MGA-N, MG-T) based on “uncertainty” surrounding the outlook for its European operations.
“The primary item for the downward revision relates to margins in the Body and Exteriors segment which has a number of facilities in Germany and is an energy/natural gas intensive operation,” he said.
Mr. Glen’s third- and fourth-quarter earnings per share projections fell to 90 US cents and US$1.07, respectively, from US$1.17 and $1.32, below the consensus estimates on the Street (US$1.20 and US$1.50. Citing “conservatism,” his full-year 2023 forecast slid to US$6 from US$6.86.
“Looking at consensus, we believe that the implications of higher energy/natural gas prices and emerging supply concerns are being underestimated,” he said. “Our best reference for this comes from Magna. With 1Q Magna highlighted $565-million of costs for 2022, which was up $290-million sequentially. While it wasn’t broken down, the biggest component of this cost escalation related to European utilities and energy. Additionally, we believe that most of this assumed cost escalation was in the 2Q, with an assumption that costs would moderate in 2H. That said, using data from FactSet and Bloomberg, Europe spot natural gas prices 3Q to date are double 1H levels, and the forward gas curve (through Dec 2023) is up 60 per cent since June 30. As well, while we understand Magna is actively seeking price concessions from their OEM customers to help compensate for this inflation, they themselves are seeing pressure from their own supply base (i.e., Tier 3 suppliers) on this exact item. As such, there is both a direct and indirect component of the energy inflation that needs to be considered.
“We understand that energy in Europe is well understood and in the news frequently, but at the same time we see the potential for ongoing negative revisions and believe this represents an overhang for the stock. We would remind investors that in 2021, Europe represented 42.6 per cent of Magna’s consolidated sales and the two largest customers were 1. BMW and 2. Daimler. With this taking place in the background, we believe Magna should reduce 2022 margin guidance to something below 4.5 per cent vs. 5-5.4 per cent currently (RJL forecast is now 4.4 per cent).”
Also seeing himself as “much more muted” on the rebuilding of inventories in the United States, Mr. Glen dropped his target for Magna shares to US$62 from US$68, keeping a “market perform” rating. The average on the Street is US$78.63.
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Following a drop in share price of almost 10 per cent thus far in September, Credit Suisse’s Andrew Kuske thinks there’s “meaningful excess potential return” to his target of $55 per share for Boralex Inc. (BLX-T).
That led him to raise his rating for the Kingsey Falls, Que.-based power company to “outperform” from “neutral” on Tuesday.
“On a relative basis, BLX’s return profile compared to declines of 7.9 per cent for ICLN and 10.2 per cent for S&P/TSX Clean Tech sub-index for the month to date,” said Mr. Kuske. “Unlike in the past, we believe the upside and downside risk potential of French merchant power prices and the embedded value of that dynamic are more appropriately reflected in BLX’s valuation and share price. That reality along with BLX’s share price performance helps support our valuation-focused upgrade, but also compels a re-visit of the company’s fundamentals.”
His unchanged $55 target exceeds the $51.62 average on the Street.
“From our perspective, the European pricing dynamics (both the upside potential and the downside risks) are better understood and more effectively reflected in the BLX share price.” he said.” In that context, we consider the European backdrop and the potential to accelerate the pipeline along with benefits arising from the US Inflation Reduction Act (IRA).”
“Boralex’s growth plan of 4.4GW capacity by 2025 and 10GW-12GW by 2030 is reasonable – albeit ambitiously executable. The ability to deliver this growth and finance the plan are key to the direction of the share price.”
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Citing the impact of higher interest rates, Scotia Capital analyst Michael Doumet lowered the firm’s recommendation for Colliers International Group Inc. (CIGI-Q, CIGI-T) to “sector perform” from “sector outperform” after assuming coverage of the Toronto-based company.
“We believe CIGI recently achieved above-normal organic growth rates in Leasing and Capital Markets; organic growth has amounted to 33 per cent since 2019 (exceeding its trend),” he said. “CIGI has also been very active on M&A (2022 should be a record year). Recent acquisitions have come at higher multiples, with CIGI acquiring investment management (IM) firms at 10 times to 12 times EV/EBITDA versus acquisition multiples of 5x to 8x for brokerage/professional services businesses; IM is a higher value-add, more revenue recurring business (and warrants a higher multiple). Given the higher interest rates and rising recession risks, we believe CIGI’s Leasing and Capital Markets business (45 per cent of consolidated EBITDA, on a pro forma basis) are likely to experience revenue/margin softness starting 4Q22. We also expect M&A to slow from its record pace as the company focuses on integration/deleveraging. While a long-term compounder with strong secular tailwinds, we believe Street expectations for 2023E may need to be moderated.”
Citing the interest rate sensitivity of both its brokerage and investment management businesses, Mr. Doumet expects activity to “soften” in the second half of 2022 through 2023.
“From an investment perspective, CIGI is an easy-to-spot compounder (its five-year Enterprise ‘25 growth targets puts that in plain sight). CIGI’s fundamentals blend secular and cyclical trends. While the secular trends are here to stay, and thus the compounder algorithm repeatable in the L-T, we believe the cyclical trend ran a little hot in the long-term and should normalize in the near-term,” he said.
He cut the firm’s target for Colliers shares to a Street-low US$120 from US$165. The average is US$154.
“While a compounder, we believe CIGI’s earnings growth is interest rate sensitive, in that higher rates should moderate leasing and capital markets activity and slow growth in its investment management business. While it is hard to argue on the long-term success of CIGI, our valuation multiple and more cautious view (versus consensus) on 2023E provides us with a limited implied share return in the NTM,” said Mr. Doumet.
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In a separate note titled First in Class, Mr. Doumet raised FirstService Corp. (FSV-Q, FSV-T) to “sector outperform” from “sector perform,” calling it a “best-in-class compounder.”
“FSV is a leader in the highly fragmented outsourced property services markets,” he said. “Its leading scale supports several sustainable competitive advantages, which play into its organic and acquisition strategy. Its trading multiple looks to have reset, and given its defensive attributes, underlevered B/S, and 10+ year runway of accretive consolidation opportunities, we believe FSV will continue to accrue significant gains for equity holders. "
Calling FirstService “never cheap, but cheaper,” he set a target of US$135, down from the firm’s previous US$148 target. The average is currently US$143.75.
“We do not think FSV will ever be a ‘cheap’ stock,” Mr. Doumet said. “However, since its peak at the end of 2021, FSV shares are down more than 40 per cent (nearly all multiple compression; business is highly resilient). Now cheaper, we believe its (still premium) valuation is justified on the basis of its 10+ year runway of accretive consolidation, its defensive attributes, and the fact that it has no visible secular headwinds. Its current trading multiple supports an 8-10-times acquisition multiple arbitrage (i.e., effectively doubles the value of the acquired business). Its B/S is levered at 1.5 times. Without deals, FSV is able to delever by 0.5 times each year. M&A could be lumpy and private equity remains competitive. That said, management is comfortable with 2.0 times to 2.5-times net debt leverage and we estimate a 0.5-times increase translates into $300 million of deployable capital, more than $0.50 per share in FCF, and $10/share to our target.”
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As Canadian consumers continue to battle the impact of inflation, Stifel analyst Martin Landry expects Dollarama Inc. (DOL-T) to gain a larger market share after introducing his $4 price point this summer.
“Our analysis suggests that Dollarama’s more than $4.00 products are priced at a discount of 50-60 per cent to similar products offered elsewhere,” he said. “This discount is impressive and in some instances reaches up to 79 per cent as we found products sold at more than 3 times the price of comparable items at Dollarama. Examples include a wastebasket sold for $4.75 at Dollarama vs $9.99 at Canadian Tire and $12.64 at Walmart and a laundry basket sold at $5.00 at Dollarama vs at $7.58 at Walmart and $12.79 at Canadian Tire.”
“We reviewed 1,764 SKUs [stock keeping units] offered by Dollarama online and found that 128 SKUs were priced above $4.00 representing 7.3 per cent of all the SKUs offered online. This is a higher number of more than $4.00 items than we expected to find and suggests a rapid rollout of the more than $4.00 products since the beginning of the summer. DOL’s average price point according to the 1,764 SKUs we sampled was $2.55. We note that 36 per cent of the 1764 SKUs were priced in the $1.00-1.99 price point, 22 per cent in the $2.00-2.99 price point and 19 per cent in the $3.00-3.99 price point and 23 per cent in the $4.00-4.99 price point.”
Mr. Landry said the value offered by Dollarama at the higher price point is “impressive and surely catch the attention of shoppers.”
“We believe this will accelerate the company’s share gain of wallet, especially currently, as Canadians fight inflation and rising interest rates,” he said. “We believe that Canadians will continue to trade down to offset inflation and that Dollarama will benefit from that trend for several quarters to come. Hence, in our coverage universe, Dollarama offers the most defensive characteristics and investors should revisit the story in our view.”
Expecting the Montreal-based retailer to “continue to outperform operationally and also on the stock market,” he maintained a “buy” recommendation and $88.50 target for its shares. The average on the Street is $86.73.
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After the Wall Street Journal reported last week that larger ocean shipping lines are turning to airplanes to help navigate supply-chain disruptions, Desjardins Securities analyst Benoit Poirier reiterated his bullish view on Héroux-Devtek Inc. (HRX-T), seeing it “well-positioned to capitalize” as a supplier for Boeing Co.’s (BA-N) 777 and 777X programs.
“Air freight industry revenue grew 21 per cent year-over-year last year to US$289-billion vs US$264-billion in 2019,” he said. “Over the past three years, 400 freight planes have joined the global fleet (up 20 per cent), according to Boeing; it estimates the global freighter fleet will increase to more than 3,600 in 2040 from 2,000 now. HRX’s current widebody exposure includes landing gear for the 777X (including freighter), actuation components for several of Boeing’s widebody platforms and the A330/A350 programs.”
He maintained his “Top Pick” recommendation and $25 target for shares of the Longueuil, Que.-based company. The average on the Street is $21.98.
“The valuation gap versus U.S. aerospace supplier peers has widened to 5.5 times from the 15-year average premium of 2.8 times,” he said.
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Citi analyst Jon Tower warned of an “increasingly less favorable risk-reward” for shares of McDonald’s Corp. (MCD-N), seeing foreign exchange and macro challenges in Europe “looming over” results heading into the winter months and a valuation “leaving little room for shares to absorb negative estimate revisions.”
Accordingly, he opened a “90-day negative catalyst watch” for shares of the fast food giant in a research report released Tuesday.
“Specifically, we see over $0.25/2.5 per cent of incremental FX headwinds on Street 2023 estimates since 2Q results and a Street outlook that shows IOM SSS [international operated markets same-store sales] momentum continuing to push higher despite well-publicized consumer challenges across Europe,” said Mr. Tower.
“We understand (and agree with) expectations for continued U.S. strength; however, we estimate the U.S. business would need mid-single-digit (MSD) SSS upside on top of existing expectations to offset the profit impact from: (1) dollar strength since 2Q earnings, and (2) even a low-single-digit (LSD) hit to aggregate Europe SSS. Conversations suggest investors are sharpening pencils on both topics, and we expect risks to become better priced in: (1) during the approach to/aftermath of 3Q results, (2) as the focus shifts to 2023.”
He lowered his earnings per share projection for 2022 to US$9.77 from $10.01 with his 2023 and 2024 estimates sliding to US$9.89 and US$10.74, respectively, from US$10.39 and US$11.26.
“We also believe that Europe macro scuffing MCD’s luster as a relative safe haven could lead to longer-term investors also focusing on other risks that may not be priced into the shares (and the associated portfolio rotation/multiple pressure), including: (1) implications from the CA Fast Act/other labor-friendly actions in the U.S., and (2) recent changes to the franchisee renewal process that could lead to disruption around a heightened pace of franchise-franchise transfers and/or “days are numbered” franchisees’ disenchantment,” said Mr. Tower.
The analyst thinks negative earnings revisions and a valuation near historical highs (on absolute and relative) will “cap upside performance and pressure shares despite a still-robust U.S. business.”
Keeping a “neutral” recommendation, he dropped his target for McDonald’s shares to US$246 from US$275. The average is currently US$282.88.
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Touting the growth potential from its aggressive M&A strategy and “attractive” valuation for its shares, Acumen Capital analyst Jim Byrne initiated coverage of Cathedral Energy Services Ltd. (CET-T) with a “buy” rating on Tuesday.
The Calgary-based company has completed six acquisitions since 2021, growing to become of one of the largest directional drillers in Canada and has a “significant presence” in the U.S. market following its US$62.7-million purchase of Alititude Energy Partners LLC in July.
“With the Compass acquisition completed in 2022, CET has now reached 20-per-cent-plus market share in Canada,” he said. “Following the Altitude purchase, the company is now roughly 7-8 per cent of the U.S. market and has built a platform for future growth through organic and inorganic opportunities on both sides of the border. Altitude brings a very strong management team that built the company from the ground up and is the market leader in the Permian Basin, the industry’s busiest region.”
“The company’s strong product portfolio and focus on technology should drive increases in market share across North America in the next few years. Acquisitions remain a key pillar of the company’s growth strategy as they look for opportunities to accelerate their growth and build on their product and service offering.”
Mr. Byrne set a target of $1.80 per share. The average on the Street is $1.70.
“CETs shares trade at just 2.3 times 2023 estimated EBITDA, and we believe they are attractively valued given the tailwinds of increasing capital budgets, and constrained capital equipment on the services side,” he said. “We anticipate drilling activity will jump again in 2023 following the past few years of underinvestment and consistently higher commodity prices. Categorized as an oilfield service company, we believe CET is more like a technology hardware company with relatively light capex requirements and strong free cash flow. The company’s products are among the most advanced in the sector and are constantly evolving to meet and exceed the demands of its customer base as they push the envelope in horizontal drilling.”
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In other analyst actions:
* Raymond James’ David Quezada trimmed his Carbon Streaming Corp. (NETZ-NE) target to $8.25 from $10 with a “strong buy” rating, while TD’s Aaron MacNeil cut his target to $8.50 from $9.50 witha “speculative buy” recommendation. The average is $8.50.
“Our Strong Buy rating on Carbon Streaming is a function of the company’s first mover status in the high growth carbon offset industry, sizable pipeline of investment opportunities, and our constructive long term view of carbon credit pricing,” Mr. Quezada said. “We further point to strong execution by the company and the stock’s heavily discounted valuation, trading at P/NAV of 0.4 times. We have reduced our price target to $8.25 from $10 reflecting a more gradual assumed pace of capital deployment.”
* JP Morgan’s Stephanie Yee lowered his target for GFL Environmental Inc. (GFL-N/GFL-T, “overweight”) to US$39 from US$42. He raised his Waste Connections Inc. (WCN-N/WCN-T, “overweight”) target to US$154 from US$148. The averages on the Street are US$43.17 and US$152.89, respectively.
* CIBC World Markets’ Todd Coupland cut his targets for Lightspeed Commerce Inc. (LSPD-T, “outperformer”) to $40 from $67 and Nuvei Corp. (NVEI-Q/NVEI-T, “neutral”) to US$35 from US$40. The averages are US$36.34 and US$59.14, respectively.
* Raymond James’ Craig Stanley lowered his Meridian Mining UK Societas (MNO-T) target to $1.60 from $2, below the $2.12 average, with a “strong buy” rating.
* With the emergence of a competing offer for RPS Group, Stifel’s Ian Gillies cut his WSP Global Inc. (WSP-T) target to $169 from $175 with a “buy” rating. Elsewhere, Scotia’s Mark Neville cut his target to $170 from $175 with a “sector perform” rating. The average is $180.23.
“We believe the company’s acquisition strategy, whether RPS or a new target, is well honed, and we continue to expect it to be successful. This remains a best-in-class company,” Mr. Gillies said.
David Leeder