Inside the Market’s roundup of some of today’s key analyst actions
While National Bank Financial analyst Cameron Doerksen expects some “softer quarters ahead” for BRP Inc. (DOO-T), he cautioned market expectations are “already too low.”
“Although we expect the powersports industry slowdown will persist through much of fiscal 2025, we continue to see BRP gaining market share and introducing new products, which will position the company well for an eventual end market rebound,” he said in a research report released Tuesday. “Furthermore, with the stock currently trading 30 per cent below its 52-week high, we would argue that it is already pricing in a material market slowdown and earnings expectations have already been appropriately re-set lower. Finally ... with an already strong financial position and solid free cash flow generation expected, we expect BRP to remain active with its NCIB and could announce another substantial issuer bid, which would be supportive of the stock.
“While investor sentiment around powersports may remain negative in the short-term, we view BRP as a compelling value play for longer-term oriented investor.”
Ahead of the release of fourth-quarter 2024 results from the Valcourt, Que.-based recreational vehicle manufacturer, Mr. Doerksen predicts guidance for its current 2025 fiscal year will bring lower expectations.
“Based on more recent reporting from BRP’s powersports peer group, we expect soft retail has continued through the early part of calendar 2024,” he said. “Indeed, Polaris highlighted in its Q4/23 earnings report that it expects retail to be down in Q1/24 given poor snow conditions relative to last year as well as ongoing economic uncertainty and higher interest rates.”
“We expect management to provide detailed F2025 guidance with its Q4 results, but based on an expectation that the industry will broadly remain soft, management previously indicated that it expects its revenue to be lower in F2025 with a 100 basis point EBITDA margin headwind. BRP may face some additional headwinds in F2025 due to the poor snow conditions experienced in much of North America this winter. We note that current consensus is for F2025 EPS to be down 20 per cent year-over-year.”
Mr. Doerksen thinks the company’s share buyback program will likely continue, seeing the potential for another substantial issuer bid.
“With leverage sitting comfortably at 1.5 times as of the end of Q3 and our expectation for strong free cash flow generation through F2025, we could see BRP announce another substantial issuer bid in the coming quarters, which would be a positive catalyst for the stock,” he said. “DOO has completed four SIBs in the past noting that three of them were announced along with quarterly results and the stock has largely reacted favorably both on the day of the announcement (up 10 per cent on average) and in the months following.”
While believing BRP’s valuation remains “compelling,” he lowered his target for its shares to $105 from $107 after introducing its 2026 forecast, reaffirming an “outperform” recommendation. The average is $102.22.
“In our view, BRP’s low forward valuation reflects a market expectation that financial results over the next fiscal year will come in well below the current consensus forecasts,” said Mr. Doerksen. “If we were to assume that the stock should trade at its historical average EV/EBITDA multiple (7.4 times) in a downturn scenario, the current share price would imply an EBITDA of $1.2 billion in F2025, which would be a 30-per-cent decline from the midpoint of management’s F2024 guidance. We believe this is an overly pessimistic scenario even in the context of a weaker powersports market.”
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A pair of analysts on the Street downgraded Fusion Pharmaceuticals Inc. (FUSN-Q) following Tuesday’s announcement that British drug giant AstraZeneca Plc has agreed to buy it for up to US$2.4-billion, the latest in a string of 10-figure takeovers of early-stage drug developers in this country.
“FUSN was the last publicly traded radiopharma takeout candidate that had both a late-stage clinical program under development and material manufacturing operations: the ideal radiopharma starter pack for big pharma,” said Raymond James’ Rahul Sarugaser. “We think this was a pretty solid outcome, and was just a matter of time before a deal like this was executed (which motivated our Strong Buy rating).
“We like the 100-per-cent premium to closing price with potential for 126-per-cent premium on realization of what we believe is a relatively easy-to-achieve regulatory milestone on FPI-2265, and we like that FUSN was able to reach an agreement with a partner that saw the potential of targeted alpha therapies very early on. We do not disqualify the potential for other parties to come over the top, but given the all-cash deal, the low hurdles to clear to realize full deal value, and the warm extant relationship between FUSN and AZN, a bully bid here would need, indeed, to be extraordinary.”
Calling the deal “another win for the radiopharma space, broadly, and an invitation to the large and growing collection of radioligand developers to aggressively pursue their programs (and, perhaps, to access the public markets for liquidity and profile),” Mr. Sarugaser moved the Hamilton, Ont.-based company to “market perform” from “strong buy” with a US$21 target, up from US$16.
Elsewhere, Leerink Partners’ Faisal Khurshid reduced Fusion to “market perform” from “outperform” with a US$21 target, up from US$17 and exceeding the US$14.73 average.
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Raymond James analyst Michael Glen thinks “things appear to be tracking quite well” for Aritzia Inc. (ATZ-T), believing it “feels very constructive” about its implied guidance for the fourth quarter of fiscal 2024 and 2025 outlook.
In a research report released Tuesday, he said a recent update by the Vancouver-based clothing retailer at Raymond James’ annual Institutional Investors Conference brought a “positive tone being communicated in terms of 1. Positive feedback with respect to U.S. store openings and square footage growth; 2. Early feedback with respect to the Spring collection; 3. Progress on strategic initiatives with respect to merchandising mix and digital spend; and 4. Progress towards achieving the communicated target of 500 basis points of margin expansion in F2025.”
“While F2025 is clearly an important first hurdle, we recognize that longer-term investors are looking to where EPS could trend beyond F2025,” added Mr. Glen. “In that regard, despite the headwinds faced in F2024, we view it as quite constructive that management still makes reference to achieving the F2027 guidance it laid out during its Investor Day in late 2022. Broadly speaking, these targets called for total sales of $3.5-3.8-billion with an adj. EBITDA margin of 19 per cent ... We look at a sensitivity exercise that outlines what ATZ’s P&L potentially looks like under the high and low end of this range, with a corresponding variance in EBITDA margin of 18-19 per cent. From this, we can back into an implied EPS range of $3.60-$4.20, which would imply ATZ stock is currently trading at 3-year forward P/E of 9-10 times.
“While we understand valuing this far out might represent a challenge for some investors, we increasingly believe this represents the basis for valuation for the long-term bulls on the name. With this in mind, given the potential underlying growth in EPS for the company, we are opting to increase our target multiple to 25 times our F2025 estimated EPS from 20 times, which is closer to in-line with the 5-year historical average.”
After raising his earnings expectations for fiscal 2025 and 2026, the analyst hiked his target for Aritzia shares to a Street-high of $46 from $35, keeping an “outperform” recommendation. The average is $41.38.
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Following strong fourth-quarter 2023 results and guidance for the current year that came in “better than hoped for,” Adentra Inc. (ADEN-T’) is poised to benefit from “easing comps” and a pickup in M&A activity, according to National Bank Financial analyst Zachary Evershed, who is “confident in management execution, supported by our bullish outlook on long-term dynamics in the housing market.”
“Even ahead of easing rates lifting end market demand, we believe ADEN should see multiple expansion, amplifying the inflection in operations and reinforcing ADEN as our top pick in 2024,” he said.
Shares of the Langley, B.C.-based distributor of architectural building products, formerly known as Hardwoods Distribution Inc., jumped 7.5 per cent on Monday after it reported quarterly revenue of $514.9-million, down 10.4 per cent year-over-year but ahead of both Mr. Evershed’s $488.3-million estimate and the consensus projection of $492-million. Adjusted earnings per share of 46 cents also blew past expectations (18 cents and 20 cents, respectively).
“ADEN’s short-term outlook calls for lower revenue year-over-year in Q1/24 as higher volumes are offset by lower pricing,” the analyst said. “For the full year, ADEN expects positive year-over-year comps towards H2/24 which should result in modest year-over-year growth in FY24 EBITDA, attributable to continued gross margin strength and cost containment, leading to operating leverage. Volumes stabilized year-over-year, finding a floor faster than we expected and setting the tone for positive revisions to our estimates, complemented by an increased pace of sales in the H2/24. While the outlook for R&R markets is gloomier, management flagged key differences in ADEN’s predominantly millwork-related aisles vs. other bigticket items within the big box mix, potentially skewing the comparison.”
Seeing Adentra moving “from repayments to deployments,” Mr. Evershed added: “ADEN repaid $224 million in debt in 2023, seeing net bank indebtedness fall to $389 million to close out the year. While deleveraging dominated the stage in FY23, M&A wasn’t left unattended as management kept leads warm and continued to build relationships. The pipeline therefore remains robust, and management aspires to add $800 million in acquired sales over the next five years as part of its Destination 2028 targets. ADEN ended the quarter with over $450 million in dry powder, sitting at 2.7 times Net Debt/EBITDA (3.0 times including leases); while we anticipate action on the M&A front, we do not bake in unannounced acquisitions, model leverage falling to 2.2 times exiting 2024 (2.6 times including leases).”
With management’s commentary leading him to believe his volume projections were “overly conservative,” Mr. Evershed raised his revenue forecast “although pricing remains under pressure, unit sales largely stabilized year-over-year.”
“We also move our profitability estimates higher, primarily reflecting outperformance on cost control and operating leverage, with lesser support from marginally higher gross margin assumptions in 2024,” he said. “Higher sales and stronger Adj. EBITDA margins flow to the bottom line, seeing our Adj. EPS forecast torque higher. We highlight potential upside to our numbers as we do not bake in any interest rate reductions in either 2024 or 2025, which would have a significant impact on the bottom line, to say nothing of the likelihood for a significant acceleration in end market demand as mortgage affordability improves.”
Reiterating an “outperform” recommendation, he raised his target to $51.50 from $47. The average target is $45.92.
Elsewhere, others making adjustments include:
* Stifel’s Ian Gillies to $50 from $44 with a “buy” rating.
“ADEN’s update this quarter reinforces our view that operating conditions are improving which should lead to better than previously expected revenue and margins. As a result, we have revised 24/25 estimated EBITDA higher by 7.8 per cent/8.5 per cent. Moreover, the company’s balance sheet is in a good shape which should allow for a more active M&A program this year,” said Mr. Gillies.
* Acumen Capital’s Nick Corcoran to $54 from $50 with a “buy” rating.
“ADEN posted a solid beat in a seasonally soft quarter. There are signs that the cycle is reaching a bottom as inflationary pressures have eased, price deflation has slowed, and interest rate cuts may start later in 2024,” said Mr. Corcoran.
* Canaccord Genuity’s Yuri Zoreda to $45 from $37 with a “buy” recommendation.
“We continue to see upside to current valuation levels. ADENTRA trades at 11.1 times 2024 EPS versus North American building products distributors trading at 14.1 times. To set our target price, we use 11 times EPS (2025E) from 12 times EPS (H2/2024E-H1/2025E) previously. The bump to our target price primarily reflects the upward revisions to our estimates,” said Ms. Zoreda.
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Citing balance sheet and operational risks, Stifel analyst Martin Landry downgraded Flow Beverage Corp. (FLOW-T) to “hold” from “speculative buy” following the release of “disappointing” first-quarter 2024 financial results.
Before the bell on Monday, the Toronto-based beverage company reported cash losses from operations of $9-million before working capital changes, down 42 per cent year-over-year and below Mr. Landry’s expectation of a loss of $6-million.
“FLOW is generating significant operating losses that are depleting the company’s cash balance,” the analyst said. “In the last twelve months, cash losses from operations amounted to roughly $25-million despite the company stretching its accounts payables by $16-million year-over-year. Flow Beverage’s balance sheet has continued to deteriorate and is in the worst position it has been since the IPO with a net debt of $27 million, vs. a net cash position of $14 million two years ago. Additionally, management will need increase CAPEX in the coming quarters to support future growth, which likely pushes back the inflection point to positive free cash flow. FLOW’s precarious balance sheet position triggered a going concern note for the first time in its financial statements.”
“While management is confident that co-packing contract wins will allow FLOW to reach positive cash flows by Q4FY24, it will require strong execution to ramp-up these new contracts and our visibility remains limited. In addition, we believe that FLOW has operational risks given its stretched payables. While this has provided time for the company to bridge its cash balance until positive cash flow from operations occurs, suppliers are likely aggravated. In our view, there is a scenario where suppliers start demanding upfront cash payment which could increase the financial stress of the company and delay projects.”
Also emphasizing growth in its branded products has “stalled,” Mr. Landry noted a FLOW’s business strategy has “changed significantly in recent months and management is now focused on growing co-packing operations vs selling the co-packing assets previously.”
“In our view, co-packing operations warrants a lower valuation multiple vs revenues from FLOW Branded products given: (1) the ‘commodity’ service provided and (2) reduced control on sales due to the reliance on the performance of third party brands,” he added.
The analyst dropped his target for Flow shares to 25 cents from 60 cents. The average is $1.13.
“There is a scenario where management can bootstrap its way to positive operating cash flows, but we struggle to see the path to positive free cash flows as further investments are needed to support the anticipated growth in FY2025. We see operational risks increasing for FLOW as the company ramp-up important co-packing contracts while delaying supplier payments and believe management has limited room for error,” he concluded.
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Seeing Calibre Mining Corp. (CXB-T) on a “path to re-rate from scale upside and repositioning jurisdictional diversification,” Stifel analyst Ingrid Rico initiated coverage with a “buy” recommendation on Tuesday.
“Calibre is on its way to becoming a diversified mid-tier gold producer with production increasing to nearly 500,000 ounces in 2026,” she said. “CXB’s operational success in Nicaragua has built the foundations of a 250-300koz producer, which coupled by strong cash flow generation, has positioned the company well to take on its next phase of growth and diversification as the team completes construction of its newly acquired Valentine Gold project in Canada. Calibre has been delivering consistent year-over-year production growth since 2019, and we forecast a continuation of that trend in 2024 and towards the 400-500koz production range in 2025-2026. We believe scale upside towards a mid-tier gold producer, and importantly, diversification are elements that make CXB poised for valuation re-rate.”
In justifying her bullish stance, Ms. Rico emphasized the Vancouver-based company’s “track record of execution and operating success.”
“Looking back to CXB’s operational performance adds conviction to the company’s plan ahead: with production growth of 108 per cent over the last four years (or a CAGR [compound annual growth rate] of 28 per cent) and operating cash flow increasing from $81-milllion in 2020 to $201-milllion in 2023, Calibre has visibly shown a track-record of execution,” she said. “We believe management’s track-record of operating execution gives the team a check mark, and, importantly, investor reassurance on the next phase of the company’s growth and diversification path.
“With the Valentine Gold project anticipated to start production in H1 2025, we estimate production increasing to 464koz in 2026, which translates to $265-million in operating cash flow (based on Stifel price deck), or a 32-per-cent increase compare to CXB’s 2023 cash flow.”
Also touting the company’s “seasoned” management team, she set a target of $2.25 per share. The average is $2.35.
“We anticipate the 22-per-cent potential upside to our target price to be realized as the company continues to de-risk its Valentine Gold project with remaining construction taking the new mine to production in H1 2025,” said Ms. Rico. “Management has a proven track record of execution that supports our belief that this team will be able to deliver the next phase of execution towards a mid-tier status. We believe diversification of cash flow and asset base are elements that make Calibre Mining poised for valuation re-rate.”
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In other analyst actions:
* BMO’s Brian Quast cut his B2Gold Corp. (BTO-T) target to $6, below the $6.06 average, from $6.50 with an “outperform” rating.
“BTO has released its long-awaited technical report for the Fekola complex, which has had a negative impact on our estimates, since we are now modeling Fekola as per this new document,” said Mr. Quast. “This technical report has Fekola production below company guidance, since inferred ounces have been excluded from estimates. There is also a limited update on the 2023 Mining Code in Mali, with further details pending.”
* TD Securities’ Aaron Bilkoski raised his target for Logan Energy Corp. (LGN-X) to $1.50 from $1.40 with a “buy” rating. The average is $1.57.
David Leeder