Inside the Market’s roundup of some of today’s key analyst actions
DA Davidson analyst Gil Luria thinks Shopify Inc.’s (SHOP-N, SHOP-T) significant investment in Klaviyo Inc. (KVYO-N) is “paying off,” calling the marketing automation platform “a promising growth story within the customer engagement space.”
Ottawa-based Shopify is one of the biggest shareholders of Klaviyo, which made its debut on the New York Stock Exchange on Wednesday, following a complex collection of deals it struck with the Boston-based company in July, 2022. Its 9.25 million shares of Klaviyo were worth over US$303-million at Wednesday’s closing price; it paid US$101-million for them 14 months ago.
“Beyond the liquid value to SHOP, we see Shopify as having new strategic optionality in this arena,” said Mr. Luria. “Shopify can continue to benefit from Klaviyo’s penetration of its installed base through the ownership stake, or Shopify can choose to liquidate this stake and expand its subscription offering into this fast growing segment. We believe that although Shopify originally decided to go buy/invest instead of build, this category would be a very natural extension of its product set.”
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While he noting some of the value of Shopify’s investment is already on its balance sheet, the analyst thinks “the increased liquidity and strategic optionality are worthy of adding today’s liquid value to SHOP’s price target,” leading him to raise his target to US$73 from US$72 with a “buy” rating. The average on the Street is US$67.12, according to Refinitiv data.
“We would note that KVYO is one of three large public investments for SHOP,” he said. “Shopify invested in GLBE [Global-E Online Ltd., GLBE-Q) and AFRM [Affirm Holdings Inc., AFRM-Q) when it made similar decisions not to enter those markets directly and now owns substantial equity in both.”
“We would also note that at the opening range for KVYO, it is trading in the 14-16-times range on forward revenue other investments. While KVYO’s growth is currently much higher than SHOP (51 per cent last quarter), we believe that as it saturates the rest of its addressable market on Shopify, we would expect growth rates to converge.”
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Cascades Inc. (CAS-T) is making “good progress” on the ramp-up of its Bear Island facility located in Virginia, said National Bank Financial’s Zachary Evershed, who called it a “great asset.”
He was one of several sell-side analysts who joined institutional investors on a tour of the facility last week. Company president and chief executive officer Allan Hogg was one of several executives in attendance.
“As expected, the Bear Island tour drove home the high quality of the asset itself, with a basis weight production sweet spot around 18 pounds (as compared to Greenpac at approximately 30 pounds and the industry benchmark kraft linerboard at 42 pounds) aligning production with the lightweight containerboard in high demand in the fastest growing markets such as e-commerce,” said Mr. Evershed. “The machine’s speed has already been largely ramped up as output on good days is punching above 1,100 tons (1,300 tons per day rated capacity) and the focus now is on improving consistency, to reduce the number of bad days. After the kinks have been worked out, the quality of Bear Island’s fibre mix can then be downshifted to lower grades of OCC and up to 60-per-cent mixed paper at a substantial cost savings.”
However, the analyst warned the current operating environment “clouds” the near-term outlook for Cascades.
“Though we see a solid win in the smooth Bear Island ramp-up, appreciate the ongoing improvements at Tissue and input costs peeling back represents a good short-term tailwind, the operating environment remains highly volatile,” he said. “We view the rapid volley of recycled capacity startups this year as a double threat to containerboard selling prices through low operating rates and to OCC costs through increased demand. Furthermore, relief on input costs at Tissue could result in pressure on selling prices over the medium term.”
Maintaining a “sector perform” rating for Cascades shares, Mr. Evershed raised his target by $1 to $14.50 based on a sum-of-parts valuation increase. The average target on the Street is $14.30.
“Though we come away from the site tour more bullish on the fundamentals of the company than at any point in the past year, given the risk presented by a volatile operating environment, we see balanced risk and reward at current valuations and reiterate our Sector Perform rating,” he said.
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Stifel analyst Martin Landry thinks the Sept. 28 release of Aritzia Inc.’s (ATZ-T) second-quarter 2024 financial results will be “important to re-establish investors’ confidence following two quarters of negative surprises.”
“Given investors’ confidence is at multi-year lows we believe it would not take much for investors to revisit ATZ,” he added. “A successful ramp-up of the GTA distribution center, healthier inventory levels and positive comments on the outlook for the fall would go a long way. Recent industry readthroughs suggests better than feared demand trends, increasing our confidence in Aritzia’s ability to achieve its FY24 guidance. ATZ’s shares do not appear to have found a bottom yet touching new lows daily.”
Mr. Landry is expected revenue of $522.97-million, which is essentially flat year-over-year and in line with the Street’s expectation of $521.75-million and the company’s guidance. He expects a 2-per-cent decline in same-store sales growth to be offset by 4.5-per-cent network growth.
“Despite stable revenues, Aritzia is expected to experience a 1,300 basis points EBITDA margin contraction driven by several factors including (1) inflationary pressures on product costs and labor, (2) transitionary dual warehousing costs and (3) a normalization of the promotional activity,” he said. “This translates into an adjusted EPS loss of 4 cents, in-line with consensus estimate of a 2-cent loss.”
Acknowledging these results are “not encouraging,” Mr. Landry thinks recent industry comments made by Aritzia’s peers point to “better than feared” demand trends.
“Amongst the six apparel retailers we analyzed, five have experienced sustained or accelerating demand trends in August,” he said. “While the apparel industry remains volatile and demand varies significantly from one retailer to the next, we are encouraged by these comments, which suggests that demand trends might be better than feared. Remember that beginning in June, Aritzia had begun to experience a deceleration in traffic trends, which pushed the company to revise its FY24 guidance. Hence, with these positive read-throughs from peers, ATZ’s guidance appears increasingly achievable.”
“Improving supply chain was amongst the main themes discussed by apparel retailers in Q2/23. American Eagle, Urban Outfitters and Abercrombie & Fitch have experienced significant improvements in inbound costs and lead times, which has led to (1) better flexibility to manage inventory levels, (2) lower markdowns levels and (3) healthier inventory position. In Q1FY24, Aritzia’s inventory position was still elevated, up 62 per cent year-over-year but the company expects inventory growth to more closely align with sales trends by the end of Q2FY24. Hence, as inventory levels continue to normalize, we would expect ATZ to benefit from similar tailwinds, which should result in margin improvement.”
Also seeing website traffic beginning to accelerate, Mr. Landry made a modest adjustment to his fiscal 2024 revenue expectation, maintaining a $40 target and “buy” recommendation for Aritzia shares, touting “significant growth potential” and an “impressive track record.” The average on the Street is $35.88.
“At 12 times forward consensus EPS, (vs 21 times historically), ATZ’s valuation is not demanding and provides investors with a healthy buffer in case expectations are too high for next year,” he said.
Elsewhere, “expecting margin compression before a better second half,” Canaccord Genuity’s Luke Hannan reiterated a “buy” rating and $37 target after raising his 2024 and 2025 revenue estimates while lowering his EBITDA projections.
“In our view, Aritzia has done a great job of navigating a changing retail landscape by offering an aspirational customer experience within its brick-and-mortar locations and an improved e-commerce platform” said Mr. Hannan. “With a robust pipeline of new store openings, a healthy balance sheet to support growth and margin enhancement initiatives, and a well-aligned management team, we believe Aritzia is deserving of a premium valuation.”
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Citing a “challenging backdrop,” Scotia Capital analyst Phil Hardie predicts AGF Management Ltd. (AGF.B-T) will see flows turn negative when it reports third-quarter financial results on Sept. 27.
“We forecast AGF to post net redemption of $124 million, ending its solid run of 11 consecutive months of positive flows amid the tough industry operating environment,” he said. “That said, we expect full-year net flows to remain up in 2023 and 2024. The strong market performance early in Q3/F23 resulted in a higher average AUM [assets under management] balance (over the quarter) that is likely to provide a favourable tailwind on management fee earned.”
Mr. Hardie is projecting operation earnings per share of 31 cents for the quarter, up a penny from his previous projection and matching the Street’s expectations. He is estimating adjusted EBITDA for shares of 46 cents, rising 2 cents but down 5 per cent year-over-year and dropping 29.5 per cent sequentially “driven by lower gains from its private alternative investments, which tend to be volatile in nature.”
“We believe key areas of focus for the quarter are likely to be: 1) AUM and sales outlook given current market volatility and pressure in industry-wide net sales, 2) quarterly SG&A and any further updates to the full-year expense guidance, 3) the impact on management fee margins from recent price changes, and 4) potential update on M&A,” he said.
Maintaining a “sector perform” rating, Mr. Hardie raised his target to $9 from $8.75, below the $9.14 average on the Street
“Under a scenario where the market makes an expectedly strong rebound and sentiment related to the sector improves, we believe AGF can offer significant upside potential above our target price,” he said. “AGF’s high exposure to equities can provide it with torque in an upward equity market swing, and its strong balance sheet helps provide a floor to the stock. Shares continue to trade at a wide discount relative to peers and offer an attractive 6-per-cent dividend yield, but we remain on the sidelines given a challenging and uncertain market outlook.”
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Desjardins Securities analyst Kyle Stanley thinks Dream Residential Real Estate Investment Trust (DRR.U-T, DRR.UN-T) offers investors “access to a portfolio of affordable Sun Belt and Midwest apartment assets which should outperform the broader market in the current period of elevated new supply.”
Seeing “supportive” demand drivers and “healthy growth expectations,” he initiated coverage of the Toronto-based REIT, which owns a 16 garden-style multi-residential properties, with a “buy” recommendation on Thursday.
“Supported by inelastic demand drivers, DRR’s Class B portfolio offers an affordable housing option for tenants and a transparent cash flow profile for investors, irrespective of the economic climate,” said Mr. Stanley.
“Although rental market fundamentals have been pressured by a wave of new supply across the U.S., the softness should largely be borne by the luxury segment. The existing supply shortage of affordable rental stock, supported by healthy population migration trends, should mitigate the impact on DRR’s portfolio. Augmented by an extensive value-add program targeting a 12–16-per-cent ROIC [return on invested capital], DRR should deliver top-line growth (approximately 5 per cent) in excess of market in the near term. Our forecast calls for mid-single-digit SP NOI growth through 2025.”
Believing its “conservative capital structure positions it well for heavy lifting,” the analyst thinks Dream’s balance sheet is “built to withstand current market uncertainty” with limited near-term debt maturities and low leverage. He sees it “well-positioned to take advantage of investment opportunities should they arise.”
“One of the primary drivers for DRR’s public listing was improved access to capital to facilitate its external growth program,” he said. “Management intends to target core/core+ and value-add assets within its three existing markets, as well as to diversify geographically across other markets that benefit from similar fundamental drivers including the Carolinas, Arizona, Nevada and Colorado. DRR’s desire to establish a presence in the Carolinas and the Mountain West region would offer TSX investors a unique geographic exposure that is not currently available.”
Touting its “defensive cash flows and a healthy organic growth profile,” Mr. Stanley set a target of US$9.50 for Dream units. The average is US$10.75.
“Combined with an active value-add program and robust demographics in its Sun Belt and Midwest markets, we believe DRR’s high-single-digit annualized FFO/unit and NAV growth upside is attractive, particularly given the deep relative valuation discount to peers,” he said.
“We believe DRR’s relative underperformance since the IPO reflects (1) the robust fundamental backdrop for the Canadian multifamily sector, which has likely attracted the bulk of available investor capital; (2) the year-to-date deceleration in market rent growth across the U.S.; (3) supply risk in some of its core markets; and (4) its limited trading liquidity and small market capitalization.”
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Seeing it “situated on high impact prospects with lots of inventory in a small (for now) company,” Eight Capital analyst Christopher True initiated coverage of Calgary-based Coelacanth Energy Inc. (CEI-X) with a “buy” recommendation, believing it offers investors “unique exposure to Montney growth” as well as “high impact production and cash flow growth.”
“Our BUY thesis is based on the fact that CEI provides unique exposure for investors to capture future upside in production and reserves growth in a region that is dominated by more mature E&Ps with larger market capitalizations,” he said. “The company currently sits on approximately 150 sections of land at Two Rivers within the oil window of the Montney fairway situated in Northeast British Colombia and intends to grow production from 0.3 MBOE/d [thousand barrels of oil equivalent per day] to 20 MBOE/d in the next 3 years.”
Mr. True thinks Coelacanth is “being built to be taken out” and already possesses a logical buyer in Vermilion Energy Inc. (VET-T), which owns an 18-per-cent stake and “continues to buy shares on the open market.”
“We think this is where we ultimately see value crystallizing for shareholders,” he added.
Believing its undervalued compared to peers, Mr. True set a target of $1.25 per share. The current average on the Street is $1.07.
“We see material value upside in the ground vs. where Stock is trading at: based on our NAV analysis, we estimate that the market is only pricing-in the development of less than 20 per cent of CEI’s land base,” he said. “We show that as Two Rivers is derisked, we estimate a NAVPS10 as high as $5.49 in a bluesky scenario.”
“Land value vs. recent M&A & Montney peers suggest stock is undervalued. Our analysis shows that on average, the market is attributing $3,750 EV/Ac [enterpise value per relevant land base] of value towards land amongst Montney E&Ps, and more importantly we estimate that VET (BUY; $40.50 price target) attributed $4,785/Ac to land on its acquisition of Mica, which directly offsets Two Rivers. Both of these comps imply a $1.28 and $1.59 share price, respectively, for CEI. We believe that the two aforementioned catalysts could be a re-rate event towards these values.”
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In other analyst actions:
* In response to its updated 2023 guidance and operational update, Canaccord Genuity’s Mike Mueller upgraded Saturn Oil & Gas Inc. (SOIL-T) to “buy” from “speculative buy” with a $5.75 target, down from $6.50 but above the $5.62 average on the Street.
“This year’s guidance has been updated to reflect (1) the impact of curtailed production in H1/23 resulting from the wildfires in Alberta; (2) a delayed start to its winter drilling program; and (3) a reduced capital program this year,” he said. “Development capital is now expected to total $130-million this year, down from $161-million previously, with 60 per cent of the spend occurring between September and December. Average 2023 production is now guided to 24,100 barrels of oil equivalent per day from 27,170 boe/d previously, with December rates expected to average 27,000 boe/d (30,000 boe/d previously). Importantly, SOIL secured an agreement with its lender to defer the September and December principal payments on its term loan. With the deferral, SOIL gains $50-million of headroom this year; although, this does decelerate the pace of debt repayment in the near term. Despite this, we view this as a net positive considering the company would have otherwise needed to further truncate its 2023 capital program to facilitate the aggressive amortization of its term loan, which would have limited the outlook for 2024.”
‘We are upgrading our rating to BUY (from Spec Buy) in light of the support provided to SOIL from its lender, reducing the risk of capital being cut. Leverage remains below 2 times, and we believe the company’s hedge book provides adequate protection to its cash flows over the NTM [next 12 months].”
* Evercore ISI’s Jonathan Chappell cut his target for Canadian National Railway Co. (CNI-N, CNR-T) to US$116 from US$119 with an “in line” rating and raised his Canadian Pacific Kansas City Ltd. (CP-N, CP-T) target to US$86 from US$87 with an “outperform” rating. The average targets are US$128.68 and US$91.42, respectively.
Elsewhere, CIBC World Markets’ Kevin Chiang lowered his CN target to $173 from $175 with an “outperformer” rating.
“We have lowered our Q3 estimates for CN and CPKC to reflect the softer volume environment and fuel lag headwind,” said Mr. Chiang. “The near-term volume environment remains muted but we do expect Q4 volumes to be up quarter-over-quarter as we see signs that the freight cycle is turning. Canadian grain will be a headwind in H1/24E and the labour disruption at the Detroit 3 auto manufacturers adds another layer of uncertainty, but we do foresee an improving macro backdrop entering next year. Further, looking longer term, we believe both CN and CPKC will benefit from unique levers to drive above-average growth.”
* Following Wednesday’s close of its second equity raise in two months, Canaccord Genuity’s Tania Armstrong-Whitworth cut her DRI Healthcare Trust (DHT.UN-T) target to $16.25 from $17 with a “buy” rating, while CIBC’s Scott Fletcher lowered his target to $18 from $20 with an “outperformer” rating. The average is $18.25.
“We believe this latest round, especially as it comes on the heels of the July raise, corroborates management’s messaging that its pipeline is more robust than ever,” said Ms. Armstrong-Whitworth. “The drug royalty space has been extremely active this year given continued weakness across equity markets, particularly for biotechs. We view the timing favourably as shares of DHT had rallied over 40 per cent from the start of the year, up until pre-deal announcement.”
* Morgan Stanley’s Ioannis Masvoulas raised his targets for First Quantum Minerals Ltd. (FM-T) to $32 from $31 with an “underweight” rating and Lundin Mining Corp. (LUN-T) to $13 from $12.10 with an “overweight” rating. The averages are $37.09 and $11.78, respectively.
* Reducing his valuation multiple based on the market backdrop but emphasizing “substantial potential upside” remains, Stifel’s Justin Keywood cut his target for Jamieson Wellness Inc. (JWEL-T) to $45 from $50 with a “buy” recommendation. The average on the Street is $41.10.
“We called 20+ customers in North America, where vitamin demand was said to be steady vs. last year with no recent change in pricing and expectations of strength over the upcoming flu season. youtheory was also unanimously mentioned as a strong brand, including at Costco U.S. stores with formulary advantages for Collagen,” he said. “As we translate the feedback into our forecasts, we see a moderation of our near-term estimates but still in-line with guidance, highlighting good growth and an opportunity. We also expect margins to expand next year (up 150 basis points) and could see JWEL further expanding into the U.S. (#1 VMS market) with additional M&A in the medium-term. JWEL’s stock has been under pressure, down (28 per cent) year-to-date (S&P/TSX, up 4 per cent) and valuation now at a historic low of 10 times forward EBITDA.”
* Following U.S. investor meetings with its management, Stifel’s Michael Dunn bumped his target for PrairieSky Royalty Ltd. (PSK-T) to $27.25 from $27 with a “buy” rating. The average is $26.20.
“Key points of discussion included aspects of PSK’s business that are different from most other oil and gas royaltcos (unleased lands, dominant ownership of W. Canada fee lands, strong balance sheet), its exposure to growth in the Clearwater and Mannville stack, shareholder returns, and management alignment. Our 2024e estimates for oil production/AFFO are up 1.6 per cent/1.1 per cent,” he said.
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With a file from Sean Silcoff and Temur Durrani
David Leeder