Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Adam Shine thinks he’s stretch his valuation for Thomson Reuters Corp. (TRI-T, TRI-N) “enough” in recent months, seeing potential growth through 2025 already priced into the stock.
Accordingly, he lowered his recommendation to “underperform” from “sector perform” ahead of the Toronto-based information and software provider’s Investor Day event on March 12, awaiting details on “an expanding addressable market and growth opportunities ahead but all of this has seemingly been baked into the stock.”
“TRI now trades at EV/EBITDA of 27 times 2024 estimates & 24.4 times 2025 estimates, with U.S. information publishers, respectively, at 23 times & 20 times consensus estimates and Europeans at 17.5 times & 16 times,” said Mr. Shine. “The stock has moved on from these peers and especially up in valuation with a further kicker post-Q3 after it offered elements of its GenAI roadmap (traction begins in H2) and then multi-year guidance (mostly in line) with its Q4 two weeks ago. TRI is pushing toward a market cap of $100-billiom, rarefied air in Canada. The Magnificent 7 (Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), Tesla (TSLA), all trade on NASDAQ and unrated) which continue to drive U.S. markets trade at a median of 21 times & 20 times. Standing out among this group for their GenAI-related positioning are Microsoft and Nvidia which trade at 23 times & 19.6 times and 28 times & 24.7 times, respectively.
“TRI may have performed remarkably well post-2019 and has offered an attractive outlook, but its valuation is stretching to and beyond even the most magnificent.”
In a research note released mid-day Monday titled GenAI Offers Oxygen to Future Growth, Valuation Helium Inflated, Mr. Shine questioned the Thomson Reuters’ ability to see further gains in the near term.
“Organic/total revs growth in 2024 seen as 7.5 per cent/8 per cent for Big 3 and 6 per cent/6.5 per cent for consolidated with Adj. EBITDA margin of 43 per cent for Big 3 and 38 per cent for consolidated with FCF $1.8-billion,” he said. “Looking out to 2025-2026 timeframe, organic growth is to be 8-9 per cent for Big 3 and 6.5-8.0 per cent for total with 75 basis points margin expansion in 2025 and 50 basis points in 2026. Capital intensity is poised to decline to 8.0 per cent from guided 8.5 per cent in 2024, with FCF in range of $2.0-$2.1-billion in 2026.
“TRI will host an Investor Day on March 12. Its last Investor Day was on March 16, 2021. The stock was up 10 per cent from its Q4/20 reporting and a week after the Investor Day. TRI is up 7.5 per cent since its Q4/23 results and 34 per cent since its Q3/23 reporting. Over the past six months, TRI is up 23 per cent vs. Magnificent 7 up 26 per cent.”
Mr. Shine maintained a target of $210 per share. The average target on the Street is $204.31.
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IA Financial Corp. Inc.’s (IAG-T) fourth-quarter 2023 results represented “a soft end to the year,” according to National Bank Financial analyst Gabriel Dechaine, who emphasized its capital position provides downside support.
After the bell on Tuesday, the Quebec City-based insurance and wealth management company reported underlying earnings per share of $2.34, missing both Mr. Dechaine’s $2.40 forecast and the consensus estimate of $2.47 due largely to higher corporate expenses and weakness in its U.S. results. Reported EPS of $2.46 were also lower than anticipated ($3.95 and $3.16, respectively) stemming from a $56-million post-tax actuarial charge.
“Although assumption changes from policyholder behaviour were positive, offsetting charges emanated from mortality/morbidity, expense and other/model changes and assumption updates,” he said. “In-period P&L charges were more than offset by a full year of increases to the Risk Adjustment, an IFRS 17 liability category that amortizes into future earnings. In our opinion, the actuarial assumption changes should be viewed in their totality through the P&L and the balance sheet (yielding a net positive figure for the full year).”
The analyst also pointed to struggles south of the border with its U.S. segment earnings sliding 4 per cent year-over-year (or 20 per cent pre-tax).
“Performance has been hindered by weaker U.S. auto sales (resulting in Warranty profits falling 34 per cent year-over-year) and a 14-per-cent year-over-year increase in U.S. segment expenses, continuing a trend that could persist into 2024. IAG’s outlook comments include ‘taking action to grow sales and earnings in a challenging environment’. We believe the details behind these plans will be a focus on [Wednesday’s] call.”
While he believes its buyback program, which he expects to result in the repurchase of 5 million shares on top of 5.4 million in 2023, should protect investors from further downside, Mr. Dechaine cut his target for iA Financial shares to $102 from $104 after reducing his estimates based on higher expenses and lower U.S. profits, keeping an “outperform” rating. The average target on the Street is $101.25.
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Raymond James analyst Steve Hansen thinks the market’s reaction to Methanex Corp.’s (MEOH-Q, MX-T) announcement of a delay to the startup of its Geismar 3 project as “overblown” and continues to see “solid value” in its shares.
The Vancouver-based company dropped 10.5 per cent on Tuesday after it said commercial production at the facility has been pushed back to late in the third quarter from the first quarter previously due to the discovery of damaged refractory bricks in the plant’s autothermal reformer unit.
“We have trimmed our 2024 EBITDA estimate by $185-million (approximately 20 per cent), primarily on account of: 1) lost G3 production (1.2 million metric tons); and 2) added short-term costs associated with pre-arranged feedstock arrangements (oxygen supply, gas hedges),” said Mr. Hansen. “Importantly, these revisions fail to account for any market response and/or improved timeline that could emerge.”
“Incremental capital costs are expected to be modest ($25-50-million), with management indicating total capital cost will not significantly exceed the high-end of its guidance range ($1.3-billion). For context, this implies $110-million in residual spending through 2024 (vs. 4Q23 cash: $458-million). While there could also be associated insurance proceeds, we do not model any at this time.”
While he thinks methanol prices will provide a “partial offset,” the analyst trimmed his target to US$62 from US$67 with an “outperform” rating, calling the news a “disappointing development.” The average on the Street is US$54.82.
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Calling it “a precious metals producer with a critical minerals tilt,” BMO Nesbitt Burns analyst Raj Ray initiated coverage of Centerra Gold Inc. (CG-T) with an “outperform” recommendation on Wednesday.
“Centerra is one of the few intermediate gold producers that offers meaningful exposure to copper within its core portfolio, which includes the flagship Mt Milligan copper-gold mine in Canada and the Öksüt gold mine in Türkiye,” he said. “2024 is expected to be a high-water mark for gold production (gold:copper split 75:25), but at steady state (2025 and beyond), copper exposure is expected to be 31 per cent based on revenue. This should find favour with ESG focused investors that are looking for gold exposure with a meaningful green metals tilt in a stable jurisdiction.”
In a report titled In for a Cent, In for a Dollar, Mr. Ray touted the miner’s “renewed management and steady business outlook.”
“Following a few tumultuous years (nationalization of the company’s major asset Kumtor, Kyrgyz Republic in 2022 and suspension of Öksüt in 2022-2023 over mercury in ADR circuit), 2024 presents the first stable business environment for Centerra, which bodes well for a steady operational and strategic outlook. The relatively new management under CEO, Paul Tomory (joined May 2023) and COO, Paul Chawrun (joined September 2022), is taking a renewed look across the asset base including improvement initiatives and portfolio rationalization opportunities,” he said. “The recently announced amendment to the Royal Gold stream agreement is a strong example of a positive step by management to unlock Mt Milligan’s growth potential.”
Believing its “solid” balance sheet and “strong” free cash flow profile provide capital allocation flexibility an seeing its non-core molybdenum business brining optionality, the analyst set a $10 target for Centerra shares. The average on the Street is $10.25.
“Centerra is well-positioned vis-à-vis its peers given relatively steady operational outlook, stable jurisdictional exposure, a strong balance sheet, and peer-leading FCF and capital returns,” he said. “While this should provide share price tailwinds, investors also expect better visibility on Centerra’s idled/development stage assets, which could help with the re-rating depending on the outcome.”
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Scotia Capital analyst Mario Saric maintained his “neutral thesis” on SmartCentres Real Estate Investment Trust (SRU.UN-T) following last week’s release of fourth-quarter 2023 results that fell narrowly below his expectations.
“Our key estimates fall an average of 3 per cent, worse than peer average to date and more consistent with average 1-2 per cent for our coverage so far,” he said. “It was another quiet quarter for capital recycling, while occupancy still leads Retail REIT peers with the offset = slightly lower lease renewal spreads. "
Excluding various adjustments, Mr. Saric estimates the REIT’s fourth-quarter recurring funds from operations per unit came in at 52.5 cents, down 4 per cent from the previous quarter (54.7 cents) and below both his 53.4-cent estimate and the consensus projection of 54.8 cents. He attributed the miss to higher common area maintenance (CAM) costs, bad debt and expenses.
Mr. Saric said his stance on the Toronto-based REIT is based on its above-average financial leverage and below-average 2023-2025 adjusted funds from operation per unit growth rate.
“We think residential density dispositions could improve both although a tough land market may constrain both ability and appetite to do so in 1H/24,” he said. “Net-net, barring a significant economic downturn, we believe investors get a sustainable 7.7-per-cent distribution yield, which comprises most of our 12-per-cent expected NTM [next 12-month] total return (vs. 21 per cent and 22 per cent sector and peer average).”
Mr. Saric trimmed his target for SmartCentres units to $25 from $25.50, reiterating a “sector perform” rating. The average is $26.28.
Elsewhere, RBC’s Pammi Bir cut his target to $28 from $29 with an “outperform” rating.
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Eight Capital analyst Adhir Kadve is “incrementally positive on the opportunity ahead” for Coveo Solutions Inc. (CVO-T), emphasizing its partnership with German multinational software giant SAP SE as “a key growth driver” and seeing “robust” opportunities come from artificial intelligence.
“A key partnership which is expected to help accelerate revenue growth in F25 is Coveo’s relationship with SAP,” he said. “Recall that SAP leverages Coveo’s Search and Recommendations capabilities to further enhance its SAP Commerce Cloud platform (formerly known as Hybris). The SAP platform has 3,000 customers who run more than $1-trillion in GMV through the SAP platform. Further enhancing the relationship is Coveo’s Endorsed status within the ecosystem, which incentives SAP sales representatives to sell Coveo’s search capabilities to the same degree as any SAP function. Further, the pipeline generated through the SAP channel includes qualified leads with larger ACVs that come with lower acquisition costs and a higher propensity to close, thus accretive to margins.”
During Eight Capital’s annual innoVIII Technology conference in Toronto last week, Coveo CFO Brandon Nussey touted the “significant” opportunities from AI for Montreal-based company and “more broadly within software spending.”
“Internally at Coveo, he spoke about the ROI that Coveo Relevance Generative Answering (RGA) presents for its end customer, which comes from being able to automate more laborious processes, leading to cost savings,” said Mr. Kadve. “Recall that RGA recently contributed to 20 per cent of Coveo’s Q3 bookings (which happened to be one of the strongest booking quarters for the company in nearly two years). In our view, the product continues to show strong product-market fit, which bodes well for continued adoption of the product. Further, Mr. Nussey contrasted previous technology themes, such as the advent of the internet, the mobile and more recently, the growth of cloud computing and the current AI adoption theme. To which Mr. Nussey noted that he believes every technology cycle only increases the rate of adoption, and that he believes that the current AI adoption cycle will only continue this trend.”
Reiterating his “buy” recommendation for Coveo shares, the analyst hiked his target to $16 from $13.50, exceeding the $13.70 average on the Street.
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In other analyst actions:
* TD Securities’ Mario Mendonca lowered Manulife Financial Corp. (MFC-T) to “buy” from “action list buy” with a $37 target, up from $35. The average on the Street is $34.21.
* TD Securities’ Greg Barnes downgraded Wheaton Precious Metals Corp. (WPM-N, WPM-T) to “hold” from “buy” with a US$51 target, down from US$58 and below the US$58.21 average. Elsewhere, BMO’s Jackie Przybylowski cut her target to US$59 from US$61 with an “outperform” rating.
* Cormark Securities’ Garett Ursu upgraded Valeura Energy Inc. (VLE-T) to “top pick” from “buy” and bumped his target to $10 from $9. The average is $8.67.
* TD Cowen’s Helane Becker raised her Air Canada (AC-T) target to $34 from $30, exceeding the $29.16 average, with an “outperform” rating.
* CIBC’s John Zamparo lowered his target for shares of Aurora Cannabis Inc. (ACB-T) to $6 from $8 with a “neutral” recommendation. The average is $8.02.
“The MedReleaf Australia acquisition should add to ACB’s FCF modestly, and it brings more exposure to a higher-margin market with growth. Even if the country is eventually crowded with competitors, valuation (at 1 times P/S) is reasonable, especially given the deal is mostly paid for in stock. Aurora’s balance sheet has improved materially versus prior years; we still believe investors will be reluctant to give credit until FCF —unadjusted — is achieved. On this front, guidance was reiterated for positive FCF late this calendar year,” said Mr. Zamparo/
* TD Cowen’s Oliver Chen raised his Canada Goose Holdings Inc. (GOOS-T) target to $21 from $17 with a “market perform” rating. The average is $17.80.
* Jefferies’ Christopher LaFemina cut his First Quantum Minerals Ltd. (FM-T) target to $13 from $15 with a “hold” rating. Others making changes include: CIBC’s Bryce Adams to $14 from $15 with a “neutral” rating. The average is $15.65.
* RBC’s Luke Davis cut his Gran Tierra Energy Inc. (GTE-T) target by $1 to $9 with a “sector perform” rating. The average is $15.19.
“Gran Tierra’s Q4/23 results were largely pre-released with cash flow slightly below expectations,” he said. “Production volumes are trending favourably to date in 2024, which management expects to continue into the second quarter as new wells are brought online. The company will be hosting an investor day in Colombia midMarch, which we view as the next potential catalyst for the stock.”
David Leeder