Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Vishal Shreedhar thinks Gildan Activewear Inc. (GIL-T, GIL-N) will be “viewed as a credible investment opportunity for financial buyers.”
On Tuesday, Gildan’s board confirmed it has put the Montreal-based clothing manufacturer up for sale following a three-month internal control battle. The Globe and Mail reported it has received a takeover approach from a potential buyer and responded by giving investment banks RBC Capital Markets and Goldman Sachs Group Inc. a mandate to look for additional bidders.
“There are already participants in the wholesale imprinted industry that have private equity participation, including some of Gildan’s competitors and customers,” said Mr. Shreedhar. “Further, we believe that Gildan’s high returns on capital (averaging approximately 16 per cent over 10 years), dominant market share in the wholesale imprinted market, low financial indebtedness (net debt to EBITDA of 1.5 times as of Q4/23), and the potential for improved execution (if the board’s allegations regarding the former CEO’s lack of engagement are accepted) make it an attractive candidate.
“These positive indications are offset in part by Gildan’s high cyclicality, which constricts debt leverage thresholds, and ongoing macroeconomic uncertainty.”
In a research note titled Print this on a t-shirt: For sale, the analyst estimated a 50-per-cent likelihood of a sale at this time with a takeout price of US$43-$50 (or $58-$68) per share. Its TSX-listed shares closed at $50.71 on Tuesday.
“A possible acquisition was not expected by us at this time, but is not surprising - recall our view on Gildan has been that activist pressure would result in increased scrutiny on the company to improve performance,” said Mr. Shreedhar.
Maintaining an “outperform” recommendation, he raised his target to $58 from $52. The average target on the Street is $54.84.
Meanwhile, Stifel analyst Martin Landry sees the likelihood of a transaction as “low.”
“We are not totally surprised by this turn of events as this was a likely outcome we contemplated given the ongoing saga between Gildan’s BOD and activist shareholders,” he said. “This may provide Gildan’s BOD with an argument to delay the AGM in order to have enough time to fully review all alternatives. We believe that the probability of a transaction happening is low given that (1) shareholders supporting former CEO Glenn Chamandy are likely to request a healthy takeout premium given their long-term view, (2) the limited number of strategic acquirers, and (3) the low likelihood of private equity firms meeting shareholders’ valuation expectations. Hence, given our view, we would advise Gildan’s shareholders to take some profit on the back of the stock price increase [Tuesday].”
Mr. Landry maintained a “hold” recommendation and US$36 target for Gildan shares.
Elsewhere, TD Securities’ Brian Morrison raised his target to US$46 from US$42 with a “buy” rating.
=====
RBC Capital Markets analyst Gregory Renza sees few obstacles to British pharma giant AstraZeneca PLC’s (AZN-Q) US$2.4-billion acquisition of Fusion Pharmaceuticals Inc. (FUSN-Q), leading him lower his rating for the Hamilton, Ont.-based company to “sector perform” from “outperform” previously.
“The acquisition of FUSN by AZN is the third large radiopharma M&A over last 12 months, following the Rayze/BMY and Point/LLY deals, and highlights continued enthusiasm from large biopharma in the space,” he said. “FUSN’s strong fundamentals with 1) TAT (225Ac) platform, 2) broad pipeline, 3) supply and manufacturing readiness, and 4) existing partnership with AZN underscore the strength of this transaction.”
“AZN’s $2.4-billion acquisition at $24/share ($21/share in cash + a non-transferrable contingent value right/CVR of $3/share based on FPI-2265′s NDA submission acceptance at first shot by end of summer 2029). The $21/$24 per-share prices represent 97-per-cent/126-per-cent premiums to 3/18′s close and 154-per-cent /190-per-cent premiums year-to-date, validating the clinical value, commercialization potential, and manufacture ability in the radiopharma space, which is our investment thesis for FUSN.”
Seeing shares of Fusion, considered one of Canada’s most promising biotechnology companies, now trading close to fair value, he raised his target to US$21 from US$16 based on the cash value of the deal’s upfront. The average target is currently US$19.08.
“We see low concern for FTC risk (due to the absence of asset overlap) and expect deal closing in 2Q24,” said Mr. Renza. “We see the deal closing in 2Q24, as guided, given limited pipeline overlap and the early status of FUSN’s programs. Upcoming catalysts to watch include: (1) FPI-2265′s preliminary data on 25–30 mCRPC patients from the ph.II TATCIST, mostly pre-Pluvicto patients (AACR, April 9); (2) initiation of the ph.II portion of the ph.II/III registrational trial of FPI-2265 in post-Pluvicto mCRPC (2Q24); (3) initiation of combination trial of FPI-2265 with olaparib in mCRPC (1H24); and (4) update of FPI-1434′s cohort 2 data and next steps (mid-2024).”
Elsewhere, other analysts making changes include:
* William Blair’s Andy Hsieh to “market perform” from “outperform” without a specified target.
“We reiterate our bullish view on the radiopharmaceutical sector and believe investing in the modality will likely provide investors with a secular growth opportunity well into the next decade,” said Mr. Hsieh.
* B. Riley’s Yuan Zhi to “neutral” from “buy” with a US$23 target, up from US$13.
“We believe FUSN shares are being acquired in a fair value range,” he said.
* Truist Securities’ Nicole Germino to “hold” from “buy” with a US$21 target, up from US$11.
“Given our expectation the deal is likely to close without issue, we think the stock is no longer trading on fundamentals and will stay close to (if not at) the proposed deal price,” she said.
* Jefferies’ Andrew Tsai to “hold” from “buy” with a US$21 target, up from US$10.
=====
While Titanium Transportation Group Inc.’s (TTNM-T) 2024 guidance fell short of expectations, Desjardins Securities analyst Benoit Poirier thinks “some management conservatism [is] clearly at play” and thinks investor focus is now on an inflection in the second half of the year as the “trucking cycle continues to bounce along the bottom.”
“Management has a history of under-promising and over-delivering, and its 2024 guidance implies margins below what TTNM achieved in 4Q (despite the Crane integration being completed in 2Q and the possibility of an industry rebound in 2H),” he said. “Thus, we believe TTNM’s 2024 guidance is overly conservative. We now forecast revenue of $500-million and EBITDA of $57-million (13.0-per-cent margin before fuel surcharges), slightly above the implied midpoint of the new guidance.”
After the bell on Monday, the Bolton, Ont.-based provider of transportation and logistics services reported fourth-quarter 2023 results that were deemed “solid” by Mr. Poirier. Revenue of $119-million and adjusted earnings per share of 3 cents both topped the estimates of both the analyst ($118-million and 2 cents) and the Street ($117.7-million and 2 cents).
However, Titanium’s guidance implied 2024 EBITDA of $49-61-million based on revenue of $490-$510-million, which fell below both Mr. Poirier’s projection of $62-million and the consensus of $59-million. He attributed a portion of that difference to a “slightly” lower EBITDA margin expectation from its Truck Transportation segment given the ongoing integration of its 2023 acquisition of Georgia’s Crane Transport of Georgia for US$53-million.
“Looking ahead to 1Q, which is a seasonally weaker quarter, management expects slightly lower margins because of the Crane integration,” he said. “TTNM expects the integration to continue until the end of 2Q24. Based on these comments and the latest spot market data, we now forecast the TT segment’s EBITDA margin regressing to 16.4 per cent in 1Q and 18.1 per cent for 2024 (driving EBITDA of $45-million).
He added: “We remain confident that TTNM can offset the cost headwinds over the next year as it will be protected by the TL contracts in place, the logistics pass-through business, a now fully refreshed fleet and its proprietary technology platforms.”
Trimming his 2024 revenue and earnings expectations to reflect the guidance, Mr. Poirier lowered his target for Titanium shares to $6 from $6.25, maintaining a “buy” recommendation. The average target on the Street is $5.02.
“We believe TTNM’s shares offer good value for long-term investors at the current level of only 5.0 times EV/FY2 EBITDA,” he concluded.
Elsewhere, Paradigm Capital’s Alexandra Ricci cut her target to $4.85 from $5.75 with a “buy” rating.
“Titanium Transportation is at an inflection point,” she said. “With a stable business in an established industry, the company is pursuing organic growth through a rapid U.S. expansion strategy for the logistics brokerage business, and an acquisition strategy in Canadian and new U.S. asset-based trucking. What makes TTNM unique is its grasp on technology. It has successfully emerged as a leader in integration and operating technologies which are enhancing efficiencies, unlike many of its peers. We think TTNM is heading into a multi-year period of above industry average growth.”
=====
ATB Capital Markets analyst Patrick O’Rourke thinks the Canadian energy market has begun to “clearly differentiate between higher and lower quality business models” over the past year, “driven by an M&A cycle that has instructively placed a premium on inventory in transaction multiples.”
“As a result of the clear differentiation, we currently view stock picking within the sector as inherently more challenging, where investors will have to weigh a trade off between lower-quality and higher-risk business models and assets at cheaper valuations and higher-quality, lower-risk assets at more expensive valuations, and the breadth of alpha is likely to narrow,” he added. “We favour higher-quality business models, at opportunistic valuations and favour names such as ARX, ATH, CVE, and TVE at this time.”
In a research report released Wednesday wrapping up earnings season in the sector, Mr. O’Rourke emphasized commodity price volatility continues to make stock picking difficult and warned further uncertainty lingers.
“[With] WTI prices now exceeding US$82.00/bbl (from $71.65/bbl at year-end 2023), companies within our coverage universe are gearing up to generate significant FCF in 2024, already seeing the TSX Energy subindex as the best performing subindex year-to-date (up approximately 14.5 per cent YTD vs the TSX at up 4.3 per cent),” he said. “Current benchmark oil prices and Canadian heavy oil differentials have already seen a considerable improvement YTD (WCS Hardisty differential has improved 37 per cent YTD to US$12.30/bbl, from US$19.50/bbl) and are anticipated to further improve through 2024 (WCS Hardisty diff Q3/24 futures are trading at US$10.95/bbl) with TMX potentially fully complete by the end of May and first waterborne exports are now anticipated by the end of June; current natural gas pricing is affected by a lack of winter heating demand, but in the near-term there is strong potential to see a La Nina event by summer 2024 (NOAA predicts a more than 60-per-cent probability by summer, >80% by late summer) following the strong El Nino winter, along with the imminent start-up and commissioning of LNG Canada, leading to a potentially improving natural gas pricing environment in H2/24 and into 2025.”
“With 2023 reserve reporting now complete for our universe, we wanted to highlight the considerable strength seen across our coverage in terms of reserve efficiency, intrinsic value per share growth, and inventory depth, highlighting some of the strongest 2023 reserve reports in our universe from ATH, SCR, and CNQ that incrementally supported both reserves magnitude and quality.”
After updating his financial models, the analyst made a series of target price adjustments. His changes are:
- Athabasca Oil Corp. (ATH-T, “outperform”) to $6 from $5.50. The average on the Street is $5.86.
- Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $107 from $100. Average: $100.79.
- Crew Energy Inc. (CR-T, “strong buy”) to $6.50 from $7.25. Average: $6.85.
- Imperial Oil Ltd. (IMO-T, “sector perform”) to $90 from $85. Average: $86.61.
- Kelt Exploration Ltd. (KEL-T, “outperform”) to $8.50 from $9. Average: $8.18.
- Meg Energy Corp. (MEG-T, “outperform”) to $35 from $32. Average: $31.15.
- Prairiesky Royalty Ltd. (PSK-T, “sector perform”) to $27 from $26.50. Average: $26.31.
- Tourmaline Oil Corp. (TOU-T, “outperform”) to $80 from $85. Average: $77.25.
=====
Despite reducing his 2024 and 2025 expectations for Rubellite Energy Inc. (RBY-T) following last week’s guidance release, Stifel analyst Michael Dunn continues to see the Calgary-based company as “an attractively valued, high-growth, Clearwater heavy oil producer” and sees “significant upside to the shares relative to recent levels.”
“Aligning our 2024 estimates with the midpoints of newly revealed 2024 guidance for 4,600-4,900 boe/d [barrels of oil equivalent per day] on E&D capex of $70-$75-million, as well as cash cost guidance, sees our 2024 estimates for E&D capex, production, and AFFO fall by 5 per cent, 7 per cent, and 12 per cent, respectively. Guidance for G&A costs ($5.50-$6.00/boe) and royalty rates were higher than we were modeling.
“Similarly, our 2025 capex, total production, and AFFO estimates are reduced by 6 per cent, 4 per cent, and 11 per cent (up 7 per cent year-over-year), respectively, with our production estimate benefiting from natural gas production post-start-up of RBY’s capital-efficient $7-million gas plant project in 1Q25.”
With his forecast changes, Mr. Dunn trimmed his target to $3.60 from $3.80 with a “buy” rating. The average is $3.70.
“We rate the shares a BUY. Rubellite offers investors exposure to a smaller entrant into the Clearwater play, with a potentially very material valuation premise predicated on de-risking its land base on a play that is generating some of North America’s highest rate of return wells in the past couple of years,” he concluded.
=====
In other analyst actions:
* TD Securities’ Aaron Bilkoski upgraded Kelt Exploration Ltd. (KEL-T) to “buy” from “hold” and raised his target to $8 from $7.50. The average on the Street is $8.13
* BMO’s Rene Cartier initiated coverage of NGEx Minerals Ltd. (NGEX-T) with an “outperform” rating and $11 target. The average is $11.08.
“In our view, continued exploration success to further define the exploration potential at Lunahuasi is underpinned by an established large-scale resource at Los Helados. The Los Helados and Lunahuasi projects proximity advantages itself for the introduction of a strategic partner, project synergies, or potential M&A,” he said.
* CIBC’s Hamir Patel raised his Adentra Inc. (ADEN-T) target to $45 from $40, reiterating an “outperformer” rating. The average is $48.58.
* TD Securities’ Craig Hutchison cut his target for Mag Silver Corp. (MAG-T) to $18 from $20 with a “buy” rating, while Stifel’s Stephen Soock trimmed his target to $19 from $20 with a “buy” recommendation. The average is $20.18.
“This morning, MAG released its 4Q23 and full-year financial results after pre-reporting production from Juanicipio of 4.5Moz Ag and 10.5koz Au (100-per-cent basis). Adj EPS of $0.15 came in higher than our expected $0.12 driven by lower TC/RCs and CFPS of $0.17 vs our $0.24 missed our estimate due to higher cash taxes paid,” said Mr. Soock. “MAG received $18.7-million in cash from the JV in 4Q, less than the $28-million we modeled. We believe the market is focused on the magnitude of capital that can be returned to them (dividends/buybacks) from MAG starting in a few months. We expect capital expenditures to increase going forward driven by a stronger peso and Mexican inflation and look for the updated technical report next week for details. Overall, our NAV has decreased by 5.2 per cent to $13.90 per share.”
* CIBC’s Stephanie Price cut her Street-high target for Telus International Inc. (TIXT-N, TIXT-T) to US$20 from US$21.50, keeping an “outperformer” rating. The average is US$12.23.
David Leeder