Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Giuliano Thornhill sees retailer-owned triple-net-lease (NNN) real estate investment trusts as “low-risk investments, fit for investors looking to hedge against wider systemic risks.”
“Low vacancy risks, stable rental growth/long-dated lease profile, in addition to substantial in-place counterparties, lead to fewer upside/downside variances,” he added. “These investments are best suited to an investor looking for a stable source of yield owing to these de-risking attributes. The primary differentiator between the three is the end markets each focuses on: dealerships (APR.UN), discretionary/auto repair (CRT.UN) and grocery retail/supply chain (CHP.UN), leading to varying risk profiles.”
In a research report released Friday, Mr. Thornhill initiated coverage of the “steady” three REITs, emphasizing they offer investors an enticing combination of stability and yield.
“As economic activity has waned in response to the BoC’s efforts to tame inflation, industrial space has been steadily added owing to its quick build time,” he said. “Meanwhile, multi-family is contending with its first period of uncertainty in years on the immigration front and softening per capita fundamentals. To contrast, neglect by retailers seeking expansion in favour of supply chain ops has left the current backdrop of retail in one of its best positions in years, albeit after years of low expectations induced by COVID. When accounting for the additional uncertainty, retail’s long-dated lease/distribution profile may come in favour relative to other investments if fundamentals remain strong as rates/alternative yield instruments ratchet lower.”
His ratings and targets are:
* Automotive Properties REIT (APR.UN-T) with an “outperform” rating and $13 target. The average target on the Street is $13.17.
Analyst: “The most bond-like of the bunch, we see this the most likely to benefit from lower rates owing to 1) the M&A strategy picking up as dealers monetize real estate holdings, 2) its financing strategy, and 3) the most torque to a soft landing scenario. In addition, we believe there remains the widest valuation gap between the current trading price.”
* Canadian Tire REIT (CRT.UN-T) with a “sector perform” rating and $16.25 target. The average is $16.
Analyst: “Since IPO, CRT has consistently grown its AFFO/u and distribution - leading to strong performance over this period. We like the balance sheet, on-site intensification and more limited development intensity. Most importantly, CRT is core to the CTC corporate strategy. However, we would prefer to wait for a better entry point than currently, amid softening growth prospects for discretionary spend among its anchor tenant.”
* Choice Properties REIT (CHP.UN-T) with a “sector perform” rating and $15.50 target. The average is $15.75.
Analyst: “One of the highest quality REITs on offer, possessing an inexpensive cost of capital amid a declining leverage profile. Grocery-anchored retail continues to be a sought-after asset class owing to its resiliency, and we do not view this any differently. Valuation, in our view, is reflective of this fact. We have set our price target near our NAV, and in line with its five-year average.”
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Calling it “a moody year to say the least,” RBC Dominion Securities analyst Pammi Bir and Jimmy Shan believe macro narratives will “remain the driver’s seat” in the next 12 month as Canadian REITs “limp to the 2024 finish line.”
“The sector’s Q3/24 rally turned out to be a summer fling,” they said. “Having given back a good portion of its gains in Q4 to date, the TSX REIT Index posted a 1-per-cent year-to-date total return (to Dec-12/24), well behind the TSX Composite (up 25 per cent YTD) and S&P 500 (up 29 per cent). Of note, the sector is on pace for its third consecutive year of underperformance vs. the TSX. In the global context, Canadian REITs lagged their counterparts in the U.S. (up 13 per cent YTD) and Asia (up 3 per cent) but edged ahead of Europe (flat).”
In a report released Friday, the analysts did hint at the presence of “levers to support stronger 2025 returns, incl. additional monetary policy support, healthy fundamentals, decent earnings growth, and valuations that look increasingly appealing.”
“At the time of writing, listed real estate on both sides of the border is under pressure as bond yields rise amid a more hawkish tone from the Fed,” they said. “We believe other factors have also weighed on Canadian REITs, including a lethargic economic outlook, moderating fundamentals in previously favoured subsectors, and U.S. investor outflows. Tack on immigration curbs, & well, investors have lots to be anxious about. Still, we see reasons for optimism. Indeed, we believe the sector can deliver stronger 2025 performance, supported by: 1) further anticipated BoC policy easing; 2) healthy fundamentals in most property types; 3) decent earnings & NAV growth (low-to high-single digit percentage); 4) liquidity at record levels; and 5) valuations that look well within reason. Potential compression at the long end of the yield curve could also light a spark under fund flows, in both public & private markets.
“Our recommended subsector positioning balances growth expectations and valuation. Our pecking order has seniors housing at the top (valuations well-supported by superior earnings growth), followed by industrial (normalizing fundamentals, yet earnings growth stacks up comparatively well with heavily discounted valuations), multi-family (above historical average NOI growth with cloudier outlook), retail (good value for solid fundamentals and steady earnings growth), self-storage (feeling effects of weaker consumer and low housing activity) and office (recovery requires more time).”
The analysts concluded that the recent pullback has pushed valuations to “more appealing” levels.
“At 19 per cent below NAV, we see a sizeable cushion for error,” they said. “Still, we believe investors continue to place more weight on cash flow multiples and implied cap rates amid slower deal flow. With that in mind, the sector’s trading at 15 times N12M AFFO [next 12-month adjusted funds from operations] (6.6-per-cent AFFO yield)/7.1-per-cent implied cap rate. Notably, the AFFO yield spread to the 10Y GoC (348 bps) has risen closer to the LTA (361 bps), with the current 396 bps implied cap rate spread also approaching long-term levels (422 bps). While stronger macro support from lower rates and better economic visibility are likely prerequisites for more robust inflows, we see compelling entries available in our top picks.”
“Our top picks include names where we see superior operational resilience and/or discounted valuations: BEI, CAR, CIGI, CSH, DIR, FCR, GRT, HOM, HR, IIP, KMP, MHC, MI, MRG, PMZ, REI, SRU, SVI.”
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Following Thursday night’s release of better-than-anticipated quarterly results, TD Cowen analyst Daniel Chan upgraded BlackBerry Ltd. (BB-N, BB-T) to “buy” from “hold” previously, citing its current valuation and improved cash flow expectations.
“Reported results this quarter were a bit messy, with some metrics including Cylance (EBITDA, net income), while the others exclude it,” he said. “Although consolidated EBITDA included Cylance’s significant losses, it still beat our estimate that excluded Cylance’s losses. EBITDA excluding Cylance is likely significantly higher than what was reported, implying a more significant beat than the headline numbers.”
“While guidance and some KPIs suggest continued SC volatility, we cannot ignore the substantial improvement in the expected FCF generation from the entire business, which are likely helped by substantial NOLs from Cylance.”
In justifying his change, Mr. Chan argued the Warerlloo, Ont.-based company (and investors) are “getting Secure Communications (SC) for free.”
“As we noted in the past, Cyber’s financial profile ex-Cylance is attractive,” he said “Coupled with a favourable deal to divest Cylance, we believe the shares are undervalued.
“DCF implies $3.80 valuation for IoT, and $1.10 for SC. What has changed to leave us more positive since four days ago, when the Cylance divestment was announced, are that the Cylance NOLs are much larger than we anticipated at 100s of millions and that FCF conversion is expected to be much higher than we were modeling. We had initially estimated 50-per-cent FCF conversion on both business lines. We believed that BlackBerry’s UEM infrastructure required continuous investments, consistent with historical operations. Management is being far more prudent on capital deployment, in addition to expense discipline, to maintain the business, rather than grow it. Consequently, SC FCF conversion could be over 80 per cent. IoT conversion could be 60-70 per cent. The risk is that underinvesting leads to higher churn, but we believe this risk could be less for BB given its government and regulated customers.”
Mr. Chan increased his target for BlackBerry shares to US$4 from US$3.25. The average is US$3.45.
“BB is trading at 3.1 times forward revenue, well below cyber peers at 10.6 times and IoT peers at 4.9 times,” he said. “While a discount is likely warranted for the SC segment, given low growth and lacklustre KPIs, we believe a 2.0 times revenue multiple (to line up with our DCF) is fair. We continue to believe the IoT segment is deserving of a premium given its market dominance and highly defensible position.”
“We rate BlackBerry Buy, given its low valuation relative to expanding margins and expected cashflow improvements. The Secure Communications segment should be stable with government and regulated enterprise customers following the Cylance divestment, while IoT remains in a dominant position within the automotive sector.”
Elsewhere, Canaccord Genuity’s Kingskey Crane bumped his target to US$3 from US$2.80 with a “hold” rating.
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RBC Dominion Securities analyst Matthew McKellar thinks housing affordability will remain a “constraint” for wood products demand, but he expects stronger lumber prices driven by significant recent permanent curtailments.
“Looking into 2025, we continue to see a good opportunity in containerboard producers International Paper Company and Smurfit WestRock PLC, driven by an ongoing cyclical recovery, improved focus on value over volume, and opportunities to capture efficiency benefits and drive stronger margins,” he said. “We also continue to like the setup for lumber producers (our top ideas: Interfor Corp., West Fraser Timber Co. Ltd., Canfor Corp.) given capacity reductions through the downturn that we think have been significant enough to drive a tighter market in 2025.”
In a 2025 outlook for paper and forest products producers released Friday, Mr. McKellar highlighted three companies as his top Canadian picks for the year ahead.
* Interfor Corp. (IFP-T) with an “outperform” rating and $26 target, down from $27. The average on the Street is $25.50.
Analyst: “We expect Interfor to continue pursuing high-return capital projects and further acquisitions over the medium term, although we think delevering is Interfor’s top priority over the near term. We view the company as well-positioned to maximize pricing realizations given its flexible, geographically diversified lumber platform, and we expect additional margin expansion over the longer term as it optimizes its expanded sawmill system. At the same time, NA lumber supply will likely be further constrained due to fiber challenges in BC.”
* Doman Building Materials Group Inc. (DBM-T) with an “outperform” rating and $11 target. The average is $11.75.
Analyst: “We think Doman’s business model as a distributor is attractive relative to more commodity-exposed names under our coverage, particularly after the company took steps to reduce its inventory levels. We think Doman can continue to execute on growing in the U.S. over time, including through M&A that helps to expand its scale and geographic reach.”
* Canfor Corp. (CFP-T) with an “outperform” rating and $19 target, falling from $21. The average is $21.67.
Analyst: “The company’s geographic diversification into the U.S. South and Europe should benefit its lumber segment, as BC faces a supply and demand imbalance. We anticipate BC to remain a very difficult operating area for the foreseeable future. We think housing fundamentals over the long term remain favourable, which should be beneficial for Canfor.”
He also named Vancouver-based West Fraser Timber Co. Ltd. (WFG-N, WFG-T) as a top U.S. idea. He has an “outperform” rating and US$117 target for its shares.
“West Fraser Timber Co. Ltd. is the largest producer of both lumber and oriented strand board in the world, and has operations in Canada, the United States, and Europe,” he said. “The company is among the lowest-cost producers of both wood products. It also owns Cariboo Pulp & Paper and has a 50-per-cent interest in Alberta Newsprint. We expect that, over time, West Fraser will benefit from exposure to growing end-markets.”
Mr. McKellar also cut his target for Canfor Pulp Products Inc. (CFX-T, “sector perform”) to $1 from $125 and raised his target for Cascades Inc. (CAS-T, “sector perform”) to $13 from $12. The averages are $1.50 and $12.50, respectively.
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Citi analyst Alexander Hacking sees Barrick Gold Corp. (GOLD-N, ABX-T) possessing a discount valuation, however he remains “cautious” and warns of “too many moving parts to click in the near-term.”
“We update our Barrick model to reflect latest guidance & updated commodity price forecasts from Citi’s global commodity team,” he said. “Citi remains bullish gold seeing prices closing in on $3,000/oz by end-2024 based on a combination of deterioration in the U.S. labor market, still high interest rates weighing on growth, and higher ETF demand (note: albeit Fed expectations were reined in this week).
“Barrick’s stock appears to have many potential sources of latent value – including PV full potential, Fourmile, Lumwana expansion & Reqo Diq, with updated studies on the latter two due early next year.”
In a Friday note, Mr. Hacking lowered his 2024 earnings per share forecast to US$1.24 from US$1.41, which is 3 US cents below the consensus. His 2025 and 2026 projections slid to US$2.15 and US$2.10, respectively, from US$2.66 and US$3.36, but both remain above the Street’s estimates (US$1.78 and US$1.77).
Reiterating a “neutral” rating for Barrick shares, Mr. Hacking cut his target to US$17 from US$23.
“Target price is reduced to $17/sh from $23/sh based on 0.9 times NAV at $2,200/LT gold,” he said. “This is reduced from 1.1 times and 30-per-cent discount to peers to reflect risk factors (Reqo DIq Mali, operating performance).”
“We rate Barrick Gold Neutral. Positive factors include low operating costs, a stable balance sheet, new management with a strong operating track record, and potential upside from synergies at the new Nevada JV. Negative factors include some challenging legacy assets, geopolitical risk, challenges to grow production from such a large base, and limited FCF. On balance, we see equal upside and downside at current levels.”
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Scotia Capital analyst John Zamparo sees the potential for Alimentation Couche-Tard Inc. (ATD-T) to increase its earnings per share performance “meaningfully” in the coming years “whether it’s a massive deal for Seven & i Holdings Co., a series of medium transactions, or billions worth of buybacks.”
“Paired with moderate valuation relative to peers and other quality consumer large caps, and improved prospects in the company’s fuel segment, we view this stock positively,” said Mr. Zamparo.
“It’s rare to find a period of underperformance from ATD – it hasn’t posted a negative annual return in the last decade. In our view, the mediocre performance through 2024 represents an attractive buying opportunity before inevitable accretive capital deployment from an under-levered balance sheet.”
Resuming coverage of the Montreal-based company with a “sector outperform” recommendation on Friday, he thinks “rolling a Seven would be a stroke of luck” as its pursuit of the Japanese parent of 7-Eleven drags on.
Andrew Willis: At 7-Eleven, Couche-Tard wins by losing out
“Seven & i would be more than 15 times larger than any deal ATD has done,” he said. “We project a significant 38-per-cent EPS accretion, assuming divestiture of 20 per cent of acquired U.S. stores. We assume lower-than-usual synergies (15 per cent of acquired EBITDA), but cost savings could still exceed $1 billion. In this scenario, ATD ceases buybacks and directs all FCF to de-leveraging, moving from 4 times post-deal to under 3 times in two years. Insider’s family deal no sure thing.
“The probable outcome for Seven & i appears to be a buyout from the founding Ito family. However, this is speculative for two reasons. First, such a deal would house Seven & i’s 7-Eleven business with Family Mart, combining for 70-per-cent market share in Japan. That concentration ultimately may not matter for a company deemed strategically important to the country, but it’s hardly irrelevant. Second, there’s no certainty the reported $58-billion offer is accurate, or that it reflects the equity value, rather than EV.”
Given that uncertainty, Mr. Zamparo emphasized “Plans B and C [are] still compelling.”
“If ATD loses out on Seven & i, further M&A is still likely,” he said. “Convenience remains highly fragmented, with more than 60 per cent of stores independent or in a chain with less than 10 locations. Fragmentation alone, however, lacks a compelling investment thesis. We take a constructive position because of ATD’s success in asset integration and synergy generation (a rate-cutting cycle helps). The next source of capital deployment involves buybacks. If ATD increased leverage to 2.5 times, it could repurchase 15 per cent of shares over the next three years.
“Still many targets; fewer move the needle. With an $80 billion market cap, it’s tougher to execute meaningful-sized deals. ATD’s recent GetGo deal cost $1.6 billion, but we expect it will add only 3 per cent to EPS. Nine chains of stores exist in the United States with more than 1,000 sites – ATD likely needs to target these next. It typically takes a network of 150+ stores to generate 1-per-cent EPS accretion. In this report, we examine a few potential deals, concluding that Casey’s General Stores Inc. (CASY) likely wouldn’t work, but Polish operator Zabka just might.”
Mr. Zamparo now has a target of $91 for Couche-Tard shares. The current average on the Street is $89.47.
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In other analyst actions:
* Raymond James’ Daryl Swetlishoff initiated coverage of Adentra Inc. (ADEN-T) with a “strong buy” rating and $60 target. The average is $53.07.
“We regard ADENTRA as well-positioned to deliver outsized growth through our forecast horizon given the company’s market position, financial liquidity and M&A pipeline, and strong U.S. macro tailwinds,” he said. “Closing on 16 acquisitions since 2011, ADENTRA’s capable management team has transformed the company from a hardwoods building materials distributor to a specialty provider of architectural products with improved value-added capabilities. This strategy has backstopped gross margin accretion laying the groundwork for valuation-boosting multiple expansion, in our view. While still early innings, we note ADENTRA is executing on a long-term strategic growth plan centered on M&A and organic growth over the next 4 years. With acquisition activity, 95 per cent of its business is USA based, and we regard ADENTRA as well-positioned to benefit from pending macro tailwinds. The 60-per-cent upside to our $60/sh target is anchored by our 2026 projections; however, we highlight the successful execution of ‘Destination 2028′ guidance could boost longer term theoretical equity value to $85/sh (representing over 120-per-cent upside).”
* Stifel’s Daryl Young increased his target for Air Canada (AC-T) shares to $28, exceeding the $27.55 average on the Street, from $25.50, reaffirming a “buy” rating.
“We are updating our estimates following AC’s investor day which included 2025 guidance and a comprehensive multi-year growth plan (approximately 7-8-per-cent average annual revenue growth to 2028, including 100 basis points of EBITDA margin expansion to 17 per cent),” he said. “Headline financial targets were broadly in-line with our expectations, but somewhat underwhelmed against elevated street expectations, prompting an 9-per-cent share price decline. We think investors were anticipating yield/margin upside in the 2025 guide, and a faster ramp toward high-teens EBITDA margins over the medium term (persistent high-cost environment offsetting efficiency/scale benefits). Our sense is that there is a degree of conservatism in AC’s medium-term targets, but given the myriad of macro uncertainties and possible implications of the weak C$ on Canadian travel demand, we expect the stock/valuation to remain in the ‘show me’ camp near-term. Regardless, the valuation is not demanding and AC’s NCIB should support the stock while rewarding longer-term focused investors.”
* KBW’s Kyle Voigt raised his Brookfield Asset Management Ltd. (BAM-N, BAM-T) target to US$57 from US$49 with an “underperform” rating. The average is US$55.41.
* Canaccord Genuity’s Robert Young hiked his target for Celestica Inc. (CLS-N, CLS-T) to US$110, exceeding the US$85.64 average, from US$77 with a “buy” rating.
“We are revisiting our view on Celestica on the back of recent datapoints from Broadcom and Jabil that renew our near-term confidence. We continue to believe the key drivers of near-term growth are hyperscaler ODM networking programs with Google, Meta, and Amazon which underpin HPS revenue and, to a lesser degree, AI Server EMS programs based on proprietary ASIC including Google TPU and Groq LPU programs. ODM and EMS peer valuations have continued to expand supporting an increased target PE multiple as we roll forward our valuation to 2026,” said Mr. Young.
* Jefferies’ Lloyd Byrne cut his targets for Cenovus Energy Inc. (CVE-T) to $32 from $33 with a “buy” rating and Suncor Energy Inc. (SU-T) to $54 from $62 with a “hold” rating. The averages are $31.45 and $62.03, respectively.
* Following Thursday’s announcement of a US$500-million precious metals stream with Sibanye-Stillwater Ltd. on its Marikana, Rustenburg and Kroondal mining operations in South Africa, Jefferies’ Matt Murphy raised his Franco-Nevada Corp. (FNV-N, FNV-T) target to US$138 from US$136, below the US$146.49 average, with a “hold” rating., while Raymond James’ Brian McArthur moved his target to US$158 from US$157 with an “outperform” rating.
“This transaction gives FNV exposure to assets with long duration, albeit with somewhat higher jurisdictional risk, and increases the company’s exposure to precious metals. FNV and Sibanye-Stillwater have also agreed to convert the 5-per-cent net profit interest that FNV holds on the Pandora property to a 1-per-cent net smelter return royalty,” said Mr. MacArthur.
* Raymond James’ Michael Barth trimmed his Step Energy Services Ltd. (STEP-T) target by 25 cents to $6 with an “outperform” rating. The average is $5.36.
“ARC and STEP mutually agreed to terminate the agreement to take STEP private after it ‘became clear that the requisite minority shareholder approval could not be achieved’,” he said. “We do not expect a full roundtrip back into the mid-$3.00/share range (where STEP traded immediately prior to the transaction announcement in early-November), but we do expect the stock to be under some pressure at the open. Even still, our target (despite being revised modestly lower) remains above the proposed transaction price and where STEP last traded. We reiterate our Outperform rating and would be buyers on any material weakness.”