Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial’s Vishal Shreedhar thinks Alimentation Couche-Tard Inc.’s (ATD-T) “underlying strength” is likely to be “obscured” by a decline in fuel margins when it reports first-quarter 2024 financial results on Sept 6 after the bell.
The equity analyst is projecting earnings per share of 79 cents for the quarter, which is a penny above the consensus estimate on the Street but down 6 cents from the same period a year ago. He attributes that 7.3-per-cent decline to weaker aggregate fuel margins, “partly offset by aggregate merchandising/fuel volume growth, and share repurchases.” Mr. Shreedhar said EPS growth would be 11 per cent year-over-year if fuel margins were the same fiscal 2023.
“OPIS [Oil Price Information Service] data suggests U.S. fuel margins averaged 36.8 cents per gallon during ATD’s Q1/F24 (NBF projects 43.1 c/g),” he said. “While Q1/F24 margins are expected to be moderately lower year-over-year, we expect industry fuel margins will trend higher over time, reflecting higher breakeven margins (ARKO previously suggested that higher margins reflected increased operating pressure). OPIS data, 4 weeks into Q2/F24, suggests that fuel margin averaged 36.2 c/g.”
Despite that margin pressure, Mr. Shreedhar expects “solid” fuel demand moving forward.
“We believe that ATD will structurally benefit from growing scale, improved logistics, and the Circle-K fuel rebranding, amongst other factors,” he said. “Our review of ATD and U.S./Canada peers’ fuel margins indicates ATD consistently outperforms the industry.
“We believe that North American fuel volume performance should be solid. EIA data on finished motor gasoline indicates volumes were up by 3.3 per cent year-over-year in Q1/F24. OPIS data indicates retail fuel prices declined 23 per cent year-over-year, averaging $3.57/gallon in Q1/F24. Statistics Canada data (May 2023) indicates finished motor gasoline and distillate fuel oil volumes grew 10.2 per cent year-over-year.”
Projecting merchandising same-store sales growth of 3.5 per cent in Canada, up from a 1.3-per-cent decline a year ago, and a 2.3 per cent in the United States, slowing from 3.5 per cent in 2023, Mr. Shreedhar thinks industry consolidation is likely to remain “topical” in the near term.
“We expect acquisitions through fiscal 2024,” he said. “Recall, ATD previously noted a target of 4-5 acquisitions in F2024. In addition, we understand that the deal backdrop is more favorable with private equity players largely on the sidelines.
“We estimate pro forma net debt to EBITDA of 2.15 times, below ATD’s target of 2.25 times (suggests acquisition capacity of $600-plus million).”
Maintaining an “outperform” recommendation for Couche-Tard shares, Mr. Shreedhar raised his target to $78 from $74 based on an advancement to his valuation period and foreign exchange adjustments. The average target on the Street is $79.31, according to Refinitiv data.
“Our favorable view on ATD is driven by expectations of organic growth supported by many improvement initiatives (fuel, fresh food, improved procurement, data analytics/loyalty, etc.) as well as acquisition capture/synergies and capital return to shareholders,” he said. “If ATD successfully executes against its priorities, we see upside to our F2024 EPS forecast,” he said. “ATD is trading at 18.0 times our NTM [next 12 months] EPS vs. the 5-year average of 17.5 times.”
Elsewhere, Canaccord Genuity’s Luke Hannan said he’s “expecting another solid print” from Couche-Tard.
“Recent price increases, and moderating inflationary cost pressures, should be supportive of margin growth over the course of our forecast period, while fuel margins over the medium term appear to be sustainable at the 30 cent per gallon level,” he said.
Mr. Hannan reiterated a “buy” rating and $78 target.
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NFI Group Inc.’s (NFI-T) “comprehensive” refinancing sets the “stage for better results ahead,” said National Bank Financial analyst Cameron Doerksen upon resuming coverage.
With the release of in-line second-quarter results on Friday, the Winnipeg-based bus manufacturer said it is is in the process of completing the elements of its previously announced refinancing plan to raise total gross proceeds of approximately $444-million. That included an additional $38-million equity private placement to a large global asset manager at a price of $10.10 per share, which is higher than an earlier deal with Coliseum Capital for $8.25 per share.
“The refinancings and new credit agreements should provide NFI sufficient cash and financial flexibility ($137 million in expected liquidity with key covenants waived through Q2/24) to execute on the production ramp that has begun,” said Mr. Doerksen. “Based on our updated modeling, we see NFI’s net-debt/EBITDA excluding convertible debentures) at 2.9 times at the end of 2024, well within the updated covenant of 3.5 times.”
“To execute on its planned production ramp, NFI will need to see ongoing improvement in supply chain stability, but the trends on this front appear positive. NFI notes that the number of its suppliers in the high-risk/severe impact category stood at nine at the end of July (out of 750 suppliers), stable versus the end of Q1 and down from 24 at the end of Q4/22. NFI’s vehicle line entries in Q2 stood at 962, stable from 990 in Q1/23 and well above the low of 714 seen in Q4/22. Pre-pandemic line-rate entries were ~1,500 per quarter, so there is a long way yet to recover, but the trend is positive (management targeting 1,500/quarter in 2025).”
Mr. Doerksen emphasized demand remains “strong” and sees “meaningful pricing improvement in backlog.”
“At the end of Q2, NFI’s backlog sat at 9,803 firm orders and options worth a record dollar value of $6.7-billion (was 10,071 EUs at $6.7-billion at the end of Q1/23),” he said. “Active bids at the end of Q2 (submitted or in process) were up 33 per cent year-over-year at 10,054 EUs with management noting that the company submitted the highest number of bids ever in Q2. We therefore expect new order announcements to remain robust in the coming quarters. Equally important, NFI’s average sales price in backlog is up 20 per cent year-over-year which will drive margin improvement in 2024 and beyond (lower margin orders should mostly be delivered by the end of 2023). With the competitive environment improving for NFI (Nova Bus exiting the U.S. market and ZEB competitor Proterra in Chapter 11), NFI may also benefit from some incremental pricing power in the coming years.”
The analyst reiterated his “outperform” recommendation for NFI shares with a $15 target, which he maintained due to increased dilution. The average on the Street is $13.42.
“NFI management still needs to execute on its planned production ramp and there remain lingering risks around supply chain improvement,” said Mr. Doerksen. “However, with more balance sheet flexibility and demand for buses continuing to be very strong, we believe financial results will trend much more positively later in 2023 and beyond, which will support a higher share price.”
Elsewhere, a pair of analysts raised their targets for NFI shares. They are:
* ATB Capital Markets’ Chris Murray at $14.50 from $12.50 with a “buy” rating.
“Management reiterated full-year guidance and increased the bottom end of the revenue and EBITDA range, reflecting a better-than-expected H1/23,” said Mr. Murray. “Management reaffirmed that supply conditions continue to improve and that the company remains on track to ramp production in H2/23. We see the proceeds from the financing providing flexibility for management to execute its turnaround plan and view a stabilizing supply chain, better pricing, and robust demand conditions as supportive for more normalized levels of EBITDA in 2024.”
* CIBC World Markets’ Krista Friesen to $10.75 from $8.50 with an “underperformer” rating.
“NFI has completed its comprehensive refinancing plan, which should address the company’s liquidity needs as it ramps up production. With all the changes below the line (changes in interest expense and shares outstanding), we question whether NFI’s historical EV/EBITDA range remains an appropriate valuation range for the company,” she said.
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Paradigm Capital’s Daniel Rosenberg expects Haivision Systems Inc. (HAI-T) to see “meaningful” margin expansion in the coming quarters.
After recent marketing meetings with its management team, the analyst said the Montreal-based video streaming technology has an optimistic outlook despite lingering macroeconomic headwinds, predicting it will return adjusted EBITDA margins to double digits by the end of fiscal 2023.
“Haivision completed a cost restructuring exercise, with management expecting annualized $8.0-million in savings going forward,” said Mr. Rosenberg. “Further lifting margins will be the fully completed sunsetting of its lower-margin, House of Worship business this quarter. The heightened cost associated with securing inventory last year is also set to taper off as supply chain issues normalize. A recent round of price increases was also enacted in the quarter to offset inflationary pressures. As such, we expect Q3 results to show a significant improvement in profitability as the accumulation of management’s optimization efforts take shape. We expect Q3 adjusted EBITDA of $2.3-million (margin of 7.0 per cent) compared to last year’s reported loss of $1.6-million.”
Mr. Rosenberg touted Haivision’s “very healthy” balance sheet, synergies gaining from its AVIWEST acquisition and the potential for expansion as the company sees “a long tailwind of demand from digital infrastructure upgrades among government agencies and enterprises looking to optimize their security operations centres for digital video workflows.”
“We were impressed with management’s message in delivering EBITDA margin growth faster than we anticipated. HAI is continuing to grow its topline while lowering its costs, and we believe that the demonstration of ramping profitability next quarter will drive renewed optimism in the company,” he said.
Reiterating a “buy” recommendation, Mr. Rosenberg raised his target for its shares to $6.50 from $6.25. The average is currently $5.42.
“HAI shares trade at 6.3 times FY24 estimated EV/EBITDA versus peers at 10.0 times,” he said. “Haivision is a technology leader with a strong reputation in a fragmented industry that is prime for consolidation. The recent dialogue with management provided us with confidence in the company’s ability to execute despite macro uncertainties. Current valuation levels present an attractive opportunity for investors to own a technology leader generating strong cash flow with a clear runway of growth opportunities.”
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Raymond James analyst Rahul Sarugaser thinks Hamilton, Ont.-based Fusion Pharmaceuticals Inc. (FUSN-Q) remains “remains materially undervalued relative to its direct peers in radiopharma.”
“We emphasize that FUSN is on the cusp of materially augmenting its pipeline, with just 18-24 months from having: i) a Phase 3 asset; ii) 2-3 assets in Phase 2, and; iii) Multiple new AZN-partnered and internal TAT candidates,” he said in a note released Monday.
“In particular, we highlight FUSN’s catalysts slated for 4Q23 and 1Q24: higher dose-level data from its Phase 1 study of FPI-1434, and a key data update (20-30 patients) from its Phase 2 study of FPI-2265 in PSMA+ mCRPC, respectively. The latter update, crucially, will come in the wake of Phase 3 data readouts from NVS and PNT(4Q23), all of which we will be following closely. FUSN has approximately $198-million in cash, and incurred $27-million in OpEx during 2Q23.”
Maintaining an “outperform” recommendation, Mr. Sarugaser trimmed his target by US$1 to US$12 on dilution. The average is US$13.10.
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Calling it a “unique play on water and sustainability demand,” RBC Dominion Securities analyst Sabahat Khan initiated coverage of California-based Tetra Tech Inc. (TTEK-Q) with an “outperform” recommendation on Monday, believing it offers investors “sustainability-aligned end-market exposure, a strong track record of growth, and a significant U.S. presence, positioning it well amidst the current infrastructure investment cycle.”.
“We believe Tetra Tech is uniquely positioned among our Engineering coverage with 55-per-cent revenue exposure to Water and 35-per-cent exposure to Environmental Services/Renewable Energy,” he said. “While each of these end-markets is likely to benefit from strong demand over the medium- to long-term (driven by the push toward Net Zero, the ongoing energy transition, and the need to address climate change), we view the significant Water exposure as being a key differentiator for Tetra Tech. Demand in the Water space is driven by issues such as water scarcity, water quality, flood/drought mitigation, coastal resilience, etc., and these issues are likely to drive demand globally for the foreseeable future. The growing investor demand for Water-exposed firms, combined with Tetra Tech’s significant presence in this end-market (highest among our Engineering coverage), has been the likely driver of Tetra Tech’s premium valuation.”
Seeing “further upside” in its valuation, Mr. Khan set a target of US$181 per share. The average on the Street is US$190.60.
“Starting in 2018, Tetra Tech’s trading multiple began to trend above that of the Engineering peer group and has more closely followed Water peers, such as Xylem,” he said. “Since 2018, Tetra Tech has traded at a 7.0-7.5 times NTM [next 12 month] EV/EBITDA premium to its Global Design peers, while trading approximately in line with Xylem over this period. We believe Tetra Tech’s end-market exposure, combined with the outlook for strong demand across its end-markets, justifies its trading range (we believe its trading multiple is anchored to Water peers instead of Engineering peers). In our view, Tetra Tech’s multiple reflects the long-run outlook for demand in the Water market and the company’s sizable and leading position in this segment. We believe our valuation multiple of 19.5 times F2024 EBITDA fairly reflects this outlook.”
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In other analyst actions:
* Cormark Securities’ Nicholas Boychuk downgraded Green Impact Partners Inc. (GIP-X) to “market perform” from “speculative buy” with a $8.75 target, below the $15.69 average on the Street.
* Echelon Capital’s Mike Stevens lowered his Boardwalktech Software Corp. (BWLK-X) target to 85 cents from $1.15 with a “speculative buy” rating.
“With macro challenges still swirling, impacting both the Company’s ability to convert pipeline prospectsinto contracted clients along with investor sentiment and appetite for unprofitable microcap growth stocks, we are trimming our PT ... (still implying 67 per cent of upside),” said Mr. Stevens, who is currently the lone analyst covering the Cupertino, Calif.-based company.
“With the PT trim, we are also trimming our forecasts due to what we believe will be a slower ramp in realized revenues throughout the remaining 7+ months in Boardwalk’s F2024. We are also increasing our DCF valuation’s discount rate to 16 per cent (from 15 per cent) and our terminal EV/EBITDA multiple to 7.5 times (from 8.5 times) to reflect the referenced challenges, resulting in a DCF valuation of 85 cents. That being said, we look for Boardwalk to demonstrate momentum in FH224 closing deals and setting the stage for a strong FQ424 (where we forecast 46-per-cent year-over-year Software subscriptions and services growth) and F2025 (beginning April 1, 2024).”
* Jefferies’ Lloyd Byrne hiked his Canadian Natural Resources Ltd. (CNQ-T) target to $94, exceeding the $91.45 average, from $84 with a “hold” rating.
* CIBC’s Dennis Fong cut his Crescent Point Energy Corp. (CPG-T) target to $14.75 from $15 with an “outperformer” rating. The average is $13.70.
“We update our estimates to reflect the announced sale of North Dakota Bakken assets. Our 2023 CFPS estimate decreases from $4.38 to $4.15, our 2024 CFPS estimate falls from $4.84 to $3.88, and our 2025 CFPS estimate decreases from $4.80 to $3.65,” Mr. Fong said.
* Roth MKM’s Joe Reagor lowered his Guanajuato Silver Co. Ltd. (GSVR-X) target to 50 cents from 55 cents with a “buy” rating (unchanged), citing the impact of dilution from its recent financing. The average is 81 cents.
“We note that lower-than-anticipated Q2 results also impacted our valuation slightly,” he added. “However, we are maintaining our Buy rating as we believe GSVR should continue to demonstrate operational improvement in the quarters ahead.”
* In response to an update to its mineral reserves and resources estimates, CIBC’s Cosmos Chiu lowered his Street-high target for Pan American Silver Corp. (PAAS-Q, PAAS-T’) to US$30 from US$32 with an “outperformer” rating. The average is US$24.75.
“Reserves decreased year-over-year on both an asset-by-asset and total basis (inclusive of the Yamana assets). This is somewhat expected in an acquisition year as the company re-strategizes and aligns newly acquired assets into existing operations. Looking ahead, and following a good Q2, Pan American is designing drill programs across the combined portfolio with plans to complete over 480,000m of drilling in 2023, from which we foresee the possibility of upside. Although the results today were not as strong as expected, we reiterate our Outperformer rating,” said Mr. Chiu.
* Following better-than-anticipated third-quarter results, Acumen Capital’s Jim Byrne bumped his target for Montreal-based Premier Health of America Inc. (PHA-X) to $1 from 95 cents with a “buy” rating. The average is 80 cents.
“The refinancings and new credit agreements should provide NFI sufficient cash and financial flexibility ($137 million in expected liquidity with key covenants waived through Q2/24) to execute on the production ramp that has begun,” said Mr. Doerksen. “Based on our updated modeling, we see NFI’s net-debt/EBITDA excluding convertible debentures) at 2.9 times at the end of 2024, well within the updated covenant of 3.5 times.”