Inside the Market’s roundup of some of today’s key analyst actions
Signs of a “rapid backdrop deterioration” in the fourth-quarter 2023 financial results from Saputo Inc. (SAP-T) overshadowed “business improvement,” according to National Bank Financial analyst Vishal Shreedhar.
Shares of the Montreal-based dairy company plummeted 11.2 per cent on Friday following the release of an earnings report that actually exceeded the Street’s expectations. Revenue grew to $4.4468-billion from $3.957-billion a year ago, topping both Mr. Shreedhar’s $4.385-billion estimate and the consensus projection of $4.400-billion. Earnings per share jumped to 47 cents from 26 cents, also ahead of forecasts (43 cents and 42 cents).
However, president and chief executive Lino Saputo cautioned consumer sentiment has “turned somewhat negative” in a call with analysts and dairy markets are now “somewhat uncertain.”
“SAP reiterated its F2025 EBITDA target of $2.125-billion (NBF estimate is $1.877-billion), though it updated the components noting a changing dairy backdrop,” said Mr. Shreedhar. “Furthermore, during the call, it speculated on extending the target timeline citing demand/commodity weakness.
“In F2024, SAP anticipates a year of organic growth with a focus on EBITDA margin expansion, maximizing cash flow and driving operating leverage. Q1 is expected to deliver modest growth. In our view, execution against the plan becomes more nuanced as it increasingly relies on implementing operational improvement initiatives.”
In response, Mr. Shreedhar cut his full-year 2024 revenue and EPS projections to $17.507-billion and $1.88, respectively, from $17.987-billion and $2.03. His 2025 revenue estimate grew to $18.2-billion from $17.964-billion, but his EPS expectation slid to $2.18 from $2.29.
“Fundamentally, we see significant operational improvement over the next 2+ years associated with numerous network optimization (automation/digital), and manufacturing footprint rationalization initiatives (approximately $200-million in F2024, and more than $200-million in F2025, albeit partially offset by market conditions),” he said. “This could suggest that the selloff was overdone, particularly if based on concerns regarding commodity prices (which are inherently volatile). On the other hand, questions on SAP’s ability to achieve targets and deliver relatively consistent growth have intensified.
“Considering tepid dairy market outlook commentary, we have reduced our estimates.”
Reiterating his “outperform” recommendation for Saputo shares, Mr. Shreedhar cut his target to $37 from $43 to reflect his lower estimates and “increasing uncertainty in the backdrop.” The average target on the Street is $39.25, according to Refinitiv data.
Elsewhere, other analysts making target adjustments include:
* Desjardins Securities’ Chris Li to $38 from $43 with a “buy” rating.
“Increasing competition and softening demand (inflation, rising rates, economic uncertainty, slower-than-expected China reopening, etc) have driven a sharp decline in dairy prices, resulting in unfavourable market factors,” said Mr. Li. “We have reduced our FY24 EBITDA by 9 per cent, and our FY25 EBITDA of $1.861-billion is below management’s aspirational target of $2.1-billion. While we believe risk/reward skews to the positive, we expect the stock to be range-bound until earnings visibility improves, likely in 2H.”
* RBC’s Irene Nattel to $40 from $46 with an “outperform” rating.
“While we remain encouraged by SAP focus on, and progress toward, network optimization (i.e., the controllables), extreme dairy market volatility since the start of FQ1 gives us pause,” she said. “Accordingly, we are reducing our forecasts and extending the path to $2.125-billion EBITDA by one year to F26. With muddled visibility on both global macro and commodity backdrops, in our view, shares are likely to be stuck in a range until visibility improves meaningfully. Nonetheless, we maintain our target multiples inline with long-term averages reflecting both depressed earnings forecasts and high degree of FCF conversion/yield.”
* BMO’s Tamy Chen to $37 from $43 with an “outperform” rating.
“According to management, several negative developments emerged rapidly in FQ1/24 that led to the company backtracking, to some degree, its ability to achieve the targeted $2.125-billion of EBITDA by F2025,” she said. “We still reiterate our Outperform rating based on valuation and our view that several of these headwinds will ultimately prove transitory. The key risk to our thesis is if management’s network optimization initiatives do not yield meaningful EBITDA gains.”
* CIBC’s Mark Petrie to $38 from $43 with an “outperformer” rating.
“Saputo posted Q4 results that were roughly flat vs. consensus but cautious commentary on the current operating environment (both demand and commodities) led shares to materially underperform on Friday (SAP down 11 per cent vs. TSX down 0.3 per cent),” he said. “Management is executing well on efficiency work, but shifts in the macroeconomic backdrop are significant. Absent an unforeseen commodity tailwind, we believe that Saputo’s $2.125-billion EBITDA target will only be achieved on a run-rate basis in F25 (and fully realized in F26).”
* TD Securities’ Michael Van Aelst to $42 from $46 with a “buy” rating.
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Scotia Capital analyst Ben Isaacson made a “move to sidelines” on Methanex Corp. (MEOH-Q, MX-T) until visibility of its free cash flow improves, downgrading its shares to “sector perform” from “sector outperform” previously.
“We had hoped methanol market softness would be brief enough to look through it,” he said. “But the timing/magnitude of price declines, rising inventory, little-to-no cost curve support (Chinese thermal coal has just collapsed too), as well as continued China macro weakness, means visibility into ‘24 FCF has become blurred. While we’ve warned about methanol weakness recently, we had expected the cost-curve to support spot at $300 per metric ton. China averaged $240 last week. The lesson? Downturns make things go down.
“The burden of proof has changed, as a weighted spot price of $265 to $275 per metric ton is MEOH’s new reality until it’s not. If spot holds, FCF in ‘24 craters to less than $2.50 per share, down from mid-cycle FCF of more than $8.00 (+G3). In fact, if MEOH were to realize spot indefinitely, leverage could peak at 5.5 times in mid-24 until a full contribution from G3 improves the B/S. So, the bulls must now demonstrate: (1) if/when methanol will return to a demand-driven state, such that pricing is based on affordability, and not on the cost-curve; and (2) if cost-curve support is required, then when/why must Chinese thermal coal recover, despite gov’t policy to further reduce the price?”
Believing hedge funds are “right to short the stock here,” Mr. Isaacson dropped his target to US$47 from US$60. The average on the Street is US$53.82.
“We were wrong for waiting this long to react,” he said. “At spot, 2H/23 EBITDA falls more than 50 per cent to $200-million from $417-million. MEOH could offer a better entry-point in the $30s.”
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Despite calling Neighbourly Pharmacy Inc.’s (NBLY-T) in-line fourth-quarter results “solid,” Desjardins Securities analyst Chris Li wants to “wait for better margin visibility” before raising his rating for its shares.
“While same-store sales are trending in line with the long-term range, elevated costs related to the pharmacist shortage will weigh on margins for two more quarters,” he said.
“4Q FY23 revenue and adjusted EBITDA were right in line with our forecast and consensus. Lower-than-expected same-store sales (1.6 per cent vs 3.0-per-cent estimate) was due to transitory factors, with the trend normalizing in 1Q FY24 (2.6–2.8 per cent, in line with the long-term range). Since the recently announced acquisitions (10 sites) will close after 1Q FY24, we expect 1Q FY24 revenue to be largely in line with the $191-million in 4Q FY23 (vs current consensus of $198-million). Pharmacist temporary relief staffing headwinds are expected to persist in 1H FY24 and weigh on margins before improving in 2H FY24. We forecast 40–50 basis points year-over-year improvement in 2H.”
Mr. Li thinks the M&A pipeline “remains robust” for the Toronto-based company, seeing it on track to acquire 35-40 pharmacies this year at a “favourable valuation.”
“NBLY is leveraging its solid financial position and strong reputation as the acquirer of choice to seek high-quality assets with above-average EBITDA per site while at the same time being able to pay at the lower end of the historical 6–7 times EBITDA range,” he said. “Despite recent noise around increasing competition for M&A, NBLY is on track to acquire 35–40 pharmacies a year. Management remains comfortable with pro forma leverage of 3.5 times net debt/EBITDA, with some flexibility to take this up to 4 times for high-quality acquisitions. We estimate leverage will remain in the mid- to high-3 times range based on 35–40 acquisitions per year at 6–7 times EBITDA.”
Maintaining a “hold” rating for its shares, Mr. Li reduced his target to $21 from $25 after lowering his 2024 EBITDA expectation based on margin pressure in the first half of the fiscal year. The average on the Street is $27.44.
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Desjardins Securities analyst Gary Ho is predicting AGF Management Ltd. (AGF.B-T) will “rebound” from a first-quarter miss when it reports its results before the bell on June 21.
He’s projecting earnings per share of 31 cents, a 5-cent improvement sequentially and up 17 cents from the same period a year ago. He’s expecting EBITDA from its Wealth Management business to rise to $23.5-million from $20-million in the previous quarter but down from $27.8-million in fiscal 2022.
“Our forecast continues to point to elevated SG&A, offset by strong contribution from its private alt platform in 2Q,” Mr. Ho said.
“Despite weak industry net flows (IFIC reported industry long-term fund net redemptions of $10.8-billion for March and April combined), we expect continued net inflows for AGF of $92-million in 2Q. We believe three-year fund performance continues to track well against AGF’s target, albeit likely below 1Q FY23. AGF reported May AUM of $41.2-billion (down 1.7 per cent vs 1Q).”
Maintaining a “buy” rating, he lowered his target to $9.75 from $10.25 based on lower assets under management. The average on the Street is $9.21.
“We favour AGF given its fund performance, positive retail net flows, solid balance sheet and healthy FCF profile,” said Mr. Ho.
“We foresee a few near- or medium-term positive catalysts: (1) retail net flows trending at or above industry; (2) redeployment of capital for organic growth, to seed new private alt strategies and for share buybacks; (3) growth in fees/earnings from its private alt platform; and (4) 2022′s DSC ban benefiting FCF and EPS.”
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National Bank Financial analyst Lola Aganga reaffirmed her “outperform” recommendation for Bravo Mining Corp. (BRVO-X) after resuming coverage following its equity raise of $20-million, citing the “attractive critical metals mix” at its 100-per-cent-owned Luanga project in Brail as well as the “project economics and regional exploration potential, notably considering the currently undefined high-grade nickel mineralization which is a focus of the Phase 2 drill program.”
The Vancouver-based company plans to use proceeds from the public offering of 5.65 million common shares (at a price of $3.50 each) to fund exploration at Luanga, located in the Carajas mineral province, as it continues Phase 2 drilling and geophysical work as well as general corporate purposes.
“The next significant catalyst/de-risking event will be the maiden resource expected in the latter half of the year,” said Ms. Aganga in a note. “Concurrently, BRVO is rapidly advancing Phase 2 drilling to follow up on the newly identified higher-grade nickel magmatic sulphide mineralization and commence extensive geophysics at site.”
“Results to date have been positive with more than 80 per cent of re-assay intercepts received returning better grades compared to historic results. Our assumptions capture 90 per cent of the Historical Resource at grades of 1.7 PGE + Au, and expect to see further upside to our estimates following the inclusion of rhodium in the upcoming maiden resource.”
Despite the share dilution, the analyst increased her target to $4.80 from $4.10 based on revised financing assumptions, as she now expects a $20-million raise in 2025 to help fund pre-feasibility activities at $3.50 per share from $1.65 per share based on recent price appreciation. The average target is now $4.18.
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H.C. Wainwright analyst Heiko Ihle sees a “foundation from meaningful growth” from U.S. GoldMining Inc.’s (USGO-Q) “already impressive resource base.”
That led him to initiate coverage of the Vancouver-based company, which began trading on the Nasdaq following the completion of initial public offering on April 20, with a “buy” recommendation.
“U.S. GoldMining’s (USGO) Whistler project maintains a significant gold and copper resource located within a world-class mining jurisdiction,” Mr. Ihle said. “The project, which is located just 150 kilometers (km) northwest of Anchorage, Alaska, hosts multiple deposits offering a variety of mineralization styles and mining opportunities. On a consolidated basis, the site presently hosts 3.0 million Indicated gold equivalent ounces (GEOs).
“We believe that 6.4 million GEOs in the Inferred category offers significant opportunity. We expect USGO’s management team to further de-risk these ounces going forward. We also believe the conversion of Inferred ounces into the Indicated category should prove to be a catalyst in driving the project’s value. In the longer term, we expect these resources to form the basis for an economic study.”
While acknowledging the lack of a published economic study for Whistler, Mr. Ihle set a target of US$20 per share. The average is US$16.25.
“Looking ahead, the primary near-term value driver for USGO is likely to be its success with the drill bit ... Whistler has seen incremental exploration work from a variety of different operators throughout its past,” he said. “We nonetheless believe that a significant amount of value has been left on the table. In addition, we expect this value to be unlocked under USGO’s ownership as the project is now poised to benefit from a dedicated technical team and a fully funded systematic drill program that we expect to be utilized as the basis of a maiden economic study. In turn, the firm remains fully permitted to conduct a broad-scale exploration program in 2023. Subsequently, mine design and financial modeling is expected to be completed in 2024 following the completion of a scoping study.”
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In other analyst actions:
* Resuming coverage following the close of its US$282.9-million treasury offering, National Bank’s Maxim Sytchev cut his target for ATS Corp. (ATS-T) to $65 from $66, keeping an “outperform” rating, while TD Securities’ Cherilyn Radbourne trimmed her target to $71 from $72. The average is $69.67.
“The talk around U.S. listing and potential capital deployment has been part and parcel of the investment thesis for some time,” said Mr. Sytchev. “One, of course, has to keep in mind that listing does not only equal automatically greater liquidity, access, etc. but also greater scrutiny vs. larger and sometimes more profitable / cheaper multi-industry firms in the U.S. Given current geopolitical backdrop of decoupling manufacturing capacity from Asia, we don’t see much necessity to rethink our thesis, especially in light of future (likely healthcare) M&A, that, based on our numbers, would be EPS-/ capability-additive.”
* Trimming his forecast to account for a weaker-than-expected China potash contract announcement and broader NPK price trends, Raymond James’ Steve Hansen lowered his Nutrien Ltd. (NTR-N, NTR-T) target to US$80 from US$85 with an “outperform” rating. The average is US$78.08.
“Notwithstanding these changes, we reiterate our OP2 rating based upon our view this long-awaited contract will provide the necessary catalyst to reinvigorate sidelined demand, cement a new global floor price, and set the stage for a healthier (more fluid) 2H23 & 1H24 demand outlook,” he said. “Against this backdrop, we also highlight that rapidly deteriorating U.S. crop conditions have put a solid bid under corn in recent weeks —historically a key leading indicator for fertilizer equities.”
* CIBC’s John Zamparo reduced his target for Canopy Growth Corp. (WEED-T) to 50 cents from $1.75 with an “underperformer” rating. The average is $2.88.
“We see a low likelihood of a positive catalyst to reverse Canopy’s fortunes and expect WEED to show significant operating losses,” he said. “WEED faces several hurdles in our view: Canadian retail sales continue to decline, potentially offsetting cost-cutting efforts; BioSteel sales now face uncertainty pending the upcoming restatement. Net debt, already at $400-million, may reach $700-million by year end. Finally, Canopy previously carried industrywide flagship status, which meant strong performance from the stock when prospects for U.S. regulatory reform arose. Not only do investors now appear to acknowledge the waning prospects for reform, but Canopy receives less uplift even on those positive days. It’s difficult to see how a turnaround plays out.”
* Cormark Securities’ Jeff Fenwick hiked his Fairfax Financial Holdings Ltd. (FFH-T) target to $1,400, above the $1,330.08 average, from $1,150 with a “buy” rating.
* RBC’s Wayne Lam cut his Frontier Lithium Inc. (FL-X) target to $3.25 from $3.75 with an “outperform” recommendation. The average is $3.95.
“We update our Frontier model post-PFS, incorporating higher cost and capex assumptions along with the proposed dual design chemical plant,” said Mr. Lam. “In our view, Frontier remains well positioned, advancing a Tier I project in Canada with PAK standing out on grades and scale. We view additional de-risking milestones including updates on infrastructure, permitting, and partnerships as supporting a potential re-rating given current discounted valuation.”
* RBC’s Irene Nattel lowered her North West Company Inc. (NWC-T) target to $36 from $38 with a “sector perform” rating. The average is $38.25.
* Jefferies’ Samad Samana raised his target for Shopify Inc. (SHOP-N, SHOP-T) to US$65, exceeding the US$61.67 average, from US$44 with a “hold” rating.