Inside the Market’s roundup of some of today’s key analyst actions
While ATB Capital Markets’ Martin Toner continues to see Softchoice Corp. (SFTC-T) as “a stable business with inherent operating leverage and growth potential, particularly in Software and Cloud,” he thinks World Wide Technology Holding Co. LLC.’s offer of $24.50 per share to acquire the Toronto-based IT services firm is fair and recommends investors tender their shares at the price offered.
Accordingly, Mr. Toner was one of several equity analysts on the Street to adjust their ratings in response to Tuesday’s announcement that will see Softchoice become the 11th of 20 tech companies to exit public markets after being listed on the TSX during the mid-2020 to late-2021 pandemic bubble. He moved his recommendation to “tender” from “outperform” previously.
“According to the press release, among other items, Softchoice’s board considered the following reasons for the transaction: i) provides shareholders with ‘certain and immediate value and liquidity’, ii) the implied transaction valuation multiple of 13.2 times ‘compares favourably to transactions in the software and technology sector’ and iii) following a strategic review process, Softchoice was unable to find any proposal superior to the WWT proposal,” he said. “According to management, the deal ‘strengthens access to Commercial, Small and Medium business customers while expanding WWT’s position in the U.S., Canada, and around the world.”
“This [offer] represents a premium of 14 per cent relative to the closing price on December 30th, and an LTM [last 12-month] EV/EBITDA multiple of 13.2 times. Birch Hill Equity Partners and officers of the Company own 51.3 per cent of the outstanding shares of Softchoice and have agreed to support and to vote all shares in favour of the Transaction. The acquisition is expected to close in ‘late Q1 or early Q2 2025′, contingent on i) approval of 66.6 per cent of shareholder votes at a special meeting of shareholders to be held in March 2025, ii) a simple majority of votes cast by shareholders (excluding shares held by senior officers) and iii) regulatory approvals.”
Also emphasizing the potential impact of a $49-million termination fee attached to the offer, Mr. Toner lowered his target for the company’s shares to $24.50 from $26 to reflect the purchase price. The average target on the Street is now $24.43, according to LSEG data.
“We believe Softchoice will be a long-term beneficiary of improving IT spending trends and will also be a market share gainer, given its exposure to the migration to the cloud and AI,” he said. “We have been bullish on the name as Software and Cloud continue to grow double-digits and margins expand, though believe that WWT’s allcash offer at $24.50 per share is reflective of our base-case growth scenario, and thus recommend that investors tender their shares at the offer price.
“We see Softchoice as a difficult Company to comp as the only software-focused IT services name in North AmericaHardware comps may undervalue the Company’s growth opportunity in Software & Cloud and it is difficult to compare SFTC to larger more liquid and diversified North American or European IT services.”
Elsewhere, others making adjustments include:
* Cormark Securities’ Gavin Fairweather to “tender” from “buy” with a $24.50 target, down from $25.50.
“We believe the transaction multiple provides shareholders with close to fair value based on the current profile,” he said. “However, we do think the timing is not ideal as the business is being sold during a period of cyclical pressures from lower IT budgets and as margin expansion has temporarily paused given the aforementioned topline pressures, combined with a recent significant increase to the salesforce. We also note that shareholders will be giving up the long-term total return potential from the business given its ability to grow gross profit at a high single digit rate organically while taking margins from 28 per cent into the 30-35-per-cent range in the mid to long-term while paying out regular and special dividends. However, given the shareholder base, we see this as a ‘done deal’ unless a higher offer surfaces. In its press release, SFTC noted that the company was marketed widely to both strategic and financial counterparties.”
* CIBC’s Stephanie Price to “tender” from “neutral” with a $24.50 target, up from $23.
“With the 11.8 times takeout multiple above the peer average and closer to the higher end of the peer range, we believe the price is fair and shareholders should tender shares at the offer price,” she said.
* National Bank Financial’s John Shao to “tender” from “outperform” with a $24.50 target, up from $23.
“We are not surprised that shareholders, including Birch Hill Equity Partners, have agreed to support this transaction as this deal provides immediate liquidity and is not subject to any financing conditions. Since this deal has already been supported by a simple majority of shareholders, we view this transaction as essentially a ‘done deal’. In terms of the valuation, we’d note the acquisition price is above our previously published DCF-based price target of $23.00,” said Mr. Shao.
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Ahead of the Jan. 29 release of its quarterly results, Raymond James analyst Brian MacArthur reduced his forecast for Champion Iron Ltd. (CIA-T), pointing to “volatile” iron ore prices through the period.
“We also note CIA’s realized price will be impacted by lagging sales contracts and tonnes priced using the quarter-end forward price as usual and the P65 forward price at quarter-end was about US$112/tonne,” he said. “In addition, the realized price will be impacted by provisional pricing as the company had about 2.3 MT priced at about US$119.4/tonne at the end of F2Q25. The magnitude of the provisional pricing will be dependent on a number of factors such as the vessel delivery time as well as contract-specific reference times, but we expect it to be negative this quarter. We note CIA books vessels weeks in advance so there is a lag effect on freight costs, but we expect them to be similar to last quarter. Finally, we expect sales to be impacted by the unforeseen breakage on December 3 at the load out facility which resulted in no sales until December 18 when it restarted. Furthermore, given this breakage CIA elected to do additional maintenance which impacted production. We continue to believe the outlook for CIA is positive over the next few years given the growth from phase 2, the potential to upgrade/pelletize some production, and the potential for CIA’s premium iron ore to help reduce emissions in the steel-making process.”
Mr. MacArthur is now forecasting full-year 2025 and 2026 earnings per share of 38 cents and 58 cents, respectively, falling from 49 cents and 63 cents previously.
He did maintain his “outperform” rating and $8 target for Champion shares. The average is $7.48.
“We believe Champion offers investors good exposure to premium iron ore through its Bloom Lake asset, which is a long-life, lower-cost asset producing, high-grade iron ore concentrate (approximately 66-per-cent Fe) located in Quebec, Canada, a lower-risk jurisdiction,” the analyst said. “In addition, we believe Champion has growth through Bloom Lake Phase 2 and the potential to upgrade/pelletize some production. Given Champion’s exposure to premium iron ore (which we believe should trade at a premium given structural changes in the iron ore industry), high-quality asset, growth potential, and low jurisdictional risk, we rate the shares Outperform.”
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In other analyst actions:
* JP Morgan’s Sebastiano Petti cut his targets for BCE Inc. (BCE-T) to $35 from $41 and Telus Corp. (T-T) to $22 from $23 with “neutral” recommendations for both. The averages on the Street are $40.62 and $24.03, respectively.