Thursday’s analyst upgrades and downgrades

Inside the Market’s roundup of some of today’s key analyst actions

While its Elements event on Wednesday lacked attention-grabbing announcements, RBC Dominion Securities analyst Paul Treiber continues to see Shopify Inc. (SHOP-N, SHOP-T) “well positioned” in the long term despite macro concerns currently weigh on its stock.

“Commerce innovation and commerce everywhere strengthen Shopify’s value proposition, in our view,” he said in a research note released before the bell. “With scale, Shopify has an opportunity to monetize value-added services.”

“The format of Shopify’s new semi-annual Elements event means there were few new announcements [Wednesday] that haven’t been mentioned elsewhere. The one that caught our eye is ‘tokengated commerce’, which is one of the most practical applications of NFTs. While the market is early, it is an example of Shopify’s ability to support bleeding edge innovations, which is a benefit of the company’s scale and provides a first mover advantage if the market emerges.”

Shopify unveils partnerships with Apple, Google and Twitter, offers crypto feature

Mr. Treiber said Apple Inc.’s (AAPL-Q) Identifier for Advertisers (IDFA) has increased the value of first-party data, which is “leading social media companies and others to build ecosystems combining advertising and commerce in order to better measure conversions.”

“Twitter Shops is one of the latest examples,” he said. “The fragmentation of commerce across more channels increases the data integration challenge for merchants and strengthens the value proposition of Shopify as the software hub for commerce.”

He also emphasized high-margin value-added services are “a key element of the bull thesis” on Shopify, noting: “Shopify Audiences (advertising), Shop Cash (loyalty), and Shop Stores (discovery) are not new news in themselves, but combined show the company’s emerging focus on high-margin, but difficult to address value-added services. Additionally, Shopify disclosed pricing for SFN, which comes at a premium to FBA and implies higher take-rate and margins than our initial estimates”

Expecting “consumer spending uncertainty” to weigh on Shopify shares in the near-term while its valuation multiples “continue to compress,” Mr. Treiber cut his target to US$700 from US$800, keeping an “outperform” rating. The average is US$584.81, according to Refinitiv data.

“We believe that Shopify is still one of the most compelling growth stories in our coverage. While the stock is likely to remain volatile in the short-term, we see Shopify continuing to rapidly scale and monetize its large TAM,” he said.


Citing negative same-store sales growth and “probable market share losses,” National Bank Financial analyst Vishal Shreedhar is taking an “unfavourable” view of the fourth-quarter 2022 financial results for Empire Company Ltd. (EMP.A-T).

Though Wednesday’s release prompted him to lower his estimates as the grocery retailer shifts its focus toward discount offerings like its peers, Mr. Shreedhar emphasized its “attractive” valuation and probable gains brought by its Project Horizon growth strategy in justifying his “outperform” rating for its shares.

Sobeys’ parent company plummeted 9 per cent on the results, which included a same-store sales decline of 2.5 per cent (versus the analyst’s estimate of a 2.5-per-cent gain). Earnings per share of 68 cents met his forecast but fell a penny below the Street’s expectation.

Sobeys owner Empire Co. posts 13.3-per-cent sales gain as food inflation and fuel sales rise

“EMP’s negative sssg was largely due to tough year-over-year comparisons and a shift to discount (also indicated by Loblaw/Metro),” said Mr. Shreedhar. “The market is concerned about market share losses given that L/MRU reported sssg of 2.1per cent/0.8 per cent, respectively. EMP is the least penetrated in the discount format (approximately 14 per cent by store count vs. L/MRU more than 40 per cent).”

“For the outlook, EMP expects positive sssg in F2023 (aided by Scene+), which if realized, should alleviate investor concerns. Project Horizon targets for F2023 remain on track, with benefits extending into F2024+.”

Though he sees e-commerce costs having “peaked” and expects earnings dilution from its Voila business to “marginally” improve, Mr. Shreedhar cut his full-year earnings per share projections for 2023 and 2024 to $2.81 and $3.18, respectively, from $2.88 and $3.24.

That led him to cut his target for Empire shares to $42 from $48. The average is $47.44, according to Refinitiv data.

“The buy case for EMP is based on continued earnings growth expectations and an attractive valuation. We acknowledge that the market will require evidence of favourable sssg before rewarding the valuation multiple,” he said.

Others making changes include:

* Scotia Capital’s Patricia Baker to $52 from $50 with a “sector outperform” rating.

“Once again, the quarterly performance reflects strong retail execution and ongoing benefits from promo optimization, fueling margin gains, Ex fuel, the Q4 GM rate improved by 17 bps, but the year-over-year change was even better if one were to exclude the impact on the DC [distribution centre] strike (+~35bps),” he said. “Sobeys navigated well through the many challenges in Q4, including supply chain disruptions, labour issues, a strike, and of course, rampant inflation. With EMP.a shares trading at a sizable discount to its grocery peers and an unwarranted, in our view, 9-per-cent hit to the share price [Wednesday], we see a compelling valuation here, particularly in the context of such consistent execution. A renewed NCIB for up to 7 per cent of the float (10.5 million shares) and another dividend hike should provide near-term support.”

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* TD Securities’ Michael Van Aelst to $45 from $50 with a “buy” rating.

“Market trends, including greater mobility and rapid inflation, do not favour Empire’s format mix (approximately 85 per cent/15 per cent conventional/discount) nor efforts to build eCommerce rapidly,” he said. “Its more modest exposure to front-store pharmacy also limits its ability to participate in the post-pandemic recovery within cosmetics/beauty, OTC medications, etc. That said, with forward P/E of 12.0 times (consensus) at eightyear lows — a historically wide 4.5-point discount to L & MRU and well below EMP’s 14.8 times five-year average — these concerns appear well-reflected in Empire’s share price. Near-tern catalysts may not be evident, but we see modest incremental downside and greater upside should guidance be achieved.”

* CIBC World Markets’ Mark Petrie to $47 from $50 with an “outperformer” rating.

“Empire reported mixed Q4 results, with healthy margins and earnings offset by a slower top line. Shares underperformed peers as the market digested the weaker sales figure, but we believe Empire is executing well, and these shifts are largely a reflection of trade-down mechanics vs. material market share losses. We moderate our target multiple to 7.5 times (from 8 times) on account of somewhat slower growth, though we believe EMP is still well-positioned to outperform the industry,” said Mr. Petrie.


TD Securities analyst Sean Steuart remains “positive” on the prospects for West Fraser Timber Co. Ltd. (WFG-N, WFG-T).

However, pointing to lower mid-term free-cash-flow estimates and a tempered target multiple, he lowered his recommendations for its shares to “buy” from “action list buy” after reducing his 2022 and 2023 earnings forecast to account for changes.

“Since we added West Fraser to the Action List in mid-April, the company’s share price has declined 2 per cent versus an average decline of 11 per cent for key peers over the same duration,” he said. “In our view, this outperformance was warranted based on value-accretive capital-deployment initiatives, but given the company’s relative valuation gains, we are comfortable removing West Fraser from the Action List.”

The change came with reductions to his commodity price, volume and operating cost projections.

“We are taking a more conservative stance at the margin, given relative outperformance in recent months,” he said. “We expect that the company will remain aggressive on asset-base investments and opportunistic M&A initiatives, while returning surplus capital to shareholders.”

Mr. Steuart cut his target to US$105 from US$120, below the the US$119.43 average on the Street.


RBC Dominion Securities analyst Walter Spracklin is “positive” on CAE Inc. (CAE-T), citing “secular industry tailwinds, its differentiated service offering and significant investment made during the pandemic.”

Believing those factors “set the stage for robust earnings growth in the long term” and seeing them not “appropriately” reflected in its current share price, he initiated coverage of the Montreal-based company with an “outperform” rating on Thursday.

“We believe secular tailwinds will support 13-per-cent revenue CAGR [compound annual growth rate] FY22-FY25,” he said. “Key drivers of this growth are: i) a medium-term recovery in passenger travel to pre-pandemic levels (35-per-cent growth to reach 2019 levels); ii) pilot training demand expected to grow at 5-per-cent CAGR out to 2029; and in the defense segment iii) increased spending by NATO members driven by Russia’s invasion of Ukraine.”

Mr. Spracklin also emphasized the steep barriers for competitors to the civil aviation training market, calling CAE an “leader” with a 30-per-cent market share.

“We believe this acts as a significant barrier to entry resulting in a secular growth trend and stable margins (RBC: 17-per-cent revenue CAGR and 410bps of margin improvement in Civil FY22-FY25),” he said.

The analyst also feels investors made during the pandemic provide a “platform for growth.”

“On the back of solid FCF generated during the pandemic, CAE was able to invest in growth and executed on a key restructuring initiative,” said Mr. Spracklin. “We point to: i) nine acquisitions totaling $2-billion; ii) a meaningful restructuring program (200 basis points of savings); and iii) a ramp up in growth capex in FY22 above pre-pandemic levels ($220-million in FY22 vs. $200-million in FY20). We view these investments as setting the stage for a significant rebound in growth exiting the pandemic.”

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Seeing near-term reported revenue growth and margin expansion, which he thinks will provide a “strong indication of CAE’s long-term earnings power,” as a potential catalysts for the stock, Mr. Spracklin set a $40 target. The average is $40.29.

“We value CAE shares on a sum of the parts basis using a blended EV/EBITDA multiple of 13.1 times on our FY25 EBITDA estimate of $1,218-million (17-per-cemt CAGR FY22-FY25), discounted back 1-yr,” he said. “We use FY25 as the basis year as we view it as better representing normalized (i.e. post-pandemic) EBITDA. Our 14 times Civil multiple is driven off compares to the Rail and Waste sectors, which trade in the 11 times to 15 times range, and our Defense multiple of 11 times is derived using a 2-times discount to its peers due to lower margins. We anticipate CAE’s valuation will be supported by the company’s favourable industry fundamentals (including secular growth and high barriers to entry), strong management team, high FCF conversion, and the expected recovery in both travel and defense procurement.”


Ahead of the June 29 release of Corus Entertainment Inc.’s (CJR.B-T) third-quarter financial results, Canaccord Genuity analyst Aravinda Galappatthige cut his financial expectations for the remainder of the year, pointing to “slowing” economic conditions and “a likely cautious stance from advertisers.”

“We also believe the supply chain-related headwinds in verticals like auto are ongoing,” he said in a research note. “We are also projecting high opex growth in TV for at least one more quarter owing to increasing programming costs. Inflationary conditions could also affect G&A. We have thus lowered our fiscal 2022 adj EBITDA estimate from $515.2-million to $498.7-million. F2023 is only modestly.”

For the quarter, Mr. Galappatthige is projecting revenue of $418.4-million, up 3 per cent year-over a with both its radio and television segments seeing gains of 4 per cent. His adjusted EBITDA projection of $128.3-million is a decline of 2 per cent.

“With the balance sheet now at 2.7 times net debt/LTM [last 12-month] EBITDA and heading lower, Corus’ risk profile is improving quickly,” he said. “While Q3 may not see a change, we still expect leverage to ease to 2.5 times net debt/LTM EBITDA by Q1/23. We would also be curious to see the level of share repurchases during Q3. Recall, the company had set up an NCIB to repurchase 5 per cent of the class B float, translating to 9.7 million shares.”

Maintaining a “buy” rating for Corus shares, Mr. Galappatthige cut his target by $1 to $6. The average is $7.18.

“In light of the notable sell-off in the broader markets as well as Corus’s closest comps and the aforementioned estimate revisions, we have reduced our target price by $1 per share,” he explained. “We now apply 4.25 times EV/EBITDA 2023 (4.5 times previously) to establish our target. We note that U.S. comps like Warner Bros. Discovery and AMC Networks trade in the 4.5-5.5 times EV/EBITDA range. We believe Corus will continue to trade at a discount to these two peers. However, we maintain our BUY rating on the stock, owing to its solid value credentials, in particular its compelling FCF yield, against the backdrop of easing balance sheet leverage.”


Seeing a “favorable entry point with [the] broader market re-set,” Stifel analyst Justin Keywood initiated coverage of Dentalcorp Holdings Ltd. (DNTL-T) with a “buy” rating on Thursday.

“The company has competitive advantages in scale through purchasing power and operational expertise, leading to more billings and a favorable M&A reputation,” he said. “dentalcorp has a history of double-digit growth, and we believe this upward trajectory will continue with an M&A pipeline of 745 practices, with 200 in advance stages of negotiation (40-per-cent growth). Patient volumes have also rebounded to pre-pandemic levels and health conscious millennials are adhering to stricter dental routines, setting up for greater lifetime value as demand increases with age.”

Touting “strong” positive feedback from dentists who have partnered with the company and believing “health and social media conscious millennials bode well for secular growth,” he set a target of $16 per share. The average is currently $19.

“2022 has been a tough year for markets due to supply chain, geopolitical, inflation, and other risks. dentalcorp is down 30 per cent year-to-date vs. the S&P/TSX down 10 per cent with highly defensive attributes,” said Mr. Keywood. “The business is 100-per-cent based in Canada today, protected from geopolitical risks, and price increases have been implemented to help negative inflationary headwinds, including 7 per cent in 2022 to be consistent with CPI. The demand for dental services remains strong and inelastic, with 75 per cent of the Canadian population visiting their dentist annually and 85-per-cent-plus recurring revenue for dentalcorp.

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“We model in dentalcorp acquiring the majority of practices in the advanced stages of negotiation, along with 4-5-per-cent organic growth. As dentalcorp grows with scale, we also see some operating leverage in EBITDA margin expansion.”


In a separate report, Mr. Keywood also initiated coverage of Inc. (KSI-T) with a “buy” rating, calling its valuation “elevated but supported by strong performance and relative downside protection.”

“Kneat operates an end-to-end SaaS platform that manages the validation or compliance process in pharmaceutical manufacturing,” he said. “The company serves eight of the top 10 global pharma companies in the world in transitioning mostly paper-based systems to digital. We interviewed a top 10 global pharma customer who spoke very highly of Kneat’s platform, its competitive advantages, high ROI, and exceptional service. The customer also described still-antiquated systems that exist within pharma, where digital processes, like Kneat’s offering, have only been implemented in 15 per cent of operations for some areas. The feedback speaks to Kneat’s 100-per-cent customer retention rate and fast growth (150-per-cent 4-year sales CAGR), along with much greater scale ahead. Kneat’s strong balance sheet with $21-million in cash and no debt is also seen as important given the market backdrop, and we see a good combination of defense and offense, leading to our Buy rating.”

His $3.75 target falls short of the $4.30 average on the Street.


Saying Alexco Resource Corp. (AXU-T) is “missing the mark” with its 100-per-cent-owned Keno Hill silver project in Yukon, Canaccord Genuity analyst Kevin MacKenzie downgraded his recommendation to “hold” from “speculative buy” following Wednesday’s operations update.

The Vancouver-based company announced it has suspended milling operations at the facility for 5-6 months, citing an “insufficient” rate of improvement in the advance of underground development.

“With a clear lack of operational execution, a near-term financing overhang, and an outstanding proof of concept, Alexco, in our view, is a show-me story,” said Mr. MacKenzie.

He cut his target for its shares to $1.25 from $2.75. The average on the Street is $1.48.

“While our adjusted target reflects a premium to market, we struggle to recognize a near-term investment thesis beyond a potential acquisition premium,” said Mr. MacKenzie. “As such, we now rate Alexco HOLD, from Speculative Buy previously.

“We highlight Alexco as a potentially attractive acquisition target for an experienced and capitalized silver producer, this given the project’s (1) permitted/established infrastructure, (2) high grade profile, and (3) illustrated district scale upside. That said, we suspect that any potential M&A would likely be centered on renegotiating the project’s silver stream (25-per-cent Ag payable), which is held by Wheaton Precious Metals.”


In other analyst actions:

* Scotia Capital’s Phil Hardie raised his target for AGF Management Ltd. (AGF.B-T) to $8 from $7.75, maintaining a “sector perform” rating, while Desjardins Securities’ Gary Hi cut his target to $8.75 from $9 with a “buy” rating and TD Securities’ Graham Ryding reduced his target to $7.50 from $8 with a “buy” rating. The average target on the Street is $7.93.

“AGF reported strong 2Q results—adjusted EPS and WM EBITDA exceeded our expectations,” said Mr. Ho. “Fund performance was surprisingly strong, driving robust net inflows. We expect a decent EPS and FCF bump from the DSC ban on June 1 (unique to AGF). Continued buybacks, with a pristine balance sheet, positions AGF well when markets recover. However, the market downdraft in June led us to lower our AUM estimates, which drove our target price down.”

* RBC Dominion Securities analyst Tom Callaghan initiated coverage of BTB Real Estate Investment Trust (BTB.UN-T) with a “sector perform” rating and $4.25 target, below the $4.47 average.

“In our minds, along with a healthy yield, BTB offers investors access to a diversified portfolio of real estate properties targeting to double its total assets over the next five years, with an increasing tilt toward the industrial segment. Our Sector Perform recommendation is principally a function of higher risk-adjusted returns elsewhere across our REIT/REOC coverage universe, and our cautious tone toward office fundamentals,” he said.

* Morgan Stanley’s Ioannis Masvoulas lowered his First Quantum Minerals Ltd. (FM-T) target to $34 from $37, maintaining an “equal-weight” recommendation. The average is $43.47.

* Mr. Masvoulas also reduced his target for Lundin Mining Corp. (LUN-T) by $1 to $11.30 with an “equal-weight” rating. The average is $13.85.

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