Tuesday’s analyst upgrades and downgrades

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

The demand for power has brought increased investor interest in renewables companies, according to National Bank Financial analyst Rupert Merer, who predicts “growth ahead in Canada and globally, with data centres, electrification and more.”

“Interest in the IPPs [independent power producers is recovering, with an improving outlook for growth and with rising costs and bond yields now in the rear-view mirror,” he saId. “Power demand in North America could double over the next 25 years, backed by data centre demand, electrification, reshoring of manufacturing and population growth. With this and a market push to green power, the sector has a long runway. IPPs with exposure to the Canadian market are well positioned, as the market seems to have less competition (so far) and should benefit from a 30-per-cent Canadian ITC [investment tax credit].

“Recently, NPI, BEP, INE and BLX have done well in RFPs in Ontario and Quebec for wind power and battery capacity (there are more to come). In the U.S., Brookfield has had success securing 10.5 GW of growth to support Microsoft and AY continues to grow its development pipeline, showing a path to competitiveness in that market too. PIF could soon announce M&A in less competitive LatAm markets and ARR sees a large pipeline of investment opportunities for its unique royalty model. With the operating scale and strong relationships that the companies have in respective target markets, they should find success.”

In a research report released Tuesday, Mr. Merer emphasized valuations are picking up, however he thinks the sector remains “attractive” and sees an increased likelihood of rising M&A activity.

“The IPPs have performed poorly over the last couple of years, with headwinds from higher bond yields, inflation and uncooperative weather,” he said. “Valuations are now improving, but remain below fair value, in our view. M&A in the sector could start to pick-up soon and asset recycling should be more commonly used to fund growth. There are large asset packages that could sell (like AQN and AY), and growth through acquisition is possible across the sector. We estimate an average implied cost of equity at about 10.8 per cent, which is down from recent highs, but still high relative to historical levels and relative to the market.”

Given “renewed support” for IPP in the market “with a growing consensus around the potential for growth in power demand over the next 25 years,” Mr. Merer thinks power demand should be “largely supported by renewables (with natural gas and nuclear too) and offers a strong investment opportunity for the infrastructure sector.”

“With less concern for rising rates and an improved growth outlook, investor perceptions of risk have come down,” he added.

Accordingly, after reducing his target discount rate for companies in his coverage universe, the analyst sees the potential for attractive returns with several catalysts on the horizon.

“With a 12-month forecast for the U.S. and Canadian 10-yr bond yields at 4.0 per cent and 3.2 per cent respectively and a lower MRP forecast (now 4.5 per cent, was 5.0 per cent), we have raised targets,” he said. “The sector could have a few catalysts soon, including asset sell-downs, M&A and the passage of a Canadian ITC for renewable power infrastructure. We believe the stocks have upside with increasing confidence in the outlook for growth and recovering valuations. Our top picks on return to target are INE, NPI, PIF and BLX.”

His target adjustments are:

• Algonquin Power & Utilities Corp. (AQN-N/AQN-T, “sector perform”) to US$7.25 from US$6.75. The average on the Street is US$6.75.
• Atlantica Sustainable Infrastructure PLC (AY-Q, “sector perform”) to US$22 from US$20. Average: US$22.56.
• Boralex Inc. (BLX-T, “outperform”) to $43 from $41. Average: $38.90.
• Brookfield Renewable Partners LP (BEP-N/BEP.UN-T, “outperform”) to US$32 from US$30. Average: US$28.35.
• Innergex Renewable Energy Inc. (INE-T, “outperform”) to $16 (Street high) from $15. Average: $10.98.
• Northland Power Inc. (NPI-T, “outperform”) to $34 from $32. Average: $29.67.

His targets for Altius Renewables Royalties Corp. (ARR-T, “outperform”) and Polaris Renewable Energy Inc. (PIF-T, “outperform”) remain $11 and $18, respectively. The averages are $12.29 and $22.75, respectively.

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Ahead of the June 12 release of its first-quarter fiscal 2025 financial results, “tailwinds for growth remain” for Dollarama Inc. (DOL-T), according to National Bank Financial analyst Vishal Shreedhar.

“Our forecast of solid same-store sales growth (on top of strong performance last year) is supported by our review of customer perception of Dollarama stores,” he said. Specifically, our proprietary sentiment analysis of more than 25,000 customer reviews since May 2022 suggests that sentiment remains positive and generally stable year-over-year for Dollarama. In addition, our proprietary pricing analysis points to average article price inflation of 3 per cent year-over-year. Specifically, we note unchanged year-over-year pricing for 86 per cent of like-for-like items and 8-per-cent average inflation for the remaining 14 per cent..

“We view the current backdrop to suggest continued tailwinds for Dollarama. Our review of retailer commentary suggests largely consistent trends with prior quarters, including an ongoing consumer search for value.”

For the quarter, Mr. Shreedhar is currently projecting total sales of $1.407-billion, up from $1.295-billion during the same period a year ago but narrowly lower than the consensus of $1.412-billion. Earnings per share are expected to increase 16.1 per cent (or 10 cents) year-over-year to 73 cents, which is 3 cents lower than the Street’s projection, on “high-single-digit revenue growth (new stores and mid-single-digit same store sales growth), Dollarcity contribution, share repurchases over the last 12 months and gross margin expansion, partly offset by higher SG&A.”

“We project gross margin rate expansion (lower shipping and logistics costs, partly offset by higher shrink) and SG&A deleverage (wage pressure and higher operating costs, partly offset by scaling and efficiency/labour productivity benefits),” he added.

With modest increases to his earnings expectations for both fiscal 2025 and 2026, Mr. Shreedhar hiked his target for Dollarama shares to $130 from $120, keeping an “outperform” recommendation. The average on the Street is $116.58.

“We continue to hold a positive view on DOL’s shares given its defensive growth orientation supported by strong cash flows, a solid balance sheet and resilient sales performance,” he said. “Over the medium term, we believe that Dollarama will be well positioned to grow earnings given anticipated network expansion, favorable sssg [same-store sales growth] and ongoing development of the international business. In addition, we believe that acquisitions are a possibility, further expanding the international footprint.

“Given premium valuation amidst an increasingly competitive backdrop, a key investor question is: can Dollarama outperform. We think it can, provided fundamental performance remains strong. In our view, Dollarama is a well-managed retailer, and we expect the company’s growth to remain solid. That said, we acknowledge that DOL’s performance will also be governed, to some degree, by market demand for stocks with defensive properties.”

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In a research report released Tuesday titled Canadian Technology: Q1/2024 Icons & Outliers, RBC Dominion Securities analyst Paul Treiber said he expects the performance of Canadian tech stocks will “strengthen” through 2024 after underperforming the broader market thus far (with the S&P/TSX Info-tech index down 7 per cent year-to-date).

“Calendar Q1 earnings were turbulent for several large cap Canadian tech stocks (e.g. SHOP, OTEX) which led to Canadian tech stocks being down 1 per cent on average after reporting Q1 results,” he said. “However, of the 14 companies in our Canadian Technology coverage universe that have reported calendar Q1 earnings, the nine stocks (64 per cent) that exceeded revenue expectations rallied 1.1 per cent following results, whereas the five stocks (36 per cent) that missed consensus declined 4.3 per cent. This performance is slightly better than that of the 100 largest tech stocks in Canada (the ‘Canadian tech top 100′), where 61 per cent exceeded revenue expectations and 39 per cent missed last quarter.

“Amidst a heightened focus on tech profitability, stocks that guided to lower margins and new investments in 2024 experienced sharp pullbacks. While near-term profitability for these stocks is lower than previously expected, new investments help better position these companies to address future growth opportunities. We believe these stocks are likely to rally if stronger growth materializes as a result of new investments.”

Mr. Treiber noted full-year calendar 2024 estimates have declined slightly, even though first-quarter were narrowly ahead of expectations, “as expectations for a rebound are slightly pushed out.” Consensus revenue estimates across his coverage universe slid by an average 1 per cent for the second quarter and 1 per cent for the full year.

“The rate of change in estimates is not deteriorating; the decline in estimates following Q1 is similar to Q4 (1-per-cent decrease for Q1/CY24 and 1-per-cent for CY24). The reduction in estimates reflects the continued push out of expectations for a potential improvement in enterprise discretionary spending, as sales cycles remain elongated. While GenAI is a long-term driver for increased enterprise software spending, it could dampen near-term spending as companies delay other initiatives in order to evaluate GenAI. Regarding consumer spending, management teams of our covered companies that are dependent on consumer spending indicate that spending remained healthy through Q1 and Q2 to date.”

For the remainder of 2024, Mr. Treiber said he sees three stocks as “most attractively positioned.” They are Constellation Software Inc. (CSU-T), Shopify Inc. (SHOP-T) and Kinaxis Inc. (KXS-T).

“We see secular growth stocks such as Kinaxis and Shopify delivering mid-teens to low 20-per-cent revenue growth in 2024, with potential growth acceleration in the second half of 2024,” he said. “For Constellation, we forecast 22-per-cent revenue growth in 2024 due to strong contribution from acquisitions. Moreover, valuations for most of our coverage universe are below historical averages. For several stocks, valuations are at trough levels. For example, Kinaxis is trading at 6 times NTM EV/S [next 12-month enterprise value to sales] and 27 times NTM EV/EBITDA, which rank in the bottom quartile for the last five years.”

His ratings and targets for the trio are:

* Constellation Software with an “outperform” rating and a Street-high $4,300 target. The average on the Street is $4,153.75.

Analyst: “We believe that Constellation Software is likely to generate one of the highest returns for shareholders over the long term in our coverage universe. Our Outperform thesis reflects: 1) Constellation’s ability to rapidly compound capital through acquisitions; 2) solid underlying fundamentals as a result of an attractive market structure and ROIC-based performance incentives; and 3) Constellation’s valuation appears attractive.”

* Kinaxis with an “outperform” rating and $200 target. Average: $196.

Analyst: “Our Outperform recommendation is based on: 1) Kinaxis’s compelling long-term growth story; 2) SaaS and ARR growth appear likely to re-accelerate; 3) operating leverage is likely to drive margin expansion; and 4) valuation below peers and near trough levels.”

* Shopify with an “outperform” rating and US$85 target. Average: US$75.74.

Analyst: “We believe Shopify is one of the most compelling organic growth stories in our coverage. Our Outperform recommendation reflects: 1) Shopify is likely a key beneficiary of the transition to next-generation commerce platforms and is just starting to monetize many new offerings; 2) further margin expansion due to operating leverage is likely over time; and 3) Shopify is likely to sustain a premium valuation.”

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Desjardins Securities analyst John Sclodnick was “impressed” with recently announced resource estimate at Aya Gold & Silver Inc.’s (AYA-T) Boumadine mine in western Morocco and “most excited by the continued resource growth potential.”

“So far, less than 10-per-cent of the 5.0 square kilometre mineralized main trend has been drilled at Boumadine and Aya has 120,000 metres with seven rigs planned for 2024, while the current resource is based on under 100,000 metres of drilling,” he said. “Aya continues to build out its land position, recently adding another seven permits to bring the total Boumadine land package to nearly 200 square kilometres. The recent geophysical survey results show a potential parallel structure of the Boumadine main trend just to the west. Drilling in 2024 will be split between infill and testing new targets, including those from the geophysical surveys. We expect the aggressive drill program to lead to significant future resource growth.”

Mr. Sclodnick’s updated basic case valuation for Boumadine now assumes “a very conservative” 50-per-cent growth in resources, leading him to raise his net asset value by 19 per cent to $14.14 per share (from $11.87). That led him to increase his target for Aya shares to $21 from $18 with a “buy” rating. The average target on the Street is $18.86.

“In our Boumadine upside scenario with 200-per-cent resource growth, our NAV would increase by 31 per cent to $15.52 per share, resulting in a $23.50 target price,” he said. “In our blue sky scenario with 300-per-cent resource growth, Boumadine would be worth more than Zgounder, and our NAV would increase by 53 per cent to $18.18 per share, resulting in a $27.50 target price.”

“As the only pure-play silver producer and with an unmatched growth profile, we expect Aya to trade at a premium valuation vs silver peers.”

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While Desjardins Securities analyst Jerome Dubreuil’s forecast for Quisitive Technology Solutions Inc. (QUIS-X) is now at the low end of its reduced guidance, he thinks its shares are “attractive at current levels given the quality of the business and low leverage.”

“On May 22 after market, QUIS reported an in-line quarter but lowered the upper end of its annual guidance; this is consistent with what we have seen with other global IT services peers as the recovery in IT spending is taking longer to materialize than expected,” he said.

“QUIS now anticipates 2024 revenue in the range of US$120–130-million, down from the previous guidance of US$123–137-million. This is a result of the overall market softness as well as a US$1.2-million negative impact from an accounting change in relation to PayiQ revenue recognition. However, we note that consensus 2024 revenue of $125-million was already toward the lower end of the company’s previous guidance. QUIS also slightly revised downward its 2024 EBITDA guidance to US$15–17-million (consensus US$15.4-milllion) from US$15–18-million. Management still expects revenue growth to resume in 2H24, partly stemming from increased investments in sales and marketing. Overall, management’s comments are consistent with those of global peers, which continue to grapple with sales pipeline conversion.”

Mr. Dubreuil does expect the Toronto-based Microsoft Cloud and AI solutions provider to return to positive top-line growth later in 2024, touting potential gains from “momentum” in artificial intelligence interest.

“During the quarter, QUIS was awarded the AI and Machine Learning in Microsoft Azure specialization,” he said. “The company is now working closely with its partner on targeted AI marketing campaigns. Management recognizes that AI might have contributed toward somewhat freezing IT services demand as companies looked to assess the technology’s potential. We believe this dynamic should start to wane shortly, which is consistent with management’s comments regarding its clients’ considerable interest in AI.”

Reiterating his “buy” rating for Quisitive shares, Mr. Dubreuil cut his target to 60 cents, matching the average on the Street, from 70 cents after reducing his revenue and adjusted EBITDA estimates for both 2024 and 2025.

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In other analyst actions:

* Ahead of its June 5 earnings release, Stifel’s Jim Duffy cut his Lululemon Athletica Inc. (LULU-Q) target to US$410 from US$539, reiterating a “buy” rating. The average on the Street is US$434.73.

“LULU shares have rerated 36.7 per cent (vs. SPX up 1.2 per cent) since issuing disappointing FY24 guidance implying sluggish U.S. trends,” he said. “The prevailing narrative is bearish citing 1) competition, 2) unfavorable shift in fashion/silhouette, and 3) negative comps in the U.S. market. The announced departure of Chief Product Officer, Sun Choe added fuel to the cautious narrative. Until this narrative is dispelled, pressure on shares is likely to persist. FY1Q earnings on June 5th represent the first opportunity to ease concern but U.S. checks on the women’s business suggest insipid trends. We think structural concerns are over-played, though softness reflects merchandising missteps, which might take until 4Q to correct. Short-term dislocation presents opportunity for long-term growth investors. While the next few quarters could be a bumpy road, we remain compelled by the best-in-class operating model and global white space opportunity. We reiterate our BUY rating though are reducing the 12 mos.”