AFN Stock

Desjardins Capital Markets released its 2023 preview on Tuesday, with a number of tech industry-related names in its mix of top picks. Investors have had to deal with a lot of interesting dynamics this year, from Omicron and the after-effects of the “COVID bounce” on tech stocks to inflation, higher interest rates, supply chain issues and geopolitical factors. A number of those issues are still hanging around as we head into 2023, which means it’ll definitely be a stock-pickers market, according to Desjardins analysts, who highlighted their top picks across nine market sectors. Tech-wise, five stocks stood out within the Diversified Industries and Telecom, Media & Tech spaces. From Diversified Industries, analysts Gary Ho and Frederic Tremblay said 2023 will have its challenges given the changing macro variables, with the potential for a soft or hard recession being key. The analysts emphasized companies with both business resilience and growth opportunities, healthy balance sheets and disciplined management, along with tools to offset labour shortages, pricing power and tailwinds related to deglobalization. First up in Desjardins’ tech-related picks is agri-food industry company Ag Growth International (Ag Growth International Stock Quote, Charts, News, Analysts, Financials TSX:AFN), which the Desjardins analysts like for its robust momentum, strong fundamentals and sizeable backlog. Ho and Tremblay said Ag Growth has also made solid strides in bolstering its balance sheet to drive its net debt/EBITDA multiple to 4.1x in the third quarter 2022 from 5.3x in the first quarter 2022. Ho and Tremblay estimate AFN to be currently trading at an attractive multiple of 7.1x for its 2023 EV/EBITDA compared to a historical range of 7.9x-10.1x as well as compared its peers at 10.2x. “AFN has delivered a home-run year, with four consecutive quarters of strong beats (versus consensus) and two consecutive guidance raises (now expecting 2022 adjusted EBITDA of $228 million+; we forecast C$231 million). Backlog was up four per cent yoy as of 3Q22 versus last year’s record backlog, which itself was up 99 per cent yoy, with robust sales pipelines and higher win rates. Ag fundamentals continue to be supportive, backstopped by a shared global focus on food security and supply chain resilience,” Ho and Tremblay wrote. Non-prime leasing and lending company goeasy (goeasy Stock Quote, Charts, News, Analysts, Financials TSX:GSY) is also looking good, according to Ho and Tremblay, who like the company’s tweaking of its credit underwriting models, which started in the fourth quarter 2021. Adjustments have included raising the credit floor, capping loan size, adjusting its debt to income formula and introducing next-generation credit models to reduce default rates. The analysts said there’s upside potential to management’s three-year guidance of ending loan book balances of $3.4 billion and $4.0 billion for 2023 and 2024, respectively, while the company’s equity raise in November of $58 million frees up over $350 million in liquidity to support accelerated organic growth without jeopardizing its current credit rating and covenant metrics. On valuation, the analysts say GSY is looking attractive, as despite posting EPS growth the stock trades at 8.0x forward P/E versus a peak of 17x and its five-year average of 10.1x. “We expect GSY to revise guidance alongside 4Q results in February. There is a long runway of organic growth opportunities for GSY, especially on secured products,” Ho and Tremblay wrote. “The stock presents an excellent risk/reward profile, in our view,” they said. Water treatment infrastructure company H2O Innovation (H2O Innovation Stock Quote, Charts, News, Analysts, Financials TSX:HEO) also got the nod, as Ho and Tremblay see “a tidal wave of organic growth opportunities” ahead. H2O has just posted four consecutive quarters of double-digit organic growth, the analysts noted, including 25.0 per cent year-over-year growth in their most recent quarter, while a record backlog, new project wins and a strong pipeline of opportunities up ahead point to a continuation of the positive trajectory. “While the company is implementing pricing actions across its three segments, we believe the bulk of the growth has been, and will largely remain, driven by higher volume as HEO looks advantageously positioned to meet growing demand and gain market share through product innovation, revenue synergies and distribution/sales network expansion,” Ho and Tremblay said. At the same time, the analysts pointed to the fact that resilience is naturally built into the water pure-play company, with secular tailwinds such as water scarcity, ageing infrastructure, increasing regulations, population growth and corporate inititatives on water management. As for valuation, Ho and Tremblay called HEO’s “mouth-watering” at about 9x their EV/EBITDA estimates, which is at the lower end of the stock’s 9x-15x historical range and a discount to its peer average at 12.5x. “We estimate that HEO could be a $4+ stock (double from current levels) if execution of the three-year plan is solid and if it closes the valuation gap with peers. Using a more conservative valuation scenario where the multiple only partially recovers to ~10x, we estimate that HEO could be a $3+ stock (ie a ~35 per cent+ potential return from current levels) if performance is in line with management’s plan,” they said. Turning to the Telecom, Media & Tech report from Desjardins, analyst Jerome Dubreuil named Quebecor Inc (Quebecor Inc Stock Quote, Charts, News, Analysts, Financials TSX:QBR) his #1 pick among telecoms, saying the stock represents an underappreciated way to play the expected closing of the Rogers-Shaw merger (likely to occur at the tail end of 2022 or in the first quarter 2023), as the terms of its deal for Shaw’s Freedom Mobile will significantly derisk Quebecor’s national ambitions. “We believe the market could warm up to the idea of a new, long runway of growth as more guidance is provided about integration costs, which we expect to be manageable,” Dubreuil said. “In addition to the upside we see on the SJR deal closing, we believe RCI’s medium-term downside is limited given its large discount to the Big Three peers.” On the Tech side, Dubreuil focused on IT Services, a sector which he thinks is set up to do better in 2023, with strong tailwinds like digitization, solid free cash flow generation from many names and attractive valuations. From that sector, Dubreuil’s top pick is Microsoft cloud solutions provider Quisitive Technology Solutions (Quisitive Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSXV:QUIS), where 2023 is expected to be the real coming out party for the company’s cloud-based payments platform PayiQ (formerly LedgerPay). Dubreuil said delays in the rollout have impacted QUIS’ share price, but he thinks this has been overdone. “We believe PayiQ will not contribute to EBITDA in 2023 and, therefore, that no value for PayiQ is priced into the stock at this point; we also do not believe delays were due to management—it is difficult to control the situation when doing business with companies as large as credit card companies,” Dubreuil wrote. “We expect QUIS to be back in control of the PayiQ timeline after it receives certification from American Express and Discover in early 2023,” he said. Stock: Ag Growth International Desjardins Rating: Buy Target Price: $55.00 Projected 12-month Return: 28 per cent (All returns are as of the publication date of the Desjardins report) Stock: goeasy Ltd Desjardins Rating: Buy Target Price: $185.00 Projected 12-month Return: 68 per cent Stock: H2O Innovation Desjardins Rating: Buy Target Price: $3.50 Projected 12-month Return: 63 per cent Stock: Quebecor Desjardins Rating: Buy Target Price: $35.00 Projected 12-month Return: 25 per cent Stock: Quisitive Technology Solutions Desjardins Rating: Buy Target Price: $1.40 Projected 12-month Return: 146 per cent

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