Inside the Market’s roundup of some of today’s key analyst actions
CIBC World Markets analyst Paul Holden has adopted a “defensive posture” on Canadian banks, believing their shares are “not being priced for the same economic risks that have already been incorporated into the bond market and U.S. bank stocks” and seeing “too many warning signs to ignore.”
”U.S. banks stocks are down more than 18 per cent over the last three months, while Canadian banks are down only less than 4 per cent on average,” he said. “The Canadian P/E [price-to-earnings] discount has narrowed to only 4 per cent versus a long-term average of 16 per cent and a level we rarely see. The average P/BV [price-to-book value] for Canadian banks of 1.8 times is above the long-term average of 1.7 times despite mounting economic risks. There is more room for multiple compression than multiple expansion.
“We have constructed economic variables for two alternative economic scenarios: recession and stagflation. We apply these economic variables to our industry-level profit assumptions and then our individual banking models. Our approach implies a little over 30-per-cent EPS downside under both scenarios. A less complicated approach of taking current P/BV vs. averages across the first few months of 2020 (1.2 times) also points to roughly 30-per-cent downside risk.”
In a research report released Monday, Mr. Holden raised his recommendation for a pair of stocks, calling them “lower risk banks.”
They are:
* National Bank of Canada (NA-T) to “outperformer” from “neutral” with a target of $102, down from $108. The average on the Street is $110.64, according to Refinitiv data.
* Royal Bank of Canada (RY-T) to “outperformer” and “neutral” with a target of $149, down from $151. Average: $150.70.
“Our scenario analysis does not suggest these banks necessarily have less EPS downside, but other defensive attributes should help on a relative basis,” said Mr. Holden. “RY and NA have the highest CET1 ratios in the group (pro forma acquisitions), offer the most earnings diversification (this was very beneficial in 2020) and show the least downside risk when comparing current P/BV vs. early 2020.”
Citing “more pro-cyclical calls,” he downgraded three banks:
* Canadian Western Bank (CWB-T) to “neutral” from “outperformer” with a $38 target, down from $45. Average: $44.13.
* Bank of Nova Scotia (BNS-T) to “neutral” from “outperformer” with a $94, down from $105. Average: $97.80.
* Toronto-Dominion Bank (TD-T) to “neutral” from “outperformer” with a target of $103, down from $115. Average: $110.04.
“We downgrade TD from Outperformer to Neutral given that its CET1 pro forma the First Horizon acquisition is at the bottom end of the group range, higher than average credit risk and less earnings diversification. We downgrade BNS from Outperformer to Neutral primarily based on higher-than-average credit risk and less remaining credit reserves. We downgrade CWB from Outperformer to Neutral based on its CET1 ratio, credit reserves and lack of earnings diversification,” he said.
He also made these other target adjustments:
* Bank of Montreal (BMO-T, “neutral”) to $150 from $156. Average: $167.66.
* Laurentian Bank of Canada (LB-T, “neutral”) to $44 from $48. Average: $48.09.
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RBC Dominion Securities analyst Andrew Wong thinks Cameco Corp. (CCO-T) is poised to benefit from significant changes to the global uranium market stemming from the Russia-Ukraine war.
Seeing it “best-positioned to meet market needs in this transition with Western-based proven and potential production along the nuclear fuel cycle,” he raised his rating for the Vancouver-based company to “outperform” from “sector perform”
“We think Cameco has a favourable asset mix that is best-positioned to meet the market transition — proven and currently operating Western-based uranium mines with production upside (we have raised long-term production at McArthur to 25Mlbs on a 100-per-cent basis); Western-based conversion in a market with severe shortages in conversion supply; and long-term optionality in advanced laser enrichment that could meet the U.S. need for future enrichment capacity,” said Mr. Wong.
In a research report released Monday, he raised his uranium demand forecast “significantly” by 10 per cent globally and 15 per cent in the West through 2035. Concurrently, he lowered his supply project by 3 per cent globally.
“As Western-aligned markets (US, EU, and allies) move to shift away from reliance on Russian enrichment, we expect Western enrichers to move into overfeed, resulting in significantly increased uranium demand and reduced secondary supply from prior enricher underfeed,” he said. “More importantly, we see a severe deficit in the Western-aligned markets, which could result in a price premium for Western production as geopolitical concerns rise and product origin becomes more important.
“We have increased our long-term uranium price to $65 per pound U3O8 from $50 per pound, taking into account a more severe deficit and recent cost inflation. .... In the near term, we see potential uranium price upside as utilities work to reduce Russian exposure while sanctions pressure an already tight supply chain. Utilities have been more active in conversion and enrichment due to immediate shortages in those areas, but we expect activity to move upstream into uranium as downstream services are secured. Concurrently, investor interest in uranium has been very strong, which may continue to drive capital flows into physical uranium purchases.”
Mr. Wong said Cameco’s premium valuation reflects “strong” investor interest, and he expects it to stay there “due to a combination of strong investor interest in nuclear and uranium, limited publicly listed and liquid uranium producers, momentum in uranium prices, and a strong financial position that limits downside. In positive uranium markets, Cameco has previously been valued between 1.5 times and 2.5 times P/NAV.”
He hiked his target for its shares $50 from $30. The average on the Street is $38.53.
Concurrently, in response to his market view, Mr. Wong also raised Vancouver’s Nexgen Energy Ltd. (NXE-T) to “outperform” from “sector perform” and increased his target to $10 from $7. The average is $10.09.
“We think NexGen’s attractive and highly economic Arrow deposit may be well-timed to coincide with the projected long-term uranium deficit in the late 2020s/early 2030s, assuming that permitting and construction are on track,” he said. “We would still like to see the company enter long-term contracts to ensure a home for future production as the project nears construction, but our previous concerns regarding market risk have been somewhat alleviated by the severe longterm deficit we see forming in the early 2030s and NexGen’s work to add flexibility to the project.
“We continue to see permitting as the key hurdle given the lack of projects that have been mined in the Western Athabasca basin and general risks/delays around uranium mine permitting. NexGen plans to submit an Environmental Impact Statement in 2022, which would be a significant step forward in the permitting process, and the company has indicated constant communication with the regulatory authorities to help smooth the process.”
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Citing improving fundamentals, diminishing near-term regulatory risk and thinking its valuation “looks good,” Scotia Capital raised Canadian Apartment Properties REIT (CAR.UN-T) to “sector outperform” from “sector perform” on Monday.
“We are upgrading CAR ... with CAR joining IIP [InterRent REIT] as our 2nd SO-rated CAD multi-family REIT,” he said. “Our intact $64.50 TP = a 28-per-cent NTM [next 12-month] total return, the 2nd highest of our Sector-Perform REITs, and well above 16-per-cent sector average (peer average = 22 per cent). ‘
“We’ve discussed a potentially more positive view on the ‘regulated’ Apartment REITs (i.e., Ontario-focused) since last year but resisted upgrading any prior to [Thursday’s] Federal Budget. While it (Budget) doesn’t fully eliminate the overhang (see link to our note) as it “kicks the can on some policy reviews”, we think CAR’s 19-per-cent under-performance vs. Sector since Sept/21 (down 2 per cent since Liberal-NDP announcement on March 22nd) is overdone and should reverse. The 14-per-cent trading discount to our Current NAVPU [net asset value per unit has been worse only 6 per cent of the time. We see 10-per-cent-plus unit price outperformance (vs. sector) through the summer. Our NTM NAVPU growth (11 per cent) + yield (3 per cent) = 14% per cent without the trading discount narrowing (CAR trades at a 23-per-cent discount to our $66.50 Forward NAVPU). The time feels right to get into the CAR...units!
Mr. Saric’s target for CAP REIT shares remains $64.50. The average is $67.
“Bottom-line, we think CAR is a high-quality REIT with a very good track record of superior growth available at a superior price. 2022 catalysts include: improved rent spreads, NCIB activity, clarity on Ontario election and Federal policy reviews (and privatization if outcome is negative),” he said.
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RBC Dominion Securities analyst Drew McReynolds expects Canadian telecom stocks to continue to be “major beneficiaries” of a “constructive” fundamental and macro backdrop.
In a research note, he predicted first-quarter results will bring a third consecutive quarter of “healthy” wireless activity with little change to recent wireline trends.
“Notwithstanding a major macro reversal, we believe constructive fundamentals support an average 2021-2024 NAV CAGR [net asset value compound annual growth rate] of 6-7 per cent for the group, strongly suggesting the roughly 10-per-cent annual total return compounding potential of the sector remains intact,” he said. “Company-wise, we expect Rogers to continue to be the biggest beneficiary of the ongoing recovery in the wireless market in part due to having been hit the hardest by COVID-19 in 2020 and 2021.
With S&P/TSX Telecom Index having generated a year-to-date total return of 12 per cent compared to 3 per cent for the S&P/TSX Composite Index, Mr. McReynolds thinks Canadian telecom stocks have been “beneficiaries from a flight to quality/safety, particularly in light of Russia/Ukraine and rising recession concerns.”
“The strength of such market rotation has clearly neutralized what would otherwise be a negative impact on valuations and share price performance due to rising interest rates/bond yields,” he said. “While Canadian telecom stocks are not immune to a recession, we would expect the sector to outperform the broader market in a hard-landing economic scenario assuming continued demand for safety/quality. On the other hand, should central banks be able to orchestrate a soft landing, ultimately triggering a reversal in fund flows away from defense, we would expect the sector to underperform the broader market – particularly given current telecom valuations and should any such reversal be concurrent with a continued rise in bond yields.”
Mr. McReynolds raised his target prices for stocks in the sector:
* BCE Inc. (BCE-T, “sector perform”) to $69 from $66. Average: $67.67.
“We believe BCE is a model of consistency with the company delivering an attractive balance of growth and profitability while continuing to make significant investments to future-proof the business,” he said. “In addition to major strategic initiatives anchored around FTTH, we continue to be impressed by BCE’s extensive array of existing and new tactical initiatives. Bigger picture, we continue to believe BCE’s competitive position relative to peers could see the greatest gains over the medium term driven by FTTH expansion and 5G deployment across Canada’s largest integrated wireline-wireless network footprint, and growth in 5G B2B. We believe BCE is well positioned to deliver continued annual dividend growth reflecting the measured migration to unlimited plans/EIPs, residential Internet market share gains driven by sustained FTTH/FWA investment, a gradual improvement at Bell Media alongside digital initiatives, and the realization of additional cost efficiencies that leverage a scale advantage.”
* Cogeco Communications Inc. (CCA-T, “sector perform”) to $127 from $126. Average: $126.60.
“We believe management continues to execute on multiple growth initiatives that include U.S. M&A with the now ongoing integration of WOW Ohio, rural broadband expansion and potential entry into the wireless market in Canada,” he said. “Furthermore, we see growing synergies and scale benefits between Canadian Broadband and American Broadband that are helping to underpin 5-per-cent average annual NAV growth through F2024E largely consistent with the average for Canadian peers. While the company’s competitive position longer term is somewhat uncertain given the absence of wireless against the backdrop of expanding FTTH/5G/FWA footprints, we do see incremental growth opportunities for American Broadband given its favourable competitive position in Internet, and for Canadian Broadband under various wireless regulatory and M&A scenarios. Although we see value in the stock at current levels, we remain patient for more timely entry points.”
* Rogers Communications Inc. (RCI.B-T, “sector perform”) to $75 from $72. Average: $73.53.
“At 8.3 times FTM [forward 12-month] EV/EBITDA, Rogers trades at a discount to large cap peers (9.4 times-10.2 times), which we attribute to a variety of factors including relative underperformance through COVID-19, recent Board/management turmoil, execution risk on remedies and integration synergies related to the Shaw acquisition, and higher proforma leverage at 5 times,” he said. “While in the near term we see better risk-adjusted returns elsewhere in the sector and thus remain patient for a more attractive entry point, we do see potential for multi-year upside in the shares driven by: (i) a forecast 9-per-cent NAV CAGR through 2024E boosted by exposure to a gradual recovery in roaming revenue, easing overage headwinds, improved Rogers Media performance and the realization of Shaw integration synergies; and (ii) an eventual narrowing of the discount to large cap peers as execution and the balance sheet are de-risked and with Rogers on a firmer 5G competitive footing with Shaw. We also see option value in Rogers’ portfolio of non-telecom assets that could NAV-accretively become a source of funds for strategic initiatives, accelerated debt repayment and/or capital returns.”
* Telus Corp. (T-T, “outperform”) to $37 from $36. Average: $33.93.
“We view much better-than-expected 2022 guidance as a pivotal turning point for TELUS as the company transitions into a new post-FTTH build / 5G phase,” he said. “While there is no finish line as TELUS positions itself to now capture incremental 5G opportunities, we do believe the company is ‘touching down in the end zone’ in 2022/2023, emerging with a distinctively different financial and operational profile relative to most global telecom peers. As FTTH coverage reaches 85-90 per cent of the targeted broadband footprint by the end of 2022E, enhanced capex flexibility should enable TELUS to capitalize on new 5G growth opportunities without meaningful capital constraints, opportunity costs, or FCF impairment. Relative to our current forecast, sources of potential NAV upside include: (i) incremental cost savings associated with FTTH migration and copper de-commissioning; (ii) additional wireline margin expansion driven by Internet flow-through, cloud-migration and/or improved B2B/TELUS Agriculture profitability; and (iii) the crystallization of TELUS Health and TELUS Agriculture. Longer term, given the company’s unique asset mix and under certain operational and regulatory conditions, we see strong strategic and financial rationale for TELUS to explore a transformational re-organization that can fully unlock the value of the company’s core infrastructure assets and core technology assets.”
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In a research note revisiting Canadian energy infrastructure energy companies following first-quarter earnings season, Credit Suisse’s Head of Canada research Andrew Kuske upgraded Pembina Pipeline Corp. (PPL-T) to “outperform” from “neutral” with a target of $56, up from $47 and above the $48.57 average.
“On balance, the Renewables and Power sub-sector remains our overall preferred area for stock exposure,” he said. “Yet, the existing commodity environment can provide volume growth and margin expansion for some of the more regionally exposed businesses via selected commodity businesses (fractionation, the exports of LPGs, refining and processing). For dedicated infrastructure only investors, this dynamic is rather important at the margins, however, the broader Canadian Energy sector and CAD (as a petrodollar) are both meaningful factors for overall funds flow. On that basis, we also focus on generally very favourable funds flow into the Canadian market ... In this context, our target multiples for this sub-sector generally expanded by 0.5 times on EV/EBITDA and resulted target price changes supplemented, at times, by underlying estimate changes.”
His targets changes were:
* AltaGas Ltd. (ALA-T, “outperform”) to $35 from $31. Average: $31.97.
* Enbridge Inc. (ENB-T, “neutral”) to $62 from $58. Average: $57.19.
* Gibson Energy Inc. (GEI-T, “underperform”) to $27 from $25. Average: $25.44.
* Keyera Corp. (KEY-T, “outperform”) to $40.50 from $37. Average: $35.43.
* TC Energy Corp. (TRP-T, “neutral”) to $80 from $74. Average: $69.64.
“For a long list of reasons, we remain constructive on Canadian energy related exposure and that position only strengthened with cascading issues arising from the most recent spate of geopolitical tensions. In this context along with quantifiably positive funds flow into Canada, our modest multiple expansion across the sector is reasonable in light of a compelling energy transition theme and underlying economically advantageous energy production,” Mr. Kuske added.
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National Bank Financial analyst Rupert Merer sees Boralex Inc. (BLX-T) set to capitalize on inflation in power prices, particularly in Europe.
For the first quarter, he’s now projecting record adjusted earnings before interest, taxes, depreciation of $175-million, down from his previous $181-million estimate but in line with the consensus on the Street of $176-million. Though he anticipates wind generation in France will fall below its long-term average, he’s expecting to earn at a weighted average spot price of €215 per megawatt-hour, easily exceeding contracted levels at less than €80/MWh.
“BLX and its peers have performed well, despite rising bond yields,” said Mr. Merer. “The market is likely baking in the impact of inflation on future cash flows, realized through higher power prices. With higher power prices baked into our estimates, we see an increase in our target, consistent with the share price performance. With the EU weaning itself off of cheap Russian gas while cutting CO2 emissions, European power prices could be higher forever and renewable assets are worth more now.”
After updating his financial projections to account for first-quarter production, high power prices and the recent sale of a 30-per-cent stake in its France operating assets, Mr. Merer raised his target for Boralex shares to $48 from $44 with an “outperform” rating. The average target is $45.85.
“If the marginal cost of power in Europe in the future comes from natural gas, supplied largely by LNG, we believe the power price is unlikely to dip below €80/MWh. We believe our power price assumptions are conservative and could see additional upside,” he said.
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Hardwoods Distribution Inc. (HDI-T) is “an especially cheap stock in a cheap sector,” according to Canaccord Genuity analyst Yuri Lunk, who sees it continuing to benefit from “strong” housing repair and remodel spending as well as rising hardwood lumber prices in the near term.
He sees the Langley, B.C.-company “well positioned to outperform the industry” following the recent acquisitions of Mid-Am Building Supply Inc. and Novo Building Products Holdings LLC, which he projects to add nearly US$1-billion sales and helps it to expanding in the growing U.S. residential and repair and remodel markets, which represents 80 per cent of pro forma sales. He said both bring “higher margins, afford attractive cross-selling synergies” and enlarge Hardwoods’ total addressable market.
“HDI shares have dropped 23 per cent year-to-date, in sympathy with the 29-per-cent and 23-per-cent year-to-date declines in the broader S&P Home Builders and S&P Building Products Indices,” he said. “These declines have the residential build products distributors trading near multi-year lows on a P/E [price-to-earnings] basis.
“We believe the increase in U.S. 30-year mortgage rates from 3 per cent to 5 per cent since the beginning of the year has investors pricing in a housing market downturn. Despite higher rates and broader affordability issues, we continue to see several long-term secular drivers of home construction and renovation. These include favourable demographic factors, a housing stock shortage, and the continuation of the work-from-home trend. Therefore, while resetting our expectations of where HDI will trade in this uncertain macro environment, we see more deep value than value trap with the stock trading at just 6 times 2022 estimated EPS vs. peers at 9 times.”
Keeping a “buy” recommendation, Mr. Lynk cut his target for its shares to $60 from $73. The average on the Street is $69.08.
“We believe the stock will trade at 9 times a year from now and EPS can increase 11 per cent year-over-year in 2023, which drives our $60.00 one-year target,” he said. “Previously, we set our target using an 11 times P/E multiple, but our work demonstrates it is unlikely HDI trades at that multiple with earnings close to a cyclical peak.”
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In other analyst actions:
* BMO Nesbitt Burns analyst Raj Ray downgraded Galiano Gold Inc. (GAU-T) to “underperform” from “market perform” with a 50-cent target, down from $1.10 and below the $1.07 average.
“Galiano’s shares have underperformed its peer group in the last 12 months (down 54 per cent vs the GDXJ at breakeven) on the back of operational challenges at the Asanko Gold Mine (AGM; 50:50 joint venture with Gold Fields) that have continued since 2021,” he said. “Consequently, Galiano is currently trading at a discount (0.71x P/NAV5% vs junior gold peer average of 1.3 times) to its peer group. Despite this we are downgrading Galiano to Underperform (from Market Perform) and decreasing target price .. as we see additional operational risks ahead.”
* Canaccord Genuity’s Matthew Lee raised his Black Diamond Group Ltd. (BDI-T) target by $1 to $7, above the $6.88 average, with a “buy” rating.
“Last week, we attended Black Diamond’s investor day and site tour in British Columbia,” he said. “We left with several key takeaways that we believe reinforce our thesis on the name and suggest that the outsized returns being achieved on the Modular Space Solutions (MSS) side are likely to continue in F22, while the Workforce Solutions (WFS) business ramps up utilization. In addition, we demoed BDI’s LodgeLink system and were impressed by the web application, noting that it currently has a larger gamut of solutions than we initially expected. Overall, the visit buttresses our view that the company will be able to deliver a combination of robust EBITDA growth and solid FCF. Our continued conviction in the BDI thesis and the roll-forward of our model to F23 results in a $1 increase in our target.”
* TD Securities’ Graham Ryding reduced his Canaccord Genuity Group Inc. (CF-T) target to $18 from $20, below the $20.67 average, with a “buy” rating.
* Taking a “more cautious” near-term stance on North American retailers due to macro pressures, Wells Fargo’s Ike Boruchow cut his Canada Goose Holdings Inc. (GOOS-T) target to $45 from $55 with an “overweight” recommendation. The average is $46.
* TD Securities’ Vince Valentini cut his Corus Entertainment Inc. (CJR.B-T) target to $7.50 from $10 with an “action list buy” recommendation, while BMO’s Tim Casey lowered his target to $6 from $6.75 with a “market perform” rating. The average is $7.46.
“Q2 results were afflicted by another round of lockdowns impacting both Television and Radio. Looking at the set-up for H2, Corus’ consistent momentum on new platform revenues could benefit from a more comprehensive rollout with its Rogers’ distribution, and commentary around content/other revenues would suggest a strong back-half performance. We anticipate television advertising and radio will improve but the magnitude of improvement is less clear,” said Mr. Casey.
* Following a call with its management, Raymond James’ Stephen Boland cut his Equitable Group Inc. (EQB-T) target to $85 from $88.50 with an “outperform” rating. The average is $97.14.
“We reviewed the public guidance in more detail and received a general update. As a reminder, our estimates do not include the acquisition of Concentra,” he said. “Management expects the acquisition to drive mid-single digit EPS accretion in the first full year post-closing. The deal is expected to drive more than $30 million in run rate synergies by the second full year of ownership as Concentra’s efficiency ratio decreases and becomes more aligned with that of EQB’s.”
* RBC’s Paul Treiber reduced his Goodfood Market Corp. (FOOD-T) target to $3 from $3.75 with a “sector perform” rating. The average is $3.89.
* Jefferies’ Owen Bennett cut his Hexo Corp. (HEXO-T) target to 64 cents from 67 cents with a “hold” rating. The average is $1.39.
* Mr. Bennett also cut his Terrascend Corp. (TER-CN) target to $12.20 from $13 with a “buy” rating. The average is $12.17.
* RBC’s raised his MTY Food Group Inc. (MTY-T) target to $68 from $66 with a “sector perform” rating, while CIBC’s John Zamparo bumped up his target to $77 from $76 with an “outperformer” rating and Scotia’s George Doumet increased his target to $63 from $60 with a “sector perform” rating. The average is $69.14.
“Q1 results were largely in line with our/street expectations. That said, internals were stronger with net closures coming in well ahead of expectations. While too early to call the 75 openings a go-forward trend, we were certainly encouraged by it. MTY remains active on its NCIB (by historical standards), but we have yet to see the restart in the healthy cadence of M&A that we saw pre-pandemic. Furthermore, with the company’s valuation compressed (to 11 times fiscal 2022 EBITDA estimates), we have seen MTY’s public/private multiple differential (especially vis-a-vis U.S. targets) shrink recently,” said Mr. Doumet.
* CIBC’s Hamir Patel cut his Richelieu Hardware Ltd. (RCH-T) target to $47 from $55, below the $49.83 average, with a “neutral” rating.
“While the company continues to execute well, posting another strong quarter with double-digit organic growth (up 16 per cent year-over-year), we now assume a faster normalization of organic growth over the remainder of the year, with base business growth turning negative next year as affordability constraints dampen housing activity,” he said. “That being said, we expect the active pace of acquisitions ($100-million per year of sales year-to-date) and platform expansion initiatives to support above-average performance vs. peers. While we do not build in unannounced acquisitions, we also expect Richelieu to remain active on the M&A front in F2022.”
* After a “very strong operating performance” in its recently completed fiscal 2021, Scotia’s Patricia Baker raised her Roots Corp. (ROOT-T) to $5 from $4.25 with a “sector perform” rating. The average is $4.65.
“The remarkable turnaround at Roots and importantly the enhanced growth platform is owed to the very disciplined and strategic approach to managing promotions, the strong focus on operational efficiencies, and an innovative approach on product assortment, all backed by a strong emphasis on staying true to the long held brand promise,” she said. “Roots Q4 operating results bettered forecasts and consensus, with EPS of $0.45 bettering our $0.33 forecast and consensus of $0.35. In Q4, Roots achieved higher year-over-year sales, significant gross margin expansion, higher year-over-year EBITDA, and a strengthened balance sheet. All these were achieved despite supply chain disruptions and related higher supply chain costs. Roots has come far in resetting the foundation of the business, and we see them well positioned to continue to execute well against their strategic agenda, driving incremental growth, share, and profitability.”
* Berenberg’s Jonathan Guy raised his Yamana Gold Inc. (AUY-N, YRI-T) target to US$8.70 from US$8.10, maintaining a “buy” rating. The average is US$6.87.
David Leeder