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

Despite reporting weaker-than-anticipated first-quarter results that brought “significant” declines in both revenue and profitability, Industrial Alliance Securities analyst Neil Linsdell upgraded DIRTT Environmental Solutions Ltd. (DRT-T, DRTT-Q) on Friday, believing the post-pandemic world should bring opportunities that “work to its strength.”

Though he cautioned about the presence of a "high degree of uncertainty," Mr. Linsdell raised the Calgary-based company, which designs and manufactures custom interior spaces, to "speculative buy" from "hold."

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"2020 will be a difficult year for DIRTT, and Q2 will likely show further declines in revenue and profitability as it reflects more of the COVID-19 shutdowns than Q1 did," he said. "However, if we continue to see governments easing restrictions, we can expect a more moderate decline than we had previously forecasted. Additionally, as businesses grapple with how to keep employees safe and happy in this postpandemic lockdown world, we expect more and more companies to look at reconfiguring office spaces, and wanting to do so as quickly as possible – working to DIRTT’s strengths."

On Thursday after the bell, DIRTT reported revenue of $41-million, down 37 per cent year-over-year (from $65.1-million) and below Mr. Linsdell's $42.4-million projection. That led to an adjusted EBITDA loss of $5.5-million, which also missed his forecast (a $2.8-million loss).

“Even before the COVID-19 impact, DIRTT had struggled with disruptions to the sales force and distribution partner network since a corporate shakeup in January 2018, and significant churn in leadership since then, with revisions to processes and strategy,” the analyst said. “In April, order entry was only slightly lower than in Q1, which would be more positive than our initial expectation. If governments continue to loosen lockdown restrictions from this point forward, we could expect a more modest decline than what we had been forecasting (for Q2 and Q3 specifically).”

"While the severity and extent of this global pandemic are still uncertain, we can imagine that when we finally pass through it we will likely see an increased focus on preparedness in the healthcare industry, which might further favour DIRTT’s solutions, specifically in the modular concept and the ability to re-task space quickly. Additionally, we could see a lot of other companies re-evaluating the high-density, openconcept work environment, and revisiting flexible solutions such as DIRTT’s."

Anticipating "many" opportunities over the next few years with "proper effort and execution," Mr. Linsdell raised his revenue and earnings expectations for 2020 through 2022.

He also increased his target for DIRTT shares to $2.15 from $1.40. The average is $2.71.

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Citing “increased confidence in the firm’s forward outlook amidst the current COVID crisis,” Raymond James analyst Steve Hansen upgraded Ag Growth International Inc. (AFN-T) to “outperform” from “market perform” following a first-quarter earnings beat.

On Thursday before the bell, Winnipeg-based Ag Growth reported adjusted EBITDA for the quarter of $25.7-million, down 16.3 per cent year-over-year but ahead of the projections of both Mr. Hansen ($23.8-million) and the Street ($23.7-million).

“While COVID-related risks are expected to linger, several variables/factors have improved our confidence/visibility in AGI’s outlook since last month, including: 1) the firm’s manufacturing plants are all back in operation (Italy/France/80 per cent. India/75 per cent, Brazil/50 per cent, NA/100 per cent) — with Brazil expected back to 100 per cent as early as next week; 2) AGI’s backlog is reportedly up 9 per cent year-over-year, with broad-based strength; 4) order intake over the past two months (since COVID emerged) is still up 10 per cent, suggesting no discernable demand erosion (as yet); 4) comments suggest the firm’s backlog mix is also skewed toward higher-margin verticals (i.e. U.S. portable handling, Brazil); 5) AGI has diligently bolstered its liquidity, initially extending its credit agreement (to 2025 w/ better terms), and more recently expanding it by $100-million (w/ more flexible covenant tests), providing more than $300-million in total liquidity,” the analyst said.

Though he lowered his earnings expectations for fiscal 2020 and 2021, Mr. Hansen raised his target for Ag Growth shares to $36 from $30. The average on the Street is $33.79.

“While the stock has enjoyed a solid bounce in recent weeks (& Thursday), we still see good value at current levels and plenty of associated upside, hence our upgrade back to Outperform,” he said.

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Though near-term “uncertainties” exist, Citi analyst Itay Michael continues to like the risk-reward proposition for Magna International Inc. (MGA-N, MG-T), believing its first-quarter results support its investment thesis.

"Magna continues to sport a compelling mix of defensive attributes (industry-leading balance sheet, relatively less trim-mix reliance), steady revenue/margin outgrowth drivers (reflected in pre-crisis 2022 outlook), upside optionality from AVs (complete-vehicle, Waymo relationship) and a track record of gaining share in 2008-09," he said. "On the defensive side of the story, the biggest takeaway from Q1 was the company’s outlook for a very respectable low-20-per-cent decremental margin for the balance of 2020. On the growth side of the story, we thought management sounded reasonably upbeat about M&A and new business opportunities.

"Stepping back, the stock has recovered ground but still trades at a double-digit yield on what we regard as normalized FCF (reflecting a partial but not a full recovery without potential share gains)."

Maintaining a "buy" rating, Mr. Michaeli raised his target to US$57 from US$52. The average on the Street is US$48.06.

“Our 2020-22 estimates are reduced to reflect greater macro impacts, but we’re raising previously reduced target multiples to reflect added comfort in Magna’s balance sheet/FCF through a difficult 2020,” he said.

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Seeing cost improvements enhancing its outlook and touting the benefits of its gas exposure based on his “very constructive” view toward prices into 2021, Raymond James analyst Chris Cox raised his rating for Seven Generations Energy Ltd. (VII-T) to “outperform” from “market perform” following better-than-anticipated first-quarter results.

On Thursday morning, Calgary-based Seven Generations reported funds from operations of 82 cents, exceeding the 73-cent projection of both Mr. Cox and the Street. Production of 193,500 barrels of oil equivalent per day also topped both the analyst's 193,200 boe/d estimate and the consensus of 191,400 boe/d.

"Seven Generations 1Q20 results were punctuated by strong execution on costs, with well costs coming in 13 per cent below budget and supporting a lower spending guide with only a modest production impact," said Mr. Cox. "We see an attractive relative set-up for the stock, with the revised outlook fully funded at strip and delivering an increasing gas mix into what is becoming a consensus bullish gas call into 2021.

"Recent underperformance (down 10 per cent versus TSX Energy Index over the past 4 weeks) has largely been due to concerns relating to wider condensate differentials as oil sands producers shut-in; we see that situation improving materially over the next few months as condensate imports adjust to balance the market. Furthermore, with 43 per cent of 2021 production gas-weighted, we see VII as an attractive way for investors to gain meaningful gas exposure in a stock that hasn't enjoyed the same robust returns that dry gas producers have exhibited lately."

Mr. Cox hiked his target for Seven Generation shares by a loonie to $3.50. The average is $4.34.

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National Bank Financial analyst Maxim Sytchev made a series of target price changes to TSX-listed Industrial Product stocks in a research note reviewing first-quarter earnings releases.

With an “outperform” rating, Mr. Sytchev trimmed his target for shares of SNC-Lavalin Group Inc. (SNC-T) to $35 from $40.50. The average on the Street is $34.42.

“We don’t have any balance sheet concerns which is a major positive in this environment,” he said. “Recall the company has a cash hoard of $2.1-billion and an undrawn credit facility of $1-billion for cash and LCs. However, EDMP decremental margin of 20 per cent (top line down 3 per cent while EBITDA declined 23 per cent year-over-year) raises questions around the underlying resilience of this business. As a result, applying WSP/STN multiples looks like a stretch and we compress it to 10 times EV/EBITDA from prior 11 times. Current management was dealt a tough hand and we believe investors understand that. We also see strategy progress and critically the whittling down of LSTK projects. 2020 and 2021 are peak LSTK backlog phasing years (around $1 bln/annum). The bulk of the projects are in the transit space, an area where SNC feels it can control execution. Unfortunately, the full model de-risking will only come once these projects roll off. For investors with a greater than two-year horizon, the investment thesis should be making sense. "

He also trimmed his target for North American Construction Group Ltd. (NOA-T) by a loonie to $15, keeping an “outperform” rating. The average is $15.17.

“Drive to diversify revenue we believe will take on new urgency; thankfully, management believes it will get to greater than 40 per cent of EBIT by 2022,” said Mr. Sytchev. “We applaud this strategy; sentiment right now is dire but as economies globally are opening up, supply / demand situation for oil is bound to normalize in H2/20E. We are comfortable to wait out the intermittent lull.”

Conversely, Mr. Sytchev raised his target for Stantec Inc. (STN-T) to $46.50 from $44.50 with an “outperform” rating (unchanged). The average is $45.65.

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“This has been another uneventful quarter for the company (just the way investors like it),” he said. “Leverage to likely rebounding U.S. economy (along with the CAD tailwind), de minimus oil & gas upstream exposure, strong balance sheet and ability to undertake work from home is what makes the thesis attractive. Consistency is starting to show.”

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Following the release of “mixed” first-quarter results, RBC Dominion Securities analyst Greg Pardy reaffirmed Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) has his favourite stock for 2020 and noted it is on both the firm’s “Global Top 30” and “Best Energy Ideas” list.

"CNQ’s confidence in its dividend policy reflects its low WTI break-even of US$30-31 to cover its sustaining capital program and dividends in 2020-21, but more importantly, ability to remain nimble amid shifting energy market conditions," he said. "This capability reflects the company’s high working interests/operatorship, and management committee structure."

After the Calgary-based company trimmed his capital budget for 2020 by a further 9 per cent to $2.68-billion alongside $745-million in operating cost reductions, Mr. Pardy raised his earnings per share projection to a loss of $1.97 from a loss of $2.36. His 2021 expectation improved by 18 cents to a 21-cent profit.

"In our eyes, CNQ’s ace remains its oil sands mining operations at AOSP/Horizon — which posted SCO production of 438,100 bbl/d in the first-quarter at an operating cost of $20.76/bbl," he said. "This includes March production of 478,300 bbl/d at a cost of $18.42/bbl. Decoking activities at Horizon planned for the first-quarter were deferred to May that will result in 50,000 bbl/d lower volumes during the month. CNQ is strategizing turnaround activities at both AOSP and Horizon during the second-half of the year, with an aim of maximizing SCO production. A turnaround at the Scotford Upgrader early in the third-quarter will see the plant running at restricted rates, aligned with the timing of activities at the AOSP mines where production will be circa 100,000 bbl/d (net) below normal levels during July and August. At Horizon, a planned turnaround will see production impacted by roughly 80,000 bbl/d over a two-month period."

Keeping an "outperform" rating, he raised his target to $27 from $24. The average on the Street is $28.83.

“At current levels, CNQ is trading at a debt-adjusted cash flow multiple of 11.4 times (vs. 8.4 times for our Canadian peer group) in 2020 and 7.0 times (vs. 6.0 times for our Canadian peer group) in 2021,” said Mr. Pardy. “In our minds, the company should command a premium cash flow multiple vs. our peer group given its long-life, low decline portfolio, and continued focus on shareholder distributions.”

Meanwhile, Raymond James' Chris Cox moved his target to $26 from $24, keeping an "outperform" rating.

Mr. Cox said: “Undoubtedly the key storyline going into, and coming out of, 1Q20 is the decision to maintain the dividend. Should the company have cut? - Maybe. Did they need to cut? - No. While no one is cheering a WTI strip of US$29/bbl, diffs have clearly moved in CNQ’s favour. On top of this, another round of capex cuts and some sizable improvements to an already low-cost operating model result in a cash flow profile at strip that looks far stronger than most on the Street expect, ourselves included. Although dividends will be predominantly funded by the balance sheet in 2020, liquidity is not a problem either, with plenty available on the sidelines, if needed. Accordingly, we believe leverage - while elevated - is easily manageable today and should improve quickly as prices recover. The advantaged funding profile afforded by the company’s low-cost structure makes this point more of a nuance to the story vs. a cause for concern, in our view.”

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In the wake of weaker-than-anticipated first-quarter results, Canaccord Genuity analyst Dalton Baretto lowered Pan American Silver Corp. (PAAS-T, PAAS-Q) to “hold” from “buy” based on its current valuation.

On Thursday after the bell, the Vancouver-based company reported an adjusted earnings per share loss of 4 cents for the quarter, well below the projections of both Mr. Baretto (19-cent profit) and the Street (13-cent profit) due in part to a 13-cent loss on its investment in New Pacific Metals . Revenue and EBITDA fell 6 per cent and 4 per cent below his expectations, respectively.

"Eight of PAAS's nine operating assets are currently suspended, and the timing around the ramp-up to full production remains unclear," said Mr. Baretto.

“Given the substantial disruption to PAAS’s operations, management has understandably withdrawn all its guidance. New guidance is not expected to be provided until the situation becomes much more clear and ramp-up plans are established.”

Mr. Baretto maintained a US$23.50 target for Pan American shares. The average is currently US$25.31.

“We note PAAS’s substantial exposure to silver, zinc and lead, commodities on which we are far less constructive than gold,” he said. “Finally, we note that at 9.0 times 2020 EBITDA and 1.4 times NAV [net asset value], PAAS trades at a premium to its peer group. Our $23.50 per share target price remains based on an equal weighting of 7.5 times next 12-month EBITDA and 1.1 times NAV, both measured as at April 1, 2021. The key risk to our rating and target remains an upward move in the silver price - the gold/silver ratio is currently at a historically high 110 times, and PAAS remains our preferred stock to gain silver exposure.”

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In other analyst actions:

* Pointing to its valuation, BMO Nesbitt Burns analyst Jonathan Lamers raised NFI Group Inc. (NFI-T) to “outperform” from “market perform” with a $23 target, rising from $17. The average is $21.50.

"We consider public transit bus service to be essential infrastructure and NFI's backlog of public transit work remains robust," he said.

"In addition, NFI would benefit from any potential stimulus programs supporting industry electrification, with its primary competitor effectively disqualified"

* Citing a “preference for defence,” BMO’s John Gibson upgraded Tervita Corp. (TEV-T) to “outperform” from “market perform,” keeping a $4.50 target. The average is $5.43.

"TEV holds steady, production-oriented business streams and solid free cash flow generating capabilities that should be relatively stable through the downturn. Further, the company's valuation (and share price) have fallen to some of its lowest levels ever," he said.

"Our only major qualm with TEV is its moderately stretched balance sheet, although we believe a potential refinancing of its 2021 notes in the coming quarters could act as a positive catalyst."

* After its first-quarter results fell short of expectations, BMO’s Ben Pham dropped Algonquin Power & Utilities Corp. (AQN-N, AQN-T) to “market perform” from “outperform” with a US$13.50 target, down from US$15 and below the US$15.11 average.

"We continue to like the long-term fundamentals, but believe growth could fall short of expectations while recognizing the stock has outperformed LTM [last 12 months] (up 27-per-cent total return vs. 15 per cent for utility index) and also the last five years (98 per cent vs. 42 per cent)," said Mr. Pham.

* Believing the risk-reward has become “more balanced ... ) in light of expected COVID-19 related headwinds,” BMO’s Stephen MacLeod dropped Premium Brands Holdings Corp. (PBH-T) to “market perform” from “outperform” with an $85 target, down from $91. The average is $89.67.

"These [headwinds] include near-term protein price inflation and potentially prolonged weakness in foodservice end markets, which has led to downward estimate revisions," said Mr. MacLeod.

“While we continue to like PBH’s long-term prospects and believe it will weather this crisis, headwinds and reduced visibility are likely to keep the stock range-bound. PBH reports Q1/20 on Monday, May 11.”

* Industrial Alliance analyst Neil Linsdell raised GDI Integrated Facility Services Inc. (GDI-T) to “strong buy” from “buy” with a $40 target, up from $39. The average is $38.50.

“Given the expectation of increased demand for cleaning services for the foreseeable future, and GDI’s dominant position and solid performance, we are upgrading our recommendation,” he said.

* National Bank Financial analyst Don DeMarco initiated coverage of Silvercrest Metals Inc. (SIL-T) with an “outperform” rating and $14.50 target. The average is $11.35.

* TD Securities analyst Graham Ryding raised Atrium Mortgage Investment Corp. (AI-T) to “buy” from “hold” with an $11 target, which falls below the $13.70 consensus.

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