Friday’s analyst upgrades and downgrades

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

Seeing an "increasingly unfavourable" demand outlook and rising inventory levels, RBC Dominion Securities analyst Paul Quinn reduced his 2020 and 2021 pulp price forecast on Friday, leading him to downgrade a group of stocks.

“Pulp markets have shown signs of strength over the last few months, with prices increasing in most regions,” said Mr. Quinn in a research report. "COVID-19 has had a mixed impact on demand, with tissue demand initially surging on panic buying and rising consumer inventory levels. On the other hand, printing & writing paper demand has collapsed as offices and schools have moved online. The other components of market pulp demand, specialties and packaging, are primarily driven by economic activity and will also likely see modest declines.

"Bulls have pointed to the reduction in global inventories from record-highs in 2019, which has historically been supportive of price increases. However, we believe that view of global inventories may not be fully evident given that we are missing volumes at many ports, on ships, and sitting with consumers. In our view, recent producer shipment data does not align with recent demand trends, which suggests that inventories have built elsewhere in the supply chain. This should normalize in the coming months."

Mr. Quinn thinks recent price gains were prompted by "uncertainty of supply." With demand now normalizing, he expects buyers to increasingly push back on further price increases.

"Our market contacts already suggest that major producers are preparing to reduce list prices; however, we also expect that discounts to list prices could further widen," he said.

For 2020, he lowered his northern bleached softwood kraft (NBSK) forecast to US$1,135 per ton from US$1,150, while his fluff pulp projection rose marginally to US$1,155 from US$1,150. However, his 2021 estimates fell for both (to US$1,150 and US$1,190, respectively, from US$1,200 and US$1,225).

Citing that "deteriorating" outlook for pulp in the near-term, which he feels is not fully appreciated by the market, Mr. Quinn lowered these five stocks to "sector perform" from "outperform" ratings:

• Canfor Pulp Products Inc. (CFX-T) with a $7 target (unchanged). The average on the Street is $7.80.
• Domtar Corp. (UFS-N, UFS-T) with a US$27 target, down from US$30. Average: US$27.36.
• Mercer International Inc. (MERC-Q) with a US$9 target, down from US$11. Average: US$10.30.
• Rayonier Advanced Materials Inc. (RYAM-N) with a US$3 target, rising from US$2.50. Average: US$4.13.
• Resolute Forest Products Inc. (RFP-N, RFP-T) with a US$2.50 target, down from $3. Average: US$2.50.

At the same time, Mr. Quinn raised his target for Canfor Corp. (CFP-T, “outperform”) to $13 from $12. The average on the Street is $12.42.

“Lower pulp prices reduce the prospect for near-term returns of capital for Canfor Pulp, Domtar, and Mercer, and could negatively impact Resolute Forest Product’s and Rayonier Advanced’s balance sheets if other commodities do not strengthen,” he said. “We raise our price target on Canfor Corporation, reflecting stronger than expected lumber markets, which we expect will translate into stronger production figures.”

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Citing its above-average growth prospects, “strong” balance sheet as well as a “historical track record of performance,” Industrial Alliance Securities analyst Brad Sturges upgraded InterRent REIT (IIP.UN-T) on Friday.

In the wake of a recent pullback in price after it hit a 52-week high earlier this year, he moved the REIT to "buy" from "hold."

“InterRent’s senior management team has established a compelling track record of creating value for the REIT’s unitholders over the past several years, as exhibited by the REIT’s Canadian REIT/RECO sector-leading total return performance to date and strong growth in NAV [net asset value] per unit and AFFO [adjusted funds from operations] per unit achieved to date,” said Mr. Sturges. “InterRent’s active management strategy is anticipated to continue to surface value from recently well-located, previously undermanaged properties in Ontario and Quebec. We expect the REIT to continue to source apartment acquisition opportunities that provide further long-term NAV per unit and AFFO per unit accretion through additional capital investment and active management strategies.”

Mr. Sturges estimates InterRent’s acquisition capacity is now over $400-million. Based on its “significant” moving forward, he sees it “well-positioned to capture accelerating consolidation of the Canadian apartment property sector.”

“The Canadian multifamily property sector could experience a further increase in institutional investors as direct property real estate allocations could somewhat shift away from retail and office property sectors towards greater weightings in industrial and multifamily real estate,” he said. “If such a shift should occur, Canadian apartment property valuations could be further supported by growing investment demand, the low interest rate environment, and future rent growth prospects that could be augmented by a return to recent Canadian population growth trends fuelled by immigration across the majority of InterRent’s existing primary property markets that include Ottawa, Montreal, and the Greater Toronto Area (GTA).”

Mr. Sturges raised his target for InterRent units by a loonie to $17. The average target is currently $16.61.

“We believe that InterRent can maintain its relative premium valuation given its historical track record of generating stellar unitholder total returns over the past decade, and due to the strength of the REIT’s balance sheet that reflects lower financial leverage ratios and solid liquidity position,” he said. “InterRent is estimated to generate an AFFO per unit CAGR [compound annual growth rate] of 10 per cent from 2019 to 2021, above the 6-per-cent average CAGR forecasted for its Canadian apartment peers.”

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Though he expects the fallout from the COVID-19 pandemic will have a “negative” impact on its business, Desjardins Securities analyst Maher Yaghi thinks Stingray Group Inc.'s (RAY.A-T) diversified sources of revenue will “help it weather the storm.”

"We believe the company should be well-positioned when confinement measures are lifted. Overall, we believe the current share price and dividend are good reasons to invest in the stock," said Mr. Yaghi.

However, the Montreal-based media company reported fourth-quarter results on Thursday that fell short of his expectations, leading him to reduce his 2021 adjusted earnings per share projection to 78 cents from $1.05 previously due largely to weakness in its radio segment.

Concurrently, he trimmed his target for Stingray shares to $7.50 from $8, keeping a "buy" rating. The average on the Street is $7.13.

“The company rapidly controlled its costs to maintain strong profitability. Management sees numerous opportunities for its products in a post-pandemic world and still expects the company to continue generating strong FCF,” said Mr. Yaghi.

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Canaccord Genuity analyst Derek Dley expects Dollarama Inc.'s (DOL-T) first-quarter results that showcase the adverse effects of the COVID-19 pandemic, projecting declining same-store sales growth and rising expenses.

However, ahead of the release of earnings report before the bell on June 10, Mr. Dley raised his revenue and earnings expectations for the discount retailer's 2021 and 2022 fiscal years, prompting to increase his target for its shares.

“While we still believe in Dollarama’s long-term growth profile, a result of its lack of meaningful competition, industry-leading profitability and free cash flow generation, and healthy ROIC [return on invested capital], we believe the softer near-term outlook is likely to leave the stock range-bound over the coming quarters,” he said.

For the first quarter, Mr. Dley estimates sales of $825-million, a decline of 1 per cent year-over-year and in line with the Street. His EBITDA and earnings per share forecast of $202-million and 26 cents, respectively, also matches the consensus.

He's also expecting to see a 5.5-per-cent drop in same-store sales.

“Although Dollarama saw momentum from the end of F2020 carry over into the first weeks of Q1/F21, seeing higher foot traffic and basket sizes due to pantry loading, the company saw sharper declines progressively throughout March,” the analyst said. "Dollarama’s mall-based stores, representing 25 per cent of the store base, saw traffic down 50 per cent over the last eight days of March; stores with street access (making up the remaining 75 per cent of the store base) also saw declines, although less severe relative to mall-based stores. We expect this trend persisted through the rest of Q1/F21.

"Furthermore, we are forecasting SG&A as a percentage of sales of 16.5 per cent, representing 180 basis points of SG&A deleveraging year-over-year, primarily due to higher labour costs associated with sanitization procedures. We also expect 200 bps of gross margin compression year-over-year, to 40.1 per cent, for Q1/F21. We expect the trend of consumables forming a greater portion of Dollarama’s overall sales mix to have been accelerated due to COVID-19, as consumers look to stock up on items such as household cleaning products."

Maintaining a “hold” rating for Dollarama shares, Mr. Dley increased his target to $44 from $37. The average on the Street is $45.33.

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In other analyst actions:

* Raymond James analyst Brian MacArthur resumed coverage of Integra Resources Corp. (ITR-X) with an “outperform” rating and $2.50 target. The average on the Street is $2.24.

“The main asset of Integra Resources is the 100-per-cent-owned DeLamar project,” he said. “The project is located near infrastructure in Idaho, a lower-risk jurisdiction with a Governor that is pro-mining. Integra released a PEA on the DeLamar project in September 2019 that indicated favourable economics with a low initial capital cost that would be manageable for Integra, if the company decides to develop the project. In addition, Integra has ongoing drill programs and metallurgical work which could improve project economics. Finally, Integra remains well funded in the near-term, with $28-million in cash at 1Q20 quarter end. Given Integra’s proven management team, the high-quality and low jurisdictional risk of the DeLamar project, potential for resource and production growth, scarcity value and current valuation, we rate the shares Outperform.”

* Raymond James’ Jeremy McCrea initiated coverage of Spartan Delta Corp. (SDE-X) with an “outperform” rating and $5 target.

“Overall, the Spartan Delta story is fairly straight forward, which should help with investors,” he said. “With little debt today and wells that are among the best in the region, that combined with other initiatives, we believe should allow Spartan to have great return on capital metrics and profitability, with a valuation substantially less than many of its peers. In our view, it’s hard not to see how investors don’t begin to rotate into the name over the coming months. We suspect the current macro environment has many institutional investors focusing on only large cap names. In time, as management meets new institutional investors personally, that could be the catalyst that starts to bring in more sizable investments into the company.”