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

Following the release of weaker-than-anticipated second-quarter financial results, Industrial Alliance Securities analyst Elias Foscolos downgraded Canadian Utilities Ltd. (CU-T) on Friday after trimming his near-term expectation and citing “compressed” upside to his revised target for its shares.

On Thursday before the bell, the Calgary-based company reported adjusted earnings per share for the quarter of 34 cents, down 26 per cent year-over-year and missing the projections of both Mr. Foscolos and the Street (36 cents and 37 cents, respectively).

“Most of the year-over-year decline in earnings is attributable to the sale of assets in 2019 as well as an adjustment in Q2/19 related to a regulatory decision,” said the analyst. “Excluding these impacts, earnings would have been flat year-over-year. The International Gas Distribution business faced headwinds due to the implementation of the new five-year Access Arrangement (AA5) at the start of the year. AA5 lowers CU’s allowed ROE [return on equity] for its Australian gas distribution assets, which was also impacted by a negative inflation adjustment in Q2/20.”

“Regulated investments were lower than we expected in the quarter and we believe CAPEX for 2020 will be below the Company’s original $1.1-billion target (Industrial Alliance estimate: $850-million). Commentary in the disclosures and on the call indicates that the capital plan is under review and that COVID-19 is still very much a concern. It is possible that we could see deferrals or cancellations beyond 2020, but we are not yet building this in as CU still has the balance sheet on its side.”

The results prompted Mr. Foscolos to lower his earnings expectations for the second half of the year as well as the next two fiscal years based on on lower assumed returns in Australian gas distribution and deferred investment in the rate base. His EPS projections for 2020, 2021 and 2022 fell to $1.95, $2.23 and $2.34, respectively, from $2, $2.26 and $2.37.

Moving the stock to “hold” from “buy,” he lowered his target by $1 to $36. The average on the Street is $37.44.

“Rate base growth was lower than we expected, as it appears that COVID-19 is having a material impact on CAPEX,” he said. “We expect that rate base growth will continue to lag prior expectations through 2020 and we have adjusted our near-term estimates accordingly. We are also forecasting a lower ROE in Australian gas distribution due to headwinds from the new regulatory compact in the region.”


In the wake of a guidance reduction for its Candelaria Copper Mining Complex in Chile, RBC Dominion Securities analyst Sam Crittenden lowered his rating for Lundin Mining Corp. (LUN-T) to “sector perform” from “outperform.”

"Management addressed the 2 issues which led to the guidance downgrade at Candelaria on the conference call: 1) A gradual improvement in throughput and ore hardness is expected through the year and they don't expect it to linger into 2021," he said. "They are running at a higher rate in July (70-80 thousand tonnes per day vs. 60 thousand tonnes per day in H1/20) but won't get to the level that prior guidance was based on (100 thousand tonnes per day) so needed to revise guidance (down 10 per cent) and 2) They are mining a similar area to where the pitwall slide happened in 2017. They are not seeing any movement now and are being cautious but they also have contingency plans so if there was any movement they can still hit guidance (using a steeper ramp and mining a different phase). Nevertheless, we have lowered our 2020 estimates for Candelaria and moved 2021 towards the bottom end of the guidance range given elevated risks."

While emphasizing "Lundin remains a steady copper name with a strong balance sheet and production growth over the next few years," Mr. Crittenden lowered his 2021 and 2022 earnings per share projections to 32 cents and 50 cents, respectively, from 36 cents and 47 cents.

Noting its shares are now above pre-COVID valuation levels after bouncing back by 81 per cent from March lows, he trimmed his target to $8.50 from $9. The average is currently $9.15.

“Lundin shares are trading at 5.6 times 2021 estimated EBITDA versus peers at 7.0 times and at 0.91 times P/NAV versus peers at 1.10 times (using RBC estimated prices),” he said. “At spot prices the shares are trading at 3.8 times 2021 EV/EBITDA versus peers at 5.5 times and at 0.80 times P/NAV vs. peers at 1.0 times. This is a similar discount to earlier in 2019 and we believe this gap could narrow as Candelaria production increases over the next 2 years.”

Elsewhere, Raymond James analyst Farooq Hamed also cut his target to $8.50 from $9 with a “market perform” rating (unchanged).

“Lundin posted a solid operating quarter with all mines remaining operational,” said Mr. Hamed. “Looking forward to 2H20, we expect marginally higher production across the metals complex despite the reduction in copper and gold production guidance at Candelaria. Further, with commodity prices strengthening so far into 2H20, we expect LUN will be able to generate FCF for the remainder of 2020 strengthening its balance sheet after it experienced some expansion in 2Q. Regarding the operating issues and delays to the mill optimization project at Candelaria, we expect it to represent a short term overhang on the stock until the issues are resolved given Candelaria’s importance to the overall production and cash flow profile.”


Tervita Corp.‘s (TEV-T) “strong” second-quarter results “largely validated the underlying defensiveness of [its] business model amidst a historically challenging operating environment for both energy and industrials businesses,” said ATB Capital Markets analyst Tim Monachello.

Seeing it pass the second-quarter’s stress test and charting a path to both cyclical and structural improvements, he raised his rating for the Calgary-based industrial waste and environmental services company to “outperform” from “sector perform.”

“We believe the current junction represents a confluence of 1) a point in time where Canadian activity is set to embark on a cyclical rebound in both field activity and production volumes from Q2/20 lows; 2) a point in time where TEV shares are trading only marginally above all-time lows in terms of both share price and valuation multiples; and 3) a period where TEV’s internal restructuring is beginning to bear fruit in terms of improving margins and free cash flow, which could lead to improving results and a rerating of the stock over the mid-term,” said Mr. Monachello.

After market close on Wednesday, Tervita reported second-quarter EBITDA, adjusted for the impact of the Canada Emergency Wage Subsidy, of $31-million, matching Mr. Monachello’s estimate while exceeding the $28-million consensus expectation on the Street. Revenue of $105-million missed forecasts ($121-million and $116-million, respectively).

In justifying his rating change, the analyst thinks the worst of the Canadian energy sector’s struggles appear to have passed.

“Q2/20 is a quarter most investors in the Canadian Energy segment would prefer to forget with the Canadian rig count hitting its lowest average quarterly level on record, and with record voluntary production shut-ins amidst record low global crude prices in mid-April,” he said. “Moving forward, we anticipate modest sequential improvements in Canadian rig activity through 2022 (excluding Q2/21 and Q2/22 which will be impacted by spring break-up). In addition, we understand shut-in production has been meaningfully restored and should continue to come back on-line through the coming quarters. Both of these improving trends should have positive cyclical implications for TEV’s fluid and waste disposal volumes. In addition, we believe TEV should be a material beneficiary of increased environmental and project work related to increased abandonment and reclamations activity funded through the $1.7-billion federal well abandonment aid program – though we include no formal allocation in our estimates to this program at this juncture. All told, our estimates suggest TEV’s EBITDA likely reached a cyclical bottom in Q2/20, and should return stronger quarterly results through the remainder of our forecast horizon – a view that is supported by management’s near-term guidance for stronger H2/20 EBITDA vs H1/20 EBITDA (adjusted for CEWS inflows).”

After increasing his earnings expectations through 2022, Mr. Monachello raised his target for Tervita shares to $6 from $5. The average is currently $5.18.


Citi analyst Paul Lejuez calls Gildan Activewear Inc. (GIL-N, GIL-T) a “well-positioned player,” but he cautioned the recovery of its end market continues to be a “big question.”

“Not surprisingly, 2Q was a weak qtr and while trends have improved somewhat in 3Q, business is likely to remain volatile in the near-term,” he said. “Konger-term, we believe GIL’s position as the low-cost producer sets it up well to take market share. For innerwear, we expect GIL to continue to gain space at its largest mass merchant customer but this category only represented 20 per cent of F19 sales. Our concern is more in the core imprintables business (80 per cent of sales), where there is little visibility on the timing of a recovery in market demand. Much of the demand for GIL’s product depends on the economy and is driven by large gatherings and corporate events that are not likely to recover for some time.”

In response to the results, Mr. Lejuez cut his 2020 earnings per share projection for the Montreal-based company to a loss of 61 US cents from a profit of 24 US cents, previously. His 2021 estimate remains US$1.10, while his 2022 expectation rose to US$1.36 and US$1.29.

However, citing a “a lower discount rate, inline with what we use for its basic apparel peer and consistent with other investment alternatives within retail of a similar risk profile,” he raised his target for Gildan shares to US$18 from US$16, keeping a “neutral” rating. The average target on the Street is currently US$17.73.

“Although being a low-cost producer enables the company to pivot and win private label business as mass merchants move away from branded products, this still results in GM pressure,” he said. “In addition, there is limited visibility in the activewear business into 2020 and the macroeconomic environment is very uncertain.”

Elsewhere, RBC Dominion Securities analyst Sabahat Khan raised his target to US$16 from US$15 with a "sector perform" rating.

Mr. Khan said: “Based on our recent investor discussions, Gildan’s soft Q2 earnings were largely anticipated by the market, and as a result, the investor focus and feedback following the release was on the $177-million of FCF, the expected ramp-up of manufacturing facilities, the outlook for “re-stocking” by distributors, and trends in the retail channel. The trends in the imprintables channel have improved from recent lows, but the uncertain trajectory over the near- to medium-term, combined with elevated leverage leads us to remain on the sidelines as we await further evidence of an improved operating backdrop.”


Calling it “a compelling exploration company set up for plenty of resource growth and an attractive future mine plan,” Desjardins Securities analyst David Stewart initiated coverage of Prime Mining Corp. (PRYM-X) with a “buy” rating.

The Vancouver-based company’s focus is the Los Reyes gold-silver project in Sinaloa, Mexico.

"We believe the current valuation is underpinned by the existing resource, but the shares are not pricing in the true exploration potential to significantly grow the resource and make new discoveries," said Mr. Stewart.

“Prime introduced trenching to the property and that has shown to be a low-cost method for adding plenty of resource ounces. Los Reyes has not been drilled since 2015; however, later this year Prime will begin drilling not only near surface to rapidly expand current resources, but also at depths of 350 metres to increase pit shell depths and potentially delineate high-grade underground resources. The 2020 exploration program will be crucial in paving the path toward potentially 2–3 million ounces or more.”

Citing “recent additions to the management team and board, revised exploration methods and prudent shift in strategy to test just how big the resource could be,” Mr. Stewart, who is currently the lone analyst on the Street covering the stock, set a target of $2.75 per share.

“It has set the stage at Los Reyes for significant exploration upside in the form of resource expansion and new discoveries,” he said. “As Prime tests just how big the deposit could get and progresses toward production in future years, we believe it should outperform its peer group.”


In other analyst actions:

* TD Securities analyst Cherilyn Radbourne raised Rocky Mountain Dealerships Inc. (RME-T) to “buy” from “hold” with a $6 target, rising from $5. The average on the Street is $5.83.

* Canaccord Genuity analyst Robert Young hiked his target for Real Matters Inc. (REAL-T) to $40, matching the current high on the Street, from $25 with a “buy” rating. The average is $33.

“Real Matters reported another record revenue and EBITDA quarter powered by historically low mortgage rates,” said Mr. Young. “Real Matters sees a multi-year refinance backlog with the pace of conversion limited by capacity-strained underwriters grappling with a surge in refi applications. We believe this dynamic will support strong financial performance for the company in the near term. Real Matters continued to outpace the market with new customer wins (4 in Title, 3 in Appraisal) and wallet share gains on the back of strong rankings on lender scorecards. Management noted a ‘very strong’ pipeline of prospects, having recognized the need for more scalable tools in the current environment.”

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