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

Canadian Pacific Railway Ltd. (CP-T) has a “difficult mountain to climb” through the winter, according to Steve Hansen of Raymond James.

Pointing to its recent share price appreciation and seeing it entering a potentially difficult traffic period, he downgraded CP shares to “market perform” from “outperform” on Friday.

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“While we continue to admire CP’s best-in-class operating model and long-term growth prospects, this morning we are downgrading our rating ... based upon the stock’s impressive 67-per-cent surge off its March COVID-induced lows (vs. S&P TSX Composite: up 51 per cent), leaving it perched within spitting distance from our $445.00 target price (unchanged),” he said.

Citing his latest traffic monitor report, Mr. Hansen said he expects CP “to face some very stiff (CBR-inflated) traffic comps over the next 15-20 week.” Accordingly, he thinks the company’s revenue ton mile (RTM) growth to “markedly slow in the coming weeks, a short-term headwind will make it difficult for the stock to sustain recent momentum, in our view.”

Mr. Hansen’s $445 target falls just below the current consensus target on the Street of $449.13, according to Refinitiv data.

“With the stock now trading just shy of 22.0 times fiscal 2021 Street estimates (a decade high), we feel it is quickly approaching fair value,” he noted.


Imperial Oil Ltd. (IMO-T) should “emerge from 2020 as an even stronger producer” after making “firm” operational and cost control progress, said RBC Dominion Securities analyst Greg Pardy following Thursday’s Investor Day.

He said the virtual event “showcased greater transparency and disclosure.”

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“Imperial delivered a series of upbeat and thorough presentations at its investor open house that emphasized its high-quality, long-life upstream portfolio, robust downstream operations — and the structural advantages both carry,” said Mr. Pardy. “Strategically, Imperial remains focused on enhancing cash flow generation from its existing portfolio, delivering excess cash to shareholders, and pursuing return-oriented ESG initiatives.”

The Calgary-based company said it expects to spend $1.2-billion for its capital program in 2021, up 33 per cent year-over-year. Upstream production is projected to increase 5 per cent to 415,000 barrels of oil equivalent per day while reaffirming a commitment to reduce its greenhouse gas emissions intensity.

Mr. Pardy thinks Imperial’s free cash flow and balance sheet outlook appear “strong.”

“Under our refreshed 2021 outlook, we peg Imperial’s free cash flow (before estimated dividends of $661-million) at $1.8-billion (US$46 WTI, US$14 WTI-WCS),” he said. “Embedded within this outlook are cash taxes of $177-million and a downstream cash flow contribution of $943-million. The company’s balance sheet remains best in class amongst our Canadian integrated peer group, with an average net debt-to-trailing cash flow ratio that we estimate at 1.0 times in 2021 (vs. our peer group average of 1.8 times).”

He maintained a “sector perform” rating and $24 target for Imperial Oil shares. The average on the Street is $21.69.

“Imperial is trading at a debt-adjusted cash flow multiple of 6.3 times (vs. our North American integrated peer group average of 6.7 times) in 2021,” said Mr. Pardy. “In our opinion, Imperial should trade at an above average relative multiple given its low-decline upstream portfolio, much improved operational performance, and strong balance sheet.”

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Elsewhere, a series of analysts raised their target prices on Friday, including:

* Raymond James’ Chris Cox to $22 from $17 with a “market perform” rating.

“Imperial’s 2020 Investor Day was highlighted by significant improvements in costs across the organization, with a particular focus on outperformance at Kearl and an encouraging path forward there,” said Mr. Cox. “As a result of these cost improvements, Management now sees its break-even WTI price to cover sustaining capital and the dividend at only US$36/bbl - highly competitive vs. the broader industry. Our own estimates sit slightly higher than this due to more pessimistic assumptions around the downstream margin environment; however, the important point worth emphasizing is that the improvements in the Upstream are more than offsetting the headwinds in the Downstream, supporting a more visible free cash flow outlook going forward.”

* Desjardins Securities’ Justin Bouchard to $22 from $18, keeping a “hold” rating.

“We have always liked the long-life, low-decline nature of IMO’s three key assets: Cold Lake, Kearl and Syncrude,” said Mr. Bouchard. “What continues to impress in practical terms is the significant progress made toward improving the cost structure, with 2020 capex and opex expected to decline $1.4-billion versus 2019, even as the anticipated production trajectory remains essentially flat over the same period. And lest it be accused of resting on its laurels, IMO continues to look for ways to further reduce its cost structure.”

* National Bank analyst Travis Wood to $22 from $21 with a “sector perform” rating

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* TD’s Menno Hulshof to $23 from $19 with a “hold” rating

* BMO’s Randy Ollenberger to $25 from $23 with a “market perform” rating


A series of analysts made rating changes for Norbord Inc. (OSB-T) in the wake of Thursday’s announcement that West Fraser Timber Co. Ltd. (WFT-T) is acquiring it in a $4-billion deal.

Raymond James analyst Daryl Swetlishoff lowered Norbord to “market perform” from “strong buy” with a target of $50, up from $60. The average is $54.40.

“We like this deal, which melds two respected industry leaders into a global wood products powerhouse,” he said. “At face value potential benefits include, improved access and lower cost of capital, greater scale with a robust growth platform and a more diversified asset base with reduced earnings volatility. In particular, the addition of Norbord dilutes less attractive West Fraser attributes (reducing British Columbia and pulp segment exposure). We expect the combined entity to further push the combined ESG strategy highlighting the many benefits that building with wood has relative to competing products.

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“We regard the terms as fair, based on yesterday’s closing price, the deal implies 5.25 times 2021 EBITDA (consensus) or 7.0 times average trailing 5-year EBITDA – in line with the 5 year average. Our estimates suggest the deal is 9-per-cent accretive to 2021 EPS. Combined the market cap of the company would be around US$7.0 bln, with a manageable net debt position of US$0.7-billion and combined LTM EBITDA of US$1.25-billion , implying net debt/EBITDA of just 0.6 times. With another stellar quarter on tap, these metrics will look more compelling upon closing expected early 2021. The transaction does not increase the weighting of the overall forest products index within the TSX, however, the combination does improve invest-ability, with potential to offer US investors direct building materials exposure through a NYSE listing on closing.”

At the same time, Mr. Swetlishoff raised his target for West Fraser to $95 from $90, keeping an “outperform” rating. The average is currently $86.17.

Elsewhere, Credit Suisse analyst Andrew Kuske raised Norbord to “neutral” from “underperform” with a target of $49.35, up from $38.

BMO’s Ketan Mamtora lowered his rating to “market perform” from “outperform” with a US$38 target.

“We consider this to be good value for Norbord shareholders. As a result, we are downgrading Norbord,” he said.

BMO’s Mark Wilde raised his target for West Fraser shares to $86 from $82, keeping an “outperform” rating.

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“We think the deal is a win-win for both sets of shareholders. The combination creates a large and diversified wood products firm. Both firms are well-run, have low-cost assets, and best-in-class margins. The combined entity will have substantial torque to an upturn in U.S. housing. A pristine balance sheet provides financial flexibility,” he said.


Third-quarter results in the Canadian oilfield services industry reflected sequential recovery and cost containment efforts, according to John Bereznicki.

“As expected, a modest seasonal recovery in WCSB activity was beneficial for the domestic-centric names in our coverage universe,” he said. “We also believe Q3/20 results more fully reflected cost containment initiatives put in place following the (COVID-induced) oil price crash in March. The Canadian Emergency Wage Subsidy also remained a factor in Q3/20, generating a total of $54-million in benefits for our coverage universe.”

In a research report released Friday, Mr. Bereznicki said natural gas remains a tailwind, but “oil uncertainty pervades.”

“We are looking for incremental WCSB activity through Q1/21, driven primarily by natural gas directed spending in the Montney and Deep Basin,” he said. “As investors process the implications of emerging COVID-19 vaccines along with a second wave of lockdowns and US political transition, however, we believe oil price uncertainty (and volatility) will pervade for some time. In our view, this uncertainty (and ongoing E&P consolidation) will likely prevent a meaningful recovery in oilfield fundamentals until 2H21 at the earliest.”

“While oilfield activity has stabilized, we believe pricing remains very competitive amidst industry overcapacity and operator cash flow constraints. As pricing typically lags a meaningful recovery in activity by several quarters, we believe oilfield service providers will remain focused on cost containment and efficiency gains through 2021. We nonetheless believe the WCSB completion market could tighten in Q1/21, depending on the willingness of domestic pressure pumpers to crew idle capacity. However, we believe any such tightness may incent operators to defer their completion work where possible.”

Mr. Bereznicki raised his target price for several companies in his coverage universe. They are:

  • CES Energy Solutions Corp. (CEU-T, “hold”) to $1.10 from $1. The average on the Street is $1.59.
  • Ensign Energy Services Inc. (ESI-T, “hold”) to 80 cents from 65 cents. Average: 77 cents.
  • Precision Drilling Corp. (PD-T, “hold”) to $26 from $20. Average: $26.47.
  • Secure Energy Services Inc. (SES-T, “buy”) to $2.75 from $2.50. Average: $3.08.
  • Trican Well Service Ltd. (TCW-T, “hold”) to $1.60 from $1.30. Average: $1.46.
  • Total Energy Services Inc. (TOT-T, “hold”) to $3 from $2.75. Average: $3.20.

“With the domestic OFS sector trading at nearly 8.0 times EV/ EBITDA on 2021 consensus estimates (even higher for the pumpers and drillers), we believe the market is pricing a 2022 recovery,” said Mr. Bereznicki. “Given the uncertainty associated with a global pandemic and a potential shift in US energy policy, we remain selective. We favour those with a bias to production spending, solid FCF generation and balance sheet flexibility. Our focus names remain SES and TEV [”buy”, unchanged $3 target].”


After coming off restriction following the expiry of the Rogers-Altice acquisition bid, CIBC World Markets analyst Robert Bek upgraded Cogeco Communications Inc. (CCA-T) to “outperformer” from “neutral,” seeing its value as “attractive.”

“We have raised our valuation on the U.S. assets, reflecting greater confidence in the worth of that unit,” he said. “While our view of the Canadian assets has declined somewhat, given greater competitive risks, the net result is a positive to our overall value targets for CCA shares.

“We continue to see stability in the Canadian cable base and growth in the U.S. footprint. FCF continues to exhibit the defensive characteristics of the space, through operational and capital cost flexibility. We consider current valuation levels now too attractive to ignore, and see it as a great entry point for investors.”

Mr. Beck raised his target to $120 from $111. The average is $119.50.

Concurrently, he also raised his target for Cogeco Inc. (CGO-T, “neutral”) to $97 from $96. The average is $113.50.

“While the return to our target implies a material upside, the larger returns, and the main driver of the buying opportunity rests with CCA shares. Given liquidity considerations, our bias is to invest in CGO through CCA at this point in time.

Mr. Bek’s target for Rogers Communications Inc. (RCI.B-T, “neutral”) rose to $65 from $62. The average is $66.31

“This is largely as a result of solid recent Wireless results flowing into Q4/20 and FY21,” he said. “While the whole telecom space cannot fully hide from disruptive pressures brought by the pandemic, Rogers finally displayed good execution in its Q3 results. Continued mitigation efforts on the cost side and capex efficiency argue for even better resilience from an FCF perspective. We have increased our estimates for FY21 and have become incrementally positive on the name. That said, a greater valuation step-up requires better visibility out of the pandemic.”


In the wake of announcing before the bell Friday that it has signed a deal to buy the 49-per-cent stake in three Quebec wind farms it does not already own from the Caisse de depot et placement du Quebec, Industrial Alliance Securities analyst Naji Baydoun raised his rating for Boralex Inc. (BLX-T) to “strong buy” from “buy.”

“We believe that the strategic consolidation of low-risk operating assets will further improve BLX’s growth profile, at a relatively inexpensive price. Furthermore, we believe that BLX’s low payout (pro forma the acquisition) supports further near-term dividend increases,” he said.

Mr. Baydoun raised his target to $48 target from $46. The current average is $42.94.

“Overall, we view BLX as the best organic growth investment vehicle in the Canadian renewable IPP space, with (1) highly contracted operations (13-year weighted average contract term), (2) strong FCF/share growth (5-8 per cent per year, compound annual growth rate 2019-24), (3) potential upside from the Company’s development pipeline (more than 2.5GW of prospects), (4) potential for dividend growth (2-per-cent yield, 40-60-per-cent FCF payout target), and (5) potential upside from M&A (not included in our estimates/valuation),” he said. “Given the improving growth profile of the Company and the recent share price pullback, we are upgrading BLX.”


ATB Capital Markets analyst Tim Monachello thinks Tervita Corp.’s (TEV-T) free cash flow profile remains “attractive” following the closing of its recapitalization transaction.

On Thursday after the bell, the Calgary-based energy and environmental waste services announced it has replaced its US$590-million senior notes due December 2021 with a US$500-milion offering of 11.00-per-cent senior second lien secured notes due December 2025.

“The recapitalization extends the maturity of TEV’s senior notes by four years, and increases the proportion of its debt load held in repayable bank debt which should allow it to reduce its total indebtedness over time, which is encouraging,” said Mr. Monachello. “That said, TEV’s interest burden following the refinancing will increase materially – we estimate that TEV’s interest payments on could increase by roughly $20-million (annualized) at onset, falling to an increase of roughly $13-million assuming the borrowings on its bank facility are fully repaid.”

Though he estimates Tervita’s interest payments will increase to $80-$85-million in 2021 and 2022 from $62-million in 2020, Mr. Monachello thinks the payments should “be easily serviceable” from operating cash flows. He also expects the company to be able to “generate significant free cash flow over our forecast horizon.”

Maintaining an “outperform” rating, he reduced his target to $5 from $6 based on increased interest payments and increased cost of borrowing. The average on the Street is $4.17.

“Overall, we remain bullish on TEV shares given their attractive valuation compared to free cash generation and given its strong and defensive positioning,” he said.

Elsewhere, RBC Dominion Securities analyst Keith Mackey trimmed his target to $3.75 from $4.25 with a “sector perform” rating.


European Residential REIT (ERE.UN-T) presents investors with “a unique opportunity to own European rental properties,” according to Fundamental Research analyst Sid Rajeev.

In a research report released Friday, he initiated coverage with a “buy” rating and named it one of the firm’s “top picks.”

“European Residential Real Estate Investment Trust provides exposure to rental markets in Europe, with a focus on the Netherlands, one of the most attractive regions in Europe,” said Mr. Rajeev. “The country is one of the top performing economies in the European Union, with above average per capita income, below average unemployment rate, and one of the strongest export economies.

“Persistent housing shortage provides strong, long-term tailwinds for Dutch residential property owners. The Netherlands is one of the most densely populated countries in Europe. It faces an imbalance between strong population growth and anemic growth in housing supply, providing support for long-term rent increases and property value appreciation.”

He set a fair value for the REIT of $4.91. The average is $5.06.


Echelon Capital Partners analyst Andrew Semple made “significant” upwards revisions to his financial forecasts for Ayr Strategies Inc. (AYR.A-CN) to account for several recent transactions, including the $20.8-million acquisition of DocHouse in Pennsylvania.

He made the changes in the wake of Wednesday’s release of in-line third-quarter financial results, which he said showed a “full recovery and then some.”

The Toronto-based cannabis company reported revenue of $45.5-million, up 61 per cent from the previous quarter and exceeding the Street’s expectation of $45.4-million. Adjusted EBITDA of $19.3-million also topped the consensus estimate ($18.5-million).

“We believe Ayr continues to have solid opportunities for organic revenue growth ahead. Ayr is expected to open the new Clark County (Las Vegas) store location in mid December,” the analyst said. “We expect a full year contribution from that location in 2021. We note that Nevada retail stores to benefit as the tourism industry in Las Vegas gradually recovers over the coming years, supporting local disposable incomes and a resumption of tourist-driven demand. The Company should also experience significant growth in Massachusetts retail operations as its stores transition to adult-use sales. The Company has signed the necessary Host Community Agreements to commence adult-use operations at three locations in the Greater Boston Area, where there are currently only three operating adult-use dispensaries servicing 60% of the state’s population. The Company requires final approvals from regulators that may take some months, but we are increasingly confident first retail adult-use sales could begin towards the end of H121. We believe each of the three dispensaries could generate sales in excess of US$20-million per location, though we take a more conservative view in our model, pending execution.”

Mr. Semple does not expect Ayr’s five announced M&A moves, including the acquisition of Pennsylvania operator CannTech LLC, two Ohio facilities and an agreement in Arizona, to contribute until 2022.

“Given the forecasted timing of contributions from these M&A transactions, we do not believe 2021 represents the full potential of these acquired assets,” he said. “For 2021, we look for announced M&A to contribute $66-million in sales. We expect a significant increase in revenues from the acquired assets in 2022, with forecasted sales contribution reaching $166-million. 2022 should also show higher gross margins from PA and AZ, as Ayr enhances the vertical integration of these operations.”

Though he expects fourth-quarter earnings to “moderate” on slightly slower growth, Mr. Semple hiked his 2021 revenue and EBITDA expectations to $277.9-million and $109.8-million, respectively, from $242-million and $97.6-million. He also introduced 2022 estimates of $412-million and $172-million.

Seeing an “attractive risk/reward tradeoff at an unreasonably low valuation,” Mr. Semple hiked his target for Ayr shares to $43 from $23, keeping a “buy” recommendation. The average is $33.50.

“For investors looking for a lower risk company to participate in the long-term growth of the cannabis industry, Ayr stands out in that category as having a proven, profitable business model with accretive acquisition opportunities to be realized ahead,” he said. “Trading at 8.4 times EV/2021E EBITDA (pro forma capital structure, including all debt, shares, and cash consideration to be issued), and a low multiple of just 5.4 times our 2022 EBITDA estimate, we believe Ayr’s already discounted valuation provides downside protection, in our view, while offering the opportunity for significant revaluation to the upside.”


Though he said it possesses “solid” fundamentals, BMO Nesbitt Burns analyst Devin Dodge sees an unclear re-rating path for Aecon Group Inc. (ARE-T), prompting him to initiated coverage with a “market perform” rating.

“In our view, Aecon is a high-quality contractor with a strong presence in a number of attractive industry verticals,” he said . ”While Construction segment revenues and earnings are expected to push higher over the next few quarters, we believe this outlook is already reflected in the stock price and suspect there is limited upside to financial performance beyond 2021.”

“We expect the shares to be range-bound over the next 12 months.”

He set a $16.50 target. The average is $19.63.


In other analyst actions:

* HSBC analyst Erwan Rambourg lowered Canada Goose Holdings Inc. (GOOS-N, GOOS-T) to “hold” from “buy” with a US$35 target, up from US$32. The average on the Street is US$33.38.

* TD Securities analyst Brian Morrison upgraded Gildan Activewear Inc. (GIL-N, GIL-T) to “action list buy” from “buy” and raised his target to US$33 from US$28. The current average is $25.11.

* Mr. Morrison also raised BRP Inc. (DOO-T) to “action list buy” from “buy” with an $85 target, exceeding the $80.42 average.

* Scotia Capital analyst Mario Saric increased his target for American Hotel Income Properties REIT (HOT.UN-T, “sector perform”) by a loonie to $3.25, exceeding the $2.13 average.

“We believe AHIP could still benefit from a proliferating ‘value trade’ as vaccine progress continues through the seasonally slower Q4 and Q1,” said Mr. Saric. “Our revised forecast reflects re-introducing the distribution in 2021 (at 9 cents per unit; 60-per-cent payout ratio and 4-per-cent yield at current unit price), increasing to 14 cents per unit in 2022 (vs. previous 65 cents per unit). Our preference remains a focus on improving NAVPU [net asset value per unit] growth; a lower distribution would help both NAVPU growth and leverage reduction (we think debt/GBV of 58 per cent for a Hotel REIT is excessive; we prefer 40-45 per cent). Net-net, we think suburban select-service hotels can see a nice recovery through 2021, reasonably reflected in AHIP post recent unit price rally, in our view.”

* Industrial Alliance Securities analyst Michael Charlton bumped his target for Leucrotta Exploration Inc. (LXE-X, “speculative buy”) to 85 cents from 70 cents. The average is 84 cents.

“While the company does look to have survived this downturn, it is becoming clearer to us that the company will need to be creative if it is going to find a way to accelerate developments and get bigger,” he said. “Ultimately, in our view, for the company to generate meaningful returns for its shareholders, it will need to be pumping more barrels and generating higher cash flows.”

* Stifel analyst Chris O’Cull raised his target for Restaurant Brands International Inc. (QSR-N, QSR-T) to US$65 from US$62 with a “buy” rating. The average is $63.54.

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