Inside the Market’s roundup of some of today’s key analyst actions
ATB Capital Markets analyst Chris Murray expects Air Canada’s (AC-T) fourth-quarter financial results to “remain to be weak,” seeing the company remaining in “survival mode” as it waits for traffic to rise later in 2021.
“In the interim, the Company continues to burn an estimated $14-million to $16-million per day in cash during the quarter,” he said. “With that said, we continue to see the Company making it to the other side of the pandemic and leveraging a more efficient cost structure and fleet in a recovery.”
Mr. Murray thinks a stronger Canadian dollar is helping to mitigate the impact of dilution stemming from the company’s recent equity raise of 38 million shares and a sale and leaseback transaction for $485-million in October, which he projects to brings proforma liquidity to $9.5-billion.
“The fall in the C$/US$ exchange rate should also prove beneficial for equity holders as most debt is US$ denominated as are a significant portion of operating costs,” he said. “We are forecasting a gain of $500-million in Q4/20 from the mark to market of debt due to the changes in FX rates, with the impact offsetting the dilution from the recent raises. We note that these impacts are sometimes misunderstood by the market, we believe creating the opportunity for some surprise.”
Ahead of the Feb. 12 release of its earnings, Mr. Murray lowered his quarterly revenue and EBITDA projections to $763-million and a loss of $379-million, respectively, citing traffic, fuel and the equity raise.
“We have also lowered expectations for H1/21 traffic based on data to date,” he said. “At ATB’s 9th Annual Institutional Investor Conference, management noted that as a result of recently introduced travel restrictions in Canada, it is exploring reducing capacity further in Q1 and press released that expectation for Q1/21 capacity of 20 per cent of Q1/20. We continue to expect domestic traffic to lead the Firm’s rebound in a recovery, and expect the Company to continue relying on cargo revenues to reduce cash burn in the meantime, with the Firm reporting a burn rate of $9-million per day in Q3.”
Keeping an “outperform” rating for Air Canada shares, he raised his target to $28 from $27.50 based on his higher 2022 earnings expectations. The average on the Street is $27.47.
Capital Power Corp. (CPX-T) “offers investors a unique value proposition in today’s gangbusters renewables environment,” said Desjardins Securities analyst Bill Cabel.
In a research report released Friday, he initiated coverage of the Edmonton-based power producer with a “buy” recommendation, calling it an “ESG/sustainable winning story”
“There is solid current/growing renewables exposure, with the remainder of the company’s portfolio an ESG ‘diamond in the rough’ which offers significant re-rate potential through emissions reduction/elimination—first stop: removing coal by 2023,” said Mr. Cabel. “An eventual hydrogen or carbon capture solution, potentially eliminating emissions from natural gas, should drive further significant upside.”
He sees Capital Power possessing the ability to incorporate “real” change within its portfolio.
“We believe investors looking for an ESG/renewables play that does not trade at a historically high valuation multiple could find CPX compelling,” he said. “The company recently developed a strategy to remove coal by 2023, turning two facilities into the most efficient gas assets in Canada that will generate carbon credits—removing significant CO2 emissions. CPX is committed to innovation and should have hydrogen-ready and carbon-capture-enabled gas facilities by 2024. Eliminating carbon from natural gas facilities is only a matter of time, and this could significantly increase the value of strategically located assets, in our view.”
Touting the trifecta of free cash flow growth, yield and low payout, Mr. Cabel sees valuation upside from re-rating.
“With a clear path for coming off coal and 30-per-cent renewables (and a pipeline to grow to 35 per cent), trading at 7.5 times EV/EBITDA does not make sense,” he said. “We believe that as ESG-investing techniques become ‘smarter’, with experience investors will identify stories such as this which are making direct positive change and will reward CPX for its portfolio transition.
“While awaiting ESG recognition, investors can expect a 7 per cent plus AFFO [adjusted funds from operations] per share CAGR [compound annual growth rate] until 2024, outsized yield (currently 5.6 per cent) and a low 45-per-cent payout ratio.”
Mr. Cabel set a target of $42 per share. The current average is $37.
“CPX offers investors deep value in light of our view that it is mispriced in the market; it offers exposure to the hot renewables market but also provides a unique re-rate angle as it works to remove coal (by 2023),” he said. “Longer-term, we believe another re-rate could be possible as CPX cleans up its strategically important natural gas assets through a hydrogen/carbon capture, utilization and storage solution.”
Citing “increased comfort” around adoption of its data products, Canaccord Genuity analyst Aravinda Galappatthige upgraded EQ Inc. (EQ-X) following its announcement on Thursday of new commitments for data-driven marketing projects of more than $4-million for 2021.
“This announcement, in our view, is quite material considering the backdrop of $10.3-million in total revenues projected for F2020 (with Q1-Q3 already reported) and $14.9-million in F202,” he said. “Recall, our thesis calls for ongoing triple-digit revenue growth in data revenues. We understand from management that one-third of the aforesaid $4-million relates to data revenues, essentially representing more than 50 per cent of the F2020 estimate base. The other two-thirds relate to general ad-tech revenue under EQ’s DSP operations.
“While we are maintaining our F2021 estimates at this point, ahead of Q4/20 reporting, this does give us increased confidence around achieving our forecasts quite comfortably.”
With that view, Mr. Galappatthige raised his rating for the Toronto-based software firm to “buy” from “speculative buy.”
“In our view, what makes EQ’s investment thesis attractive is its data solutions business, which we believe can grow exponentially over the next several years,” he said. “EQ’s value proposition primarily involves helping its clients better understand and define its own customers, through unique datasets and analytics. The product is offered both on a self-serve (essentially SaaS) and managed-services basis, with several key blue-chip clientele already secured. The quality of EQ’s clientele, in our mind, which includes Bell Media, Loblaws, Walmart, TD Bank, and Jaguar dealerships, is the key piece of evidence for investors in terms of the credibility of its offering.”
Mr. Galappatthige raised his target for EQ shares to $2.50 from $2, which is the current average on the Street.
“[Thursday’s] press release, together with recent announcements relating to new engagements in the publishing and education sectors, further corroborates our thesis and reinforces our confidence around the traction being achieved by EQ, particularly on the data services front. Factoring in this and the sharp upswing in the peer group, we take our target to $2.50 per share from $2.00,” he said.
Acumen Capital analyst Jim Byrne called Points International Ltd.’s (PCOM-Q, PTS-T) preliminary fourth-quarter results a “positive,” noting “the ramp up in activity is happening faster than our previous expectations, and PTS continues to add partners and cross-sell into existing partnerships.”
On Thursday before the bell, the Toronto-based company announced it expects gross profit of $8.3-$8.7-million and adjusted earnings before interest, taxes, depreciation and amortization of $0.2-$0.6-million. Both exceeded Mr. Byrne’s projections ($7.7-million and a loss of $0.4-million).
With its full-year guidance also topping his estimates, he raised his target for its shares to US$18 from US$14, which is the current consensus. He kept a “buy” recommendation.
“Management continues to lay the foundation for a strong rebound with new partners and expanded relationships with existing partners,” the analyst said.
In other analyst actions:
* JP Morgan analyst Richard Choe upgraded Rogers Communications Inc. (RCI.B-T) to “overweight” from “underweight” with a $72 target, up from $63. The average on the Street is $67.92.
* Mr. Choe also raised his target for Telus Corp. (T-T) to $27 from $25 with a “neutral” rating. The average is $27.50.
* He lowered his target for BCE Inc. (BCE-T) to $60 from $61 with a “neutral” rating. The average is $59.75.
* CIBC World Markets analyst Hamir Patel raised his Richelieu Hardware Ltd. (RCH-T) target to $41 from $40, maintaining a “neutral” rating. The average is $36.75.
“Despite earlier fears about the effects of COVID-19 on indoor renovation activity, RCH delivered organic growth of 1 per cent in 2020 (sharp contrast to the 5-per-cent decline experienced in 2009 during the Great Recession),” he said. “We expect organic growth of 6 per cent in 2021 and 5 per cent in 2022 given continued strength across NA housing markets. While we do not build in unannounced acquisitions, we expect Richelieu to remain very active on the M&A front, and would not be surprised if the acquisition pipeline this year proves as robust as 2020 (when RCH completed five acquisitions with over $70-million of annualized sales).”
“We continue to view VFF as the best operator in the Canadian cannabis sector, with strong up-side optionality on the U.S., so—while the argument could be made that VFF should trade at a premium—right-sizing VFF’s valuation in-line with peers is, in our view, still a conservative valuation methodology,” he said.
* Paradigm Capital analyst Don MacLean hiked his target for Orla Mining Ltd. (OLA-T) to $7.50 from $3, keeping a “speculative buy” rating. The average is $7.86.
“Orla recently announced a new Feasibility Study for the oxide portion of its 100-per-cent-owned Camino Rojo (CR) project in Mexico,” he said. “We have tweaked our oxide NPV and increase CR’s sulfide resource valuation. The share price has performed far beyond its Development peers and our expectations and now has a premium valuation. Despite what appears to be a premium valuation, we retain our Speculative Buy as we believe OLA is a keeper, longer term.”
* Laurentian Bank Securities analyst Nauman Satti raised his Guru Organic Energy Corp. (GURU-T) target to $19 from $15 with a “hold” rating. The average is $18.50.
" Guru published its quarterly results for the first time as a public company and the results did not disappoint with a revenue beat of 11 per cent and year-over-year growth of 51 per cent. The growth stemmed from the Quebec market, reinforcing our view of the brand’s strong acceptance there. The company is still in the early stages of pursuing its expansion outside of Quebec, albeit cash of $30-million remains available to aid such efforts. We believe the execution of expansion remains critical to the story; success similar to the Quebec market (13-per-cent-plus market share) can result in high double-digit revenue growth for a number of years,” said Mr. Satti.
* RBC Dominion Securities analyst Irene Nattel cut her target for Loblaw Companies Ltd. (L-T) to $95 from $106 with an “outperform” rating. The average is $77.73.
* CIBC World Markets analyst Anita Soni lowered his target for B2Gold Corp. (BTG-N, BTO-T) to US$8 from US$8.50, while National Bank Financial’s Don DeMarco cut his target to $11 from $12 with an “outperform” recommendaition. The average is $11.78.
* CIBC’s Scott Fromson increased his target for Exchange Income Corp. (EIF-T) to $39.50 from $37.50 with a “neutral” rating. The average is $41.35.