Inside the Market’s roundup of some of today’s key analyst actions
Bombardier Inc.’s (BBD.B-T) 2021 Investor Day marked an “important milestone” in its transition to a pure-play business jet manufacturer, according to Desjardins Securities analyst Benoit Poirier.
“It enabled investors to better understand its long-term potential (growth, margin, FCF generation) and the path to get there,” said Mr. Poirier in a research note. “While we believe management’s strategic plan through 2025 is sound, we note that a significant level of execution will be required to achieve the 2025 financial targets.”
On Thursday, the Montreal-based plane maker laid out a strategic game plan for the next five years with an expectation of turning free cash flow positive next year and generate more than US$500-million in free cash annually by 2025,
Mr. Poirier called its growth ambitions “realistic and achievable,” given its “healthy” backlog of US$10.7-billion and “line of sight for aftermarket growth.”
“We forecast revenue of $7.3-billion, including $5.6-billion from aircraft sales and US$1.8-billion from services (implying 24 per cent of total sales for the year),” he said. “We believe there could potentially be some upside to BBD’s growth forecasts if the business aviation industry is able to translate higher aircraft utilization (brought on by the pandemic) into orders. Management highlighted that the number of first-time buyers represented 24 per cent of aircraft sales in 2020, up from 16 per cent in 2019.
“Management appears to have decent visibility on the key levers for margin expansion through 2025—expected improvements are front-end-loaded. Management expects an adjusted EBITDA margin of 20 per cent in 2025, implying adjusted EBITDA of US$1.5-billion (up from US$0.2-billion in 2020). The margin expansion will be driven by (1) growth of the higher-margin aftermarket business, (2) realization of the US$400m cost-saving program by 2023, and (3) further execution on the learning curve for the Global 7500 program. Interestingly, management noted that a large portion of the cost savings would be front-end-loaded in the 2021–25 plan.”
After raising his revenue and earnings expectations for 2021 and 2022, Mr. Poirier increased his target price for Bombardier shares to 80 cents from 55 cents, maintaining a “hold” recommendation. The average target on the Street is 59 cents.
“Given BBD’s elevated indebtedness, we prefer to remain on the sidelines as we await further clarity on the execution of the turnaround plan,” he said.
Elsewhere, BMO Nesbitt Burns analyst Fadi Chamoun upgraded Bombardier to “outperform” from “market perform” with a $1.25 target, rising from 85 cents.
“Improvement in demand from pandemic lows and growth in aftermarket revenues alongside a steadily declining interest cost burden support upside to over $3 by 2025,” said Mr. Chamoun.
“However, the turnaround plan remains vulnerable to macroeconomic setbacks given high financial leverage.”
Scotia Capital analyst Konark Gupta raised his target to 80 cents from 65 cents, keeping a “sector perform” rating.
After it dropped almost 17 per cent on Thursday in reaction to the release of its fourth-quarter results that included the first revenue decline and operating loss since going public in 2014, equity analysts on the Street reacted by slashing their target prices for shares of Kinaxis Inc. (KXS-T).
Those making adjustments included:
* RBC Dominion Securities’ Paul Treiber to $190 from $260 with an “outperform” recommendation. The average on the Street is $204.90.
“Kinaxis provided additional disclosures that show the disruption from COVID has benefitted the company’s sales pipeline (more than 40 per cent year-over-year increase in 2020), though has weighed on near-term bookings momentum,” he said. “The slip of a few large deals is enough to restrain next year’s SaaS growth. Maintain Outperform, as we expect Kinaxis will see stronger bookings going forward as disruptions related to COVID alleviate.”
* CIBC World Markets’ Stephanie Price to $200 from $288 with an “outperformer” rating.
* Scotia Capital’s Paul Steep to $179 from $241 with a “sector outperform” rating.
* TD Securities’ Daniel Chan to $165 from $255 with a “buy” rating.
* BMO Nesbitt Burns’ Thanos Moschopoulos to $170 from $250 with an “outperform” rating.
* National Bank Financial’s Richard Tse to $225 from $250 with an “outperform” rating.
Seeing “the prospect for a more back-half loaded earnings profile for the stock in 2021,” Raymond James analyst Michael Glen downgraded Martinrea International Inc. (MRE-T) to “outperform” from “strong buy.”
He made the move in response to the company’s first-quarter guidance of production sales of between $900-million and $1.0--billion and adjusted earnings per share in the range of 36 cents to 44 cents.
“The 1Q EPS guidance was lower than our prior forecast, with three factors indicated: 1. 7-8 cents negative impact from higher aluminum prices (transitory); 2. higher launch costs; and 3. lower production levels at certain facilities due to the chip shortages. For the full-year, MRE anticipates 2021 sales and earnings to be roughly in-line with 2019 levels (i.e., adj. EPS of $2.27), with our new 2021 forecast at $2.07,” he said. “In terms of Metalsa, MRE continues to face challenges in terms of getting in to make the necessary operational changes needed to improve profitability, with the prospect for break-even EBITDA being delayed to post 2021. Additionally, as indicated above, Martinrea has provided an indication for 2021 CAPEX spending of $325-million, which is above our previous forecast of $250-million. Coupled with our earnings adjustments, we now see the business generating roughly $7.5-million in FCF (9 cents per share)
Mr. Glen maintained an $18 target for Martinrea shares, which sits lower than the $19.50 average.
“Martinrea remains an inexpensive stock, in our view, and we continue to see positive developments taking place within the business,” he said. “In that regard, with electrification on top of mind with all investors, management provided additional insight into how the business is positioned as the market transitions towards EV products. Specific highlights included: 1. $45-million in new business wins on EV platforms during 4Q (out of $115-million total wins); 2. An estimated $2,150-3,800 CPV opportunity on EVs versus $2,000-3,000 on ICE; and 3. An overall indication that 80 per cent of the current MRE product portfolio is agnostic to the transition to EV. That said, while it is clear that the backdrop for auto sales and production remains constructive, guidance provides a clear indication that the year will be more back half loaded from an earnings perspective (with 1Q / 2Q impacted by chip shortages and launch costs), and the full year seeing a higher level of CAPEX spend in the $325-million range.”
Elsewhere, other analyst making target changes include:
* Scotia’s Mark Neville to $18.50 from $19.50 with a “sector perform” rating.
* CIBC World Markets’ Kevin Chiang to $22 from $21 with an “outperformer” recommendation
* BMO Nesbitt Burns’ Peter Sklar to $17 from $16 with a “market perform” rating.
After its fourth-quarter results exceeded expectations, Desjardins Securities analyst Justin Bouchard said Canadian Natural Resources Ltd. (CNQ-T) provides “a compelling value proposition,” pointing to its “impressive” free cash flow profile, “significant” commodity upside and “a longstanding history of increasing shareholder returns.”
On Thursday before the bell, the Calgary-based company reported adjusted cash flow per share of $1.56 after accounting for a provision on the KXL pipeline, exceeding the $1.47 projection of both Mr. Bouchard and the Street Concurrently, it hiked its quarterly dividend to 47 cents per share from 42.5 cents.
“The 11-per-cent bump to the annual dividend (to $1.88/share) marked the 21st consecutive year of dividend increases and was predicated on the board’s confidence in the sustainability of the company’s FCF profile (although surging oil prices certainly must have made that decision easier),” the analyst said. “Inclusive of the dividend bump and the $3.2-billion capital budget for 2021, CNQ estimates FCF of $4.9–5.4-billion (under a US$57 per barrel WTI assumption), which is roughly in line with our estimates at the strip. We also note that spot WTI surged to US$65 per barrel today in response to the OPEC+ supply decision, and while there are many factors at play, we note that management reiterated its $330-million FFO sensitivity to a US$1 per barrel WTI move.”
With the dividend hike and the fact that crude prices have “significantly” outperformed his forecasts, Mr. Bouchard raised his target for Canadian Natural shares to $46 from $38 with a “buy” rating. The average on the Street is $41.52.
“Needless to say, oil prices have outpaced our expectations and, with OPEC’s decision today to stay the course on supply cuts, oil has significant and growing momentum on its side. The trajectory of oil prices from here is anyone’s guess,” he said.
Meanwhile, TD Securities analyst Menno Hulshof raised his target to $42 from $39 with a “buy” rating and BMO Nesbitt Burns’ Randy Ollenberger increased his target to $45 from $42 with an “outperform” recommendation.
Citing the “negative implications” on both its governance and valuation from the resignation of CEO Ulf Quellmann following pressure from major shareholder and Oyu Tolgoi project operator Rio Tinto, Canaccord Genuity analyst Dalton Baretto downgraded Turquoise Hill Resources Ltd. (TRQ-T) to “sell” from “hold.”
“Goodbye, good governance — we hardly knew ye!,” he said. “Mr. Quellmann was the first CEO in our long history with TRQ that we believed actually pushed back on RIO and stood up for decisions that were in the best interests of all shareholders. Mr. Quellmann departs at a critical time for TRQ, with major project financing and project economic disbursement discussions underway amidst conflicting agendas between the major stakeholders. We believe these discussions could all be concluded by the time TRQ appoints a new permanent CEO.
“We are unsure how much [interim CEO Steeve] Thibeault will weigh in on behalf of the minority shareholders, given his ‘interim’ designation, his history with RIO, and the fate of Mr. Quellmann.”
Mr. Baretto maintained a $14 target. The average is $19.22.
Elsewhere, BMO Nesbitt Burns analyst Jackie Przybylowski cut the stock to “market perform” from “outperform” with an $18 target, down from $23.
“In our view, Mr. Quellmann had prioritized the defence of minority shareholder interests; with his departure, it’s increasingly likely that project funding will be dilutive to Turquoise Hill minority equity holders,” she said.
In a research note titled The Only Thing Better Than Raising Guidance, Raising Dividends, iA Capital Markets analyst Michael Charlton hiked his target for shares of Michael Charlton raised his target for shares of Freehold Royalties Ltd. (FRU-T).
After the bell on Thursday, the Calgary-based company increased its annual production guidance to 10,500-11,000 barrels of oil equivalent per day from 10,000-10,500 boe, pointing to a jump in drilling activity. It also bumped its monthly dividend by 1 cent to 3 cents based on an improved commodity price outlook.
“We hate to say we told you so (ok not in this case), but, we told you so,” said Mr. Charlton. “Here Freehold is bringing an increased dividend and will still be well below its targeted 60-80-per-cent payout ratio. Not only is it boosting the dividend, but the Company is also increasing guidance on the back of a mighty decent Q4/20, with the improved commodity pricing outlook. We believe that at current prices the U.S. acquisition Freehold made should be almost entirely economical now with drilling activity likely on the upswing with WTI north of $60/bbl. We applaud Freehold for getting in front of the puck on this one, picking up assets at pricing lows and continuing to quietly pick away at assets, adding another 75 boe/d in 2021 in the Bakken and Permian basins for $4.7-million or $62,267 per flowing barrel.”
With a “buy” recommendation, Mr. Charlton increased his target for Freehold shares to $9 from $7.75. The current average is $8.29.
“Increasing its long-term upside potential, Freehold has added over $300-million of royalty assets in the last three years alone, expanding both upside potential and geographic footprint with its $47-million of deals completed in 2019 that were funded through free cash flow and its recently completed US$58-million transaction,” he said. “The Company is also actively trying to grow royalty production while reducing working interest volumes, which we view as a great long-term strategy as less working interest production means a decrease in production/transportation costs as well as reduced liability, both while the well is producing and also at the end of its life. As a Royalty Company, FRU has no abandonment/reclamation costs to be concerned with, not to mention less capital is at risk on day one when the well is drilled making Freehold less risky than a traditional E&P.”
Other analysts making target changes include:
* RBC Dominion Securities’ Luke Davis to $10 from $9 with an “outperform” rating.
“Freehold posted another strong quarter, generating meaningful FCF with drilling activity ramping sharply into year end. In our minds this points to a strong setup for 2021,” he said. “The dividend was raised sequentially by 50 per cent and remains below the company’s payout target. Freehold remains our top idea.”
* Scotia’s Jason Bouvier to $8 from $7.25 with a “sector outperform” rating.
* CIBC World Markets’ Jamie Kubik to $10 from $8.50 with an “outperformer” rating.
* BMO Nesbitt Burns’ Ray Kwan to $9 from $6 with a “market perform” rating.
In other analyst actions:
* Citing its strong year-to-date share performance, iA Capital Markets analyst Elias Foscolos cut Tervita Corp. (TEV-T) to “hold” from “speculative buy” with a $4.75 target, up from $4.25. The average on the Street is $4.85.
“EV’s Q4/20 results were just slightly below estimates, and after sharpening our model based on commentary on the Company’s call, the impact to our outlook is minor,” he said. “TEV’s near-term outlook is shaped by several ongoing external tailwinds, including recovery of economic and industrial activity, improving WCSB activity levels, government stimulus spending on environmental-related services, and favourable FX, as well as internal business rationalization and prudent capital allocation. With these factors in mind, we expect TEV to generate strong EBITDA growth year-over-year in 2021 excluding CEWS, and FCF for deleveraging.”
* Morgan Stanley analyst Simon Flannery upgraded BCE Inc. (BCE-T) to “equal weight” from “underweight” with a $58 target, up from $55. The average on the Street is $59.96.
* Mr. Flannery also raised his target for Rogers Communications Inc. (RCI.B-T, “equal weight”) to $65 from $63 and Telus Corp. (T-T, “overweight”) to $28 from $24. The averages are $67.86 and $28.75, respectively.
“Our Outperform rating reflects our view of Algonquin’s robust regulated rate base and contracted renewable power growth. While we acknowledge the specter of rising rates could further pressure valuations among utilities, we believe recent weakness in the stock is overdone and see current
levels as ultimately representing an attractive point to add to positions,” said Mr. Quezada.
* Scotia’s Mark Neville raised his NFI Group Inc. (NFI-T) to $35 from $34 with a “sector outperform” rating, while BMO Nesbitt Burns’ Jonathan Lamers increased his target to $38 from $40 with an “outperform” recommendation. The average is $36.86.
* RBC Dominion Securities’ Pammi Bir raised his Cominar REIT (CUF.UN-T) target to $10 from $9 with a “sector perform” rating. The average is $9.85.
“On the back of Q4 results that exceeded our call, our outlook on Cominar continues to incrementally improve,” said Mr. Bir. “Looking ahead, we expect organic growth to gain traction over the course of 2021 as the economy gradually re-opens. To be clear though, we believe the path to recovery is likely uneven, particularly given the exposure to enclosed malls and CUF’s elevated leverage. Net-net, for more risk-tolerant investors seeking a ‘re-opening trade’, the current discounted valuation may have some appeal.”
* RBC’s Michael Harvey raised his Peyto Exploration & Development Corp. (PEY-T) target to $7 from $6.25 with a “sector perform” rating. The average is $5.98.
“Peyto delivered an in-line (and largely pre-released) quarter, with formal 2021 guidance unchanged, and is positioned to deliver roughly $120 million in FCF at our deck. With the commodity outlook considerably more favorable, balance sheet concerns have largely abated, reverting Peyto’s model to ‘business as usual’,” said Mr. Harvey.
* Scotia’s Orest Wowkodaw increased his Labrador Iron Ore Royalty Corp. (LIF-T) target by a loonie to $41, maintaining a “sector outperform” rating. The average is $36.71.
* CIBC World Markets analyst Jason Wilkinson moved his True North Commercial REIT (TNT.UN-T) target to $6.75 from $6.25 with a “neutral” rating, while Canaccord Genuity’s Brendon Abrams raised his target to $6.75 from $6.50 with a “buy” recommendation. The average is $6.81.
“True North Commercial REIT (True North) reported Q4/20 results which were generally in line with our expectations,” said Mr. Abrams. Overall, the REIT’s portfolio continues to perform well as reflected by its strong rent collections (99 per cent), positive leasing spreads (8.3 per cent), and high occupancy (98 per cent) during the quarter. We attribute the resiliency of the REIT’s portfolio, not just in Q4/20 but throughout 2020, largely to its strategy of acquiring properties leased predominantly to credit-worthy tenants on long-term leases.
“Looking forward, there remains a significant amount of uncertainty surrounding the office market and the impact work-from-home policies may have on-demand in the future. While we acknowledge this risk, we would highlight that True North’s portfolio should be less impacted, particularly in the near term and on a relative basis, given its portfolio is generally located in less densely populated areas where utilization rates have been higher and the REIT has limited lease maturities (approximately 12 per cent of GLA) in 2021. Following Q4/20 results, our outlook for True North is largely unchanged. We continue to view the REIT as an attractive investment for yield-oriented investors given its 9.2-per-cent yield, which we believe is sustainable.”
* Mr. Wilkinson raised his Tricon Residential Inc. (TCN-T) target to $14.50 from $13.50, keeping an “outperformer” rating, while BMO Nesbitt Burns’ Stephen MacLeod increased is target to $15 from $14 with an “outperform” rating. The average is $14.31.
“We believe Tricon is well-positioned for growth, benefitting from favourable tailwinds and its multi-year investments in technology. We see value in the stock,” said Mr. MacLeod.
* CIBC’s David Popowich hiked his Frontera Energy Corp. (FEC-T) target to $7.50 from $4 with a “neutral” rating. The average is currently $6.58.
* TD Securities’ Arun Lamba cut his Equinox Gold Corp. (EQX-T) target to $20 from $22 with a “buy” rating, while Canaccord Genuity’s Dalton Baretto dropped his target to $14.50 from $20.50 with a “buy” recommendation. The average is $19.67.
“Despite the weak quarter, our thesis on EQX remains unchanged. We continue to like the company for what we believe is its unrivaled (and fully funded) growth profile, as well as likely near-term catalysts in the form of new technical reports on Los Filos and Castle Mountain Phase 2,” said Mr. Baretto.
* National Bank Financial analyst Adam Shine raised his Cineplex Inc. (CGX-T) target to $17 from $14, keeping an “outperform” rating. The average is $12.21.
* National Bank’s Zachary Evershed increased his Intertape Polymer Group Inc. (ITP-T) target to $30 from $27 with an “outperform” rating. The average is $29.13.
* Canaccord Genuity analyst Mark Rothschild raised his Granite REIT (GRT.UN-T) target to $87 from $84, maintaining a “buy” rating, while Desjardins Securities analyst Michael Markidis lowered his target by a loonie to $84 also with a “buy” recommendation. BMO Nesbitt Burns’ Joanne Chen raised her target to $85 from $83 with an “outperform” rating. The average is $85.95.
“GRT reported in-line 4Q results,” said Mr. Markidis. “We are cognizant of the reopening theme that has resonated year-to-date. At the same time, we struggle to understand why GRT is trading at a similar level to February 2020, given (1) internal achievements (10-per-cent FFOPU [funds from operations per unit] growth, 4-per-cent distribution increase, $1-billion of acquisitions, inaugural green bond, etc) through 2020, and (2) the step-change in demand for industrial space in the wake of the pandemic. Recent softness represents an opportunity, in our view.”