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

Equity analysts at RBC Dominion Securities named six Canadian companies to its “Top 30 Global Ideas list” for the third quarter of 2021 on Friday.

“The COVID-19 recovery, reopening and inflation remain in focus,” the firm said in a research report. “In our latest quarterly RBC U.S. equity analyst survey, conducted in June, our analysts leaned most positive overall on the Financials, Energy, Information Technology, Utilities and Health Care sectors on a 6-12 month view, and our U.S. Equity Strategy team maintains overweight positioning views on Financials, Materials and Energy (Cyclicals) ... Relative to our benchmark (the MSCI World Index) our Top 30 list remains notably overweight Energy, reflecting positive fundamental outlook, and Materials, driven by company-specific attributes and commodity exposure, and a constructive economic growth backdrop through 2022.”

For the quarter, Telus Corp. (T-T) was added to the list, while Thomson Reuters Corp. (TRI-N, TRI-T) was removed from the list due to recent share price appreciation.

Analyst Drew McReynolds currently has an “outperform” rating and $30 target for Telus shares and an “outperform” recommendation and US$104 target for Thomson Reuters. The average targets on the Street are $29.46 and US$100.45, respectively.

On Telus, he said: “The rationale for the $1.5-billion broadband investment program in 2021 and 2022 at this juncture is to capitalize on a likely lengthy approval and integration timeframe for the Rogers-Shaw transaction. In our view, the key strategic benefit of accelerating this investment is an even stronger competitive positive, specifically: (i) broader FTTH [fiber to the home] coverage, increasing from 80 per cent of the long-standing targeted FTTN [fiber to the node] footprint currently to approximately 90 per cent by the end of 2022E; (ii) a ‘substantial’ portion of the wireline customer base on FTTH by the end of 2022E (up from 50 per cent currently), with positive implications for churn reduction; and (iii) enhanced capex flexibility beginning in 2023 given substantial completion of the FTTH build, which should enable TELUS to capitalize on new 5G growth opportunities without meaningful capital constraints, opportunity costs, or FCF impairment.”

The five Canadian companies included are:

* Alimentation Couche-Tard Inc. (ATD.B-T) with an “outperform” rating and $57 target. The average on the Street is $51.67

Touting a “solid” underlying operating performance and defensive sector attributes, analyst Irene Nattel sees “multiple avenues for growth, underpinned by i) acquisition synergies both direct and reverse; ii) top-line momentum from a more focused, data-driven approach to merchandising/promotional strategies; iii) sharing of best practices among geographies to drive sales and optimize margin/productivity, an element that has proven extremely useful since the pandemic hit Europe earlier than North America; iv) focus on opex/scale benefits; v) increased activity on new store openings, and of course, opportunistic acquisitions.”

* Brookfield Asset Management Inc. (BAM-N, BAM.A-T) with an “outperform” rating and US$55 target. Average: US$55.57.

Analyst Geoffrey Kwan: “We think the combination of (1) BAM’s strong long-term investment track record, (2) significant liquidity available ($80-billion) to fund acquisitions and investments at potentially attractive prices in the current market environment and drive future NAV growth, and (3) a differentiated and diversified product shelf with demonstrated ability to fund-raise and drive scale benefits could result in double-digit NAV growth over time. Coupled with the shares trading at an 11-per-cent discount to NAV, we believe the current share price is an attractive entry point for a stock we view as a core holding.”

* Canadian Natural Resources Ltd. (CNQ-T) with an “outperform” rating and $53 target. Average: $51.26.

Analyst Greg Pardy: “We believe Canadian Natural Resources’ management committee structure and shareholder alignment are unique factors which distinguish the company globally. CNQ’s long-life, low-decline portfolio—anchored by moderate sustaining capital of about $3 billion — affords the company with superior free cash flow generative power.”

* Canadian Pacific Railway Ltd. (CP-T), which is currently under a research restriction at the firm.

* Element Fleet Management Corp. (EFN-T) with an “outperform” rating and $19 target. Average: $16.83.

Mr. Kwan: “There are four key themes that drive our positive view of EFN: (1) attractive growth. We forecast EFN’s EPS could grow at a mid-teens CAGR [compound annual growth rate] over the next 5 years driven by new client wins, organic growth within existing customers and significant returns of capital; (2) multiple potential catalysts (see below); (3) strong defensive attributes. EFN faces minimal credit/residual risks and tends to have long-term contracts (3-5 years) with high retention rates (98 per cent); and (4) attractive valuation, as we see high EPS growth as a key driver of valuation and potential valuation multiple expansion.”


When its US$1.13-billion acquisition of an internet and cable platform in Cleveland and Columbus from WideOpenWest Inc. closes in the first quarter of fiscal 2022, Desjardins Securities analyst Jerome Dubreuil expects Cogeco Communications Inc. (CCA-T) to generate more revenue in the United States than Canada for the first time in its history.

On Wednesday, Cogeco announced the WOW deal, which the analyst called “positive” for its stock, seeing additional growth “partly offset by the relatively elevated (vs historical levels) multiple that management agreed to pay.” He sees few regulatory issues stemming from the deal.

Andrew Willis: Cogeco proves rivals wrong with $1-billion U.S. takeover

“The U.S. has generated more growth than Canada in the last few years given the more fragmented nature of the broadband market south of the border. We now expect even more growth in the US following the acquisition of WOW, as we expect CCA should manage to improve WOW’s subscriber penetration metrics,” said Mr. Dubreuil.

“While the deal would be dilutive on an EV/EBITDA basis given the high multiple paid, the transaction has prompted us to increase our multiple for the U.S. business due to the expected acceleration in growth in this segment, bringing our NAV slightly higher than prior to the transaction, even after considering the additional capex investment requirements.”

After raising his 2021 and 2022 adjusted earnings per share estimates, the analyst increased his target for Cogeco Communications shares to $130 from $127, keeping a “hold” recommendation. The average on the Street is $131.10, according to Refinitiv data.

“CCA has a management team of solid operators, as evidenced by the company’s industry-leading margins and FCF conversion of EBITDA,” said Mr. Dubreuil. “However, the stock now trades above cableco peers, even though launching a profitable wireless service would depend on the regulators.”

Elsewhere, Canaccord Genuity’s Aravinda Galappatthige raised his target by $1 to $127 with a “buy” recommendation.

“We believe that this acquisition has the potential to notably shift Cogeco’s investment thesis towards a more U.S. cable leaning name, which naturally has positive valuation implications,” said Mr. Galappatthige. “With this transaction, U.S. cable rises to 48 per cent of consolidated EBITDA from 42 per cent. Furthermore, [Cogeco’s U.S. subsidiary Atlantic Broadband] moves up one rank to become the 8th largest US cable provider. Lastly, given that ABB’s leverage would be at 5 times upon closing, thus requiring alternative financing for any significant future M&A, the prospect of a spin out of the U.S. business also comes to the fore, which would be meaningfully accretive in our view.”


Desjardins Securities analyst Chris Li saw Alimentation Couche-Tard Inc.’s (ATD.B-T) fourth-quarter 2021 financial results as “solid,” seeing them reflect strong fuel margins and “continuing benefits from its organic growth and cost reduction initiatives and favourable industry fundamentals.”

He says investor focus now turning to a July 14 Investor Day event, where he expects further clarity for both earnings potential from organic initiatives and its M&A strategy could act as a catalyst for its shares.

Mr. Li sees significant opportunities for the Montreal-based retailer from “data-centric, localized pricing and merchandising.”

“Management believes there is a very large prize to optimizing locally in terms of pricing, product assortment and promotion,” he said. “Currently, 60 per cent of the store network is equipped with new localized pricing capabilities. The improvement in gross margin dollars is exceeding ATD’s expectations. ATD is planning to roll this out to the remainder of its store network in FY22. While localized pricing is broadly deployed across the store network, there is a significant opportunity to densify the percentage of categories covered. Tobacco represents a big opportunity.

“The next major phase is to leverage its enhanced data capabilities to tailor product assortments and promotional activity at a local level. While local optimization is still in its early days and is being piloted in three markets, over the longer term ATD believes there are significant sales and gross profit growth opportunities as this data-centric approach to retailing is applied to more SKUs within the store. In the meantime, ATD is supporting the expansion by building a second data team in India to complement the work that is being done by the team in Arizona, where localized merchandising was first launched (Sweden was the other market).”

He also thinks the business-to-business fuel market in the United States represents “an attractive growth opportunity,” noting “B2B is attractive in part because trucks/vans are less suited for electrification and are supported by structural growth from e-commerce. ATD has a strong position in the B2B segment in Europe, which we believe it can replicate given its scale and asset base. The U.S. B2B fuel market is highly fragmented, with the top 3 players accounting for less than 30 per cent of the market. Having a unified Circle K fuel brand should help set the foundation. The recent hire of a seasoned fuel executive from Ampol in Australia should help spearhead ATD’s efforts to grow in the B2B space.”

After raising his fiscal 2022 earnings forecast, Mr. Li increased his target for Couche-Tard shares to $50 from $48, reaffirming a “buy” rating. The average is currently $51.67.

“ATD has recovered to its pre-Carrefour level and now trades largely in line with its five-year average (17.5 times forward P/E), reflecting solid industry fundamentals, share buybacks (supported by strong FCF and balance sheet) and perhaps investors being a little more comfortable about ATD’s desire to diversify its fuel business by expanding to adjacent channels,” the analyst said. “As ATD laps strong comps (EPS expected to decline 15 per cent in FY22) and ongoing EV concerns, we see limited room for further multiple expansion unless ATD makes an attractive acquisition or provides a strong organic growth outlook.”

Elsewhere, others making adjustments include:

* Stifel’s Martin Landry to $47 from $43 with a “hold” rating.

“Similar to previous quarters, strong gasoline margins have been an important driver of earnings beats. We are not convinced of the sustainability of these strong margins which are 25 per cent above historical levels but have increased our long-term assumption for U.S. gasoline margins to $0.25 per gallon up from $0.235 per gallon previously to reflect the company’s recent outperformance and bullish sentiment. Management also displayed confidence in its organic growth initiatives and ability to boost FY23 EBITDA by 50 per cent from FY18 levels from organic growth. Management also believes in its ability to continue to create value with M&A but increased valuation could slow down the pace of acquisitions, potentially generating lower growth rates than seen in the last 10 years. Hence, with difficult comps ahead and valuation in line with historical levels, we maintain our Hold rating.”

* CIBC’s Mark Petrie to $54 from $50 with an “outperformer” rating.

“Buoyant fuel margins remain a significant tailwind for Couche-Tard amidst struggling fuel volumes,” said Mr. Petrie. “We view this as a positive indicator of both industry rationality and ATD’s own initiatives. The outlook on merchandise growth is also favourable, with initiatives underway to offset an expected pullback in alcohol. Our estimates increase in both fuel and merchandise. We also increase our long-term U.S. fuel margin estimate to 24 cents per gallon (was 23 cents per gallon).”

* TD Securities’ Michael Aelst to $49 from $45 with a “hold” rating.

* Scotia Capital’s Patricia Baker to $56 from $53 with a “sector outperform” rating.


Pulse Seismic Inc. (PSD-T) latest “significant” transactional agreement is “a continuation of the positive trend of M&A activity in the upstream sector driving strong seismic sales,” according to iA Capital Markets analyst Elias Foscolos.

On Wednesday, the Calgary-based company announced the signing of a $6.4-million seismic data licensing sales contract in a liquids rich fairway in West Central Alberta.

“The Company disclosed that the Transactional agreement brings its Q2/21 sales to $19-million, which is a very strong quarter, driven by Transactional sales resulting from robust M&A activity in the WCSB,” said Mr. Foscolos. “This announcement follows another major sale disclosed in May, part of which is factored into the Q2/21 results with an additional $9.7-million expected to be recognized by mid-April 2022.”

Mr. Foscolos said Pulse is now enjoying its strongest quarter since third quarter of 2017 and has almost doubled its full-year 2020 sales already.

“PSD’s strong equity cash conversion has allowed most of the Company’s revenue to go toward debt repayment, and based on our funds flow estimates, we forecast that PSD will be debt-free partway through 2022, at which time the Company should be at a point to directly return residual cash flow to shareholders via an issuer bid or a dividend,” he said. “While our forecasts remain unchanged as there is no guarantee of a continued strong pace of Transactional sales, building in the debt reduction results in an upward target price revision.”

Keeping a “speculative buy” rating for its shares, his target rose by 10 cents to $2.40, matching the current consensus.


In other analyst actions:

* In response to its agreement to acquire the remaining 50-per-cent stake in Energia Llaima (EL) for US$71.4-million in stock, Scotia Capital analyst Justin Strong raised his target for shares of Innergex Renewable Energy Inc. (INE-T) to $23.50 from $23 with a “sector perform” rating. The average is $24.35.

* After announcing a streaming deal with Royal Gold Inc. on its NX Gold mine in Brazil, Scotia’s Orest Wowkodaw increased his Ero Copper Corp. (ERO-T) target by $1 to $27 with a “sector perform” rating, while Raymond James’ Farooq Hamed raised his target to $31 from $30 with an “outperform” recommendation. The average is $28.77.

“We believe NX Gold has significant resource expansion opportunities and as such we carry a significant exploration credit for NX Gold in our NAV. We believe this transaction legitimizes (and helps quantify) the exploration upside at NX Gold while also providing a very low cost of capital. We expect proceeds to be used to fund development of the upcoming Boa Esperanca project,” said Mr. Hamed.

* Following “another ‘high-quality’ earnings miss,” CIBC World Markets analyst Nik Priebe raised his target for AGF Management Ltd. (AGF.B-T) to $8.50 from $8, keeping a “neutral” rating, while TD Securities’ Graham Ryding raised his target to $9.50 from $9 with a “buy” recommendation. The average on the Street is $8.75.

“In many ways, fiscal Q2 closely resembled Q1 results,” said Mr. Priebe. “The quarter was characterized by strong net sales, which resulted in the frontloading of certain expenses and a corresponding earnings miss. A higher proportion of DSC fund sales likely contributed as well. Higher variable expenses owing to higher sales is a good problem to have, in our view, and we remain very encouraged by the recent pattern.

* CIBC’s Bryce Adams cut his Orla Mining Ltd. (OLA-T) target to $7 from $7.50 with an “outperformer” rating. The average is $7.47.

* TD Securities analyst Aaron MacNeil raised his target for Mullen Group Ltd. (MTL-T) to $18 from $17 with a “buy” rating. The average is $14.48.

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