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

National Bank of Canada analyst Richard Tse has raised his price target on Shopify Inc (SHOP-N, SHOP-T) to US$2,000 from US$1,650. That makes him the most bullish on the Street, surpassing the previous highest analyst target of US$1,900 from Rosenblatt Securities’ Mark Zgutowicz, according to Refinitiv Eikon data.

Mr. Tse, who has an “outperform” rating on the stock, is impressed with the continued growth at the company, which is increasingly broadening out to international markets and seeing reduced churn.

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“As we approach Q2 reporting season, we think it’s fair to say the comparables are more challenging on a year-over-year basis given the Q2/F20 surge in the early days of COVID. Yet, while we had been expecting a moderating pace of growth this year given the above, our analysis suggests Shopify has been tracking above its sequential quarterly growth rate, excluding Q2/F20 which is potentially all that more impressive given the increasing base,” Mr. Tse said in a research note.

“Based on our analysis, Shopify had net merchant growth of around 16% Q/Q – which would be the highest in the last two and a half years, excluding Q2 of 2020 (COVID bump quarter). And it’s that increased merchant base that should bring accompanying GMV (gross merchandise value) to lessen the impact of ‘normalizing’ growth in e-Commerce post the height of the COVID impact in the prior year.”

Mr. Tse said growth in Shopify’s merchant base is also being helped by what he sees as a moderating churn rate. “Based on our analysis, we estimate Shopify’s annualized churn rate YTD 2021 is running in the 50%-60% range, down considerably from our estimated churn run rate of +80% prior to COVID.”

He also notes Shopify’s international expansion is re-accelerating again.

Only about 27 per cent of Shopify’s revenue today comes from markets outside North America. But when it comes to global e-Commerce, excluding China, about 86 per cent comes from markets outside North America.

“While we think Shopify rightly adjusted and paused certain expansion activities while redirecting its efforts to support its existing and new merchants during the height of the pandemic, we believe the improving environment has allowed Shopify to return to those expansion initiatives,” he said.

He estimates that 45 per cent of new merchant additions in the second quarter came from non-North American markets.

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“We continue to believe Shopify is in the early stages of scaling,” he commented.

The average analyst target on Shopify is now US$1,519, according to Refinitiv Eikon data.

***

Morgan Stanley analyst Simon Flannery has downgraded Telus Corp. (T-T) to “equal-weight” from “overweight” in reaction to The Globe and Mail reporting that the 3,500 MHz 5G spectrum auction is set to raise around C$8-billion.

That would be a record for a Canadian auction and more than double the Street consensus and Morgan Stanley’s expectations. Such a high price-tag is raising concerns about the debt levels the telecom companies will be taking on to pay for it, and Mr. Flannery is concerned it may ultimately result in a reduction in the growth rate of Telus’ dividend.

If confirmed, “it would potentially drive up industry leverage by over 10%, valuation multiples by around 5%, and could result in changes in capital allocation policies. Given the increased risks we are moving to the sidelines on the sector,” said Mr. Flannery.

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The ISED, which is running the auction, and the Canadian carriers have not confirmed the $8-billion figure that was attributed to unnamed Globe sources. Final results of the auction are not expected until the end of the month.

“It is hard to see any winners among the Big 3 from this auction, since one either ends up spending a lot of money for spectrum, or ends up with little or no spectrum and a weaker competitive position in 5G,” Mr. Flannery said in a note. “In addition, this auction only allocates an average of 64 MHz spectrum across the country, far below the 100 MHz per carrier seen as necessary to provide a compelling mid-band 5G offering.”

The Morgan Stanley analyst thinks that Telus could be the biggest spender, given that the company has a very limited spectrum position in the band. The company also has less cash on hand that BCE.

“If we assume a $3-billion spend, this could take leverage to around 3.5x, with their credit ratings already facing negative outlooks from two of the major agencies,” the Morgan Stanley analyst said.

“We are particularly focused on dividend policy, with the payout ratio currently elevated as a result of the accelerated capex program, and the company set to approve a new three year dividend growth program next year. It would seem harder to support another 7-10% 3 year dividend growth target in this environment. This additional spend could increase the risks that the company will need to take more aggressive actions to return leverage more quickly to 3x or below,” he said.

He has a C$29 price target on Telus shares.

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***

Raymond James analyst Steve Hansen cut his price targets on both of Canada’s national railways, cautioning that a traffic recovery in the second quarter was likely offset in part by higher costs.

“While Canadian rail traffic staged a handsome recovery through 2Q21, we anticipate these robust gains were in part blunted by emerging cost headwinds associated with higher foreign exchange and surging fuel prices,” he said in a note. “More recently, acute BC forest fires have also levied a temporary drag on early third quarter traffic.”

His price target on Canadian National Railway Co. (CNR-T) was cut to C$152 from $160, and on Canadian Pacific Railway Ltd. (CP-T) to C$98 from $100, which reflected modest downward adjustments to his financial forecasts. But he reiterated “outperform” ratings on both stocks, “given our fundamentally upbeat view of the economic recovery and macro freight backdrop.”

Mr. Hansen noted that CN Rail and CP Rail saw their revenue ton mile, which measures how much revenue a company makes per volume of freight transported, rise 14.2 per cent and 9.3 per cent, respectively, in the second quarter from a year ago, largely thanks to the healthy recovery in the North American economy.

But the British Columbia forecast fires are weighing on early third quarter traffic, with both railways suffering temporary mainline shutdown and speed restrictions. “While fire risks continue to linger, we understand that mainline traffic for both carriers is again flowing with only a modest drag on capacity. Still, we expect velocities of most key products moving in/out of Vancouver will be impacted near-term (grain, potash, coal, intermodal),” the analyst said.

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***

Desjardins Securities analyst John Chu downgraded Neptune Wellness Solutions Inc. (NEPT-T) to “hold” from “buy” after the consumer products health and wellness company reported a highly disappointing fiscal fourth quarter.

Believing that Neptune is now a “show-me” story, he slashed its price target to C$1.10 from $3.75.

“A bad 4Q miss along with a failed attempt at trying to capitalize on the need for PPE during the pandemic have caused us to reset our expectations for Neptune’s sales outlook. Ancillary revenue associated with these previously announced sales agreements also seem to have been lost or deferred as well,” Mr. Chu said.

Neptune reported sales of $6.8-million and adjusted EBITDA of negative $38.2-million vs. consensus of $10.6-million and negative $7.7-million, respectively. The sales, gross margin and EBITDA shortfalls were attributed to weakness in its health and wellness divisions, more specifically related to its personal protective equipment (PPE)–related sales that did not materialize.

Mr. Chu listed a lot of concerns when it comes to company’s handling of its personal protective equipment: “It appears the entirety of the US$100m of new purchase orders announced in November 2020 was based on PPE (eg gloves), but given supply chain issues, declining prices and falling demand, Neptune was unable to fulfill the purchase order profitably. As a result, no revenue is expected from this agreement. Similarly, an August 2020 agreement with Unilever which was valued at US$65–137m over 18 months also involved PPE and was recently adapted such that near-term revenue will not materialize meaningfully. However, management suggests there are still longer-term opportunities. Lastly, an October 2020 partnership announcement with a subsidiary of The Kraft Heinz Company (see our note) also seems to have taken a different direction, with no expected revenue. Granted, none of these agreements specified any minimum purchase order, but we had incorporated revenue from these agreements into our forecast.”

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“We need better clarity from Neptune regarding its direction and outlook before we regain comfort with the story,” the analyst said in summing up his downgrade.

***

Canaccord Genuity analysts led by Carey MacRury have downgraded ratings on two stocks as part of a preview to the second quarter earnings season for precious metals companies, which begins next week with Newmont Corp.

Franco-Nevada Corp. (FNV-T) and Wesdome Gold Mines Ltd. (WDO-T) were both lowered to “hold” ratings from “buy” based on valuation concerns. Canaccord has a C$200 price target on Franco-Nevada and C$11.50 on Wesdome.

But Canaccord upgraded its rating on Pretium Resources Inc. (PVG-T) to “buy” from “hold,” with an unchanged price target of C$15. The upgrade was largely based on the return the stock can produce if it reaches Canaccord’s price target. But Canaccord added, “with continued operational execution, we increasingly view Pretium as a potential acquisition target.”

As part of its earnings preview, Canaccord upwardly revised its forward price assumptions for gold by about 3 per cent and by 4 per cent for silver. Its new long-term gold price forecast is US$1,848 an ounce, and for silver, US$28.45 an ounce.

***

BMO analyst Mark Wilde downgraded Domtar Corp. (UFS-N, UFS-T) to “market perform” from “outperform” but raised his target price to US$55.50 from US$53.

“With the stock currently trading at $54.69 and Paper Excellence’s takeover bid at $55.50, the remaining upside is limited,” he said. “Financing for the deal is reportedly in-place and we see little/if any regulatory risk.”

Closing of the takeover of Domtar is slated to occur before year end.

***

TD Securities analyst Sam Damiani initiated coverage on Summit Industrial Income REIT (SMU-UN-T) with a “buy” rating and C$21.00 price target.

“With over 70% concentration in and around Toronto and Montreal, where market rents have jumped +70% and +44%, respectively, over the past three years and market vacancies are less than 1.5%, Summit’s portfolio is ideally positioned to achieve continued strong NOI (net operating income) growth in our view. These two markets appear to be at a major inflection point, which we believe will support further strong rent growth,” Mr. Damiani said in a note.

He also thinks Summit is a takeover candidate.

“With its single-country focus, absence of a control block, and our view of strong sector fundamentals, we see Summit as the most likely among its peers to be acquired,” he said.

***

In other analyst actions:

* Neighbourly Pharmacy (NBLY-T) National Bank of Canada initiates coverage with C$32 PT and “sector perform” rating.

* Pure Gold Mining Inc (PGM-X): Haywood Securities cuts target price to C$1.3 from C$2

* Stelco Holdings Inc (STLC-T): JP Morgan raises target price to C$58 from C$54

* Brookfield Renewable Partners LP (BEP-N): Simmons Energy cuts PT to US$41 from US$43

* Fibrogen Inc (FGEN-Q): Stifel cuts target price to US$29 from $55 and downgrades rating to hold from buy

* Suncor Energy Inc (SU-T): Barclays raises target price to C$46 from C$40

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