Inside the Market’s roundup of some of today’s key analyst actions
With the release of an impressive second-quarter report, RBC Dominion Securities analyst Gregory Pardy sees Cenovus Energy Inc.’s (CVE-T) strategic plan “progressing nicely.”
Buoyed by stronger market conditions and its takeover of rival Husky Energy Inc., the Calgary-based company reported results before the bell on Thursday that reinforced Mr. Pardy’s “confidence that the company’s favorable rate of operational improvement is occurring quicker than we had thought.”
That led him to reaffirm Cenovus as his favorite integrated producer and its place on RBC’s “Global Energy Best Ideas list.”
“Cenovus Energy delivered solid second-quarter results punctuated by 2 per-cent higher upstream production of 765,900 boe/d [barrels of oil equivalent per day], free cash flow of $1.3-billion, and net debt reduction of nearly $1.0-billion,” he said. “The company boosted its 2021 production guidance by 2 per cent to a mid-point of 770,000 boe/d, maintained its capital investment plan at $2.3-$2.7-billion, and pointed towards modestly higher cash taxes of $200-$250 million amid higher commodity prices.
“Cenovus remains on track to realize at least $1-billion in synergies this year and reach targeted run rate synergies of $1.2-billion (one-half of which resides in capital) by year-end. The company incurred $291 million ($257-million expensed) of one-time integration costs in the first half and now expects to spend $400-$450-million in 2021, with the balance of $50- 150-million to be expended next year.”
Seeing it on track to realized at least $1-billion in synergies this year and given the company’s expectation of further assets as its debt continues to shrink, Mr. Pardy raised his cash flow and earnings projections through 2022 alongside increased production estimates. That led him to raise his target for Cenovus shares to $16 from $15, exceeding the $15.33 average, with an “outperform” rating.
“Cenovus is trading at a discount debt-adjusted cash flow multiple of 3.4 times (vs. our global integrated peer group avg. of 4.8 times) in 2021, and an elevated free cash flow yield of 25 per cent (vs. our peer group avg. of 17 per cent),” he said. “In our minds, Cenovus should trade at a modest discount multiple reflective of its improved upstream-downstream balance and reduced exposure to Canadian heavy oil differentials following the Husky merger, partially offset by its above-average balance sheet leverage.”
Others making target changes include:
* Raymond James’ Jeremy McCrea to $14 from $13.50 with a “market perform” rating.
“Strong consolidated downstream results propelled CVE’s 2Q21 results past our and street expectations,” he said. “Investors can expect the company to remain acutely focused on the reduction of debt towards its $10-billion interim target. As this target is achieved towards the end of 2021, investors can expect the company to employ a more balanced capital allocation strategy that will likely see CVE’s cash return profile move closer in-line to its peers while the company continues to grind the debt load down to the longer term target of $8-billion.”
* JP Morgan analyst Phil Gresh to $15 from $14.50, keeping an “overweight” rating.
Though he acknowledged a valuation risk is present, RBC Dominion Securities analyst Drew McReynolds continues to view Thomson Reuters Corp. (TRI-N, TRI-T) as “a low-risk double- digit total return compounder” and calls the stock as “an attractive core holding.”
In a research report released Friday previewing the Aug. 5 release of the Toronto-based company’s second-quarter financial results, Mr. McReynolds said its valuation ”better reflects an accelerating growth trajectory through 2023,” however he thinks it is “far from stretched given improving fundamentals and the absence of identifiable negative re-rating catalysts.”
He raised his raised his enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiple to 17 times from 16 times to reflect “a steady improvement in COVID-19 visibility, the emergence of a structural stepup in end-market demand and growing confidence in management’s ability to deliver close to 6 -per-cent estimate organic revenue growth by 2023/2024.”
For the quarter, Mr. McReynolds is projecting revenue of US$1.483-billion, up 5.5 per cent year-over-year and in line with the consensus estimate on the Street (US$1.492-billion). Adjusted EBITDA of US$469-million would be a decline of 2 per cent, due to investments in its Change Program, but matching the Street.
“With the provision of detailed 2021, 2022 and 2023 outlooks, there are fewer stones left unturned in sizing up the growth trajectory of the company through 2023,” he said. “Thus, our focus is now shifting to four potential additional total return contributors: (i) the potential for further upward revisions to these detailed outlooks through 2023 as management executes on the Change Program; (ii) an increase in the international revenue contribution from 20 per cent of consolidated revenue currently to a company target of 30 per cent longer-term with potential positive implications for organic revenue growth; (iii) a likely period of accelerated M&A beginning in 2023 anchored though by management’s primary requirement that M&A be accretive to the Change Program; and (iv) the high likelihood of a significant and sustained increase in the rate of average annual dividend growth to the high-single digits or low-double digits commensurate with FCF growth beginning in 2022.”
Maintaining an “outperform” rating for Thomson Reuters shares, Mr. McReynolds increased his target to US$112 from US$104. The average on the Street is US$102.38.
“Following the recent run-up in the stock, the total return to our revised target price is approximately 10 per cent,” he said. “While not exactly exciting upside for certain investment strategies and relative to other information publishing or business services peers, we continue to believe from current levels the stock can deliver double-digit annual total returns through 2025 given sustained average more than 10-per-cent annual NAV growth (up from average annual NAV growth of 5-6 per cent through the 2000s and 2010s). Thus, we reiterate our Outperform ranking with a greater focus on this multiyear, low-risk annual compounding set-up rather than a sole focus on the near-term (i.e., the next few quarters) with the stock likely due for a pause and consolidation period.”
After its multi-year operating guidance for its flagship Candelaria mine fell below the Street’s expectations, a pair of equity analysts downgraded Lundin Mining Corp. (LUN-T) on Friday.
Scotia Capital’s Orest Wowkodaw said the “very significant” 10-15-per-cent reduction in guidance for both 2022 and 2023 raises “more questions than answers” on its life-of-mine plan.
“The guidance cut was attributed to previously unrecognized mine to mill grade dilution of 5-8 per cent and to a lesser extent, processing plant underperformance,” he said. “An updated LOM plan is anticipated to be completed in Q4/21. Given that the cause of the grade dilution is currently unknown, future downgrades to the 2024+ outlook appear probable in our view. We are uncertain if these newly disclosed operating issues are structural or transitory.”
Moving the stock to “sector perform” from “sector outperform,” Mr. Wowkodaw cut his target to $13 from $15. The average is $15.12.
“On a positive note, a new dividend return framework was unveiled that included an immediate increase in payout,” he said. “Overall, given both our materially lower estimates and the ongoing uncertainty at Candelaria, we view the update as negative for the shares.”
“While we are bullish Cu, Candelaria and Chilean fiscal uncertainty are likely to overhang the shares in H2.”
In a research note titled Getting chilly in Chile, Canaccord Genuity analyst Dalton Baretto lowered Lundin to “hold” from “buy.”
“The downgrade on throughput estimates going forward appears to be a function of the Candelaria Mill Optimization Project (CMOP) not delivering as planned,” he said. “In our view, this speaks to the engineering rigour and level of scenario analysis in the design phase. The cause of the 5-8-per-cent mine-to-mill dilution is as yet unknown, which speaks to the level of process control in place.
“As a result of two issues above, production guidance for 2022 and 2023 has been lowered by 10-15 per cent, and we have lowered our estimates accordingly. LUN notes that the gold production drop may have a mitigant in improved recoveries, but we err on the side of caution for now. We note that while we have left our 2023+ estimates unchanged for now, it appears as though a capital solution will be required to get back to planned production rates as per the current mine plan.”
Mr. Baretto cut his target to $12 from $13.50.
“While the new dividend policy is robust, we remain concerned around ongoing negative operating surprises and the increased operational and regulatory uncertainty at Candelaria,” he said. “In addition, we see no real catalysts in the near term that could positively impact the share price in a meaningful way, particularly now that the Chapada reserve update is expected to be less robust than previously anticipated.”
Elsewhere, RBC’s Sam Crittenden cut his target to $13.50 from $14 with a “sector perform” rating (unchanged).
“Lundin is now yielding 3 per cent on the base dividend and 5 per cent including the performance dividend which is a standout in our copper universe with producers yielding 0.7 per cent,” said Mr. Crittenden. “However, Candelaria production and costs could take time to reach prior targets and operational risk remains. We lowered our life of mine estimates by 10 per cent in June with higher costs and lowered 2022/23 estimates by a further 5 per cent today.”
Stifel’s Ian Parkinson cut his target to $14.50 from $15 with a “hold” rating.
Following a “solid” second-quarter earnings beat, Canaccord Genuity analyst Scott Chan raised his financial expectations for IA Financial Corp.’s (IAG-T), tracking management’s increasing confidence in its performance for the second half of 2021.
On Thursday, the Quebec City-based firm reported core earnings per share of $2.29, easily exceeding its guidance range ($1.95-$2.10) as well as the consensus projection on the Street of $1.97. That led Mr. Chan to bump up his full-year estimate by 4 per cent to $8.19 (from $7.85) to the high end of IA’s target ($7.60-$8.20).
“The EPS surprise was largely related to higher expected profit, positive experience gains, and larger earnings on surplus,” he said. “In Q2, expected profit was $232-million (up 31 per cent year-over-year]; Canaccord Genuity estimate: $223-million) driven by: (1) added expected profit from the IAS acquisition in the U.S. Operations sector; (2) favourable impact of financial markets; and (3) high net fund entries in the wealth sector. As a result, we lifted our 2021 expected profit forecast by 2 per cent (1 per cent for 2022). Further, policyholder experience was once again positive at $44-million (CGe: $0). The former benefited from several business units that included iA Auto and Home, U.S. Operations, and Individual sectors.”
“Management increased their confidence for 2H/21 (i.e. expect core EPS at top end of guidance range) mainly due to: (1) positive traction on the IAS acquisition; (2) iA Auto and Home exhibiting strong results; (3) solid financial markets helping generate higher assets; and (4) robust sales for another consecutive quarter.”
With a “buy” rating, Mr. Chan increased his target to $83.50 from $81.50. The average target is $82.39.
Others making adjustments include:
* BMO’s Tom MacKinnon to $85 from $83 with an “outperform” rating.
“With balance sheet/capital ratios that are the least sensitive to swings in interest rates/equity markets amongst its peers, combined with the fact that IAG trades at 1.2 times BV, in line with 2008/2009 trough valuations, IAG is compelling value for what has consistently been a steady 8-10-per-cent EPS & dividend grower. The capital-light IAS acquisition accretively adds to earnings growth & diversification,” he said.
* Desjardins Securities’ Doug Young to $80 from $78 with a “buy” rating.
“We believe IAG will likely hit the high end of its 2021 core EPS guidance, and we view the valuation as compelling,” he said.
* Scotia’s Meny Grauman to $88 from $90 with a “sector outperform” rating.
“After delivering a record quarter on broad-based strength that beat the Street by 17 per cent, the key question for IAG is can this impressive performance continue?,” he said. “The good news is that the message coming out of the quarterly analyst call is that yes it can. Despite concerns about elevated experience gains, supply shortages in the auto market, and normalizing results in the P&C business, the lifeco believes that the the good times are likely to continue with core EPS expected to come in at the upper end of Management’s target range for H2 and likely to exceed the upper end of the company’s target for the year as a whole. This means core EPS is likely to exceed $8.20 this year, a material increase versus consensus of only $7.83 heading into reporting season. This also means that core ROE is likely to exceed the upper end of Management’s 12.5-14.0-per-cent guidance range, and organic capital generation is likely to exceed the upper end of Management full year target of $275-million to $325-million.”
* RBC Dominion Securities’ Darko Mihelic to $81 from $78 with an “outperform” rating.
“Q2/21 results were very strong as all core earnings drivers and segmented results came in above our expectations. IAG is currently sitting on a lot of excess capital with $800-million available for capital deployment. IAG is our top pick in our lifeco coverage universe,” he said.
* Canaccord Genuity’s Scott Chan to $83.50 from $81.50 with a “buy” rating.
* National Bank Financial’s Gabriel Dechaine to $80 from $76 with an “outperform” rating.
Canaccord Genuity analyst Scott Chan expects Canadian asset managers to display “solid asset growth with positive net flow traction” during second-quarter earnings season.
In a research note released Friday, he raised his adjusted earnings per share projections for the quarter by 1 per cent and his full-year 2021 and 2022 estimates by an average of 2 per cent, pointing to “robust” mutual fund flows and increased ETFs flows.
That led him to increase his targets for three stocks in his coverage:
- CI Financial Corp. (CIX-T, “buy”) to $28.50 from $27.50. Average: $26.28.
- IGM Financial Inc. (IGM-T, “buy”) to $52 from $50. Average: $49.89.
- Onex Corp. (ONEX-T, “buy”) to $104 from $100. Average: $103.52.
Mr. Chan maintained a “buy” rating and $14 target for Fiera Capital Corp. (FSZ-T). The average is $12.22.
“ We remain positive on Asset managers with the Group trading at a P/E (NTM) of 8.5 times (14-per-cent discount to 5-year average) with CIX and FSZ offering the largest discounts,” he said.
A group of equity analysts on the Street raised their target prices for shares of Canadian Utilities Ltd. (CU-T) after its second-quarter results topped the Street’s forecast.
On Thursday, the Calgary-based company reported adjusted earnings per share of 43 cents, topping analysts’ 39-cent estimate.
“The beat can be attributed to a combination of factors, most notably solid performance in Alberta Gas Distribution, improving economic activity and rising inflation in Australia, greater-than-expected contribution from LUMA, and Corporate and Other earnings that were less negative than forecasted,” said IA Capital Markets analyst Elias Foscolos. “These factors more than offset a negative one-time regulatory impact of $8-million in Electricity Transmission related to prior periods. A settlement relating to the Australian Gas Distribution business provided a one-time benefit, and the Company also noted positive year-over-year variance due to the timing of expenses and improved ATCO energy earnings in Corporate & Other.”
Seeing the benefit of several tailwinds that he thinks will continue to make an impact going forward,” Mr. Foscolos raised his target for Canadian Utilities shares to $40 from $39 with a “buy” recommendation. The average target is currently $36.97.
“We reiterate our Buy rating as we believe CU’s upside and valuation relative to peers is compelling given its (a) strong performance so far in 2021, (b) constructive earnings outlook, (c) track record of operating efficiently and outperforming its base allowed ROE, and (d) balance sheet flexibility to pursue new, clean energy-oriented growth,” he said.
Other analysts making changes include:
* RBC’s Maurice Choy to $38 from $37 with a “sector perform” rating.
* CIBC’s Mark Jarvi to $38 from $37 with a “neutral” rating.
After Thursday’s earnings release, National Bank Financial analyst raised Michael Parkin Kinross Gold Corp. (K-T) to “outperform” from “sector perform” with an $11 target. The average is $13.02
Conversely, other analysts cut their targets for Kinross shares, expressing concerns about weaker-than-anticipated production results. They include:
* Stifel’s Ingrid Rico to $14 from $14.25 with a “buy” rating.
“Revised 2021 production guidance was maintained, but cash cost / AISC now expected to be higher than original guidance. That said, encouraging updates out of Tasiast (higher degree of confidence that the mill will resume operations in Q4) and Round Mountain (pit wall stabilization efforts have been successful) provide reassurance on the 2022-2023 production outlook. K is also signaling confidence on the outlook with a share buyback program and ongoing quarterly dividend. As inflation starts to come through, we have started to review and adjust our cost estimates. Slight hit to target price, but we still project strong FCF in 2022-2023,” she said.
* Canaccord Genuity’s Carey MacRury to US$12.50 from US$13.50 with a “buy” rating.
“Our BUY rating is based on Kinross’ strong production and FCF profile, advancing project pipeline and on valuation as one of the most inexpensive senior producers at 0.60 times NAV vs. the senior peer average of 0.86 times (based on the current forward curve),” said Mr. MacRury.
Seeing it set to benefit from the coming conclusion on a multi-year investment period “which has provided a solid foundation for future growth,” Cormark Securities analyst Gavin Fairweather initiated coverage of Softchoice Corp. (SFTC-T) with a “buy” rating, calling it a “trusted” solutions provider with key partnerships with market-leading vendors.
“Softchoice’s focus on software, cloud and services provides it with a high degree of revenue predictability and exposure to some of the fastest growth verticals in IT,” he said. “We think investors can look forward to low-risk double digit gross profit organic growth and steadily improving margins and FCF as investments in the operational infrastructure yield returns. Despite above average recurring revenue and software exposure, SFTC trades inline with its overall peers at 14.7 times ‘22 EBITDA, but below its software-oriented peers at 20.1 times.”
Mr. Fairweather set a target of $34 for shares of the Toronto-based company, exceeding the $28.67 average.
In other analyst actions:
* JP Morgan analyst Stephanie Yee upgraded GFL Environmental Inc. (GFL-N, GFL-T) to “overweight” from “neutral” and raised his target to US$39 from US$36, while BMO’s Devin Dodge raised its target to US$40 from US$39 with an “outperform” rating. The average is US$38.38.
“We believe there is a favourable setup for the shares underpinned by a strong outlook for organic revenue growth, attractive capital deployment opportunities and margin upside potential. In our view, there are several paths for financial performance to exceed our estimates while the multiple is consistent with WM/RSG despite significantly more growth potential,” said Mr. Dodge.
* CIBC World Markets analyst Robert Catellier raised his AltaGas Ltd. (ALA-T) target to $29, exceeding the $28.40 average, from $28 with an “outperformer” rating, while National Bank’s Patrick Kenny increased his target to $29 from $26 with an “outperform” rating and IA Capital Markets’ Elias Foscolos bumped up his target to $29 from $28 with a “buy” rating . The average is $28.40.
* Canaccord Genuity analyst Dalton Baretto raised his target for Champion Iron Ltd. (CIA-T) to $8 from $7.50 with a “buy” rating. Others making changes include: Raymond James’ Brian MacArthur to $8.50 from $8 with an “outperform” rating; Scotia Capital’s Orest Wowkodaw to $9 from $8.50 with a “sector outperform” rating and TD Securities’ Craig Hutchison to $8.50 from $8 with a “buy” rating. The average is $8.49.
“We believe CIA offers investors good exposure to premium iron ore through its Bloom Lake asset, which is a long-life, lower-cost asset producing high-grade iron ore concentrate (66-per-cent Fe) located in Quebec, Canada, a lower-risk jurisdiction,” said Mr. MacArthur. “In addition, we believe there is potential for near-term growth through its Bloom Lake Phase 2 expansion project at favourable capital costs, given the previous owners spent significant capital. Given CIA’s exposure to premium iron ore, high-quality asset, growth potential, and low jurisdictional risk, we rate the shares Outperform.”
* BMO Nesbitt Burns analyst Etienne Ricard raised his target for Equitable Group Inc. (EQB-T) to $180 from $170 with an “outperform” rating, while TD Securities’ Graham Ryding increased his target to $170 from $160 with a “buy” recommendation. The average is $168.63
“The backdrop for Equitable’s shares is favorable with loan growth accelerating and continued funding diversification positioning the bank for cost of funding improvements, both over the near and longer term,” said Mr. Ricard. “Valuation is undemanding, with the stock continuing to trade at a discount to small-cap Canadian banks, despite a stronger EPS growth and ROE track record and higher regulatory capital positions. EQB is one of the best total return ideas within our coverage underpinned by a low-teens earnings CAGR outlook and re-rating potential.”
* CIBC’s Kevin Chiang raised his Canadian Pacific Railway Ltd. (CP-T) target to $106 from $105 with an “outperformer” rating. The average is $104.97.
* CIBC’s Paul Holden cut his target for Element Fleet Management Corp. (EFN-T) to $15.50 from $16, reiterating an “outperformer” recommendation. The average is $16.77.
* CIBC’s Mark Jarvi raised his Fortis Inc. (FTS-T) target to $59 from $58 with an “outperformer” rating, while National Bank Financial’s Patrick Kenny trimmed his target to $59 from $60, keeping a “sector perform” recommendation and BMO’s Ben Pham lowered his target by $1 to $56 with a “market perform” rating. The Street’s average is $58.75.
“The Q2/21 results and outlook illustrate that USD F/X translation and potential ROE compression could dampen growth through 2022,” said Mr. Pham. “But given FTS has one of the more defensive businesses within our broader coverage (99-per-cent regulated) and rate base is still rising nicely (6-per-cent CAGR), downside in the shares is probably limited, in our view. We are maintaining our Market Perform rating, which balances these considerations.”
* CIBC’s Jacob Bout raised his Toromont Industries Ltd. (TIH-T) target to $109 from $106 with a “neutral” rating, while BMO’s Devin Dodge increased his target to $118 from $114 with an “outperform” recommendation. The average is $116.67.
“Toromont remains our preferred idea among the heavy equipment dealers given the strong demand in its markets, a well-established track record of cost discipline and earnings growth potential,” said Mr. Dodge “Moreover, the company has significant available resources to self-fund growth opportunities which provides upside optionality to estimates and valuation.”
* In response to Loblaw’s earnings, BMO Nesbitt Burns analyst Peter Sklar raised his target for George Weston (WN-T) shares to $138 from $120 with a “market perform” rating. The average is $132.43.
“We forecast Weston’s largest holding, Loblaw, will be able to generate only modest EBITDA growth in future quarters as COVID-19 costs continue to depress strong sales growth,” he said. “As well, with the prospect of vaccines becoming available in 2021, we believe investors will be less focused on the stability offered by grocery stocks such as Loblaw and its parent company, George Weston.”
* CIBC’s Mark Petrie bumped up his Metro Inc. (MRU-T) target to $66 from $65, maintaining a “neutral” rating. The average is $63.42.
* RBC’s Maurice Choy bumped up his Atco Ltd. (ACO.X-T) target to $47 from $46 with a “sector perform” rating, while CIBC’s Mark Jarvi raised his target by $1 to $50 with an “outperformer” recommendation. The average is $46.75.
“We believe ATCO’s continued progress in rebuilding its Structures & Logistics (S&L) business, exemplified by the continuation of contract wins and by strong earnings performance in Q2/21 and recent quarters, has markedly improved investor confidence, particularly with regards to establishing a healthy baseline of earnings that is absent of large contracts,” said Mr. Choy. “We have modestly (and cautiously) upgraded our outlook for the segment, and along with better expectations for Canadian Utilities, we believe ATCO continues to be well-positioned to deliver investors with growing dividends and an exposure to macro outlook improvements.”
* Ahead of its second-quarter earnings release, RBC’s Drew McReynolds raised his Stingray Group Inc. (RAY.A-T) target to $10 from $9 with an “outperform” rating. The average is $9.33.
“Despite lingering headwinds within commercial music and radio, we believe management continues to execute well on identifying and capitalizing on new growth opportunities, such as advertising, SVOD, B2C AVOD and other OTT services, and new commercial music partners/contracts most recently in the important U.S. market,” he said. “Looking past lingering headwinds, the combination of renewed momentum within Broadcasting and Commercial Music, a sustained cyclicalrecovery in Radio post-COVID-19,the realization of cost efficiencies, valuation at 7.7 times FTM EV/EBITDA and healthy FCF generation ($1 per share) should continue to translate to a rising floor on the stock through F2022.”
* Scotia Capital analyst Phil Hardie raised his Alaris Equity Partners Income Trust (AD.UN-T) target to $21 from $20 with a “sector perform” rating, while RBC’s Geoffrey Kwan increased his target to $22 from $21 with an “outperform” recommendation. The average is $21.69.
“Alaris reported solid Q2/21 results and has been demonstrating strong fundamentals (e.g., record capital deployment, record revenue/EBITDA, historically strong earnings coverage ratios (ECRs) for investments, partner diversification, etc.) over the last several quarters, capped off with a 6.5-per-cent dividend increase announced this quarter,” said Mr. Kwan. “We continue to like the setup for the stock, reflecting the following: (1) substantial capital deployment opportunities to drive top-line growth; (2) historically low payout ratio, (less than 65 per cent), which should be supportive of continued dividend increases; (3) historically strong investment portfolio (record ECRs, improving diversification); and (4) an attractive valuation.”
* TD Securities analyst Steven Green lowered his Alamos Gold Inc. (AGI-T) target to $15.50 from $16, maintaining a “buy” rating. The average is $13.99.
* National Bank Financial analyst Travis Wood raised his Whitecap Resources Inc. (WCP-T) target to $10 from $9.50 with an “outperform” rating. The average is $8.95.
* Mr. Wood cut his target for Suncor Energy Ltd. (SU-T) to $36 from $41 with a “sector perform” rating. The average is $36.59.
* National Bank Financial analyst Jaeme Gloyn raised his Fairfax Financial Holdings Ltd. (FFH-T) target to $775 from $750 with an “outperform” recommendation. The average is $716.07.
* Stifel analyst Robert Fitzmartyn cut his ARC Resources Ltd. (ARX-T) target to $17 from $17.50, exceeding the $14.32 average, with a “buy” rating.