Inside the Market’s roundup of some of today’s key analyst actions
Pointing the uncertainty around the “ultimate project economics” for upgrades to its Oyu Tolgoi mine and the major financing challenge its now faces, Canaccord Genuity analyst Dalton Baretto cut his rating for Turquoise Hill Resources Ltd. (TRQ-T) to “sell” from “hold.”
On Thursday after the bell, the Montreal-based company said it requires more than $1.2-billion than previously expected for the Hugo North Lift One project at the Mongolia facility, one of the world’s largest copper-gold-silver mines, due to recent delays.
“COVID-19 remains a significant issue, with continued impacts on the current operations, logistics chain and most importantly, the HNLO project,” said Mr. Baretto. “In addition, ongoing delays in negotiations with the Government of Mongolia (GOM), have now delayed the project by at least three months, and later stages by nine months. The net result is a significant $1.2 billion increase in the funding gap to first production, from $2.4 billion to $3.6 billion. In addition, given the uncertainty, TRQ flagged that most sources of financing contemplated could be at risk, raising the spectre of a major (potentially multi-billion dollar) rights offering. ... We note here that a re-structuring of the economic agreement governing the asset remains a major incremental overhang.”
Updating his projections to reflect a six-month project delay and the funding gap, Mr. Baretto cut his target for Turquoise Hill shares to $12 from $20 to reflect the expectation for significant declines on Friday. The current average is $23.86.
Elsewhere, Scotia Capital’s Orest Wowkodaw cut Turquoise Hill stock “sector perform” from “sector outperform” with a $20 target, down from $28.
“TRQ released a very disappointing Phase II Oyu Tolgoi (OT) project update that included an expected start-up delay and higher associated capex,” he said. “Moreover, due to new delays in accessing the higher grade ore in both the current open-pit and the future underground, the company’s estimated funding requirement has ballooned to $3.6B (from $2.4B previously). While our previous estimates already assumed higher capex and a development delay, our revised 12-per-cent NAVPS declined by 24 per cent, largely due to materially higher expected equity dilution. Overall, we view the update as very negative for the shares. Given the heightened operating and liquidity uncertainty, we have lowered our investment rating.”
Others making adjustments include:
* TD Securities analyst Craig Hutchison cut the stock to “hold” from “speculative buy” with a $20 target, falling from $29.
“We expect shares to come under significant pressure following the production delays, increased funding gap, and the lack of material progress on resolving the non-technical criteria to initiate the undercut of the block cave. Considering that COVID-19 continues to remain a concern in Mongolia, we believe that there could be further delays and cost overruns until the workforce can return to planned requirement levels targeted by the end of 2021,” he said.
* BMO Nesbitt Burns Jackie Przybylowski lowered her target to $17 from $20 with a “market perform” rating.
“Turquoise Hill dropped several material negative surprises with its Q3 production update. Revenue has been negatively impacted by COVID at both the open pit and underground (where startup is delayed again), and the project is quickly approaching its authorized spending cap; all work could be halted if further spending is not approved by the Oyu Tolgoi board. The funding gap for the project has also jumped sharply since the last update. In our view, successful execution in terms of timing, budget, and securing the required financing is increasingly risky,” she said.
* BMO Nesbitt Burns’ Tony Robson moved his target to $17 from $20 with a “market perform” rating (unchanged).
Equity analysts at CIBC World Markets expect an undersupply of oil and gas to persist worldwide through the fourth quarter and into 2022.
Accordingly, they raise their commodity price expectations on Friday, leading to higher financial estimates across the sector and price target increases.
The firm’s key benchmark price assumption increases for 2021 included WTI to US$67.91 per barrel from US$64.76 and NYMEX to US$4.05 per thousand cubic feet from US$3.58.
“The third quarter showed significant strength in both oil and natural gas pricing as a combination of faster-than-expected demand recovery and capital discipline from producers has created a situation where the globe could be undersupplied for energy through the winter months,” he said. “With the stronger oil price, our focus turns towards capital allocation plans, 2022 guidance and the acceleration of cash returns for shareholders.”
“As companies achieve debt targets through 2021, we expect further defined capital allocation plans which focus on a combination of dividend increases, special dividends and share repurchase programs.”
After a period of strong performance, analyst Chris Thompson sees Storm Resources Ltd. (SRX-T) as “near fully valued on current strip,” leading him to downgrade his rating to “neutral” from “outperformer” with a $7 target, up from $6.30. The average on the Street is $7.04.
Notable target price adjustments include:
- Canadian Natural Resources Ltd. (CNQ-T, “outperformer) to $62 from $58. Average: $57.20.
- Cenvous Energy Inc. (CVE-T, “outperformer”) to $22 from $20. Average: $17.13.
- Crescent Point Energy Corp. (CPG-T, “outperformer”) to $9.75 from $9. Average: $8.05.
- Enerflex Ltd. (EFX-T, “neutral”) to $12 from $10. Average: $11.58.
- Freehold Royalties Ltd. (FRU-T, “outperformer”) to $16 from $14. Average: $13.92.
- Imperial Oil Ltd. (IMO-T, “neutral”) to $50 from $48. Average: $43.06.
- Paramount Resources Ltd. (POU-T, “neutral”) to $27 from $20. Average: $23.23.
- Precision Drilling Corp. (PD-T, “neutral”) to $65 from $60. Average: $60.35.
- Tourmaline Oil Corp. (TOU-T, “outperformer”) to $60 from $55. Average: $58.42.
- Vermilion Energy Inc. (VET-T, “neutral”) to $15 from $12.50. Average: $13.91.
Following Thursday’s release of its third-quarter attributable royalty revenue and expecting its 2022 and 2023 revenue and earnings to decline, Laurentian Bank Securities analyst Jacques Wortman lowered Altius Minerals Corp. (ALS-T) to “hold” from “buy.”
The St. John’s-based company expects to report attributable quarterly royalty revenue of approximately $20.7-million, down from $21.9-million during the same period a year ago and missing Mr. Wortman’s $23.2-million projection. Royalty revenue from potash fell 16 per cent quarter-over-quarter, while base metals saw a 12-per-cent decline.
“By segment, we were expecting a higher contribution from base metals and potash, offset by somewhat higher thermal coal royalty revenue,” he said.
Mr. Wortman now expects Altius’ 2022 revenue to decline 9 per cent year-over-year to $73.6-million and its 2023 revenue to drop a further 11 per cent to $65.5-million.
He pointed to several factors, including the cessation of mining at Hudbay Minerals Inc.’s (HBM-T) 777 mine in Manitoba in mid-2022; the winding down of royalty revenue from its thermal coal portfolio; “the downward trending profile” for Labrador Iron Ore Royalty Corp.’s dividends, due largely to lower iron ore prices; and expecting downward trending potash prices starting in 2023.
The analyst cut his target for Altius shares to $19 from $20, which is below the $20.57 average on the Street.
Citing near-term uncertainty brought on by Canopy Growth Corp.’s (WEED-T) acquisition of Wana Brands, Raymond James analyst Rahul Sarugaser lowered his rating for Indiva Ltd. (NDVA-X) to “outperform” from “strong buy.”
Ottawa-based Indiva currently possesses the exclusive license to market Wana’s gummies in Canada, which Mr. Sarugaser said has pushed its “dominance” in the edible markets.
“Our initial take is that this transaction clearly illustrates the strength of the Wana brand as it has captured the ‘largest multi-market presence of any independent edibles brand across the U.S. gummy market, and #1 share of the Canadian gummy market,’” he said. “We have seen clear evidence of this strength as Wana has powered NDVA to capturing the #10 market share spot in Canada with 2.3 per cent, while CGC’s total share has dwindled to less than 10 per cent. As such, we had posited in our initiation of coverage on NDVA that, based on this dominance, NDVA is (was) an ‘M&A Target if We’ve Ever Seen One.’
“So, with [Thursday] morning’s news, in our view, NDVA’s potential acquirer universe has now narrowed to one player: CGC. That said, in order for CGC to ensure durability of the Wana brand in Canada in the interim period before it fully acquires Wana the company, logic would dictate that CGC should want to motivate NDVA to continue its success in marketing Wana, and so, CGC and NDVA will need to play nice.”
Mr. Sarugaser cut his target for Indiva shares to $1.25 from $1.75. The current average is 94 cents.
The third quarter should mark the bottom of The Valens Co.’s (VLNS-T) “recent slide in financial performance as it has essentially transitioned from tolling services into a CPG company,” according to Desjardins Securities analyst John Chu.
After the bell on Wednesday, the Kelowna-based company reported sales of $21-million for the quarter, topping Mr. Chu’s $20-million estimate and the consensus of $20.7-million. An adjusted EBITDA loss of $6.2-million was narrowly higher than expectations (losses of $5.9-million and $6.1-million, respectively).
“On the sales front, a substantial increase in SKU listings along with the Citizen Stash acquisition (closing later this year) should accelerate sales growth in FY22, which should drive gross margins higher as sales better absorb existing costs,” the analyst said. “Other revenue drivers include recent manufacturing agreements with six LPs, an entry into Quebec (timing expected soon), a full-quarter contribution from recently acquired Green Roads and LYF, and some potential U.S.-based manufacturing agreements.”
“Management noted that revenue from its SKU listings can take 6–12 months to fully ramp up, which suggests that we should be more conservative with our near-term sales outlook. Supply chain issues (eg delays in equipment arrival and availability of technical staff to commission the equipment) impacted 3Q sales and margins (ie lack of automation impacted the ability to meet demand and having to hire additional staff was a drag on margins), and should also impact 4Q. Revenue from the recently announced manufacturing agreements with six LPs (three of which are ranked in the top seven) will not generate meaningful revenue until 1Q FY22. Lastly, the drop-off in tolling and co-packing revenue was faster than we had anticipated, which also acts as a modest drag against sales growth.”
With a “more conservative” sales outlook and pushing his timeline for reaching positive EBITDA to the second quarter of 2022 from the fourth quarter of this year, Mr. Chu cut his target for Valens shares to $3.50 from $4.25, keeping a “buy” recommendation. The current average is $3.97.
Others making target adjustments include:
* ATB Capital Markets’ Frederico Gomes to $3.75 from $4.25 with an “outperform” rating.
“Valens is undergoing strategic changes as it moves into the CBD market in the US and branded products in Canada. With the closing of the Green Roads acquisition and the Citizen Stash (CSC-X) acquisition expected to close in Q4/FY21e, we believe that Valens has the elements in place to accelerate growth and drive to profitability. We view FY2022e as a landmark year as Valens’ fundamentals flow through to financials,” he said.
* Canaccord Genuity’s Shaan Mir to $3.75 from $4.25 with a “speculative buy” rating.
“Following the quarter, we apply a more gradual ramp to our revenue assumptions through FY2023 while making downward revisions to our long-term margin forecasts (as we reduced our international sales mix in perpetuity),” said Mr. Mir.
Touting “what is shaping up to be an impressive turnaround,” Stifel analyst Ian Gillies initiated coverage of Bird Construction Inc. (BDT-T) with a “buy” recommendation on Friday, expecting organic growth to reappear in the second half of 2021 as pandemic-related slowdowns “begin to reverse course.”
“The company stands to benefit from higher spending profiles in its key end markets, which should drive organic revenue growth in the mid-single digits,” he said. “This is complemented by internal initiatives to improve margins closer to peer averages. This leads to a 2020-2023 estimated EPS CAGR [compound annual growth rate] of 8 per cent. We also expect Bird to remain active on M&A with its disciplined strategy. There’s a lot to like if management continues to execute its business plan, making BDT an intriguing small cap value stock.”
Mr. Gillies called the 2020 acquisition of Stuart Olson Inc. as “transformative,” seeing Bird become a “key” provider of maintenance and repair work in the oilsands.
“This end market is going to provide the company with a low risk, recurring cash flow stream to redeploy into other parts of the business,” he said. “In August 2021, the company acquired a private Ontario construction company, which will create increased exposure to the Ontario transportation sector. This is important because of the quantum of spending expected to occur in this market over the next decade. We expect M&A to be a key part of the growth trajectory.”
“One important consideration is management has done a good job turning the business around after being stuck in a number of onerous P3 contracts that had a significant negative impact on financial results in 2017-2019. The contracts were executed prior to President and CEO Teri McKibbon’s arrival and at the very beginning of CFO Wayne Gingrich’s tenure. Since that time, the company has been working at reducing its exposure to P3 contracts. As a result, EBITDA margins have recovered to the mid-3-per-cent range from 0.8 per cent in 2018. We believe Bird may be chasing Aecon’s Construction segment EBITDA margins of 5.3 per cent as a goal.”
Seeing the potential for a “significant” re-rating if its “solid” execution continues, the analyst set a target of $13 per share, exceeding the consensus of $11.91.
In a research report previewing the third-quarter earnings season for Canadian telecommunications companies, Canaccord Genuity analyst Aravinda Galappatthige expects to see signs of a further recovery in wireless results.
“Despite noticeable weakness over the past month, we continue to see an underlying recovery in the Telecom sector after having performed poorly in 2019 and 2020,” he said. “With that said, the sector returns year-to-date are still lagging key yield-oriented sectors such as Banks, Pipes, and REITS as well as the broader S&P/TSX index. We believe this is driving up the relative attractiveness of Telecom yields. With Q3 results likely to corroborate the ongoing recovery in wireless fundamentals, residential wireline trends likely to remain robust, and a further normalization in conditions in terms of the pandemic offering upside in areas like international roaming, wireless volume growth (e.g., supported by immigration), media etc., we continue to recommend overweighting the Telecom sector at large. Our call is also based on the improved regulatory and government relations backdrop as well as a manageable competitive/promotional environment – two key factors with respect to the health of Telecom economics.
“In terms of risks, we would keep a closer eye on balance sheets, as leverage is Expected to tick up as payments for the recently acquired 3500MHz spectrum largely hit the quarter.”
Pointing to the potential impact of a recent Globe and Mail report on internal management friction, Mr. Galappatthige cut his target for Rogers Communications Inc. (RCI.B-T) by $1 to $70 with a “buy” recommendation. The average is currently $71.87.
“For Rogers, we believe the case is built around its notably inexpensive valuations, now trading at 7.0 times EV/EBITDA 2022 vs 8.4 times for BCE and 9.5 times for TELUS,” he said. “It also has more traction to a wholesome recovery from pandemic conditions (for instance travel returning nearer to pre-2020 levels). With that said, there is a risk that the stock could see some incremental underperformance to the group in the near term due to i) a lagging wireless recovery vs peers and ii) investors potentially being concerned around distractions to management at a critical time in the company’s development, given recent revelations by The Globe and Mail.”
“Operationally, both BCE and TELUS have been delivering a stronger recovery in wireless than expected, with service revenues nearly back to pre-pandemic levels as of Q2/21,” he said. “We also highlight that both TELUS and BCE are reaching the latter stages of their fibre related capex spend, suggesting a meaningful FCF uptrend post 2022, in our view, not to mention better product driven competitive positions (i.e., higher speeds that can compete with cable). We believe this can elongate the current phase of Telcos gaining share from cablecos, particularly in terms of internet sub growth. We think BCE may have significant room for sub gains as its fibre deployments progress in Montreal and subsequently in the 905 regions. In the West, we do not expect to see Shaw initiate any major efforts to recapture share from TELUS in the near term given the impending transaction, and even beyond that point, the merged entity itself could take some time to move.”
In other analyst actions:
* Anticipating it may struggle to reach its 2021 copper guidance and expecting its shares to be under pressure until it demonstrates its asset base potential, National Bank analyst Mike Parkin downgraded Barrick Gold Corp. (ABX-T, GOLD-N) to “sector perform” from “outperform” with a $29 target, down from $36. The average on the Street is $28.07.
Elsewhere, Bernstein analyst Danielle Chigumira cut her target to $33 from $35 with an “outperform” rating.
* Seeing its growth opportunities already priced into its valuation, TD Securities analyst Dan Chan initiated coverage of Shopify Inc. (SHOP-N, SHOP-T) with a “hold” rating and US$1,500 rating. The average is US$1,700.68.
* In response to a significant change in its strategy, Canaccord Genuity analyst Tania Gonsalves downgraded Antibe Therapeutics Inc. (ATE-T) to “hold” from “speculative buy” with a $1.20 target, down from $5 and below the $5.79 average.
“Following a full scientific and strategic review involving external experts and KOLs, ATE provided an update on its development plans for otenaproxesul [Thursday] morning,” she said. “The company is shifting its focus from osteoarthritis to post-operative pain. With the full details of the new program yet to be outlined, for now we are removing otenaproxesul from our valuation.”
* RBC Dominion Securities analyst Luke Davis initiated coverage of Headwater Exploration Inc. (HWX-T) with an “outperform” rating and $7 target, exceeding the $6.74 average.
“Headwater offers investors pure-play Clearwater exposure in the heart of what is becoming one of the most active and most economic oil plays in Western Canada. Coupled with the team behind the Raging River/Wild Stream franchise and a debt-free balance sheet, we believe HWX is well positioned as a regional consolidator,” said Mr. Davis.
* Scotia Capital analyst Orest Wowkodaw trimmed his Labrador Iron Ore Royalty Corp. (LIF-T) target to $41 from $42 with a “sector outperform” rating, while BMO’s Alexander Pearce cut his target to $37.50 from $40 with a “market perform” recommendation. The average is $43.57.
“Rio Tinto Ltd. (RIO:L – Not Rated) released weaker than anticipated Q3/21 operating results for the Iron Ore Company of Canada (IOC),” said Mr. Wowkodaw. “Given the relatively weak performance, 2021 production guidance for IOC was reduced by 11 per cent. Overall, we view the update as negative for LIF shares.
“Despite the disappointing update, we continue to rate LIF shares Sector Outperform based on relative valuation and our strong dividend outlook.”
* Scotia’s Himanshu Gupta raised his Storagevault Canada Inc. (SVI-X) target to $6.50, topping the $6.34 average, from $6.25 with a “sector outperform” rating.
* Scotia’s George Doumet bumped up his Park Lawn Corp. (PLC-T) target by $1 to $43 with a “sector outperform” rating. The average is $44.44.
* “On the back of sector-wide multiple contraction,” CIBC’s Scott Fletcher cut his Dialogue Health Technologies Inc. (CARE-T) target to $11 from $13 with an “outperformer” rating. The current average is $15.78.
“Q3 was a difficult quarter from a share price perspective, with CARE shares down 37 per cent in the midst of sector-wide weakness. We continue to believe that Dialogue’s Integrated Health Platform (IHP) is a strong product offering that should continue to both win new business and enable sales of additional services into the install base. Quarterly results should include important updates on member additions, the attach rate of multiple services within the install base, and the integration of iCBT and virtual EAP services into the overall mix,” he said.
* After it revised its 2021 guidance, confirmed its 2022 budget an announced a dividend increase before the bell on Thursday, Canaccord Genuity analyst Anthony Petrucci increased his target for Whitecap Resources Inc. (WCP-T) to $11.50 from $11, exceeding the $10.15 average, with a “buy” rating. Others making changes include: CIBC’s Dennis Fong to $10.50 from $9.25 with an “outperformer” rating and Stifel’s Cody Kwong to $10.50 from $10 with a “buy” rating.
“In aggregate, WCP managed to reduce its capital spending expectations for this year and the next by $25M while keeping its 2022 production guidance intact. The capital adjustments also shift more capital to Q4 this year (from next year), in an effort to secure key services. We view this as a prudent move by the company given expected labour shortages in the industry. Overall a positive update from the company,” said Mr. Petrucci.
* CIBC’s Stephanie Price cut her Dye & Durham Ltd. (DND-T) target to $44 from $50.50 with a “neutral” rating. The average is $53.
* CIBC’s Mark Petrie hiked his Aritzia Inc. (ATZ-T) target to $52 from $43, keeping an “outperformer” rating, while Scotia’s Patricia Baker raised her target to $49 from $44 with a “sector outperform” rating. The average is $49.
“We see ATZ advantaged by its exceptional e-commerce platform (arguably world-class), small brick and mortar footprint (affording opportunities for growth), unique operating model, and brand positioning. We believe the long-term opportunity for ATZ remains rich with growth potential, particularly in the vast U.S. market,” said Ms. Baker.
* CIBC’s Kevin Chiang raised his target for shares of Bombardier Inc. (BBD.B-T) to $1.60 from $1.30 with an “underperformer” rating. The average is currently $2.02.