Inside the Market’s roundup of some of today’s key analyst actions
Tidewater Renewables Ltd. (LCFS-T) is “well positioned to execute on a robust portfolio of longer-term growth opportunities,” according to Canaccord Genuity analyst John Bereznicki.
Emphasizing the benefits of being led by the senior management of Tidewater Midstream and Infrastructure Ltd. (TWM-T), which owns a 69-per-cent stake in the spin-off vehicle following its $161-million initial public offering in late August, he initiated coverage with a “speculative buy” rating on Friday.
“TWR’s ‘starter kit’ includes approximately $40 million in run-rate contracted EBITDA and $225 million in fully funded organic growth opportunities through 2023,” he said. “These include a flagship Hydrogen Derived Renewable Diesel Complex (HDRD) that enjoys significant British Columbia government support. Longer term, TWR believes it has a portfolio of growth opportunities exceeding $1.8 billion that include renewable fuel and hydrogen production as well as carbon capture. Management believes these projects can be developed at 2x to 8x EBITDA by levering existing TWM facilities and operations.
“TWR will maintain a common management team with TWM that has significant experience with large-scale project development. The relationship between the two companies will be governed by several key agreements, and TWM will initially be the counterparty to more than 75 per cent of TWR’s run-rate EBITDA. By 2023, we expect this figure to fall to 25 per cent as the HDRD enters production.”
Mr. Bereznicki also sees Tidewater Renewables in a good position to benefit from both existing low-carbon fuel incentive schemes in British Columbia and several U.S. states “that are driving demand growth for renewable fuels as well as planned industry capacity expansion.”
“In our view, existing low-carbon fuel incentives are key to TWR’s project economics through 2023,” he said. “Longer term, we believe TWR should also benefit from new low carbon fuel programs (such as Canada’s Clean Fuel Standard) as energy transition policies continue to evolve.
“We expect TWR to exit 2021 with net debt of $103-million (with leases) and access to a $150-million credit facility. We believe TWR’s net debt will peak at 2.3 times EBITDA as it executes its capital program through 2023. At that point, we believe the company’s significant free cash flow should support longer-term organic growth opportunities.”
Mr. Bereznicki set a target of $21 per share. The average target on the Street is $21.78, according to Refinitiv data.
“We believe TWR is subject to several uncertainties. These include risks related to major project development, government clean fuel policy, feedstock availability and cost, commodity and renewable fuel incentive pricing volatility, competitive intensity, physical offtake arrangements, capital funding and reliance on TWM,” he said. “The company’s market liquidity is also limited by TWM’s 69-per-cent ownership position.”
“We are initiating coverage with a SPECULATIVE BUY recommendation that reflects the risk factors noted above and believe TWR is an attractive energy transition vehicle for investors with an above-average risk tolerance.”
Calling it a “a high-growth machine,” Scotia Capital analyst George Doumet initiated coverage of BRP Inc. (DOO-T) with a “sector outperform” recommendation on Friday.
“BRP is a high-quality cyclical that has compounded adjusted EBITDA by a CAGR [compound annual growth rate] of 15 per cent from fiscal 2015 to 2022 and adjusted EBITDA per share by a CAGR of 25 per cent due to its aggressive share repurchases,” he said. “Looking under the hood, top-line growth has been fuelled by strong secular tailwinds, including ongoing bouts of innovation leading to market share gains, but more importantly by the application of this innovation to entry level price points leading to substantial expansion of the category itself (i.e., Spark for PWC, Ryker for 3WV, and more recently Switch for the high-growth pontoon industry). BRP is fully committed to electric vehicles (EVs) and expects to offer an electric version of each of its models by the end of 2026, but as soon as 2022 for some units. More recently, triggered by the pandemic, powersports saw a cohort of new entrants attracted to the socially distanced leisurely nature of the industry.”
In a research report titled Engineered for Outperformance, Mr. Doumet expects a “healthy amount” of growth over the next two years, driven by product restocking after dealership inventories dropped by almost 75 per cent from 2019 levels. He estimates it could lead to a multi-year replenishment revenue opportunity of $750-million to $1-billion, representing approximately 10 per cent of fiscal 2023 revenues).
“As such, for F2023 and F2024, we forecast above-average revenue growth, with a CAGR of 14 per cent (versus 9 per cent from F2015 to F2021),” the analyst said. “However, given ongoing (although improving) supply chain challenges, labour constraints, and persistently higher input costs, we expect adjusted EBITDA growth to moderate (i.e., for margins to compress). With BRP’s valuation multiple below its historical average, we believe this has been priced in.”
Mr. Doumet said BRP has established itself as both an “innovator” in the sector as well as “steward of capital,” having reduced its outstanding shares by 25 per cent since 2014 and by returning almost $1-billion to investors through substantial issuer bids since 2017.
“Supported by strong earnings growth and healthy free cash flow (FCF) conversion, BRP was also able to reduce its leverage by almost half and is projected to exit this year at 1.4 times (and next year at 1.0 times),” he said. “With a comfort zone closer to 2 times, this leaves capacity to continue aggressive buyback activity and/or pursue strategic M&A.”
Calling its current discount to peers “unjustified,” Mr. Doumet set a target of $127 per share. The average on the Street is $136.21.
“We apply a 7.5 times EV/EBITDA multiple to our F2024 estimates to derive our one-year target price of $127.00 per share,” he said. “This is largely in line with Polaris’ trading multiple and at a premium to the company’s current trading multiple. We believe this valuation is justified given BRP’s stronger growth outlook and similar balance sheet capacity. That said, we note that BRP’s FCF profile is weaker than its peers but we expect significant improvements over the next two years that should bring it closer in line.”
In a research report titled Trilogy of Value – The Right Team, the Right Metals, the Right Partners, Scotia Capital’s Eric Winmill initiated coverage of Vancouver-based Trilogy Metals Inc. (TMQ-T) with a “sector perform” recommendation.
The analyst said its development project in Alaska, which holds a 50-per-cent interest through its Ambler Metals LLC joint venture with South32 Ltd., is “highly compelling because of its attractive project economics, mix of base and precious metals, strong financial backing, exploration upside, and strong support from local and multinational partners.”
He said the project has “attractive” economics, estimating a net present value using a discount rate of 8 per cent (NPV8%) to be nearly $2.5-billion on a 100-per-cent basis, and is currently well funded due to initial advancement.
“To support full-scale mine production, access to and from the project is envisaged through a 211-mile private-access road from the east to allow supplies and concentrate shipments to reach the port in Anchorage, Alaska,” said Mr. Winmill. “The road permitting is being managed by Alaska Industrial Development and Export Authority (AIDEA), and while a permit was issued in July 2020 to support road construction, two lawsuits have since been filed claiming that due process was not followed during the permitting process. Although we expect that these lawsuits will be successfully resolved to allow road construction to proceed in the future, at this time our Sector Perform rating largely reflects uncertainty on the timing of the road construction.”
He set a target of $3.50 per share. The average is $3.85.
”Although we note the significant discount in Trilogy shares relative to peers and the opportunity for value accretion as core projects continue advancing, at this time we rate the shares Sector Perform. Our rating largely reflects uncertainty on the timing of road construction. As we get more details relating to the path forward on road construction and mine permitting and advancement, we plan to revisit our investment rating,” he added.
Following a “messy” third-quarter and the removal of its guidance, Canaccord Genuity analyst Scott Chan lowered his rating for Nextpoint Financial Inc. (NPF.U-T) to “hold” from “buy,” pointing to “extremely low financial visibility” and several “concerning issues” with its LoanMe online lender and loan marketer.
“On a consolidated basis, NPF reported adj. EBITDA of a loss of US$60-million,” he said. “Total consolidated revenue was US$36.1-million that was well below our expected run-rate heading in. Although Liberty tax sales were impacted by seasonality, the large operating miss primarily related to issues pre-warned by management with regards to LoanMe . Further, management withdrew their previously stated guidance for 2021, 2022, and 2023 outlined in its Prospectus and also from their main assumptions put forth (e.g. loan originations, broker mortgage volumes, total operating expenses, cross selling of LoanMe products) driving their annual targets.
“With removed guidance, we have limited near-term visibility on operations at NPF. As a result, we prefer to be on the sidelines until we can envision better operating metrics (particularly at LoanMe).”
Prior to the earnings release, Mr. Chan said the LoanMe business represented a large portion of his valuation for the Hurst, Texas-based company. However, he now sees several reasons to be worried.
“In Q3, LoanMe brought in gross interest income of US$33.1-million which came in well below our annualized run rate,” he said. “In addition, total expenses were inflated driving a significant operating loss (Q3 adj. EBITDA: a loss of US$62.1-million). There are several concerning issues that we will be monitoring near-term: (1) fewer originations led to a lower net loan book (i.e. cross selling lower than anticipated, loan product to service challenges); (2) credit issues that we have to characterize as weak underwriting standards and internal controls (Q3 PCLs of negative US$80-million; more than 3 times what we were looking for); (3) higher SG&A (Q3: a loss of US$20.0-million total); (4) closing down its mortgage brokerage business at YE (unfavorable dynamics and pricing) that had represented 19 per cent of our LoanMe’s total revenue in 2023E; (5) resignation of Jonathan Williams (President of Lending) and appointed Eric Norona (currently COO of NextPoint) to replace duties for Mr. Williams; and (6) potential for writedown on goodwill for LoanMe with year-end results. With no historical comparisons provided and removal of their annual guidance, we have very limited visibility on LoanMe’s operations near term.”
Waiting for “better visibility before getting more constructive on the stock,” Mr. Chan, currently the lone analyst covering the stock, cut his target to US$6 from US$15.50. It closed at US$5.54 on Thursday.
After a “choppy” year for gold, Credit Suisse analyst Fahad Tariq said there’s reasons for optimism heading into the new year.
“We continue to remain constructive on the gold price heading into 2022, despite the potential for multiple rates hikes by the Fed, as we expect continued economic uncertainty, elevated inflation, and negative real rates,” he said in a research note. “We expect gold prices to average $1,850 per ounce in 2022 (up 2.8 per cent vs. 2021) before declining to $1,600 per ounce in 2023 and $1,400 per ounce long-term. We note that gold miners continue to conservatively assume $1,250 per ounce for calculating reserves, and $1,500 per ounce for resources. Risks to our view include a more hawkish Fed, returnto normalized inflation, substitution effect with cryptocurrencies, and lingering weakness in retail demand for gold (particularly in India/China).
“Fundamentals remain attractive, but investors [are] concerned on margin compression. Despite a decline in the gold price from a record $2,000 per ounce in Aug. 2020 to $1,770 per ounce spot (down 11.5 per cent), the gold sector remains fundamentally sound with strong balance sheets (most producers in our coverage are in a net cash position) and strong margins, though more recently there has been increased investor concern on margin compression. Since mid-2021, investors have been more closely watching cost inflation for gold miners and heading into 2022, there is concern that as a result of 5-10-per-cent operating cost inflation, coupled with potentially flat-to-declining gold prices, margins and free cash flow could be meaningfully lower year-over-year.”
Believing cost inflation is the top operational concern heading into 2022, Mr. Tariq made a series of target price adjustments to gold stocks in his coverage universe with this view.
He cut his target for these companies:
- Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “outperform”) to US$65 from US$70. The average on the Street is US$76.53.
- Barrick Gold Corp. (GOLD-N/ABX-T, “outperform”) to US$22 from US$24. Average: US$27.19.
- Centerra Gold Inc. (CG-T, “neutral”) to $9.75 from $10. Average: $11.08.
- Eldorado Gold Corp. (EGO-N/ELD-T, “underperform”) to US$9.25 from US$9.50. Average: US$14.07.
- Kinross Gold Corp. (KGC-N/K-T, “outperform”) to US$7 from US$8. Average: US$9.42.
- New Gold Inc. (NGD-N/NGD-T, “neutral”) to US$1.60 from US$1.70. Average: US$1.86.
- Yamana Gold Inc. (AUY-N/YRI-T, “outperform”) to US$5.25 from US$5.50. Average: US$6.49.
He raised his target for these stocks:
- Iamgold Corp. (IAG-N/IMG-T, “neutral”) to US$3.25 from US$3. Average: $3.36.
- Triple Flag Precious Metals Corp. (TFPM-T, “outperform”) to $17 from $16. Average: $19.95.
- Wheaton Precious Metals Corp. (WPM-T, “neutral”) to $57 from $53. Average: $57.53.
“Our top pick heading into 2022 is Agnico Eagle (AEM), following its merger with Kirkland Lake. We view the post-deal Agnico Eagle as the highest quality, lowest cost senior gold producer, with room for a meaningfully higher dividend. Our other Outperform-rated stocks are: Barrick (GOLD), Endeavour Mining (EDV), Kinross (KGC), Newmont (NEM), Triple Flag Precious Metals (TFPM), and Yamana (AUY). As we expect gold prices to improve year-over-year in 2022, we generally prefer lower-cost producers with scale. We revise target prices across our coverage based on estimate and/or valuation multiple changes,” he said.
Recent share price weakness in shares of Montreal-based graphene company NanoXplore Inc. (GRA-T) represents an opportunity for investors ahead of “multiple” catalysts, said Echelon Capital Markets analyst Amr Ezzat.
“NanoXplore Inc. announced [Thursday] morning the acquisition of Canuck Compounders Inc. and released F2022 guidance,” he said. “The sales guidance is broadly in-line with our forecast but below what we thought were overzealous and unrealistic Street estimates. More importantly and impactful in our view is the formalized line of sight to positive EBITDA (FQ422) on the Canuck acquisition and improved customer outlook (i.e., graphene sales).
“We believe this to be a key inflection point that can see the stock move substantially higher.”
Mr. Ezzat sees the $9.3-million acquisition of Canuck Compounders providing strategic partnershops with end customers, noting: “NanoXplore’s acquisition strategy centres around providing an eventual channel for the sale of graphene powder as well as providing a mechanism to develop market credibility to accelerate adoption of graphene materials in thermoplastic. Customers of acquired companies are generally open to evaluating graphene’s added value and, upon satisfactory performance, integrate graphene in their products.”
Though he trimmed his 2022 and 2023 financial estimates to account for “the ongoing impact from the pandemic on some of the Company’s markets,” the analyst said his long-term projections “on a quicker ramp of graphene sales.”
Maintaining a “speculative buy” recommendation, Mr. Ezzat raised his target for NanoXplore shares by $1 to $8.50. The average is $9.88.
“We believe a much more aggressive return profile is possible beyond our target price should the Company be successful in developing its energy storage initiatives,” he said.
BMO Nesbitt Burns analysts Jenny Ma and Joanne Chen expect Canadian REITs to “put up another solid year in 2022, leaving aside the strong returns in 2021 and the rise of another variant.”
“It is our view that the improvement seen in 2021 continues in 2022, with multiple boosters — literal and figurative — supporting REIT returns,” they said in a research report released Friday. “Our outlook for 2022 calls for Canadian REITs to deliver an average total return of 17 per cent. With the unpredictability of the enduring pandemic, we do not expect the path to be smooth. However, the accelerating rollout of vaccine boosters, continued “reopening” efforts to bring the economy back to prepandemic capacity, the resumption of immigration, expected cash flow growth, and inflation driving hard asset values should all contribute to above-average REIT returns in 2022. Risks to our outlook include the pandemic evolving in the wrong direction again, interest rate volatility, and adverse changes in regulations.”
The analysts made a series of rating changes in her coverage universe on Friday.
Ms. Ma upgraded these equities:
* Crombie Real Estate Investment Trust (CRR.UN-T) to “outperform” from “market perform” with a $19.50 target. The average is $19.61.
“For CRR.UN, the upgrade is predicated on attractive valuation, as recent weakness in the unit price has enhanced the forecast total return to a relatively attractive 16 per cent, while our constructive outlook for CRR.UN’s internal and external growth remains intact,” she said.
* Pro Real Estate Investment Trust (PRV.UN-T) to “outperform” from “market perform” with a $7.50 target. Average: $7.65.
“We are upgrading PRV.UN ... to reflect its attractive forecast total return of 25 per cent, which we view as favourable on both an absolute and relative basis among the Canadian REITs under coverage,” she said. “Moreover, PRV.UN has grown significantly through acquisition and increased its weighting to the industrial asset class to two-thirds of cash flow; its concentration in secondary industrial markets such as Dartmouth (Halifax), Winnipeg, and Moncton position it well to benefit from strong fundamentals observed across the board for industrial assets.”
* Slate Grocery Real Estate Investment Trust (SGR.UN-T) to “outperform” from “market perform” with an $11.75 target. Average: $11.12.
“Our upgrade of SGR.U is driven by the higher target price, bringing its forecast total return to north of 20 per cent (including an 8.3-per-cent distribution yield). SGR.U’s portfolio of grocery-anchored retail properties exclusively located in the U.S. has held up exceptionally well throughout the pandemic, and we expect this to remain the case despite the rise of the new Omicron variant,” she said.
Citing its current valuation, Mr. Ma downgraded Boardwalk Real Estate Investment Trust (BEI.UN-T) to “market perform” from “outperform” with a $56.25 target, falling from $57.75 and below the $60.09 average.
“Since December 2020, BEI.UN’s total return is 62.9 per cent,” she said. “Although we expect fundamentals for multifamily will continue to improve with the reopening, we are cognizant of ongoing uncertainties with respect to the Omicron variant combined with ongoing fluctuation in oil prices. Correspondingly, we have modestly lowered our target price for BEI.UN to $56.25 (from $57.75), based on a slightly lower applied premium to our NAV/unit estimate of $53.50.”
Ms. Chen downgraded Chartwell Retirement Residences (CSH.UN-T) to “market perform” from “outperform” with a $13.50 target, down from $14 and below the $14.07 average.
“Despite positive long-term fundamentals remaining intact, we are cognizant of rising short-term uncertainties surrounding the pandemic and its direct operational impact on the seniors housing sector,” said Ms. Chen. “As such, we are moving our rating on CSH.UN to Market Perform from Outperform and have slightly reduced the premium applied to our NAV/unit estimate ($12.45) to arrive at our new target price of $13.50 (from $14.00).”
In other analyst actions:
* In response to the completion of its Kansas City Southern acquisition, Raymond James analyst Steve Hansen increased his target for Canadian Pacific Railway Ltd. (CP-T) shares to $105 from $98, maintaining an “outperform” rating. The average on the Street is $104.06.
“As part of its update, CP also took the opportunity to lower its FY2021 guidance to account for the impact of recent historic flooding that struck British Columbia,” he said. “While the lingering impacts of this event are expected to spill into 1Q22, our positive thesis remains rooted in the belief that the CP-KCS combination creates the enviable ‘Triple Crown’ of Class 1 railroads, including: best network, best management, and best growth potential over time.”
* Following Thursday’s announcement of its $420-million acquisition of Millar Western Forest Products Ltd.’s solid wood operations, TD Securities analyst Sean Steuart raised his Canfor Corp. (CFP-T) target to $38 from $37 with a “buy” rating, while Raymond James’ Daryl Swetlishoff increased his target to $55 from $53 with a “strong buy” rating. The average is $41.67.
“Our Strong Buy rating for Canfor is a function of our bullish view of lumber markets coupled with a valuation disconnect with peer lumber producers,” said Mr. Swetlishoff. “With [Thursday’s] acquisition of 3 sawmills in Alberta from Millar Western, we highlight the company has expanded its lumber operating platform by an incremental 9 per cent while further minimizing exposure to the high-cost B.C. jurisdiction. While a modest premium to building materials peer Interfor’s recent Eacom acquisition, we estimate the deal to be 10-per-cent accretive to 2022 and 17-per-cent accretive to 2023 EPS prompting us to boost our target for the stock to $55/sh (up $2/sh). We also highlight lumber commodity markets have gained steam once again with WSPF and SYP spot pricing currently trading near or above the US$1000/mfbm mark, and note that despite CFP shares returning 29 per cent year-to-date (vs. the TSX 19 per cent) the company has materially lagged peers Interfor (50 per cent) and West Fraser (38 per cent) which have lower relative exposure to the high-cost B.C. interior region. While BC has become the marginal cost producing region in NA, we highlight that cash costs are forecast to drop to the US$450 level by 2Q22 and we see material earnings and valuation tailwinds, and expect the valuation gap to narrow. We note after this acquisition we peg Canfor’s year-end net cash position at $950-million, with the company remaining the standout inexpensive stock in our coverage list offering an attractive relative valuation.”
“Following this week’s topline data of ph.IIb SOOTHE trial, the conference call where additional details were discussed - including absolute cough reductions, secondary endpoints, tolerability detail, exploratory arm insights – coupled with many touchpoints of investor feedback, we take an opportunity to update our model to reflect these developments and highlight select takeaways that continue to support BLU-5937′s best in class profile, reiterate the positive data, and propel the company toward the next stage of development,” he said. “As BLU moves forward with regulatory interactions and ph.III initiation over 2022, we believe developments in the P2X3 remain worth watching with interesting read-through potential, and, moving on from chronic pruritus, we look to the emerging developing strategy in extension cough indications. In totality, we raise our PT to $14 based on increase in POS to 50 eper cent (from 45 per cent) and deeper penetrations to reflect a strengthening clinical profile, incrementally offset by the removal of the pruritus program though now with underlying upside for several potential expansion opportunities within the vast cough space.”
* CIBC World Markets analyst Krista Friesen downgraded Boyd Group Services Inc. (BYD-T) to “neutral” from “outperformer” with a $230 target, down from $272 and below the $249.54 average.
* CIBC’s Kevin Chiang raised his Canadian National Railway Co. (CNR-T) to $173 from $170 with a “neutral” rating. The average on the Street is $159.
* CIBC’s Jamie Kubik increased his target for Prairiesky Royalty Ltd. (PSK-T) to $20 from $19, keeping a “neutral” rating. The average is $19.13.
* Following the release of weaker-than-anticipated preliminary fourth-quarter results, Canaccord’s Tania Gonsalves cut her Quipt Home Medical Corp. (QIPT-X) target to $10.75 from $11, below the $12.13 average, with a “buy” rating.
* TD Securities analyst Tim James lowered his Air Canada (AC-T) target to $29 from $32, maintaining a “buy” rating. The average is $29.81.
* Mr. James also cut his Chorus Aviation Inc. (CHR-T) target to $5.50 from $6 with a “buy” rating. The average is $5.34.
* Deutsche Bank analyst Brian Bedell raised his target for TMX Group Ltd. (X-T) by $1 to $152 with a “buy” rating. The average is $154.
* JP Morgan analyst Jeremy Tonet raised his AltaGas Ltd. (ALA-T) target by $1 to $31, topping the $30.43 average, with an “overweight” rating.