Inside the Market’s roundup of some of today’s key analyst actions
While investors in precious metals companies need to acknowledge the impact of inflation will linger for longer than initially, iA Capital Markets’ George Topping and Puneet Singh think “Dr. Copper [is] boosted and ready for another run.”
Despite near-term “turbulence” brought by the Omicron variant, the equity analysts expect the base metal to remain “strong for years to come.”
“Omicron is peaking in certain areas of the world, however, there’s still a possibility for weaker data in Q1/22 due to supply chain issues, reduced manufacturing activity to curb case counts, etc.,” the analysts said in a research report released Friday. “We’d expect copper to slightly pull back during Q1/22 as this data comes out and some investors worry about how global growth is being impacted. However, the copper market still looks very tight. For example, the labour issues at BC’s Highland Valley mine (just 0.75 per cent of global supply) were enough to propel the copper price last week by more than 10 US cents per pound. This, combined with sustained low inventories on the exchanges, have led us to raise our price deck in the near term.
“Longer term, we continue to point out that the higher tax/royalty rhetoric in LAM could deter investment into new supply, further pushing out its timeline. Larger copper supply gaps could form 2024+ and we believe copper, like other metals benefitting from green investments themes, will remain higher to incentivize new supply. Thus, we have also raised our long-term price deck to compensate.”
With those price deck changes, Mr. Singh made a trio of target price changes to producers in his coverage universe.
Calling it “undervalued but starting to gain traction with investors,” he reaffirmed Hudbay Minerals Inc. (HBM-T, “buy”) as his top pick, raising his target to $15.50 from $14. The average target on the Street is $12.96, according to Refinitiv data.
“With FM trading at a premium and LUN dealing with issues, we find that HBM is gaining traction again with investors as it’s the option with the most attractive valuation (trades at just 0.8 times P/NAV [price to net asset value] and 3.0 times 2022 P/CF [price to cash flow]),” said Mr. Singh. “This year, HBM will benefit from a full year of higher grades getting accessed at Pampacancha (started mining last year) in Peru and we project HBM will increase Cu production by 25 per cent (210Mlbs) year-over-year at the Constancia complex. In Manitoba, HBM will benefit from a full year of the fully refurbished New Britannia gold plant ramping up processing. We project that HBM will increase Au production by 30 per cent (+170Koz) year-over-year in Manitoba. The discount on HBM ignores these growth areas and misses that given the bulk of capital spent on these projects, HBM is at a free cash flow inflection point at current copper prices. ... The Peru risk doesn’t seem as bad as the market is implying based on HBM’s trading multiple. The key catalyst for HBM this year is that mid-year the Company will table a PEA for Copper World/Rosemont’s private land option in Arizona. This is a free option in HBM’s share price currently and the PEA will allow the market to assign value to the asset.”
Mr. Singh also made these changes:
* First Quantum Minerals Ltd. (FM-T, “speculative buy”) to $44.50 from $35. Average: $35.96.
“The market reaction to the royalty chatter in Panama has been muted and that’s surprising as the new gross profits royalty is negative to NAV. At the end of the month, FM is expected to provide an update on the finalized agreement between both parties. We think there’s a chance that FM’s shares pull back when the final agreement is released. But longer term, due to the torque to copper, FM’s balance sheet repair exercise, and new performance dividend (15 per cent of cash flows after obligations), we remain positive on the Company,” he said.
* Lundin Mining Corp. (LUN-T, “buy”) to $13 from $12.50. Average: $12.03.
“Lundin trades at a discounted valuation (trades at just 0.7 times NAV) but it has some work to do this year to restore investor confidence. Candelaria outperformed in Q4/21, producing 100Mlbs Cu. While we don’t think Candelaria will continue to produce 100Mlbs Cu per quarter (~85Mlbs Cu per quarter seems more sustainable), if LUN can string together a couple of steady quarters, it would be reassuring to investors,” he said.
Mr. Topping bumped up his target for Copper Mountain Mining Corp. (CMMC-T, “strong buy”) to $6.30 from $5. The average is $5.05.
“One of our recommended copper producers is CMMC as it has pulled back and now offers an attractive entry point on a highly torqued to copper equity. Amongst the larger BM producers (HBM, FM, LUN), our top pick is HBM,” they said.
For precious metals, particularly gold, the analysts see a new narrative emerging.
“Gold averaged US$1,800 per ounce last year but sentiment was poor as the broader market did well and inflation concerns were ignored in favour of the transitory inflation theme being put forth by the Fed,” they said. “To start 2022, the narrative is shifting amongst investors. Inflation numbers are still high, and with the amount of debt outstanding, the worry is that the Fed can’t tighten enough or will panic and tighten too much. Gold has successfully tested downside resistance many times and that’s because physical demand is returning. Central Banks around the world have been net buyers of gold, soaking up ETF sales. A policy mistake by the Fed could be disastrous and would catapult gold into finally breaking out and staying there. We have curtailed our gold price deck a bit to exercise conservatism as potential rate hikes are still a headwind until they happen, but we project that real rates will stay negative for the considerable future as inflation continues to rear its head through the year, and thus still remain bullish.”
That view led them to lower the target prices for several stocks in their coverage universe, including:
- Aginco Eagle Mines Ltd. (AEM-T, “strong buy”) to $105 from $120. Average: $94.65.
- Franco-Nevada Corp. (FNV-T, “buy”) to $235 from $250. Average: $204.28.
- Nomad Royalty Company Ltd. (NSR-T, “buy”) to $17 from $17.50. Average: $16.19.
- Osisko Gold Royalties Ltd. (OR-T, “strong buy”) to $24 from $25. Average: $22.77.
- Treasury Metals Inc. (TML-T, “buy”) to $2 from $2.50. Average: $2.23.
- Wesdome Gold Mines Ltd. (WDO-T, “strong buy”) to $15.60 from $16. Average: $14.49.
- Wheaton Precious Metals Corp. (WPM-T, “buy”) to $80 from $90. Average: $69.60.
“Amongst the golds, WDO remains a favourite,” they said. “WDO will benefit from a full year of production from its recently restarted Kiena mine and from follow-up drilling into new discoveries and regional exploration areas. Amongst the larger caps, until gold fully breaks out, we still prefer royalty names over producers as the royalty model is insulated from cost inflation (producers will likely all put out higher cost guidance this year). OR remains our top royalty pick as its discounted valuation is too steep (note: management has been buying back stock below $15.00) with its peer-leading growth pipeline.”
Ahead of their fourth-quarter earnings releases, which he calls “an exciting finale for 2021,” Desjardins Securities analyst Benoit Poirier reaffirmed his preference for Canadian Pacific Railway Ltd. (CP-T) over Canadian National Railway Co. (CNR-T).
“CP’s shares offer a higher risk-adjusted potential return than CN’s given that we believe future OR [operating ratio] improvement at CN is largely reflected in its current share price,” he said. “The integration plan presented by CP/KCS in their merger application is impressive in our view, and leads us to believe that the US$1-billion of revenue synergies targeted over three years may be conservative. Whether CN appoints a CEO with a strong operational pedigree remains a risk to our thesis.”
For the quarter, Mr. Poirier said both companies were “negatively impacted by significant flooding in B.C. and harsh winter conditions,” calling it a “challenging” operating environment.
“That said, we note that most of the lost volume should be recovered through 2022 as road access was also affected by flooding, which we believe could enable CN and CP to deliver mid-single-digit RTM [revenue ton mile] growth in 2022,” he said. We remain conservative and forecast 2.8 per cent for CN and 3.7 per cent for CP.”
After incorporating the Kansas City Southern acquisItion into his financial projections, Mr. Poirier raised his target for CP shares to $113 from $103 with a “buy” rating. The average on the Street is $106.23.
“While we expect some noise in the results related to the closing of the voting trust, our understanding is that management will provide some colour/guidance on the performance of the legacy business,” he said. “Management’s comments should also help remove uncertainty until the transaction fully closes (expected in 4Q22).”
Mr. Poirier thinks announcement of CN’s new chief executive officer will “garner significant attention,” adding: “Beyond that, we anticipate an update on the strategic plan, including the ongoing sale process for GLT and management’s updated view on TransX. Finally, we will watch for incremental insight on the potential for OR improvement beyond 2022.”
Keeping a “hold” recommendation, he raised his target to $170 from $165, exceeding the $159 average.
Elsewhere, Raymond James analyst Steve Hansen bumped up his CN target to $160 from $150, keeping a “market perform” rating.
“We are increasing our target price ... as we cast our valuation lens into 2023—a period that we expect will be characterized by healthy, more normalized traffic growth and ambitious internal cost control,” he said. “In the more immediate term, however, we continue to see traffic growth as challenged, with 4Q21 & 1H22 still grappling with lingering weather-related issues (floods & frost), a drought-afflicted Canadian harvest, and broader supply-chain congestion affecting key categories such as Intermodal & Auto. Against this volatile backdrop, with leadership issues still unresolved, we view CN’s share price as reasonably valued at current levels.”
Citing a high trading multiple relative to its peers, Scotia Capital analyst Trevor Turnbull lowered Lundin Gold Inc. (LUG-T) to “sector perform” from “sector outperform” on Friday.
“Lundin Gold is trading at 1.46 times our NAV (net asset valuation) versus the mid-tier peer group at 0.81 times using our Scotia price deck ... At spot gold, Lundin Gold trades at 1.05 times our valuation versus peers at 0.62 times. For our comparison we removed the two companies currently the target of takeover offers and the range of trading multiples is 0.55–0.92 times (0.41–0.85 times at spot),” he said.
“In our opinion, Lundin Gold may seek to diversify its single-asset and above-average political jurisdictional risk through acquisition especially given its premium trading multiple. We continue to believe the company could be an acquisition target given its exceptional large-scale high-grade operation. However, since 32-per-cent shareholder Newcrest Mining is in the midst of purchasing Pretium, we feel it is less likely it will seek a transaction with Lundin Gold in the near-term.”
He maintained a $12 target for its shares. The current average is $13.69.
Expecting concern about the potential for an extended waiting period on commissioning of its Juanicipio project, Mr. Turbull also downgraded MAG Silver Corp. (MAG-A, MAG-T) to “sector perform” from “sector outperform.”
“The delay is pending approval by the government electrical company to tie the mill into the power grid and the actual connection work itself,” he said. “Juanicipio has back-up power generation capacity, but it is not sufficient to run all the plant components at once for final commissioning, testing and steady state production. The partners originally stated they believed approval would come after the first week of May, but there are reports approval could come by the end of January; although, this does not necessarily mean tie-in as well.”
“Until that happens we do not expect any detailed guidance on production levels, costs or sustaining capital. In our opinion, all of these could vary widely.”
With the stock approaching his US$17 target, he lowered his rating for Vancouver-based company. The average is US$23.75.
Though he remains a “fan” of Guru Organic Energy Corp. (GURU-T) and its long-term growth strategy, Echelon Capital analyst Amr Ezzat said he’s “cautious” in the short term given Omicron-related “weakness.”
Before the bell on Thursday, the Montreal-based company reported fourth-quarter 2021 revenue of $8.5-million, up 38.4 per cent year-over-year and ahead of the estimates of both Mr. Ezzat ($7-million) and the Street ($7.8-million). However, an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) loss of $5.7-million fell short of expectations (losses of $2.5-million and $2.7-million, respectively).
That earnings miss stemmed, in large part, from the impact of an agreement with PepsiCo in Canada, which came into effect in early October for distribution, selling, and merchandizing fees. The deal weighed on gross margins, which slid to 51.0 per cent from 62.6 per cent in the previous quarter.
“While expected to increase overall profitability in the long-term, the agreement had and will likely continue to have a negative impact on profitability in the short-term,” said Mr. Ezzat. “Notably, the distribution agreement has allowed the Company to shift its focus and sales resources on the larger U.S. market. The Company has increased its total estimated points of sale by 8,800 to over 23,700 since the beginning of the fiscal year.”
Despite maintaining his Street-low expectations, the analyst sees Guru poised to capitalize on the growing energy drink industry in North America, which he estimates his worth $15-billion and calls “the fastest-growing non-alcoholic beverage category” with 8-per-cent annual growth.
“58 per cent of households with children consume energy drinks with millennials and Gen Z driving consumption while demanding healthier alternatives,” said Mr. Ezzat. “Capitalizing on these trends, GURU is on pace to more than double revenues in three years and is currently the fastest-growing energy drink brand in Quebec’s convenience and gas stores. In early 2018, the Company began implementing its sales strategy in select California markets resulting in early success as evidenced by strong growth in conventional grocery and convenience stores. Namely, GURU is currently the fastest-growing energy drink brand and the top organic energy drink in Bay Area convenience stores (excluding performance energy and private label brands). Our long-term modelling sees GURU gain 1.3-per-cent market share penetration in North America in 10 years, yielding revenues of $400-million. We note the Company’s current market share in its core QC market is 13-15-per-cent and, while its market share is negligible outside of QC, the Company has aggressively grown in number of doors, showcasing early success in its expansion plans.
“We expect the Company to generate 30-per-cent EBITDA margins at the abovementioned top-line level. For reference, GURU has already delivered 30-per-cent EBITDA margin quarters while industry bellwether Monster Beverage (MNST-Q) started to deliver 30-per-cent-plus EBITDA margins at the US$350-million ($400-million) sales mark in 2005.”
Maintaining a “buy” rating, he cut his target for Guru shares to $20 from $23.50. The average on the Street is $19.25.
Elsewhere, CIBC World Markets analyst John Zamparo cut his target to $18 from $21 with an “outperformer” recommendation, while Stifel’s Martin Landry lowered his target to $20 from $24 with a “buy” rating.
“GURU’s shares may experience short-term weakness due to downward estimates revisions which could create an appealing entry point,” said Mr. Landry.
CIBC World Markets analyst Mark Petrie thinks “unprecedented” inflation and operational challenges are leading to “elevated uncertainty” for Canadian grocers in 2022.
“The Canadian grocery channel is heralded for its relative stability in a notoriously difficult industry. We expect this to remain the case in 2022, though unprecedented cost increases lead to accelerating retail price inflation, with more to come. Challenges in the supply chain and labour availability add further uncertainty, on top of (hopefully) unwinding pandemic behaviours. Overall, we believe the grocers are well-positioned to navigate the year and deliver healthy earnings growth, though we believe the range of outcomes is wider than normal; execution will be in even greater focus,” he said.
Mr. Petrie made a series of target price adjustments to grocery stocks in his coverage universe.
He raised his target for these companies:
- Loblaw Companies Ltd. (L-T, “outperformer”) to $116 from $108. The average on the Street is $106.
- Metro Inc. (MRU-T, “neutral”) to $68 from $67. Average: $69.40.
- Empire Company Ltd. (EMP.A-T, “outperformer”) to $49 from $48. Average: $45.60.
Converesly, Mr. Petrie cut his George Weston Ltd. (WN-T) target to $171 from $175, exceeding the $157.43 average, with an “outperformer” recommendation.
“We have made a number of adjustments to our estimates for each of the grocers,” he said. “At a high level, we have increased inflation and same-store sales (SSS) forecasts, moderated GM% and SG&A% expectations, though the dollar amounts are higher. On a net basis, our EPS forecasts rise on account of higher net margin dollars. We continue to favour Loblaw as the industry leader with margin and multiple upside as operational improvements flow through. Empire should see benefits in year 3 of Horizon and deliver healthy earnings growth, despite a small discount business. Metro will lean on best-in-class operations, but premium valuation leaves less upside. We also updated our WN price target for a corrected cash flow estimate and a higher L target.”
Richelieu Hardware Ltd. (RCH-T) ended 2021 “with a bang,” according to National Bank Financial’s Zachary Evershed, though he warned “normalization” is on the horizon.
On Thursday, the Montreal-based company reported fourth-quarter results that “easily” exceeded the analyst’s Street-high estimates. Revenue rose 24.8 per cent year-over-year to $398.2-million, topping both Mr. Evershed’s $380.4-million projection and the consensus on the Street of $364-million. Earnings per share of 79 cents also blew past expectations (65 cents and 62 cents, respectively).
“Effective cost management measures and improved gross margins played their part, topped by better fixed cost absorption on strong organic growth, especially in the Manufacturers segment,” the analyst said. “Alongside Q4/21 results, RCH announced an 85.7-per-cent increase to its dividend to $0.13 quarterly.”
“EBITDA margins expanded 330 bps year-over-year to 17.9 per cent, smashing the previous high watermark and once again showcasing the twin engines of gross margin improvement and better fixed cost absorption, as the company continues to support thriving Manufacturers. Contact with customers leads management to believe end-market demand should remain strong at least through 2022, and we believe RCH’s superior fulfillment (interconnected warehouses, aggressive procurement throughout global supply chain disruptions) will allow the company to retain greater market share as tailwinds subside.”
Mr. Evershed introduced his 2023 estimates, seeing a wane in pandemic tailwinds and introducing the potential impact of rate hikes on organic growth.
“We remain cautiously optimistic regarding the company’s profitability and call for EBITDA margins to trend back down toward the top end of the 13-14-per-cent range indicated by management as RCH’s end markets cool somewhat and supply chains untangle, leading to lower pricing lending less support to fixed cost absorption,” he said.
Reaffirming his “outperform” rating, Mr. Evershed hiked his target to $53.50 from $48. The average is currently $50.83.
“RCH is well-positioned to execute on its M&A program, having already broken the record set in 2021 with $100 million in added revenue closed year-to-date,” he said.
In other analyst actions:
* BMO Nesbitt Burns analyst Peter Sklar upgraded Dollarama Inc. (DOL-T) to “outperform” from “market perform” with a $71 target, rising from $61. The average on the Street is $66.38.
“We believe Dollarama is relatively better positioned to navigate through a period of inflation, and we are concerned that Canadian Tire’s comps could decelerate (lapping huge COVID sales, future sales already brought forward, inflation on larger tickets more pronounced for consumers),” he said.
“As a result, we have a relative preference for Dollarama over Canadian Tire.”
* Raymond James analyst Steven Li initiated coverage of Vecima Networks Inc. (VCM-T) with an “outperform” recommendation and $24 target. The average is $21.
“Vecima is a global leader focused on developing integrated hardware/software solutions for broadband access (cable & fiber) and IP video delivery,” he said. “The cable industry is just embarking on a multi-cycle network upgrade. What we like about VCM is that they are in all the right places. They offer both R-PHY and R-MACPHY/EPON solutions, so they are well positioned regardless of which path or steps operators choose. Given VCM’s still relatively small size, we believe its strong early market position should drive remarkable growth at least over our forecast horizon, if not beyond.”
* With the close of its $42.5-million bought deal financing, Raymond James analyst Brian MacArthur trimmed his Nomad Royalty Company Ltd. (NSR-T) target by $1 to $16 with an “outperform” rating, while Scotia’s Trevor Turnbull cut his target to US$11 from US$12 with a “sector outperform” recommendation. The average is $16.06.
“We believe royalty/streaming companies like Nomad offer equity investors exposure to precious metals prices while mitigating downside risk given limited exposure to operating and capital costs,” Mr. MacArthur said. “At the same time, upside optionality exists through exploration potential. Nomad’s royalty/streaming portfolio offers meaningful growth over the next few years. In addition, Nomad pays an annual dividend of 20 cents per share, representing around 2-per-cent dividend yield. Given Nomad’s high margin business model, mid-term growth profile, longer-term growth optionality, dividend yield and current valuation, we rate the shares Outperform.”
* Wells Fargo analyst Ike Boruchow cut his Lululemon Athletica Inc. (LULU-Q) target to US$370 from US$420, below the US$443.57 average, with an “equal weight” rating.
* Canaccord Genuity analyst Doug Taylor increased his target for Blackline Safety Corp. (BLN-T) to $9 from $8.25 with a “buy” rating. The average is $11.06.
“Blackline reported FQ4 (October) results that featured a top-line revenue beat,” he said. “The company has recently been showing strong momentum with sizable contract announcements and reported a record pipeline in most markets. Combined with the upcoming G6 launch (targeted for July), we are increasingly comfortable with the improving growth trajectory factored in our model, which we expect will lead to operating leverage beginning to show through in F2022.”
* Cowen analyst George Mihalos lowered his Nuvei Corp. (NVEI-T) target to $142 from $169 with an “outperform” rating. The average is US$120.12.
* CIBC World Markets analyst Scott Fromson increased his Park Lawn Corp. (PLC-T) target to $48, exceeding the $46.81 average, from $45 with an “outperformer” rating.
* National Bank Financial analyst Shane Nagle raised his Filo Mining Corp. (FIL-T) target to $22.50 from $16 with an “outperform” rating, while Canaccord Genuity’s Dalton Baretto increased his target to $20 from $17 with a “speculative buy” rating. The average is $18.27.
* National Bank’s Don DeMarco cut his B2Gold Corp. (BTO-T) target to $8, matching the average, from $8.50 with an “outperform” rating.