Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Mike Parkin sees Alamos Gold Inc.’s (AGI-T) strategic shift to focus on the Phase III expansion its Island Gold Mine before committing significant development capital for Lynn Lake “greatly lowers the financial risk of the company.”
Accordingly, he raised his rating for the Toronto-based company to “outperform” from “sector perform,” believing the decision “affirms the prudence” of Alamos’ management team and improves its free cash flow profile through the next few years.
“Previously, Alamos management communicated that it would proceed with the development of Lynn Lake while simultaneously building out Island Phase III expansion,” said Mr. Parkin. “Although possible with Alamos’s balance sheet, we modeled a need to greatly rely on its US$500-million RCF to maintain a minimum cash balance if it proceeded in this manner. The prior FCF outlook for the company was for multiple years of consecutive negative FCFs.
“With management’s new strategy to bring Island Phase III online (or largely close to completion) before commencing development at Lynn Lake, we see positive FCF in 2023 and an almost neutral FCF in 2022. We now model Lynn Lake construction starting 1Q24 (prev. 3Q22) with first production by mid-2026 (prev. 3Q24). Island currently has the necessary permits to break ground, and we model the Phase III shaft coming online in 2025. We believe that this prudent allocation of capital, improved FCF profile, and discounted valuation warrant the upgrade to Outperform. Watch for an Island LOM update and Lynn Lake updated Feasibility Study later this year.”
The move came in the wake of Alamos’ release of largely in-line financial results after the bell on Wednesday. Adjusted earnings per share of 5 US cents met Mr. Parkin’s forecast and was a penny below the consensus on the Street.
“We have adjusted Mulatos over the next three years, resulting in slight increases in 2022 production estimates followed by decreases in 2023 and 2024,” the analyst said. “Based on the management commentary, we have pushed out the Lynn Lake construction to start in 1Q24, resulting in a large decrease to our 2023 capex estimates and thus resulting in our FCF turning positive for the year. At this point, we do not have a high conviction in our 2024 Lynn Lake capex spend in terms of the magnitude, so our FCF estimate for that year is currently at a lower conviction.”
Mr. Parkin maintained a $13 target for Alamos shares. The current average on the Street is $13.21.
Elsewhere, Canaccord Genuity’s Dalton Baretto upgraded Alamos to “buy” from “hold” with a $12 target.
“We like AGI for its pure gold exposure, organic growth profile, relatively low cost structure, strong balance sheet, and safe jurisdictional risk profile,” he said. “In addition, we note that the company trades at an attractive 0.55 times NAV vs. the intermediate precious metals producer average of 0.67 times and the senior average of 0.86 times. Finally, we see a potentially positive catalysts on the horizon in the form of an updated Island Gold Phase III study and an aggressive share buyback program to be deployed under the existing 30 million share NCIB.”
Following “modestly positive” first-quarter financial results, Canaccord Genuity analyst Dalton Baretto upgraded Lundin Mining Corp. (LUN-T) to “buy” from “hold” on Friday.
“LUN beat our financial estimates, which were above the consensus average, largely due to higher realized pricing for all three base metals produced,” he said. “Copper and nickel production were in line with our estimates, while gold and zinc production were below our forecasts. LUN did not make any changes to its production, cost or capex guidance, but noted that given Q1 challenges, production and costs at Chapada are tracking negatively vs. guidance due to the Q1 issues, and capitalized stripping costs at both Candelaria and Chapada are tracking above guidance due to higher explosives and fuel costs.”
Mr. Baretto increased his net asset value multiple for Lundin to reflect “emerging upside” in its assets, including Chapada and Josemaria, which he feels was not properly reflected in his estimates, leading to the upgrade. He raised his target for its shares to $14 from $13.50, exceeding the $13.67 average.
“We like LUN for its commodity diversity, emerging growth and value at each of the assets, robust balance sheet, and attractive relative valuation,” said Mr. Baretto. “In addition, we see a number of catalysts on the horizon this year: expansion studies at Candelaria and Chapada, exploration updates at the new Sauva discovery near Chapada, and project milestones at the newly acquired Josemaria project.”
Elsewhere, citing its valuation, Stifel’s Ian Parkinson raised the stock to “buy” from “hold” with an unchanged $14 target.
“Lundin Mining successfully navigated the start of 2022 beating most of our estimates for the quarter,” he said. “4 of 5 operating assets outperformed our estimates in the quarter on a production and on an operating cost basis. At the same time the company completed the acquisition of Josemaria securing a growth project that brings a step change on the LUN copper production profile.”
Conversely, Scotia Capital’s Orest Wowkodaw reduced up his target to $13 from $13.50 with a “sector perform” rating.
“LUN reported better-than-anticipated Q1/22 results and made no formal changes to 2022 operating guidance despite cost pressures. However, the company disclosed a higher maiden capex estimate of more than $4.0-billion for the newly acquired Josemaria Cu-Au project. Overall, we view the update as negative for the shares given our lower valuation,” he said.
RBC Dominion Securities analyst Keith Mackey thinks Precision Drilling Corp. (PD-T) has “more room to run” following largely in-line first-quarter results.
“We continue to expect 2022 to unfold favourably for land drillers as rig counts grind upward, driving margin expansion through increased utilization and stronger pricing,” he said.
The Calgary-based company’s shares rose 2.2 per cent following the premarket release of its results on Thursday.
Revenue of $351-million topped Mr. Mackey’s projection by 4 per cent and the Street’s forecast by 6 per cent, driven by gains in both Contract Drilling and Completion and Production Services
While U.S. rig pricing is “moving sharply upward,” the analyst sees Canadian customers in “uncharted territory” for the rest of the year.
“Precision remains sold out of its Super Triple Montney rigs and expects that third quarter activity could surpass the winter drilling season while bookings and customer discussion see the second half of the year shaping up to be the busiest since 2014,” he said. " PD rejected opportunities to activate rigs in Q1 due to low rates, and it continues to open rate discussions as rig demand increases.”
After increased his 2022 and 2023 EBITDA projections by 8 per cent and 20 per cent, respectively, Mr. Mackey hiked his target for Precision shares to $147 from $135 with an “outperform” rating. The average is $119.45.
Others making changes include:
* ATB Capital Markets’ Waqar Syed to $133 from $130 with an “outperform” rating.
“PD stock has pulled back from its recent highs owing to market concerns about margins, and we think these results should be viewed positively,” he said.
* Stifel’s Cole Pereira to $142 from $135 with a “buy” rating.
“Further U.S. drilling margin upside could provide a path as high as $169.00/sh without assuming any activity increases. We view this improving outlook as reaffirming PD as our Top Pick in Canadian Oilfield Services. The stock has traded down 16 per cent from its week high in the past two weeks, while its outlook has continued to improve. We would be taking advantage of the recent pullback and entering or adding to positions,” said Mr. Pereira.
* TD Securities’ Aaron MacNeil to $130 from $125 with a “buy” rating.
IA Capital Markets analyst Matthew Weekes said AltaGas Ltd.’s (ALA-T) first-quarter beat reinforces his “constructive” outlook for the company, pointing to its “low-risk commercial model and constructive growth outlook driven by investment in gas and NGL infrastructure, which we believe is experiencing improved sentiment, and opportunities to expand the global exports platform.”
Shares of the Calgary-based energy infrastructure company rose 1.5 per cent on Thursday following the premarket release, which included normalized earnings before interest, taxes, depreciation and amortization of $574-million, topping the estimates of both Mr. Weekes ($552-million) and the Street ($554-million).
He attributed the strong performance, which resulted in a decision to maintain its guidance, to AltaGas’ Utilities segment, noting: “Beyond organic growth andasset optimization, Utilities experienced tailwinds in the retail business, including the timing of certain swap gains which had the effect of moving some profitability into Q1 from Q2. As such, we would expect some of the Utilities strength to reverse going forward.”
Reaffirming his “buy” recommendation, Mr. Weekes raised his target by $1 to $33. The average on the Street is $33.16.
“Potential catalysts include resolution of negotiations between the government and First Nations leading to improved development visibility in northeast BC, and additional permitting progress leading to improved visibility on the completion and sale of ALA’s interest in the MVP,” he said.
Elsewhere, RBC’s Robert Kwan raised his target to $33 from $31 with an “outperform” rating, while TD Securities’ Linda Ezergailis bumped her target to $33 from $32 with a “buy” rating.
“AltaGas delivered a solid quarter that helped underscore why we view it as our favourite ‘utility’ stock given its above-average rate base growth (8-10-per-cent CAGR through 2026E), Midstream torque with respect to growing volumes and commodity prices/spreads, and favourable valuation relative to both utility and midstream peers,” said Mr. Kwan. “However, our enthusiasm is somewhat tempered as we believe some investors were hoping for a greater sense of urgency to take advantage of currently attractive gas utility M&A valuations in a bid to more quickly achieve the company’s leverage target of under 5 times debt/EBITDA.”
In a research note previewing the Saint-Jérôme, Que.-based manufacturer’s first-quarter results, scheduled for a May 3 release, the equity analyst reduced his full-year profit expectations, citing higher parts, labour and expenses costs for its growing operations.
Mr. Merer does see tailwinds from “good” bus orders, however he thinks a ramp-up in truck orders remains elusive.
“Following Russia’s invasion of Ukraine, diesel prices are up, making EVs more attractive,” he said. “A government push for EVs in the U.S. & Canada should also benefit the industry, including the first $500 million of U.S. funding for school buses to be awarded this year, with applications open for a period of 90 days starting in May (up to $375k per bus). LEV has seen success with school bus orders (backlog now 2,025 units), however, LEV’s truck orders and sales have not shown much momentum despite the bigger truck market. LEV has a truck order backlog of about 300 units, with only 130 new orders since May 2021 and 45 trucks delivered last year. Meanwhile, some of LEV’s competitors in the U.S. (some are still in pre-production stages) have seen more success. We lowered our long-term assumptions ... though we believe that momentum in truck sales could pick up when LEV starts production in Illinois with ‘Made in America’ trucks and a growing product offering.”
Mr. Merer noted Lion Electric’s second lock-up agreement, for approximately 8 million shares held by its SPAC sponsors Northern Genesis Acquisition Corp., will expire on May 7, noting: “We believe the stock may have been under pressure with the risk that some of these investors could sell as of May 9th.”
Keeping an “outperform” rating, he cut his target to US$10 from US$13, citing “rising bond yields, continuing industry-wide supply chain and labour challenges as well as a potential for future dilution.” The average is US$12.75.
In other analyst actions:
* In the wake of lowering its full-year 2022 guidance due to increased supply chain challenges, National Bank Financial analyst Cameron Doerksen downgraded NFI Group Inc. (NFI-T) to “sector perform” from “outperform” with a $14 target, down from $19. The average on the Street is $18.25.
“While new bus demand is strong and getting better, a key part of our positive thesis on the stock is that supply chain challenges would gradually improve in the second half of 2022. We no longer have confidence that this will be the case, so we recommend investors stay on the sidelines until there is greater visibility,” he said in a research note released Friday afternoon.
* BMO’s Devin Dodge trimmed his Aecon Group Inc. (ARE-T) target to $17 from $18 with a “market perform” rating. The average is $19.83.
“We believe there is a favourable outlook across most of Aecon’s core markets and the company appears well-positioned to capture significant contract awards in the nearto-intermediate term,” said Mr. Dodge. “However, the focus remains on its current multi-year, fixedprice projects where costs have shifted materially higher. Given the limited visibility into potential claims settlements and the risk of significant cash flow burn if these agreements aren’t favourable to Aecon and its consortium partners, we remain on the sidelines.”
* Previewing its first quarter, Desjardins Securities’ Gary Ho raised his Alaris Equity Partners Income Trust (AD.UN-T) target to $24.50, exceeding the $24.29 average, from $24 with a “buy” rating.
“Our investment thesis is based on: (1) AD’s diverse portfolio is well-positioned to benefit from the overall U.S. macro outlook; (2) strong pace of capital deployment supported by a fortified balance sheet from the Kimco redemption and recent debt financing; (3) healthy 60–65-per-cent payout ratio; and (4) the units remain attractively valued, trading at 1.1 times P/BV with a 7.1-per-cent distribution yield,” he said.
* Mr. Ho cut his Fiera Capital Corp. (FSZ-T) target to $11.50 from $12.50 with a “buy” rating. The average is $11.14.
* RBC’s Maurice Choy raised his Atco Ltd. (ACO.X-T) target to $49 from $47 with a “sector perform” rating, while CIBC’s Mark Jarvi increased his target to $53 from $52, keeping an “outperformer” rating,and TD Securities’ Linda Ezergailis moved her target to $55 from $53 with a “buy” rating. The average on the Street is $48.64.
“Amidst market uncertainty around the impact of inflation, supply chain issues ,the war, and COVID, ATCO’s businesses appear well-positioned to record solid results in both CU and S&L this year (as it did in Q1/22, where ATCO’s EPS was stronger than our street-high forecast),” said Mr. Choy. “Big picture, we see the dividends as sustainable (currently offering investors roughly 4-per-cent yield), with the company positioned to benefit (via S&L and Neltume Ports) if the economic activity improves, while relying on the defensiveness of a regulated utility (e.g., CU) if the market uncertainty prevails.”
* Following in-line quarterly results, National Bank Financial’s Dan Payne raised his Baytex Energy Corp. (BTE-T) target to $9.50 from $8.75, exceeding the $8.09 average, with an “outperform” rating. Others making changes include: TD Securities’ Menno Hulshof to $7.50 from $6.50 with a “hold” rating and BMO’s Ray Kwan to $8.50 from $8 with a “market perform” rating.
“Tailwinds continue to build, and while the commodity price has helped, no doubt, the Clearwater has significantly rejuvenated its prospects and outlook of value,” Mr. Payne said.
* Mr. Choy also raised his Canadian Utilities Ltd. (CU-T) target to $41 from $38 with a “sector perform” rating. The average is $39.09.
The better-than-expected Q1/22 results set the stage for CU to deliver strong earnings this year, which is primarily underpinned by potential ROE outperformances from its gas distribution utilities (i.e., initiatives in the past to improve cost efficiency benefitting this last year of PBR2 in Alberta; inflation offers earnings support in Australia),” he said. “And whilst EPS is projected to decline in 2023 (mainly due to cost rebasing as part of the new 2023-2027 regulatory period for Alberta distribution utilities), CU’s dividend is sustainable (and growing), and we are encouraged by the progress relating to its renewables and hydrogen growth plans.”
* Seeing it “executing well on all fronts,” Canaccord Genuity’s Robert Young raised his Celestica Inc. (CLS-N, CLS-T) target to US$14 from US$13.50, keeping a “buy” rating, while TD Securities’ Daniel Chan moves his target to US$13 from US$12.50 with a “hold” rating. The average is US$12.88.
“Celestica reported a strong Q1 with a beat across the board and raised its 2022 full year guidance,” said Mr. Young. “While a robust demand backdrop and longer-term visibility into demand support management’s targets, Celestica’s business is also benefiting from new program ramps across both CCS and ATS and strong execution on supply chain. Although management reiterated its 4-5% adj. OM guide for 2022, growing HPS mix in CCS and recovery in A&D suggests margin expansion will continue from current levels. The wild card is supply chain which is further complicated by China lockdowns and uncertainty in Eastern Europe although management has built the risk into their outlook. We believe underlying growth across the business, particularly across HPS, capital equipment and Industrial will remain strong in the near term supported by growing investments in inventory. We believe Celestica shares are attractive at these levels.”
* BMO’s Jenny Ma raised her Choice Properties REIT (CHP.UN-T) target to $16 from $15.50 with a “market perform” rating. The average is $16.25.
“Choice Properties REIT started 2022 with an office portfolio disposition that advanced management’s efforts to focus its portfolio on essential retail, industrial, residential, and development,” she said. “Further, as investors have come to rely upon, Q1/22 results were in line with expectations and demonstrated steady growth. In Q1/22, Choice recognized 5-per-cent quarter-over-quarter growth in IFRS NAV/unit mostly driven by higher values for its industrial portfolio. This is consistent with our view that IFRS fair value gains arising from industrial and multifamily assets would be thematic for Canadian REITs this quarter.”
* National Bank Financial’s Jaeme Gloyn raised his Fairfax Financial Holdings Ltd. (FFH-T) target to $1,050 from $1,000 with an “outperform” rating, saying its first-quarter earnings beat on a “strong” underwriting performance “strengthens” his investing thesis. Elsewhere, BMO’s Tom MacKinnon raised his target to $780 from $760 with an “outperform” rating. The average on the Street is $876.42.
“Every business unit generated underwriting profit, and every business unit except Zenith and ‘Other’ outperformed our forecasts,” said Mr. Gloyn. “Results included approximately 3 percentage points of catastrophe losses (roughly normal for a Q1) primarily due to Australian floods while COVID-19 losses were nil for the first time since the pandemic started. Notably, management did NOT highlight underwriting or claims expense inflationary pressures in any of its business lines except for Northbridge (which still posted an 87-per-cent combined ratio). We view this favourably as more of the rate increases across most lines of business will drop to the bottom line. FFH also reported minimal losses on claims with potential exposure to the conflict in Ukraine.”
* Oppenheimer’s Brian Nagel cut his target for Lululemon Athletica Inc. (LULU-Q) target to US$440 from US$520 with an “outperform” rating, while Wedbush’s Tom Nikic initiated coverage with an “outperform” rating and US$430 target. The average is US$431.03.
“There are several reasons why we remain bullish” he said. “First, the global energy complex remains elevated, including Chinese coal. This should support marginal cost in the $400/mt area near-term, which is higher than what the Street is pricing in. In other words, watch for EBITDA revisions to move higher. Second, we expect the methanol market to tighten through Q2 on planned/unplanned outages, providing some positive momentum for implied margins and the stock. Third, Methanex is delivering on its capital allocation philosophy by focusing excess FCF toward material share repurchases – having just upsized its buyback to 10 per cent. Fourth, with oil in the $100 to $110/bbl range, the marginal consumer of methanol, MTO, has fairly supportive economics. Fifth, G3 remains on-time and on-budget. Based on $400/mt methanol (MEOH just realized $425), we estimate an incremental $325-million in annual EBITDA contribution from G3. As we get closer to the end of 2023, the market should begin pricing this in. Sixth, on valuation, not only is Methanex trading at a approximately 1 times EV/EBITDA discount, but this also includes no value whatsoever for G3, which doesn’t make sense.”
* RBC’s Jimmy Shan bumped up his target for Morguard North American Residential REIT (MRG.UN-T) to $24 from $23, above the $21.60 average, with an “outperform” rating, while TD Securities’ Lorne Kalmar raised his target to $24 from $23 with a “buy” rating.
“Morguard North American Residential REIT reported better-than-expected Q1 results from strong NOI in the U.S. portfolio offset by margin pressures in its Canadian portfolio,” said Mr. Shan. “Two U.S. asset sales provide strong support to our conservative NAV and the REIT’s IFRS value,” said Mr. Logan.
* BMO’s John Gibson raised his Pason Systems Inc. (PSI-T) target to $23 from $22, above the $19.08 average, with an “outperform” rating.
“There were very few things to dislike from Pason’s Q1/22 results, which included a 20-per-cent EBITDA beat, impressive margin improvement and a new revenue per day record. We believe PSI is very well positioned going forward given its dominant market share, capital light business and strong incremental margin potential,” said Mr. Gibson.
* RBC’s Keith Mackey raised his Secure Energy Services Inc. (SES-T) target to $9 from $8.50, above the $8.48 average, with an “outperform” rating, while National Bank’s Patrick Kenny bumped his target to $9 from $8 with an “outperform” rating and BMO’s John Gibson also moved his target to $9 from $8 with an “outperform” recommendation.
“Secure reported strong 1Q22 results as margins expanded significantly year-over-year as the effect of stronger commodity prices, increased facility volumes, and fixed cost absorption were compounded by realization of merger cost savings,” said Mr. Mackey.
* ATB Capital Markets’ Martin Toner reduced his Real Matters Inc. (REAL-T) target to $10 from $11.50 with an “outperform” rating, while Canaccord’s Robert Young cut his target to $4.75 from $6 with a “hold” rating and BMO’s Thanos Moschopoulos lowered his target to $5 from $7 with a “market perform” rating. The average is $6.68.
“Real Matters reported its FQ2 results that largely missed expectations across the board,” said Mr. Young. “While a decline across Appraisal and Title was expected, and likely priced into the stock, a sharp rise in mortgage rates drove volumes significantly lower. A silver lining from the FQ2 print was that Real Matters continues to gain share and add new clients to its Appraisal and Title rosters, with scorecard performance remaining solid. Management sees weakness in refi persisting while purchase originations are also likely to decline albeit at a lower rate given strong demand for homes in the US and moderating Appraisal waivers. Management also views a reboot in HELOC and stronger cash out refinancing trends given increased value locked in homes as a potential offset to some of the expected rate refinance volume weakness. In our view, Real Matters shares are likely to be impacted by macro factors including Fed rate swings and lender priorities rather than operational factors, and we see weakness in the stock persisting until macro headwinds abate.”
* CIBC’s Scott Fletcher raised the firm’s Stingray Group Inc. (RAY.A-T) target to $9.50 from $8.50, maintaining an “outperformer” rating after assuming coverage. The average is $9.04.
“Stingray is in the midst of a significant repositioning of its business, engendered by the decline of the linear cable Pay TV business. Stingray has diversified its business into new areas of strategic growth that include distribution of its music channels and products through streaming platforms and an increased presence and more complete product offering to serve the in-store commercial market. We view the organic growth opportunities offered by the strategic growth areas and the outlook for strong EBITDA margins and free cash flow conversion as ingredients for solid performance in the short and medium term, and see opportunity for multiple expansion as the business executes on its more diversified approach,” he said.
“While we hold a positive view on TRI’s market-leading position in its key segments and expect the ongoing Change Program initiative to result in improving organic growth and EBITDA margins, we view TRI shares as fairly valued at current levels. TRI has generally traded at a modest premium to information services and software peers despite a similar forward growth and margin profile, and with shares currently trading at a similar premium we are comfortable remaining at a Neutral rating,” he said.
* RBC’s Sabahat Khan raised his Toromont Industries Ltd. (TIH-T) target to $129 from $126 with an “outperform” rating. Others making changes include: CIBC’s Jacob Bout to $125 from $123 with a “neutral” rating, TD Securities’ Cherilyn Radbourne to $130 from $125 with a “hold” rating, Scotia Capital’s Michael Doumet to $126 from $125 with a “sector outperform” rating and BMO’s Devin Dodge to $130 from $126 with an “outperform” rating. The average is $127.78.
“Q1 results reflected higher-than-expected revenue and EBIT/EPS, with improved equipment and rental margins more than offsetting higher SG&A as a percentage of revenue, driving earnings above expectations,” said Mr. Khan. “We note that revenue came in above RBC/consensus estimates despite management reiterating on the call that supply chain constraints are still impacting the business. Management noted some slippage (i.e., deliveries pushed to the right) in prime equipment as well as parts (discussed in more detail below). Looking ahead, the strong demand from Mining, Construction, and Power Systems end-markets is contributing to a record backlog, while the balance sheet remains in a net cash position, providing ample flexibility for internal investments and return of capital/ M&A on an opportunistic basis.”
* RBC’s Greg Pardy increased his Vermilion Energy Inc. (VET-T) target to $28 from $26 with a “sector perform” rating. The average is $32.82.
“We look upon Vermilion’s $477 million Leucrotta deal as a somewhat pricey acquisition of a scalable asset which augments its already diverse portfolio,” he said. “More broadly, the transaction constitutes a return to premiums in corporate deals.”
* RBC’s Luke Davis increased his target for Whitecap Resources Inc. (WCP-T) to $14 from $13, remaining below the $14.70 average, with an “outperform” rating.
“:Whitecap’s Q1/22 results highlighted strong operational execution and continued focus on capital discipline. We expect the company to reach its long-term debt target in the Q2 timeframe, after which the company can reevaluate overall capital allocation and enhanced return of capital. We reiterate our favourable view of the stock,” said Mr. Davis.