Inside the Market’s roundup of some of today’s key analyst actions
The Energy equity team at National Bank remains “constructive” on both medium and long-term fundamentals in the sector, despite what they call “shorter-term, sentiment-based volatility in the commodity complex.”
“Given the strength of underlying business fundamentals and current valuations, we view the recent pullback as an opportunity to purchase quality equities with an appreciation that volatility is likely to persist through this part of the cycle,” they said. “With most energy companies positioned with solid balance sheets, return of capital strategies and trading at discounted valuations, investment differentiation becomes difficult. For this reason, we see operational execution and strict capital discipline as key investment drivers as we look out over the next 12 months.”
In a research report previewing the second half of fiscal 2022 released Friday, they took a “more conservative stance” after reducing the firm’s WTI price assumptions “while remaining comfortably above strip to reflect our positive outlook beyond the current headline-driven volatility).” Their natural gas projections remain largely unchanged.
For WTI, the firm’s price forecast for 2022 slid to US$95 per barrel from US$100 previously. It’s 2023 and 2024 estimates fell to US$80 and US$75, respectively, from US$90 and US$85.
“We continue to view the global crude complex as tight on supply, which is showing up in global crack spreads, while also appreciating that transitory uncertainty may continue in the near term (SPR releases, China lockdowns, OPEC+ production cuts, Russian embargo, Iran nuclear deal, etc.),” the analysts said. “On the natural gas front, as we have previously highlighted, fundamentals have experienced structural changes in recent years (LNG exports, inelastic power burn, etc.) which has augmented the complexion of the supply/demand backdrop in support of a more resilient and investible commodity pricing.”
The firm expects the upcoming third-quarter earnings season to “provide a good barometer of whether companies are poised to meet, beat or miss 2022 corporate guidance.” They currently project most of their coverage universe to reach the midpoint of production guidance “but expect capex to trend towards the high end of guidance ranges given inflationary pressures.”
For investors, they think oil and gas equities “screen well” on valuation and think “sustainability of the current business models and compounding shareholder returns provide a reasonable risk profile in the sector.”
With the changes to their commodity price assumptions, the firm lowered its target prices for stocks by an average by 10 per cent “driven by oil-weighted names.”
“However, we see approximately-70 per-cent and 50-per-cent total return potential across our Outperform and Sector Perform rated names (no rating changes at this time),” they said.
For senior producers, their changes are:
- Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $88 from $100. Average: $95.70.
- Cenovus Energy Inc. (CVE-T, “outperform”) to $36 from $38. Average: $33.53.
- Imperial Oil Ltd. (IMO-T, “sector perform”) to $73 from $86. Average: $74.53.
- Suncor Energy Inc. (SU-T, “sector perform) to $53 from $63. Average: $54.70.
For large-cap and mid-cap stocks, their changes are:
- ARC Resources Ltd. (ARX-T, “outperform”) to $23 from $26. The average on the Street is $24.92.
- Baytex Energy Corp. (BTE-T, “outperform”) to $9 from $10. Average: $8.98.
- Crescent Point Energy Corp. (CPG-T, “outperform”) to $18 from $20. Average: $15.27.
- Enerplus Corp. (ERF-T, “outperform”) to US$21 from US$26. Average: $23.67.
- Freehold Royalties Ltd. (FRU-T, “outperform”) to $19 from $20. Average: $20.34.
- Headwater Exploration Inc. (HWX-T, “outperform”) to $9.50 from $10.50. Average: $10.28.
- Kelt Exploration Ltd. (KEL-T, “outperform”) to $9 from $10.50. Average: $10.19.
- MEG Energy Corp. (MEG-T, “outperform”) to $26 from $30. Average: $24.61.
- Nuvista Energy Ltd. (NVA-T, “sector perform”) to $15 from $16.50. Average: $16.44.
- Ovintiv Inc. (OVV-T, “outperform”) to US$77 from US$99. Average: US$70.17.
- Peyto Exploration & Development Corp. (PEY-T, “outperform”) to $17 from $19. Average: $18.33.
- Pipestone Energy Corp. (PIPE-T, “sector perform”) to $6 from $7. Average: $7.42.
- Paramount Resources Ltd. (POU-T, “outperform”) to $40 from $45. Average: $42.80.
- Prairiesky Royalty Ltd. (PSK-T, “sector perform”) to $24 from $26. Average: $23.95.
- Spartan Delta Corp. (SDE-T, “outperform”) to $20 from $22.50. Average: $19.86.
- Tamarack Valley Energy Ltd. (TVE-T, “outperform”) to $8 from $9. Average: $7.56.
- Vermilion Energy Inc. (VET-T, “outperform”) to $50 from $48. Average: $41.57.
- Whitecap Resources Inc. (WCP-T, “outperform”) to $15.50 from $17.50. Average: $15.23.
For small-cap stocks, they made these changes:
- Lucero Energy Corp. (LOU-X, “sector perform”) to $1 from $1.20. Average: $1.25.
- Surge Energy Inc. (SGY-T, “outperform”) to $14 from $15.50. Average: $17.
“Many E&P equities hit 52-week highs in early June after a strong start in 2022, but have contracted by an average of 30 per cent since then,” the firm said. “The risk-off momentum has been largely driven by the rising rate environment, global recession risk, SPR releases, Iran nuclear deal and China lockdowns. However, despite the equity drawdowns, the Energy sector remains the top-performing sector year-to-date within the S&P/TSX Composite Index. As our colleagues in the NBF Economics and Strategy group published earlier this year, it is interesting to note that the Energy sector has historically outperformed during periods of high stagflation (i.e., 1973-1980). We expect continued strong relative performance for the sector given the sustainability of current business models, which, after multiple years of laser-like focus on strengthening balance sheets, are well-equipped to weather the ongoing commodity price volatility as base dividends have been stress-tested down to US$50/bbl WTI.”
With gold stocks having been “hit hard” by the recent market selloff, Citi analyst Alexander Hacking sees “an opportunity for investors to accumulate.”
“Citi’s commodity team is broadly bullish on gold expecting prices to rebound above $1900/oz by mid-2023,” he said. “Gold has held above $1600/oz despite real yields moving about 1.5 per cent (normally associated with $1200/oz) – which is also a bullish sign, in our view.”
Seeing Agnico Eagle Mines Ltd. (AEM-N, AEM-T) as “the highest quality name in the space with high quality assets and a strong management team,” Mr. Hacking upgraded his recommendation for its shares to “buy” from “neutral” based on valuation.
“The stock is trading close to 5-year lows and at a similar P/NAV to NEM,” he said. “Citi commodity team is mid-term bullish on gold expecting the price to recover to $1,900/oz by 2H23. “If $1600/oz ends up being the floor during an aggressive Fed hike cycle, then this resets gold’s trading range to a very attractive level.”
After reducing his 2022 EBITDA estimate by 16 per cent and increasing his 2023 estimate by 10 per cent, Mr. Hacking lowered his target for Agnico shares to US$50 from US$72. The average on the Street is US$64.51.
He also made these target adjustments:
“Barrick appears discounted to Newmont on valuation but we struggle to see a re-rating catalyst. Incremental gold investors appear focused on geopolitical profile and Reqo Diq is a headwind,” he said.
“The stock has underperformed year-to-date based on higher costs/capex disclosed with 2Q results. That said, we continue to see 3-5-per-cent yield as sustainable, which remains relatively attractive, in our view.”
In a research report analyzing the potential impact of its recently unveiled two-year, US$400-million initiative to boost Burger King in the United States, RBC Dominion Securities’ Christopher Carril reaffirmed Restaurant Brands International Inc. (QSR-N, QSR-T) as his “top idea across the highly franchised restaurant group.”
“Outperform-rated QSR remains among the most discussed stocks in our recent investor conversations and marketing,” he said. “And while much of the focus around BK’s new strategy is on its more visible elements (e.g. advertising, remodels, technology), our belief is that an underappreciated aspect of the new strategy is its potential to improve the overall health of the BK system with greater franchisee and company alignment.”
“In the near-term, menu changes (e.g. BK Royal Crispy Chicken, launched in August) and a step up in advertising should help drive sales improvement, in our view.”
Emphasizing the impact of inflation on customers across the restaurant sector, Mr. Carril trimmed his 2022 earnings per share estimate to US$3.08 from US$3.11). His 2023 forecast slid to US$3.28 from US $3.32.
“Change in demand for Food Away from Home — which includes, among other eating occasions, restaurant sales — has generally tracked GDP over time … So as inflation and macro concerns remain front and center, our restaurants coverage is down 17 per cent year-to-date, with highly-franchised fast food names down down 15 per cent, fast casual down 22 per cent and casual dining down 11 per cent,” he said. “In our view, overall group sentiment remains mixed, given ongoing debate regarding the health of the consumer, offset in certain cases by more insulated business models (e.g. franchised fast food).”
With his lower projections, he reduced his target for Restaurant Brand shares to US$70 from US$72, keeping an “outperform” rating. The average is US$65.14.
“We believe QSR deserves a higher multiple than the peer group average given its relatively stronger unit, system sales, and revenue growth. Its best-in-class dividend yield also supports our valuation,” said Mr. Carril. “Our price target supports our Outperform rating.”
“While the markets remain choppy, BBU is clearly in harvest mode and should reap the benefits from operational improvements and strategic tuck-ins from several of its larger investments,” he said. “Recall that the company has three potential monetization assets on the horizon—Westinghouse (WH), Clarios and BRK. Particularly on WH, management is fairly confident of a successful outcome from the live process. BBU estimates more than US$1.5-billion of near-term potential monetization proceeds, which include WH and other marketable securities. Looking ahead, management expects the next monetization cycle should be meaningfully larger. BBU has invested US$5.5-billion from 2020–22, which at a 15-per-cent IRR (low end of its targeted range of 15–20 per cent) could grow to US$12.5-billion-plus of potential proceeds over a 6–8-year holding period.”
In a research note reviewing its Thursday Investor Day titled Quality shines in uncertain times, Mr. Ho emphasized “it’s a great time to be a value investor,” seeing both the healthcare and technology sectors bringing Brookfield “tremendous investment opportunities in the current environment.”
“BBU focuses on mature technology companies trading at reasonable valuations, as well as healthcare verticals where it could capitalize on its value creation advantages,” he said. “BBU has US$3.3-billion of capacity on its corporate credit facility.”
Though he thinks its current valuation discount is “unwarranted,” Mr. Ho trimmed his target for Brookfield shares by US$1 to US$31 following narrow reductions to his EBITDA and funds from operations projections. The average on the Street is US$34.50.
“Our positive investment thesis is predicated on: (1) a secular shift in investor appetite for private alts to drive capital flows into the asset class—BBU offers investors a unique way to gain PE exposure without liquidity constraints; (2) BBU’s team has delivered a solid investment return track record; (3) the BBUC structure should help broaden the investor base; and (4) BBU’s ability to leverage BAM’s extensive platform,” said Mr. Ho, who maintained a “buy” recommendation.
Elsewhere, others making changes include:
* iA Capital Markets’ Matthew Weekes to US$32 from US$38 with a “buy” rating.
“BBU’s investor update highlighted the Partnership’s strong track record of internal returns and value investment opportunities created by challenging market conditions, in addition to highlighting the strong underlying fundamentals of its businesses and measured approach to leverage in an effort to dispel investor concerns putting pressure on the units,” he said. “While we are lowering our target price as we consider equity valuation compression amidst rising interest rates, we continue to view the units as discounted. We are maintaining our Buy rating, supported by a high-teens FCF yield on the current unit price, BBU’s track record of generating per unit growth and strong IRRs on investments, the quality of BBU’s businesses which are 75-per-cent weighted toward large-scale, market leading operations, and future growth potential driven by value creation opportunities in existing businesses, capital recycling opportunities, and strong global deal origination capabilities leveraging Brookfield Asset Management’s platform.”
* Scotia Capital’s Phil Hardie to US$32 from US$39 with a “sector outperform” rating.
“We came away from the presentation with increased conviction on BBU’s positioning and investment opportunities in an uncertain environment,” Mr. Hardie said. “That said, we were disappointed that our current NAV estimate appeared to be overly optimistic relative to management’s own assessment of its value.”
“We expect BBU to continue to transition its portfolio towards larger, higher-quality businesses and have confidence it remains well positioned to achieve its targeted 15-20-per-cent IRR, which would imply its ability to double its NAV over the next five years ... Despite the reduction to our NAV estimate and target price, we continue to believe the valuation remains very attractive, with the stock trading at a wide discount and providing investors with a unique mix of compelling value and growth potential.”
Seeing “a counter-cyclical opportunity to add a long-term compounder,” Stifel analyst Ian Gillies initiated coverage of Hardwoods Distribution Inc. (HDI-T) with a “buy” recommendation on Friday.
“HDI has enjoyed very strong cash generation since the beginning of the pandemic due to advantageous supply and demand dynamics, which has allowed for a significant expansion of capabilities through two sizable U.S. acquisitions,” he said. “We are expecting more of the same from this company in future years. The stock offers: (1) an attractive growth strategy; (2) an inexpensive valuation; (3) good downside protection; and (4) strong insider alignment.”
While acknowledging the current macro environment is not supportive, Mr. Gillies thinks Langley, B.C.-based company’s management team “has the pedigree to succeed.”
“HDI generated 91.5 per cent of its TTM [trailing 12-month] revenue from the U.S.,” he said. “The company generated 40 per cent of its revenue from new home builds and 40 per cent from R&R. New home builds are going to be a headwind, with Fannie Mae forecasting a 19-per-cent year-over-year decline in 2023. The Joint Center for Housing predicts that R&R activity should be much healthier with spending growth projected through 2Q23E (end of forecast). We expect HDI to achieve market share capture in the face of slowing housing starts as it becomes a vendor of choice for certain large national brands.”
Calling M&A a “core competency” and seeing its low capital intensity and use of leverage delivering a “strong” return on equity, he set a target of $52 per share. The current average on the Street is $61.13.
“We believe HDI’s stock price valuation is inexpensive when compared to its U.S. peers,” said Mr. Gillies. “HDI is trading at 5.6 times P/E compared to its U.S. distribution peers at 6.7 times. HDI’s financial metrics (growth, margins and ROE) screen slightly worse than the peer group, but as its growth strategy is executed we expect the metrics to push closer to the peer group due to size and scale opportunities. We believe this will result in valuation expansion over the course of time. Every 0.5-times catch-up in P/E would add $2.37/sh to HDI’s share price.”
Touting the potential of the voluntary carbon market, BMO Nesbitt Burns analyst Rachel Walsh initiated coverage of a pair of companies on Friday.
“Given the opaque nature of the market, challenges with liquidity, and nuances involved in carbon credit quality analysis, direct investment is likely unpalatable for the average investor,” she said. “However, investors can gain exposure to potential market growth and price appreciation through investments in royalty and streaming vehicles, which have built-in market expertise. We see potential growth for the VCM reaching 6.5 times by 2030 and 17.4 times by 2050, relative to 2020 VCM volumes.”
Mr. Walsh gave Toronto-based Base Carbon Inc. (BCBN-NE) an “outperform” rating and $1.25 target. The average on the Street is $1.75.
“With cash on the balance sheet, we believe Base Carbon will announce additional upcoming stream agreements, which we expect should have a positive impact on the stock,” she said. “The company has telegraphed that it is working on a reforestation stream that we would view positively, as we consider this to be one of the highest quality project types within nature-based carbon solutions.”
“Given the company’s inexpensive valuation, relatively low cost structure, expertise in the carbon space, and strategic partnerships, we view this name favourably in the carbon streaming and royalty space.”
Currently the lone analyst covering Carbon Streaming Corp. (NETZ-NE), she gave it an “outperform” rating with a $4.25 target.
“While Carbon Streaming is currently pre-revenue, we expect the company to see impressive growth in the coming years through its existing streaming agreements. With cash on the balance sheet, we believe additional streams will follow. That said, current uncertainty surrounding the company’s largest asset has weighed on the stock and we believe upside will be somewhat capped until issues are resolved,” said Ms. Walsh.
In other analyst actions:
* TD Securities’ John Mould lowered his Altius Renewable Royalties Corp. (ARR-T) target to $13.50, below the $15.04 average, from $15.50, with a “buy” rating.
* After hosting a roadshow with its management on Thursday, RBC Dominion Securities’ Gregory Renza raised his target for shares of Laval-based Bellus Health Inc. (BLU-Q, BLU-T) to US$21 from US$19 with an “outperform” rating. The average is US$18.88.
“With the upcoming ph.III initiation [for BLU-5937], we see heavy news flow over 2H2022/2023 - Shionogi R&D Day, BLU KOL Day, MRK regulatory and commercial updates, validation work, SOOTHE publication - all on top of company execution, providing read-through and momentum ahead of topline in 2H2024. We are making several model tweaks to reflect the latest patient population data and our thinking around market penetration given the latest positioning for BLU and P2X3 class in the chronic cough space,” he said.
“At BEP’s annual investor day, management highlighted how the company is positioned to capitalize on the global decarbonization trend,” he said. “The current energy crisis has put energy security at the forefront of global governmental policies, and renewable deployment is expected to benefit as the lowest-cost source of power generation. We expect strong FFO per unit growth of 10-per-cent-plus to allow BEP to continue delivering 5-9-per-cent distribution growth and 12-15-per-cent total returns. We are updating our PT to $33 based on current DDM assumptions. Despite the recent pullback in share price, we continue to view shares as fairly valued and reiterate our Neutral rating.”
* Barclays’ Brandon Oglenski lowered his targets for Canadian National Railway Co. (CNI-N/CNR-T, “equalweight”) to US$110 from US$115 and Canadian Pacific Railway Ltd. (CP-N/CP-T, “overweight”) to US$77 from US$88. The averages are US$126.87 and US$81.64, respectively.
“Railroad margins face near-term pressure from labor agreements and softer volume outcomes this fall driving a less robust earnings forecast for 2023; however, recent valuation compression similar to prior recessionary period impacts for most stocks,” he said.
* Barclays’ Gaurav Jain cut his targets for Canopy Growth Corp. (CGC-Q/WEED-T, “underweight”) to US$2 from US$3.50 and Cronos Group Inc. (CRON-Q/CRON-T, “equalweight”) to US$3.50 from US$5. The average targets are US$5.89 and US$4.41, respectively.
“The Canadian cannabis industry remains under pressure from oversupply and a tightening credit environment. We expect some level of market consolidation to happen soon. We think both Canopy and Tilray need to lower operating costs and expenditure to ensure healthy operating cash flow,” he said.
* CIBC World Markets’ Bryce Adams cut his Copper Mountain Mining Corp. (CMMC-T) target to $2.35 from $2.50, below the $3.17 average, with a “neutral” rating.
* Barclays’ Theresa Chen reduced her Enbridge Inc. (ENB-T) target by $1 to $57, below the $60.50 average, with an “equalweight” rating.
* Following a tour of its properties, in Randstad, Netherlands, Desjardins Securities’ Kyle Stanley cut his European Residential Real Estate Investment Trust (ERE.UN-T) target to $4.75 from $5.25 with a “buy” rating. The average is $4.97.
“We came away with an enhanced appreciation of the REIT’s operating philosophy and rent growth potential,” he said. “We have reduced our target ... reflecting updated NAV work (20bps of cap rate expansion) and the uncertain European macro environment. In our view, should the material 40-per-cent discount to NAV not begin to narrow, we would not be surprised to see ERE’s parent (CAR) evaluate strategic opportunities to maximize unitholder value.”
* TD Securities’ Michael Tupholme cut his Russel Metals Inc. (RUS-T) target to $36 from $41 with a “buy” rating. The average is $38.64.
* Stifel’s Cody Kwong reduced his Tamarack Valley Energy Ltd. (TVE-T) target to $6 from $6.75 with a “buy” rating. The average is $7.56.