Friday’s analyst upgrades and downgrades

Inside the Market’s roundup of some of today’s key analyst actions

National Bank Financial analyst Shane Nagle thinks Copper Mountain Mining Corp.’s (CMMC-T) proposed acquisition by Hudbay Minerals Inc. (HBM-T) in a US$439-million all-share deal creates “compelling strategic benefits” for shareholders.

That led him to move Vancouver-based Copper Mountain to a “tender” recommendation from “outperform” previously.

“The deal provides CMMC shareholders with a stronger balance sheet to allocate capital towards expansion of Copper Mountain Mine, asset diversification throughout the Americas with an operating portfolio of three long-life mines (Constancia, Copper Mountain and Lalor) and compelling longer-term organic growth from expansion and development projects (including the Copper Mountain expansion, Copper World and advancement of higher-grade satellite deposits surrounding Constancia),” said Mr. Nagle in a note. “Hudbay expects tangible operating synergies on the order of US$30-million per year, including US$20-million per year from operating cost reductions through the application of Hudbay’s operating efficiency practices to the Copper Mountain mine.”

Copper Mountain shares jump 18.1 per cent on Thursday following the premarket announcement of the deal, which will see shareholders receive 0.381 of a Hudbay common share for each Copper Mountain common share held. The deal values Copper Mountain at $2.67 per share, representing an 18-per-cent premium to its Wednesday close.

Mr. Nagle moved his target for Copper Mountain shares to $2.73 from $2.50. The average is currently $2.65.

“We do not anticipate any additional bidders for CMMC given the bilateral negotiation process and opportunities provided by the combined portfolio in terms of delivering near-term operational improvements and providing longer-term optionality,” he concluded.

Elsewhere, others making adjustments include:

* iA Capital Markets analyst Ronald Stewart to “tender” from “buy” with a $2.67 target, down from $3.

“The proposed deal comes as a bit of a surprise to us,” said Mr. Stewart. “Both companies had a rough time in 2022. Last year, HBM missed guidance due to ongoing social unrest in Peru while CMMC suffered a series of operational challenges that derailed its production. While CMMC’s share price had rebounded approximately 30 per cent year-to-date, HBM was flat and underperforming versus other copper producers. The combined entity offers investors improved liquidity and removes the urgency to advance HBM’s development assets, focusing instead on optimizing Copper Mountain.”

“We believe it unlikely that a third-party offer will emerge and recommend that investors vote in favour of the transaction.”

* BMO’s Rene Cartier to “market perform” from “outperform” with a $3 target, up from $2.50.

* Stifel’s Alex Terentiew raised his target for $2.60 from $2.20 with a “hold” rating.

“Overall, we expect the Copper Mountain Mine to benefit from today’s transaction as HBM’s experience in managing Constancia, a much larger scale and efficient operation, may bring in mine level operational enhancements and operating and corporate synergies,” said Mr. Terentiew. “Additionally, HBM expects today’s transaction to strengthen its balance sheet, which could potentially ease Copper World’s (HBM’s flagship Arizona based Cu project) financing requirements and offer benefits from scale and jurisdictional diversification with a potential re-rating opportunity for HBM, according to management. By updating our model with the implied multiple in the transaction terms (100-per-cent weighting in NAV), we arrive at a target price for CMMC mirroring HBM’s bid, while maintaining our HOLD rating.”

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Scotia Capital analyst Jason Bouvier downgraded Cenovus Energy Inc. (CVE-T) to “sector perform” from “sector outperform” on Friday, projecting weaker-than-anticipated downstream operational performance in the first half of the year.

“The restart of the Superior and Toledo refineries is having a greater impact on CVE’s U.S. downstream cash flows than expected,” he said. “Margins at these refineries will be weaker than usual as they are restarted and optimized. As such, we expect the Street’s H1/23 estimates to drop meaningfully.”

“Weakening refining margin outlook will increase cash flow volatility. CVE’s downstream assets, largely located in the US, have lower margins than its Canadian peers. Given our bearish thesis on global crack spreads, we expect CVE’s downstream cash flows to fall more than its Cdn peer group.”

Mr. Bouvier also sees a “longer timeline for higher shareholder returns.”

“CVE is currently returning 50 per cent of its free cash flow, after base dividends, to shareholders and this will increase to 100 per cent once net debt hits $4-billion,” the analyst said. “However, we estimate that it will take until late Q3/23 to hit this target. Ultimately, this will slow the pace of shareholder returns. However, we continue to expect an increase to the base dividend (could be sizable) this Spring. It’s important to keep in mind that all of our Cdn Large Caps will see increasing net debt in Q1 due to a combination of tax installments, a use of working capital due to commodity price swings and/or closing acquisition costs.

“We forecast modestly lower production than the Street for 2023. Our current estimate for 2023 production is 800 mboe/d. This compares to CVE’s guidance of 800 – 840 mboe/d and Street expectations of 814 mboe/d. In our view, production has been affected by the slower-than-expected ramp-up of Terra Nova (shifted from Q2 to mid-year) and slower-than-expected growth in the conventional business.”

He reiterated a $28 target for Cenovus shares. The current average is $31.83.

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Following Thursday’s release of weaker-than-anticipated second-quarter results that sent its shares plummeting 6.6 per cent, Canaccord Genuity analyst Aravinda Galappatthige downgraded Corus Entertainment Inc. (CJR.B-T) to “sell” from a “hold” recommendation, predicting significant pressure on television advertising is likely to continue and believing balance sheet concerns remain “top of mind.”

The television and radio broadcaster reported revenue of $343.9-million, down 4.9 per cent and below the Street’s expectation of $344.5-million. Earnings before interest, taxes, depreciation and amortization slid 31.7 per cent to $59.1-million, also missing the consensus estimate of $60-million and attributed to “current global advertising market conditions.”

“Programming cost inflation remained at high single-digit rates in Q2/23 owing to higher original programming deliveries and the aforementioned impact from the U.S. studio deals (long-term output arrangements),” said Mr. Galappatthige. “Considering all the moving pieces, including the Canadian content component, we are unlikely to see this ease materially until Q4/23. Thus, much depends on management’s enterprise-wide cost review and the extent of cost reductions achieved in the G&A line items. Thus far, while employee costs are showing signs of easing, investment in Corus’ streaming services is making it difficult to bring down overall G&A. Given the ad declines, this drove a 770 bps y/y contraction in TV EBITDA margins in Q2, and we anticipate a not too dissimilar result in Q3/23.”

“With an expanding number of verticals reflecting ad declines and economic lead indicators suggesting a slowing economy, there is little visibility around the prospect of a bottoming in the ad environment. Management comments around TV ad declines, which suggest 11-per-cent result in Q3 was well below our pre-quarter expectation of down 7 per cent. Consequently, notwithstanding Corus’ sustained efforts around optimized advertising, DAI (dynamic ad insertion) in STACKTV etc., the overall picture for ads remains soft.”

The analyst called the near-term outlook for Corus “incrementally more challenging” following the second-quarter release, emphasizing “management comments suggesting an acceleration in TV ad decline rates back into double-digit territory in Q3.”

“Furthermore, programming cost inflation remains a major challenge given the longer-term output deals inked by the company which reduces flexibility on the opex front, further worsened by the catch-up CPE (Canadian content) component. All this is pointing to Corus’ leverage ratio ticking up very close to 4 times by Q3/23,” he added.

Reducing his 2023 and 2024 revenue and earnings projections, Mr. Galappatthige cut his target for Corus shares to $1.40 from $1.80 “largely due to the exaggerated impact of the balance sheet leverage.” The average on the Street is $2.44.

Other analysts making target adjustments include:

* National Bank Financial’s Adam Shine to $2.25 from $2.50 with a “sector perform” recommendation.

“Having not renewed its NCIB in January and halved its dividend in March, capital allocation is now firmly focused on debt reduction,” said Mr. Shine. “We wait to see if a U.S. writers’ strike will occur in May, how long it could last, and its implications for fall TV expenses.”

“Amid pressure from TV ad sales & catch-up Cancon spending, cost savings are being pursued and Corus is looking to preserve cash.”

* Scotia’s Maher Yaghi to $2.30 from $2.75 with a “sector perform” rating.

“Corus is contending with both a cyclical downturn and a secular decline in linear TV advertising,” said Mr. Yaghi. “The ongoing pressure from both trends is exerting significant pressure on profitability. Management continues to act proactively to offset those pressures however we believe that much of the costs that remain are harder to reduce without affecting essential services. In addition, regulation has been slow to provide Canadian broadcasters with breathing room and Bill C-11 is likely to take many quarters to provide flexibility to Canadian programming spending. Until we see an improvement in advertising trends, we prefer to maintain our neutral stance.”

* CIBC’s Scott Fletcher to $2.25 from $2.50 with a “neutral” rating.

* BMO’s Tim Casey to $1.75 from $2.50 with a “market perform” rating.

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In a research report titled Grey skies are gonna clear up (Put on a happy face), Canaccord Genuity’s Dalton Baretto expressed optimism for the fortunes of base metals producers moving forward.

“Q1/23 was an eventful quarter, from both a macro and micro perspective,” said the analyst. “2023 kicked off with an unleashing of the ‘animal spirits’ in the market, with a significant rally in commodities and related equities predicated on the Chinese economy re-opening, a declining USD, anticipation of a Fed pivot, and ongoing supply disruptions. We then saw an inflection point in the early part of February as essentially all these factors reversed.

“Looking out into the rest of 2023, we expect physical demand for most commodities to improve as the Chinese reopening gathers pace and typical seasonal factors kick in. That said, we also expect supply of most commodities to improve given that early disruptions have eased. We expect sentiment (as reflected in futures markets) to remain dampened as long as dark clouds remain over the global economy; however, we view positive economic surprises out of China as a non-trivial probability that could serve as significant tailwinds despite the broader macroeconomic picture. In general, however, our base case view is for the industrial commodities to remain largely range-bound over the rest of this year.”

Mr. Baretto upgraded a pair of stocks to “buy” recommendations from “hold” previously based on “meaningful” positive implied returns to his revised target prices. They are:

* Champion Iron Ltd. (CIA-T) with a $7.50 target, up from $7. Average: $8.01.

“At CIA, we believe ongoing progress on the Phase II ramp-up at Bloom Lake coupled with ongoing studies to unlock value at the property should result in the share price trading back up toward our revised target price,” he said.

* Lundin Mining Corp. (LUN-T) with a $12 target, up from $9.25. The average on the Street is $9.92.

“At LUN, in addition to our higher copper and gold price decks, we believe the recent acquisition of a 51-per-cent interest in Caserones sets the stage for a JV-structure at Josemaria that could significantly de-risk LUN’s interest in the project,” he said.

The analyst also made a series of others target revisions and reestablished his top picks. They are:

“Growth and copper price leverage”: Capstone Copper Corp. (CS-T, “buy”) with a $9 target from $8. The average is $7.44.

Analyst: “We continue to like CS for its strong, fully funded, low-risk, near-term organic growth profile via the MVDP project and the potential re-rate in H2/23 as the project approaches completion. We also like the multiple capital-efficient expansion opportunities available to the company in both Chile and Arizona, its leverage to copper prices, and its profile as an attractive acquisition target in a copper-focused M&A market that is heating up.”

“Growth, margins and game-changing exploration potential”: Ero Copper Corp. (ERO-T, buy”) with $32 target from $26.50. The average is $25.98.

Analyst: “As with CS, we like ERO for its strong, fully funded, low-risk, near-term organic growth profile via the Tucuma project and the potential re-rate in H2/23 as the project approaches completion. We also note ERO’s meaningful gold exposure via the Xavantina mine, which should be a strong cash flow contributor in the current gold price environment. Finally, we believe ongoing progress on the nickel exploration program could result in a game-changing discovery later this year.”

“Value and free cash flow yield”: Hudbay Minerals Inc. (HBM-T, “buy”) with an $11.50 target, up from $9.25. The average is $9.30.

Analyst: “We like HBM for its current focus on free cash flow generation as well as its exposure to strong current gold prices and the strategic implications of the CMMC acquisition. Our estimates indicate that the company will generate (ex. CMMC) $1.59 per share in FCF this year, implying a FCF yield of 30 per cent. In addition, we note that HBM trades at just 2.2 times our 2023 EBITDA estimate and 0.38 times NAV, vs. the peer group averages of 7.6 times and 0.85 times respectively.”

“Exploration and development”: Filo Mining Corp. (FIL-T, “speculative buy”) with $36 target (unchanged). The average is $31.41.

Analyst: “We believe new drill results and a maiden resource for the high-grade sulphide core coupled with ongoing strategic movements by the Lundin family toward the longer-term future of the Vicuna district should support FIL’s share price over the rest of 2023.”

Mr. Baretto’s other changes were:

• Arizona Sonoran Copper Company Inc. (ASCU-T, “speculative buy”) to $3.50 from $3. Average: $3.23.
• Faraday Copper Corp. (FDY-T, “speculative buy”) to $1.75 from $1.50. Average: $1.50.
• First Quantum Minerals Ltd. (FM-T, “buy”) to $39 from $36. Average: $31.22.
• Ivanhoe Mines Ltd. (IVN-T, “buy”) to $15.50 from $14. Average: $15.16.
• Marimaca Copper Corp. (MARI-T, “speculative buy”) to $6 from $5.50. Average: $5.50.
• Teck Resources Ltd. (TECK.B-T, “buy”) to $68 from $68.50. Average: $66.08.

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Seeing a “compelling valuation with upside potential,” National Bank Financial analyst Ahmed Abdullah assumed coverage of AirBoss of America Corp. (BOS-T) with an “outperform” rating on Friday.

The Toronto-based chemical and manufacturing company previously had an “under review” designation from the firm.

The analyst sees the AirBoss Defense Group as “an expanding survivability platform with significant upside potential” and its Airboss Rubber Solutions business as an “industry-leading” compounder.

“The AirBoss Defense Group (ADG) provides military, law enforcement, healthcare providers, industrial providers, and first responders with a diverse portfolio of protective equipment aimed towards survivability,” he said. “The segment’s results have normalized in 2022 following a material jump in 2020 and 2021 due to four large contracts in that period. ADG will likely continue the expansion of its innovative survivability platform with steadier growth ahead as its baseline business secures longer-term mandates.”

“AirBoss Rubber Solutions (ARS) is North America’s second largest custom compounder which manufactures 2,000+ proprietary custom formulations and compounds from both natural and synthetic polymers, reinforcing agents, and other additives/chemicals. ARS caters to a wide array of customers (more than 90 per cent of sales in North America) in addition to supplying the Company’s other two segments with compounded rubber and meeting their material R&D needs. We expect ARS to deliver solid gains with margin expansion driven by the growth of specialized compounded products (white/colour compounds and other).”

Moving forward, the analyst thinks a turnaround in its AirBoss Engineered Products (AEP) segment will “enhance the company’s profitability profile.”

“AEP is a leader in manufacturing and supplying customized rubber-based products that primarily include anti-vibration and noise dampening solutions,” he said. “Customers of the segment are mostly in the North American automotive and adjacent sectors (including electric vehicles, heavy truck, and off-highway sectors), with a recent push into non-automotive markets. AEP recently secured amended contract terms with its top customers to reverse a trend of operating losses that has taken hold since 2020. Furthermore, AEP’s push into the non-automotive market is in its early stage and could present an opportunity to enhance margins and provide another growth vector.”

Believing AirBoss’s current levels “present a value opportunity for investors, and that is before considering upside potential from the ADG potential sales pipeline, Mr. Abdullah set a target of $12 for the company’s shares. The current average on the Street is $12.92.

“Our $12 target for AirBoss of America is based on the average of the 2023 value in our Discounted Cash Flow (DCF) and the 2024E metric in our Net Asset Value (NAV) analysis for implied EV/EBITDA multiples of 8.0 times 2023 and 7.3 times 2024 estimates, in line with the current peer group average at 8.4 times 2023 and 7.3 times 2024,” he said.

“AirBoss is a unique industry player that can leverage its core competency to take advantage of various growth opportunities in different vectors (defense, nonautomotive, etc.). We believe BOS warrants trading at these implied multiples as we expect the Company to continue the expansion of its innovative survivability platform at ADG with a degree of stability to come, deliver steady growth at its ARS business with margin expansion driven by the growth of specialized compounded products, and reverse the trend of operating losses at AEP with amended customer agreements in place while driving top-line growth across its product lines (non-automotive included).”

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ATB Capital Markets’ Chris Murray believes the valuation gap for SNC-Lavalin Group Inc.’s (SNC-T) primary Engineering Services business is “increasingly exposed” ahead of the May 9 release of its first-quarter results and with the firm moving “one quarter closer to the end of the LSTK saga.”

“SNC is more complicated to value than other ‘pure-play’ E&C businesses, as there are several specialty pieces of the business (Nuclear, O&M, and Linxon), as well as concessions and other assets,” he said ain report released Friday. “We see these masking the value of a high-recurring-revenue, cash-flow-generating business, which we see as being the core driver of future value. We see ‘pure-play’ engineering consulting names trading at significantly higher valuations (approximately 13.0 times EV/EBITDA vs. 7.1 times). While the margin profile justifiably plays a role in the discount, we believe the gap should close as the final two Ontario projects are completed this year and as confidence grows in the go-forward plan, including M&A and improved cash flow generation.”

Mr. Murray pointed to media reports that suggest both the Eglinton Crosstown and Ottawa Trillium LRT could be complete and move to operations this year.

“While the Company has indicated it will incur losses in 2023,the expectation is that all potential future losses should stay within the $300-million reserve,” he said. “However, we note credibility around future cost reforecasts is low.”

“With Q4/22 reporting, SNC announced it is undertaking a strategic review, as management continues repositioning the Company. We expect SNC to consider its options with Linxon, which reported a loss of $14-million in Q4/22, given inconsistent financial performance and lack of fit within a pure-play design firm. We think the additional refinement of the Company’s portfolio, which could include divesting Linxon or other non-407ETR concession assets, with proceeds used to retire additional debt, could create a positive catalyst for the story.”

Mr. Murray raised his target for SNC shares to $38 from $37, which is the current average, with an “outperform” rating.

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In a first-quarter earnings preview for the Canadian energy sector, CIBC World Markets analysts say they “remain relatively constructive on oil prices” despite recessionary headwinds.

“Concerns around a potential recession continue to put a cap on oil price upside; we continue to focus on OPEC+ actions after a surprise cut, capital discipline from producers, and an eventual DOE replenishment of SPR volumes as reasons to remain constructive on oil price,” they said. “To that effect, we like companies that provide asymmetric risk-return, including CNQ, CVE, and SU.”

“Our cash flow expectations are below consensus estimates for nearly all producers at this time, which we largely attribute to actualized pricing for the quarter. We are expecting cash flow beats from IMO, NVA, PSK, SDE, and VET at this stage.”

With that view, they made a series of target price adjustments on Friday, noting: “Our price targets remain grounded in modest forward cash flow multiples, but we see room for multiple expansion for Canadian operators given the increased importance of energy security. Our top ideas include ERF, NVA, PSK, and SU.”

Their changes included:

• Arc Resources Ltd. (ARX-T, “outperformer”) to $22 from $25. Average: $21.90.
• Birchcliff Energy Ltd. (BIR-T, “neutral”) to $8 from $9. Average: $10.90.
• Enerflex Ltd. (EFX-T, “neutral”) to $12 from $11. Average: $14.25.
• Freehold Royalties Ltd. (FRU-T, “neutral”) to $18 from $19. Average: $19.98.
• Kelt Exploration Ltd. (KEL-T, “outperformer”) to $6.50 from $7. Average: $8.04.
• Lucero Energy Corp. (LOU-X, “neutral”) to 70 cents from 75 cents. Average: 91 cents.
• Paramount Resources Ltd. (POU-T, “neutral”) to $37.50 from $40. Average: $40.22.
• Precision Drilling Corp. (PD-T, “outperformer”) to $135 from $150. Average: $140.31.
• Tamarack Valley Energy Ltd. (TVE-T, “outperformer”) to $5.50 from $6. Average: $6.55.
• Topaz Energy Corp. (TPZ-T, “outperformer”) to $25 from $27. Average: $27.27.
• Tourmaline Oil Corp. (TOU-T, “outperformer”) to $70 from $80. Average: $84.14.

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RBC Dominion Securities analyst Keith Mackey reduced his targets for a group of oilfield service providers on Friday.

They include:

• Calfrac Well Services Ltd. (CFW-T, “sector perform”) to $7 from $8. The average on the Street is $10.30.
• Ensign Energy Services Inc. (ESI-T, “outperform”) to $4.50 from $5. Average: $5.69.
• Pason Systems Inc. (PSI-T, “outperform”) to $20 from $21. Average: $18.
• Precision Drilling Corp. (PD-T, “outperform”) to $130 from $145. Average: $140.31.
• Step Energy Services Ltd. (STEP-T, “sector perform”) to $6 from $7. Average: $7.79.

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In other analyst actions:

* CIBC’s Cosmos Chiu upgraded Triple Flag Precious Metals Corp. (TFPM-T) to “outperformer” from “neutral” and raised his target to $28 from $22.50. The average is $22.94.

“Year to date, TFPM shares have trailed, up only 19 per cent while the peer group is up an average of 25 per cent (FNV, WPM, RGLD, SSL, OR),” he said. “TFPM shares currently trade at 1.1 times P/NAV and 15.5 times P/CF, a discount to the peer group at 1.8 times P/NAV and 21.7 times P/CF. With an attractive growth profile and improvement in trading liquidity, and now with an established track record since the IPO, we expect TFPM shares to continue to catch up to peers.”

* In a preview of first-quarter earnings season for the North American waste sector, RBC Dominion Securities’ Walter Spracklin increased his Waste Connections Inc. (WCN-N, WCN-T) target to US$162, above the US$153.71 average, from US$154, better-than-expected labour efficiencies from technology and automation could lead to an increase in his estimate. He kept a “sector perform” rating.

“Waste outperformed the market in Q1 (driven by GFL up 18 per cent) as investors rotated back into high-quality defensive names on banking instability and macro concerns,” he said. “We are making some cadence adjustments for sustained weaker OCC pricing seen in Q1, and the quarterly cadence on certain metrics (full-year estimates generally unchanged). Additionally, we have taken our target multiples up by 0.5 times on the rotation described above and have left GFL unchanged [GFL-T, “outperform” and US$39 target] as it tends to benefit from the inverse. Our areas of focus for the quarter will be 1) pricing and indications of a seasonal peak due to CPI lookbacks, 2) the impact of depressed OCC prices during the quarter and early signs of a reversal, 3) M&A activity and sustainability investments, and 4) leading volume indicators such as C&D and their read on the economy.”

* Canaccord Genuity’s Katie Lachapelle trimmed her Energy Fuels Inc. (EFR-T) target to $13 from $13.50 with a “speculative buy” rating. The average is $11.53.

* In response to better-than-anticipated fourth-quarter 2022 results, iA Capital Markets’ Neehal Upadhyaya bumped his Wishpond Technologies Ltd. (WISH-X) target to $1.75 from $1.50 with a “buy” rating. The average on the Street is $1.85.

“Wishpond is trading at just 0.9 times our 2024 revenue estimate compared to its Canadian SaaS comps trading at 5.7 times and its North American marketing peers at 5.5 times,” he said. “2023 should be a pivotal year for the Company, and we expect another record year with top-line organic growth of 32 per cent. However, while we expect Adj. EBITDA to be positive, we are slightly decreasing our Adj. EBITDA margin estimate from 6.3 per cent to 5.7 per cent due to management’s renewed focus on growth from organic initiatives such as increasing its sales personnel along with its R&D budget to introduce several new AI-powered marketing solutions.”