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

CIBC World Markets analyst Mark Jarvi continues to see Hydro One Ltd. (H-T) as “a top-quality name with the most defensive positioning and strongest growth” in his regulated utilities coverage universe.

However, he thinks its valuation is “elevated” and investors should “await a better entry point,” prompting him to downgrade its shares to “neutral” from “outperformer” on Friday.

“We’ve been bullish on the H story for a few years now and we continue to have a positive outlook,” he said. “We see it as the highest-quality name in our regulated utility coverage with the strongest balance sheet and above-average (still somewhat underappreciated) growth. Having said that, we cannot ignore valuation. The stock is trading at 22.5x and 21.0x 2023E and 2024E consensus EPS, respectively. This is a 3.5 times and 2.5 times premium to Canadian peers, respectively, and 1x-2 times above almost all U.S. utilities, including the higher-quality/premium growth companies against which we benchmark H.

“While we believe the long-term growth outlook for H is underappreciated (we believe it could be an 8-per-cent-plus EPS growth story), we do not see much upside to our/consensus estimates that would argue for further outperformance. As such, with only a 6-per-cent total return to our new $41 price target we downgrade H to Neutral. For long-term dividend growth and defensive-minded investors, we would continue to hold the shares, but don’t see the need to add at these levels. Rather, we’d look for a better entry point on any correction.”

Expecting a 6-per-cent dividend increase to be announced with its quarterly results, Mr. Javi raised his target for Hydro One shares to $41 from $39. The average is currently $38.54.

In a research report released Friday, Mr. Jarvi also made these other target adjustments ahead of earnings season:

  • Atco Ltd. (ACO-X-T, “outperformer”) to $52 from $49. The average is $49.88.
  • Boralex Inc. (BLX-T, “outperformer”) to $48 from $46. Average: $47.31.
  • Canadian Utilities Ltd. (CU-T, “neutral”) to $39 from $37. Average: $39.56.
  • Emera Inc. (EMA-T, “neutral”) to $58 from $56. Average: $59.20.
  • Fortis Inc. (FTS-T, “neutral”) to $59 from $57. Average: $58.79.
  • Innergex Renewable Energy Inc. (INE-T, “neutral”) to $17.50 from $19. Average: $19.08.
  • Northland Power Inc. (NPI-T, “outperformer”) to $42 from $43. Average: $44.87.
  • TransAlta Corp. (TA-T, “outperformer”) to $16.50 from $16. Average: $15.88.

Colleague Robert Catellier moved his targets Tidewater Midstream and Infrastructure Ltd. (TWM-T, “outperformer”) to $1.50 from $1.60 and Tidewater Renewables Ltd. (LCFS-T, “outperformer”) to $17 from $16. The averages are $1.38 and $16.38, respectively.

“We have modified estimates for the Midstreamers under coverage to reflect lower commodity prices. Lingering macro concerns have pressured trading multiples for the Midstreamers, which are trading below long-term averages,” they said. “Exposure to opportunities like LNG and renewables remains a bright spot and may generate additional long-term growth opportunities (ENB and TRP best exposed to these trends). Weak gas prices have us watching producer activity for signs of a slowdown. Softening power prices and pockets of weaker resource conditions are likely to temper Q1 results. We are 5 per cent below consensus, on average, for the renewable names. Funding and return outlooks will be key items to track once again. CPX and TA should have decent quarters as Alberta power prices firmed up through Q1 and for the balance of 2023. The Utilities have traded well in the last month and now trade at richer valuations. Q1 results and updates for the Utilities should be non-events.”


Canaccord Genuity analyst John Bereznicki is expecting “generally steady” quarterly results from Canadian pipeline and energy infrastructure companies “despite a volatile fundamental backdrop.”

“The domestic midstream sector was on pace to deliver a relatively steady year-to-date performance through mid-March before the SVB failure, which drove a concurrent decline in oil prices and midstream equities, which fell an average of 8 per cent between January 3 and March 24,” he said. “While an OPEC production cut subsequently helped the sector recoup much of this decline, it nonetheless remains down an average of 3 per cent YTD (the outlier is KEY, up 7 per cent year-to-date). We are looking for largely stable core operating results in Q1/23 as industry production volumes continued to grind higher. We also expect generally solid marketing contributions in our coverage universe in the first quarter with limited downtime on major assets (with the notable exception of PPL’s Northern Pipeline). In terms of capital allocation, we expect ALA and KEY to remain focused on debt reduction in their Q1/23 commentary, with PPL remaining pragmatic and GEI likely to remain active on its NCIB through the balance of 2023.”

Mr. Bereznicki was one of two analysts to downgrade Keyera Corp. (KEY-T) on Friday, moving its shares to “hold” from “buy” in response to its outsized gain this far in 2023 ahead of the May 9 release of its results.

“We believe the company’s Gathering & Processing (G&P) segment continued to benefit from strong northern asset growth with increased Pipestone and Wapiti volumes in the quarter,” he said. “In our view, Keyera’s transportation and terminal operations also enjoyed seasonal tailwinds in Q1/23 and expect a modest contribution from the recently commissioned Cheecham sulphur forming facility. We anticipate strong iso-octane volume demand benefited Keyera’s Marketing segment (KMS) in the first quarter, driving sequential margin growth. We also expect Keyera to issue full-year KMS guidance with its Q1/23 results. We believe weakening butane pricing could push 2023 KMS segment margin through the highend of the company’s long-term target of $250-$280 million (albeit well below the $397 million this segment generated in 2022). We will be looking for an update on KAPS, with a particular focus on the timing of commissioning and contract status. While we continue to expect Keyera to remain focused on debt reduction through the balance of 2023 following its completion of KAPS, we will nonetheless be looking for an update on the company’s capital allocation plans.”

His target for Keyera shares remains $34. The average target on the Street is $34.86, according to Refinitiv data.

Heading into earnings season, Mr. Bereznicki said Pembina Pipeline Corp. (PPL-T, “buy” rating and $53 target) remains his “focus name” and sees AltaGas Ltd. (ALA-T, “buy” and $28) “well-positioned for significant deleveraging through 2024.”

Elsewhere, ATB Capital Markets’ Nate Heywood moved Keyera to “sector perform” from “outperform” with a $34 target.

“We have taken our Q1/23 estimates higher to capture strong volume growth for the G&P and LI asset base,” said Mr. Heywood. “The LI segment should also benefit from incremental contributions from KFS following the close of an acquisition, increasing KEY’s working interest at the facility. While our quarterly estimates have increased, we expect EBITDA to modestly beat consensus (ATB estimate: 3 per cent). The KAPS project remains a key consideration, as it is expected to enter service in Q2/23. The project has started to see line-fill activities on both the C3 and C5+ pipes. We continue to expect a slow ramp-up for the project and are hopeful to receive an update on contract positioning. We revised our rating to Sector Perform from Outperform with this update, given the total return of 13.7 per cent to our target of $34.00 per share, which compares to the average price target return of peers rated Outperform of approximately 45 per cent.

Mr. Heywood reduced his target for Gibson Energy Inc. (GEI-T, “sector perform”) to $25 from $26 and Northland Power Inc. (NPI-T, “outperform”) target to $48 from $50.. The averages are $25.21 and $44.87, respectively.

“Ahead of the Q1/23 reporting season, we have revised several of our estimates to capture current macro trends and product pricing considerations,” he said. “In general, we expect midstream names to benefit from volume growth across the WCSB but expect modest pricing impacts for marketing and commodity-exposed cash flows, given the tempered pricing environment. We saw modestly tighter crack spreads sequentially for names with refining exposure, given lower fuel pricing and rising compliance costs. The power producers realized another strong Alberta merchant environment, driving quarterly estimates higher for exposed names. Overall, we continue to view energy infrastructure names as defensively positioned given their contracted cash flows; however, as volume and basin activity remains supportive, we expect growth considerations to gain momentum.”

Scotia Capital’s Robert Hope raised his Keyera target to $37 from $34 with a “sector outperform” recommendation.

“We reiterate our favourable view on Keyera as we believe the company is well positioned to generate above-average growth at what we view to be an attractive valuation,” said Mr. Hope. “The company is at an interesting point in its evolution, which we refer to as Keyera 2.0. With the large Key Access Pipeline System (KAPS) entering service soon, we see a step down in Keyera’s risk profile and a step up in cash flows, along with a move down in capital expenditures. We believe this presents an opportunity for increased shareholder returns through dividend increases and buybacks, all the while further strengthening the balance sheet. These are themes that we expect will be well-received by the market. We also introduce our 2025 estimates and roll forward our valuation to 2025, which increases our target.”


National Bank Financial analyst Richard Tse and John Shao see the potential for slowing momentum in the Canadian technology sector entering the earnings season after a strong start to 2023.

“If you follow our research you’ll recall in our 2023 Year Ahead (Get Ready) we made it a point of emphasizing that avoiding the Technology sector given the big pullback in 2022 was a potential detriment to missing outsized returns, at least in the short term,” they said. “A big part of that was based on what we’ve seen historically, and as recently as the middle of 2022, when the idea of moderating rates pushed the group higher. That bottom-fishing had the S&P/TSX Info Tech index up 26.5 per cent vs the 4.6-per-cent return on the TSX in Q1 (March).

“But what do you do now? Given that early year run, we think inertia is setting in as valuations have crept back up again to their historical averages against growing risk for a softening economic backdrop. For investors looking ahead, we see our defensive technology names (CSU, GIB.a, OTEX) outperforming at this point with an opportunity to build positions in our OP-rated growth names that continue to consistently execute (AIF, DCBO, KXS, NVEI, SHOP, TCS, TIXT).”

In a research report released Friday, the analysts see increased potential for earnings disappointments heading into reporting season following a change in sentiment on the Street through the first four months of the year.

“While earnings had been moderating earlier this year, that declining trend has recently turned based on a shifting focus towards cost controls with many names taking on restructuring over the past 12 months,” they said. “We think that’s led to a slight uptick in expectations, and it’s that higher bar that’s also set up increased risk going into this Q1 earnings season as those cost improvements are likely temporary pickups under moderating top-line growth.”

“From a macro perspective, the narrative in the first quarter of 2023 for Tech was largely driven by potential implications following the SVB (Silicon Valley Bank) collapse. No doubt, that amplified the notion of liquidity when it comes to our coverage group from tighter financial conditions, particularly for many of our ‘newer’ names and especially the unprofitable ones burning cash. In light of that, we’ve updated our cash burn analysis to assess which of our (NBF) coverage names have potential liquidity risk. The analysis underscores that most of our coverage names are in sound financial positions with low liquidity risk.”

The duo named four companies with the “potential upside from calendar Q1 results.” They are: CGI Inc. (GIB.A-T, “outperform”), Nuvei Corp. (NVEI-T, “outperform”), Shopify Inc. (SHOP-T, “outperform”) and Tecsys Inc. (TCS-T, “outperform”).

Conversely, they think Farmers Edge Inc. (FDGE-T, “sector perform”) and Real Matters Inc. (REAL-T, “sector “perform”) have downside risk.

With their updated forecast, they made these target adjustments:

* CGI Inc. (GIB.A-T) to $160 from $140 with an “outperform” recommendation. The average on the Street is $136.46.

“We’re expecting solid FQ2 (CQ1) results for CGI given the follow through in digital transformation projects post-COVID combined with a pick-up in cost savings/efficiency offerings under the current and expected economic market backdrop,” said Mr. Tse.

* Constellation Software Inc. (CSU-T) to $3,000 from $2,700 with an “outperform” rating. The average is $2,854.31.

“We’re expecting solid in-line results for Constellation in FQ1,” said Mr. Tise. “If you’ve been following our research, you’d know that we’ve been calling for more potential spinoffs looking ahead as a way of surfacing value following the successful spinoff of Topicus and more recently the Lumine Group. While it’s still too early to assess that potential untapped value from the Lumine Group, we’d note that Topicus has seen its market capitalization expand by $3.3-billion since it began trading as a publicly-traded entity.”

“All in, we continue to like CSU for its defensive attributes (recurring revenue and cash flow) and heightened growth profile given the accelerated pace of capital deployment.”

* Lightspeed Commerce Inc. (LSPD-N, LSPD-T) to US$20 from US$30 with an “outperform” rating. The average is US$27.21.

“Given a recent shift in strategy to target ‘higher value’ merchants (i.e., more than $500k in annual GTV [gross transaction value]) care of the improved unit economics associated with the group, the Company is refining its target market,” said Mr. Tse. “For reference, those merchants (higher value) have 2.5x – 4.5 times greater ARPU [average revenue per user] than smaller merchants (those with less than $200k in annual GTV) and represent 63 per cent of total GTV despite only representing 15 per cent of the total market. Beyond that shift (in strategy), on January 17, 2023, Lightspeed announced the elimination of 10 per cent of headcount-related operating expenditures (300 employees) with half of those cost reductions coming from management layers. All in, Management expects the salary and related benefits from the eliminated roles to save $25-million annually. While those savings are meaningful, the Company has made operating leverage gains with software margins up 110 basis points year-over-year (FQ3). And with the forward focus on only two core (flagship) products, Lightspeed Retail and Lightspeed Restaurant by yearend (post-acquisition integrations), we think the path to profitability looking into F24 appears reasonable.”

* Q4 Inc. (QFOR-T) to $5 from $3.50 with an “outperform” rating. The average is $3.38.

“We’re expecting an in-line quarter for Q4 in FQ1,” said Mr. Tse. “A notable growth driver for Q4 is IPO deal flow as it presents greenfield opportunities to onboard new customers at a low cost given its partnership with NYSE. IPO deal flow was soft in calendar Q1, but has recovered from the lows of 2022, up 44 per cent year-over-year and 271 per cent quarter-over-quarter. That said, declines in valuations have the potential to fuel M&A/de-listings. The above factors have reigned in growth expectations to 10-15 per cent in F23.”

Elsewhere, in a research note, RBC Dominion Securities’ Paul Treiber said valuations for tech stocks remain below historical levels heading into earnings season.

“With the decline in risk-free rates and improving sentiment, tech valuations have rebounded over the last several months,” he said. “However, macro uncertainty persists, with some markets resilient and others seeing signs of softening. In this environment, we see outperformance in Canadian tech dependent on individual stock selection. The stocks that we expect to rally through Q1 results will be those that are able to avoid the near-term impact from elongating sales cycles and deliver growth or profitability ahead of expectations. In our coverage, we believe several secular growth stories like SHOP, KXS, and NVEI are likely to report solid Q1 results. We also view the consolidators as attractive holdings in this environment. Consolidators are counter-cyclical and are likely to deploy additional capital in periods of uncertainty.”


Touting an “attractive entry point” and “balance risk profile,” National Bank Financial analyst Tal Woolley initiated coverage of Primaris Real Estate Investment Trust (PMZ.UN-T) with an “outperform” recommendation on Friday in a research report titled Shoplift these units.

“While we appreciate investors can perceive the operating risk of enclosed malls as higher than other retail (e.g., grocery-anchored retail), we do believe PMZ’s strategy of owning among the largest retail centres in its markets, combined with the ongoing post-COVID rebound in malls and limited development exposure should mitigate some of that operating risk,” he said. “PMZ counterbalances this higher operating risk with low financial risk (e.g., low leverage, low payout ratio, an internally financed business strategy, offering a 6.0-per-cent yield).”

Mr. Woolley thinks units of the Toronto-based REIT, which possess a retail portfolio that include Dufferin Mall in Toronto and Orchard Park in Kelowna, currently “balance higher operating risk with lower financial risk.”

“PMZ’s spin-out from H&R came with one standout benefit for these times — a top quality balance sheet, which offers a lot of durability and strategic flexibility during a changing interest rate regime,” he said. “At 5.1 times EBITDA and 32-per-cent debt/assets, PMZ carries the lowest leverage, no matter how you measure it, in our coverage universe. While grocery-anchored retail is favoured within retail today (and make no mistake, we like it as an investment too), we believe the lower financial risk in PMZ units is being underpriced versus other publicly traded peers (who can sport balance sheet leverage as high as 2 times PMZ’s 5 times EBITDA). The leverage is also unlikely to rise materially given management compensation incentives and an investment/capital return strategy financed by internal operating cash flows.”

Calling it “one of the cheapest names in the space showing the most operating momentum,” Mr. Woolley set a target of $17.50 per unit. The current average on the Street is $17.38.

“Trading at just 8.6 times 2023 consensus FFO/u [funds from operations per unit], offering a 6.0-per-cent yield at a 52-per-cent FFO payout ratio, PMZ units are among the cheapest on almost any valuation metric,” he said. “At the same time, it is showing some of the strongest operating momentum of any name we cover (SPNOI up 8.8 per cent last quarter, looking for 3-5 per cent in 2023). Beyond the organic rent and occupancy growth in the portfolio, PMZ has the opportunity to recapture rent concessions made to tenants during COVID. This will take some time, but with the worst of COVID behind us, even the most skeptical investor can likely see a path to recapturing some of this rent as mall occupancies recover.

“Finally, PMZ’s balance sheet flexibility provides investors a path to upside beyond our forecasts. We estimate PMZ is capable of repurchasing $25-60 million in stock annually without increasing its leverage ratios (2-4 per cent of the current market cap), assuming stable NOI and capex spending profiles. The balance sheet allows PMZ to pursue consolidation opportunities with debt capacity (i.e., they are not at the mercy of the equity markets to acquire). We also see as much as $194 million in non-traditional equity sources (liquidating notes outstanding, sales of excess land for residential development) if needed for larger deals.”


In a earnings preview for the mining sector, Barclays analyst Matthew Murphy made a series of target changes to stocks in his coverage universe. His changes are:

  • Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “overweight”) to US$63 from US$62. The average is US$68.49.
  • Barrick Gold Corp. (GOLD-N/ABX-T, “overweight”) to US$28 from US$26. Average: US$22.51.
  • First Quantum Minerals Ltd. (FM-T, “underweight”) to $27 from $22. Average: $32.57.
  • Franco-Nevada Corp. (FNV-N/FNV-T, “underweight”) to US$127 from US$115. Average: US$151.70.
  • Hudbay Minerals Inc. (HBM-T, “equalweight”) to $9 from $7. Average: $9.75.
  • Lundin Mining Corp. (LUN-T, “equalweight”) to $11 from $10. Average: $10.56.
  • Newmont Mining Corp. (NEM-N/NGT-T, “equalweight”) to US$62 from US$57. Average: US$58.30.
  • Wheaton Precious Metals Corp. (WPM-N/WPM-T, “equalweight”) to US$43 from US$42. Average: US$54.93.

“In Q1 the global economy continued to beat expectations and the supply side faced challenges. We again bump up our medium-term copper and gold prices, but still expect downside from spot. With consolidation taking hold we raise base metal targets and multiples, but retain our preference for gold over base equities,” said Mr. Murphy.


In other analyst actions:

* Scotia’s Michael Doumet bumped his Ag Growth International Inc. (AFN-T) target to $76 from $75 with a “sector outperform” rating. The average is $70.36.

“While AFN shares have gained almost 100 per cent from their 2022-lows, it has yet to exceed its mid-2019 levels – despite NTM [next 12-month] EBITDA being 70 per cent higher,” said Mr. Doumet. “What it got in profit growth, it gave away in multiple. To us, FCF margin expansion, deleveraging, and the proving out of the (secular) growth story, will progressively lead to a positive re-rate (i.e. a return to its historical multiple of 9.0 times on our 2024 estimates implies 50-per-cent upside).

“In 2022, AFN initiated its EBITDA guide at more than $200 million and ended with $235 million. A strong starting backlog (up 10 per cent), robust quoting activity, and margin expansion opportunities (up 100 basis points, in our view), leads us to believe there is upside to the 2023 guide/Street. An expected strong start in Farm, including a potential boom in Canada, is likely to lead to AFN topping 1H23 Street estimates (more likely in 2Q). Raising the 2023 guide may depend on increased visibility in Brazil, EMEA, and Food, which could be a 2Q event. Incrementally, we expect progressive margin expansion through 2023 to roll over into 2024 (+30bp in 2024).”

* Canaccord Genuity’s Michael Fairbairn cut his Asante Gold Corp. (ASE-CN) target to $2.20 from $3 with a “speculative buy” rating. The average is $2.40.

“Fujairah, an 11-per-cent shareholder, presented a $2.20 per share cash offer that Asante’s board determined was not in the best interests of Asante or its shareholders,” he said. “While the specifics of the offer were not disclosed, management did note that it was contingent on satisfactory due diligence during a lengthy exclusivity period, negotiation of a definitive agreement, and required ASE to cease all discussions and negotiations with all persons other than Fujairah in respect of any debt or equity financing. Given ASE’s current financial situation (outlined below), we agree with the board’s conclusion. Without a near-term cash injection, we think it is unlikely Asante will be able to meet its upcoming financial obligations. This could occur during Fujairah’s proposed exclusivity period which would place Asante at a significant disadvantage when negotiating a definitive agreement. While we believe it unlikely that Fujairah’s proposal will advance in its current form, we believe it does highlight Asante’s robust fundamental value. On the other side, we acknowledge the company’s near-term liquidity risks which drive our lower target price and temper our BUY rating as SPECULATIVE.”

* BMO’s Rene Cartier raised his Foran Mining Corp. (FOM-X) target to $4.75, above the $4.39 average, from $4.25 with an “outperform” rating.

* Jefferies’ Owen Bennett cut his targets for Hexo Corp. (HEXO-T, “hold”) to $1.70 from $2.57 and Organigram Holdings Inc. (OGI-T, “buy”) to $1.50 from $1.80. The averages are $1.99 and $1.62, respectively.

* JP Morgan’s Ryan Brinkman lowered his Magna International Inc. (MGA-N, MG-T) target to US$60, below the US$63.50 average, from US$64 with an “overweight” rating.

* Ahead of its April 27 earnings release, Raymond James’ Andrew Bradford cut his Secure Energy Services Inc. (SES-T) target to $9.25 from $10 with a “strong buy” rating. The average is $8.84.

* IA Capital Markets’ Gaurav Mathur reduced his Slate Office REIT (SOT.UN-T) target by $1 to $3 with a “hold” rating. The average is $3.77.

“Slate Office REIT cut its monthly distribution by 70 per cent on April 4,” he said. “Post the announcement, we discussed the outlook for Canadian suburban office properties with CRE brokers. Unsurprisingly, the data provided did not post a favourable view. Given the highest concentration in Canada, we spoke with CRE brokers on the state of the suburban office market. Collectively, tenants continue to give back space on the sublease market after an initial slowdown in 2022. Based on data provided by CRE brokers for the Toronto suburban office market, the increase in vacancy rates and decrease in net rents mirror market sentiment. The more interesting aspect of the data is the doubling of tenant incentives (TI) between Q1/19 and Q1/23, based on leases signed among various CRE brokers. We have decreased our revenue and NOI estimates amid sector headwinds, bringing our NAV to $4.00 per unit.”

* TD Securities’ Greg Barnes hiked his target for Teck Resources Ltd. (TECK.B-T) to $80 from $71 with a “buy” rating. The average is $67.53.

Follow David Leeder on Twitter: @daveleederOpens in a new window

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