Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Paul Quinn is expecting “mixed” third-quarter financial results from North American paper and forest product companies, seeing “more supportive building materials prices but somewhat lower prices across several other commodities.”
“Pulp prices seem to have bottomed, led by a resumption of purchasing activity by China, although significant capacity additions and elevated inventory levels are likely to slow the pace of a recovery,” he said in a research report released Friday. “Paper prices have moved only modestly lower, but operating rates are weak. Supply-demand tension in containerboard is improving somewhat with recently announced closures, and prices have stabilized, but we expect market-related downtime to offset new mill start-ups to continue for the near-term. Timber prices remain weak across North America due to weak lumber and other end use consumption.
“During the Q3 earnings season, we think investors will be focused on the trajectory into 2024, particularly as it relates to wood products demand against a backdrop of elevated interest rates, and demand for graphic paper and paper packaging. While we wait for an inflection point in the economy, interest rates and overall confidence, we note that valuations remain near historic lows”
Heading into earnings season, Mr. Quinn predicts lumber prices are likely to “struggle to gain meaningful momentum” through the remainder of the year, “barring any transportation issues or unforeseen events, driven by both seasonality and higher interest rates weighing on new construction and R&R activity.
“With elevated inventory levels, we expect pulp prices to remain relatively weak through the end of the year, to the benefit of tissue producers (CAS and CLW),” he added. “We think paper packaging names (containerboard and boxboard producers) are also likely to see improving demand as North American destocking concludes, and note that containerboard producers continue to rationalize capacity. For the balance of the year, we favour lumber, tissue and paper packaging companies.”
“We expect low pulp pricing and continued weak graphic paper demand to weigh on companies leveraged to these commodities in Q3. While paper consumption enjoyed a renaissance in 2021 and 2022, significant destocking and negative secular demand trends through 2023 are a significant headwind. We also are cautious on OSB, as we anticipate that the significant capacity additions in 2023 will bring OSB prices down to modestly above cash costs in 2024.”
Following revisions to his commodity price forecast, Mr. Quinn lowered his targets for a trio of Canadian companies:
- Canfor Corp. (CFP-T, “outperform”) to $27 from $30. The average is $27.
- Interfor Corp. (IFP-T, “outperform”) target to $30 from $32. Average: $31.60.
- West Fraser Timber Co. (WFG-N/WFG-T, “outperform”) to US$100 from US$110. Average: US$115.
Mr. Quinn named both Canfor and Interfor to his list of “favourite names” along with Cascades Inc. (CAS-T, “outperform” and $15 target) and Doman Building Materials Group Ltd. (DBM-T, “outperform” and $9 target),
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Elsewhere, Raymond James analyst Daryl Swetlishoff thinks third-quarter misses from North American forest products companies could present attractive entry points for investors in the weeks ahead.
“Despite higher quarter-over-quarter benchmark commodity pricing, challenged operating rates and a wildfire-induced cost surge are taking a toll on building materials earnings,” he said.
“Our refreshed financial estimates are (largely) sitting below consensus, however, we maintain conviction the sector is poised to hit an earnings inflection point as headwinds taper off through 4Q23. In taking a more conservative stance, we are also downwardly revising our 2024 lumber commodity estimates reflecting expectations for elevated Euro wood flow to the US market through 2024. Accordingly, our WSPF and SYP lumber price forecast drops US$25/mfbm to US$450 and US$475 (respectively). While this has prompted target revisions for Canfor, Interfor, West Fraser and Western Forest, we highlight average upside for the sector remains at a very attractive 50 per cent with our ratings left unchanged.”
Mr. Swetlishoff’s target changes are:
- Canfor Corp. (CFP-T, “outperform”) to $23 from $28. The average is $27.
- Interfor Corp. (IFP-T, “strong buy”) target to $32 from $41. Average: $31.60.
- West Fraser Timber Co. (WFG-N/WFG-T, “strong buy”) to US$110 from US$125. Average: US$115.
- Western Forest Products Inc. (WEF-T, “market perform”) to 75 cents from 85 cents. Average: $1.13.
“Given the pullbacks in trading levels, our estimates suggest average sector valuations remain at just 3.8 times 2024 EV/EBITDA, with P/BV in some cases hitting 14-yr (approaching Great Financial Crisis) lows,” he said. “While building materials end users continue to execute on just in time purchasing, fresh US housing data supports the seasonal trade theme with single-family permit activity up every single month this year and homebuilders taking increased market share from the re-sale market. Aside from valuation and the seasonal trade we also point out that cash lumber prices are holding 25 per cent below our estimate of 4Q23 BC variable costs. When coupled with depressed year-to-date B.C. interior harvest activity (down 41 per cent relative to the 5-year average) we highlight expanded curtailment potential which we regard as a catalyst. We also highlight pulp commodity prices have quietly ground higher of late with global inventories coming off highs.
“While the pulp sector is still in the early innings of recovery, we highlight Outperform-rated Canfor Pulp as an attractive value pick trading sub $2 per share. Against the aforementioned backdrop, we would take advantage of potential earnings-related volatility to add to positions of Strong Buy-rated Interfor and West Fraser while we also remain bullish on Doman. We further highlight Canfor Corp’s attractive low relative and absolute valuation, with its material net cash position plus after-tax duties currently accounting for almost 70 per cent of market cap.”
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Desjardins Securities analyst Chris Li thinks Parkland Corp. (PKI-T) is likely to showcase “strong” organic EBITDA growth when it reports its third-quarter results on Nov. 1, reaffirming his view that Calgary-based fuel supply and convenience store company is “well-positioned to achieve its organic EBITDA and deleveraging targets.”
In a research note released Friday, Mr. Li raised his EBITDA projection for the quarter to $531-million from $457-million previously, exceeding the consensus on the Street of $520-million, due to higher crack spreads and capture rates.
“We estimate strong organic EBITDA growth of approximately 25 per cent year-over-yeary excluding Refining, acquisitions and the USA inventory writedown last year,” he said. “We expect well-balanced growth across geographies, driven by higher fuel margins, fuel volume growth (strong summer driving season in Canada and robust tourism and resource exploration activity in International), non-fuel gross profit growth, USA turnaround and cost efficiencies.
“We have also increased our 2023 and 2024 EBITDA estimates to be largely in line with PKI’s positive guidance update on September 5. Normalizing for Refining, we estimate PKI’s $2-billion EBITDA target in 2024 implies solid 6–7-per-cent growth, driven by synergy capture, cost efficiencies and organic growth. We believe mid-single-digit EBITDA growth is achievable in 2025 (excluding refinery maintenance), supported by additional synergy capture, cost savings by leveraging PKI’s scale and the ratable nature of PKI’s business. We expect PKI to achieve its leverage targets (3 times net debt/EBITDA by the end of 2023 and 2–3 times in 2024).”
With his higher estimates and a “greater confidence” in Parkland’s ability to meet its growth and leverage targets, Mr. Li increased his target price for Parkland shares to $47 from $41, keeping a “buy” recommendation and expecting its Investor Day event on Nov. 14 to provide a “better insight on how the company will create additional value over the longer term.” The average target on the Street is $45.96.
“Despite the strong share price performance (up 39 per cent year-to-date), we believe valuation (approximately 7 times NTM [next 12-month] EBITDA) remains attractive at one standard deviation below the five-year average (8 times) and the weighted average of its retail, commercial and refining peers (8 times),” he said. “A clear path to achieving organic EBITDA targets and deleveraging are key catalysts. We expect the results and investor day to reaffirm our view.”
Elsewhere, JP Morgan’s John Royall raised his target to $47 from $42 with an “overweight” rating.
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With higher jet fuel prices acting as a significant headwind for the entire airline sector, Citi analyst Stephen Trent said “it is still worth reminding investors that Air Canada (AC-T) has even more international long haul exposure than the U.S. majors.”
“This, along with continued good momentum in its core domestic market, provide a supportive backdrop for long-term earnings growth,” he added in a research note released Friday.
While Mr. Trent lowered his earnings per share projections for 2024 and 2025 to $4.05 and $5.12, respectively, from $4.49 and $5.28, he raised his current fiscal year estimate by 2 cents to $3.61, seeing signs of optimism in this week’s financial release from Air Canada’s U.S. peers.
U.S. airline investors worry the travel boom may be ending
“On the back of recent 3Q results from Delta and United, international long-haul demand continues to be strong, with United mentioning its Trans-Pacific revenue per available seat mile or RASM was up 4 per cent year-over-year, even though that carrier’s capacity was up ca 86 per cent over the same period,” he said. " Although higher fuel prices could create some challenges for the carrier, Air Canada’s international revenue growth, along with its dominant domestic market position, leave the carrier well positioned over the coming quarters.”
Despite that optimism, he also trimmed his target for Air Canada shares to $28 from $31, reiterating a “buy” recommendation, to account for his lower expectations for the years ahead. The average on the Street is $30.08.
“Forecast adjustments for Air Canada include the incorporation of slightly higher ‘23E passenger yields, higher fuel prices and lower ‘24E net financial expenses into our model. (Yield, the airline industry’s price point, measures the amount of ticket revenue per passenger mile flown),” he noted.
“We rate Air Canada Buy, which is based on strong global potential for a continued recovery in international long-haul passenger revenue, and what looks to be a stock price dip. Although the carrier’s margins seem unlikely to catch those of several of its southern peers, this carrier has the most international long-haul exposure among Citi’s Americas Airline coverage.”
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National Bank Financial analyst Rabi Nizami sees upside for Foran Mining Corp.’s (FOM-T) McIlvenna Bay Project in Saskatchewan after touring the site recently as well as meeting with provincial government officials, who have “voiced strong alignment and support” for its plan to build a volcanogenic massive sulfide (VMS) district.
“A recurring theme was management’s aim to exceed the initially projected 4,200 tons per day throughput rate outlined in the Feasibility Study,” he said. “With the integration of the Foran/G Mining construction management team, detailed engineering plans are already targeting higher throughput as a base case. An official construction decision is anticipated in H1/24.”
“Expect to continue near-mine and regional exploration throughout the upcoming construction period. The application of integrated geophysics and geochemical data has yielded promising results in the Tesla and Bridge Zone discoveries and this approach should be applied elsewhere. We are looking forward to borehole EM results from the nearby Higgs Target and initial testing of Ada and several other drill-ready targets.”
After raising his projections for the company, including a “modest initial throughput increase soon after commercial production with higher initial capex, Mr. Nizami bumped his target for Foran shares to $5.50 from $4.75, reiterating an “outperform” recommendation. The average on the Street is $4.97.
“Foran tends to trade at a premium versus other base metal developers, which we believe is driven by positive sentiment on the stable Canadian jurisdiction, net-zero ESG credentials, advanced stage of the project, significant exploration upside and strong financial backing from well-known investors in Fairfax, Pierre Lassonde, Sprott and G Mining Services,” he said. “We also note several historical M&A precedent takeout multiples for select developers over 1 times NAV (San Nicolas, Santo Domingo, Kamin, Rosemont) which did not necessarily share these merits.
“Our Speculative risk rating recognizes that our thesis is contingent on successful execution of production growth scenarios not currently reflected in the feasibility study as well as an element of exploration success.”
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Ahead of third-quarter earnings season for Canada’s telecommunications companies, CIBC World Markets analyst Stephanie Price reduced her target multiples for stocks in the sector to reflect a “difficult” market environment, seeing the impact of rate, competitive and regulatory concerns.
“However, we believe that the market has stabilized somewhat, with back-to-school less aggressive than feared and pricing up quarter-over-quarter in both wireless and wireline,” she said. “We expect Q3 to reflect solid organic wireless subscriber growth (approximately 5 per cent year-over-year), but slower ARPU [average revenue per user] growth (down 0.4 per cent year-over-year, excluding the Q3/22 outage credit) as telecom providers focus on subscriber growth in a more competitive environment. We expect average Q3 organic EBITDA growth of 4 per cent and expect free cash flow growth and the sustainability of dividend growth models to be key topics in the quarter. Our top picks heading into earnings are Rogers, Quebecor and TELUS.”
Ms. Price’s target changes include:
- BCE Inc. (BCE-T, “neutral”) to $56 from $62. The average on the Street is $59.44.
- Cogeco Communications Inc. (CCA-T, “neutral”) to $69 from $75. Average: $77.25.
- Cogeco Inc. (CGO-T, “neutral”) to $58 from $64. Average: $81.50.
- Quebecor Inc. (QBR.B-T, “outperformer”) to $38 from $43. Average: $38.63.
- Rogers Communications Inc. (RCI.B-T, “outperformer”) to $67 from $76. Average: $72.47.
- Telus Corp. (T-T, “outperformer”) to $26 from $29. Average: $28.
“Dividend yields in the sector currently average 4 per cent, with telco yields averaging 6 per cent,” the analyst said. “We see TELUS as attractive at these levels, trading at a 0.8 times discount to its two-year average EV/EBITDA versus a sector average discount of 0.5 times. We see TELUS’ dividend yield of 5 per cent as fully supported and continue to see room for upside from non-telecom assets as TI stabilizes and TELUS Health continues to grow. We also see Quebecor and Rogers as attractive at these levels, with both benefiting from synergies and opportunities resulting from recent M&A.”
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Dalton Baretto of Canaccord Genuity made a series of target changes to mining companies in his coverage universe on Friday.
He raised his targets for these stocks:
- Arizona Sonoran Copper Co. Inc. (ASCU-T, “speculative buy”) to $4 from $3.50. Average: $3.36.
- Capstone Copper Corp. (CS-T, “buy”) to $9.50 from $9. Average: $7.90.
- Teck Resources Ltd. (TECK.B-T, “buy”) to $71 from $64.50. Average: $68.66.
His targets for these stocks fell:
- Ero Copper Corp. (ERO-T, “buy”) to $30 from $33. Average: $28.59.
- Filo Corp. (FIL-T, “speculative buy”) to $26 from $35. Average: $31.73.
- First Quantum Minerals Ltd. (FM-T, “buy”) to $39 from $43. Average: $36.94.
- Hudbay Minerals Inc. (HBM-T, “buy”) to $9.50 from $10. Average: $9.84.
- Ivanhoe Mines Ltd. (IVN-T, “buy”) to $13 from $15. Average: $15.57.
- Lundin Mining Corp. (LUN-T, “buy”) to $11.50 from $13. Average: $11.87.
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Following Thursday close of Surge Energy Inc.’s (SGY-T) $48.3-million convertible debenture offering, National Bank Financial analyst Dan Payne sees “improved strength of positioning of the company in the prevailing environment, both through high sensitivity to the commodity and strength of execution in high-interest asset types, each in support of its ultimate value proposition.”
Resuming coverage of the Calgary-based company, Mr. Payne thinks an expanded return on its capital is “imminent.”
“To the point of the improved quality of the business, a recent management update continued to highlight a highly sustainable model, backstopped by an ample duration (10-15 years) of low capital efficiency oil development prospects (approximately $20,000 per barrels of oil equivalent per day) from which to harvest maximum free cash flow off a low associated decline (23 per cent) in a rising commodity price environment,” he said.
“For context, the company sees a 10-15-per-cent cash flow per share sensitivity to a $5 per barrel rise in WTI pricing (potentially augmented by WCS differential tailwinds) that should have a disproportionate impact on FCF sensitivity (25-per-cent upside) in support of accelerating its inflection point of return of capital. Management expects to reach Phase 2 of its return of capital paradigm (50-per-cent FCF returns at debt less than $250-million, or less than 0.7 times D/CF [debt to cash flow] at $80 per barrel) by the end of Q1/24 (at strip), at which point, its return of capital (through base dividend and buyback) could 2 times and support a more than 10-per-cent potential cash yield (and prospectively a doubling of its equity value under the assumption of a static yield).”
Touting its “conventional cornerstones,” the analyst raised his target for Surge shares by $1 to $13, reiterating an “outperform” rating. The average is $12.55.
“Underlying that remains a solid asset quality in the Sparky and SE Sask Conventional assets, where execution continues to delineate high returns in large OOIP conventional reservoirs. Notably, its Sparky asset continues to be a standout (having grown from 1,000 to 11,000 barrels of oil equivalent per day; asset profile highlighted within), to prove the strength and sustainability of the economics of the play (predominantly through multi-frac well design to date), which could be complemented (high-grading inventory and returns) through the deployment of multilateral wells in the halo of the play (i.e., 2 times historical results at a 25-per-cent greater cost) and compounding returns with continued deployment of EOR. Ultimately, its leadership in the conventional realm (extending that analogy into SK) has foreshadowed the renaissance of interest there, and as we map the potential value tailwinds for the sector, its equity continues to stand out as a key benefactor.”
Elsewhere, BMO’s Mike Murphy resumed coverage with a $10.50 target, up from $9, with a “market perform” recommendation.
“With debt-reduction targets in sight, we view the company as having the ability to accelerate returns to shareholders while also achieving modest growth through accretive acquisitions or development of its core areas,” said Mr. Murphy.
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In other analyst actions:
* Jefferies’ Alejandro Demichelis downgraded Canacol Energy Ltd. (CNE-T) to “hold” from “buy” with an $11 target, below the $18.83 average on the Street.
* CIBC’s Dennis Fong initiated coverage of Stratchona Resources Ltd. (SCR-T) with an “outperformer” rating and $40 target, below the $43.99 average on the Street.
“The reverse takeover of Pipestone Energy has created a large corporate entity with attractive, self‑funded production growth supported by significant drilling inventory and low-decline production,” said Mr. Fong. “The main pushback for shareholders is a concern around the limited float, which may curtail institutional investor interest and slow the timing of a re-rate higher.”
* Raymond James’ Brian MacArthur trimmed his Altius Minerals Corp. (ALS-T) target to $25.50 from $26 with an “outperform” rating, while BMO’s Rene Cartier lowered his target to $22 from $23 with a “market perform” recommendation. The average is $24.38.
“Altius delivered weaker-than-expected Q3/23 attributable royalty revenue relative to our estimates,” said Mr. Cartier. “In our view, the miss in the results was mainly driven by the potash division and to a lesser extent base and battery metals and thermal coal. In the quarter, Altius received its first lithium royalty revenue. SEDI filings show Altius was active on share repurchases and cancelations during the quarter. Altius plans to release its full Q3/23 results after market close on November 8.”
* Ahead of the release of its third-quarter results, Desjardins Securities’ Gary Ho cut his target for Dentalcorp Holdings Ltd. (DNTL-T) by $1 to $11.50, citing contraction in peer valuations, with a “buy” recommendation. The average is $12.27.
“We expect 3Q revenue and SSSG [same-store sales growth] to be at the lower end of guidance, with 2H acquisitions skewed toward 4Q; we maintain our EBITDA margin,” he said. “We model DNTL self-funding acquisitions going forward; consequently, deleveraging will be primarily driven by EBITDA growth.”
“We view DNTL as a quality compounder given its (1) proven M&A playbook in a fragmented market; (2) organic growth outlook; (3) compelling financial profile with resilient top-line growth and growing cash flows; and (4) recession-resistant attributes.”
* In a preview of third-quarter earnings season for precious metals companies, analysts at Stifel made a trio of target changes: Franco-Nevada Corp. (FNV-T, “buy”) to $218 from $215, Mag Silver Corp. (MAG-T, “buy”) to $23 from $22.50 and Silvercrest Metals Inc. (SIL-T, “hold”) to $7.75 from $7.50. The averages on the Street are $212.67, $23.39 and $9.08, respectively.
* BMO’s Michael Markidis trimmed his Granite REIT (GRT.UN-T) target to $84 from $91 with an “outperform” rating. The average is $93.40.
“GRT’s U.S. development tour (October 16-18) emphasized the (1) quality of GRT’s asset base and tenant roster, and (2) strength of its team, in our view,” said Mr. Markidis. “Recent deliveries, combined with a slowdown in new leasing in certain markets, have negatively impacted U.S. segment occupancy this year (down 530 basis points to 94.4 per cent as at Q223). Further erosion is possible in the near term; however, we believe we are nearing a trough. Reflecting an expansion to our overall cap rate assumption (25 basis points, to 5.25 per cent), we’ve adjusted our target.”
* Morgan Stanley’s Josh Baer cut his Lightspeed Commerce Inc. (LSPD-N, LSPD-T) target to US$17 from US$18 with an “equal-weight” rating. The average is US$19.85.
* CIBC’s Krista Friesen lowered her targets for Linamar Corp. (LNR-T) to $90 from $91 with an “outperformer” rating and Martinrea International Inc. (MRE-T) to $14.75 from $16 with a “neutral” recommendation. The averages are $88.17 and $19.08, respectively.
“As we head into Q3 reporting season, much of the focus will be on the UAW strike,” she said. “For Q3 we expect a limited impact from the strike on our companies. Looking out the rest of the year however, the duration and magnitude of the strike remain unknown so it is difficult to decipher the impact. We have baked some conservatism into our estimates for the suppliers in Q4 as we expect there could be an impact within that quarter.”
“A core tenet of our positive thesis on the auto suppliers—despite some macroeconomic uncertainty—is the valuation at which they are currently trading. Since the discussions of a strike started gaining attention at the beginning of August, we have seen the suppliers’ multiples compress. Most notably, LNR is trading 0.75 times below its multiple on August 1.”
* Barclays’ Benjamin Theurer cut his Nutrien Ltd. (NTR-N, NTR-T) target to US$64 from US$68, keeping an “underweight” recommendation. The average is US$76.10.
* RBC’s Irene Nattel cut her Pet Valu Holdings Ltd. (PET-T) target to $35, below the $39.11 average, from $43 with an “outperform” rating.
“Adjusting the cadence of H2/23E with Q3 pressure largely offset by Q4 relief as distribution expenses begin to normalize, results in 2023E EBITDA $230-million, at the low end of guidance range $230-$237-million (consensus range $225-$231-million),” she said. “Rolling valuation forward to TTM [trailing 12-month] Q3/25 estimates to reflect the passage of time and trimming EBITDA target multiple from 13.5 times to 11.0 times to reflect higher-for-longer interest rate backdrop and changing consumer demand patterns, drives price target to $35 (-$8). Outlook remains solid, in our view, but diminished visibility and investor apathy for small cap, discretionary-oriented names could keep near-term valuation rangebound.”
David Leeder