Inside the Market’s roundup of some of today’s key analyst actions
Reinstating coverage following the close of its acquisition of Hammerhead Energy Inc., ATB Capital Markets analyst Amir Arif said he would be a buyer of Crescent Point Energy Corp. (CPG-T), citing “well performance continuing to come in above type curves, an increased Montney footprint with existing infrastructure built out, and the pullback in the name due to the acquisition as well as a sector pullback.”
“Key reasons include its 3.2 times 2024 strip EV/DACF [enterprise value to debt-adjusted cash flow] valuation, 14-per-cent strip FCF [free cash flow] yield to market cap, and a further improvement in outlook in 2025 given the prebuilt infrastructure capex on the acquired assets and cost assumptions on the acquired assets that we think will prove conservative over time,” he added.
On Thursday, shares of the Calgary-based company rose 1.6 per cent following the premarket announcement of the close of $2.55-billion deal for Hammerhead and its assets in the Montney region of northwest Alberta.
“CPG announced two minor asset sales totaling 5 mboe/d [thousand barrels of oil equivalent per day], slightly improved proforma 2024 guidance, positive initial production rates on new Duvernay and Gold Creek well pads that came online in Q4/23, updated its five-year outlook, and provided more granularity on the spending plans by region, as well as the outlook for the acquired assets,” said Mr. Arif. “CPG had previously provided preliminary 2024 guidance on November 6, 2023 at the time of the HHRS acquisition announcement. After taking into consideration the asset sale, the updated 2024 guidance is slightly better on the production and capex front.”
Mr. Arif maintained an “outperform” recommendation and $13 target for Crescent Point shares. The average target on the Street is $14.38.
“CPG has assets focused in SE and SW Saskatchewan, the Kaybob Duvernay, and the Alberta Montney,” he concluded. “The Saskatchewan assets provide low decline rates and meaningful positive free cash flow through waterflood and CO2 flood development programs. The Alberta Montney and the Duvernay provide more scalable growth through primary development. On a combined basis, the company has a low corporate decline rate, in the 25-per-cent range, allowing for modest production growth and meaningful free cash flow generation. Approximately 60 per cent of the free cash flow is targeted for return of capital to shareholders.”
Elsewhere, others making target adjustments include:
* Stifel’s Cody Kwong to $15.50 from $16 with a “buy” rating.
“The $2.55-billion acquisition of Hammerhead Energy marks the fulfillment of Crescent Point’s strategic asset transformation, where it now is the dominant player in the Montney oil fairway,” said Mr. Kwong. “When combined with its enviable Kaybob Duvernay position, CPG moves forward with a 20-year drilling inventory that carries some of the most attractive economics in North America. This final piece of the puzzle also opens the door to the company to expand its return of capital beyond the current 60% of FCF as the balance sheet improves. With our view that the attributes of this transaction will outperform expectations both operationally and financially, CPG screens as one of our Top Ideas.”
* BMO’s Randy Ollenberger to $12 from $13 with an “outperform” rating.
“The purchased assets are adjacent to the company’s legacy Montney position and Crescent Point believes it can leverage significant operational synergies through further well optimization and shared infrastructure,” he said. “Additionally, the transaction adds another 800 net drilling locations, bringing total inventory life to over 20 years. We view the acquisition as being materially accretive on 2025 metrics and enhancing the company’s growth and shareholder return potential.”
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National Bank Financial analyst Zachary Evershed thinks DRI Healthcare Trust’s (DHT.UN-T, DHT.U-T) “rapid-fire royalty investments remain sustainable” following recent institutional investor meetings with its executive team, including CEO Behzad Khosrowshahi.
“DHT sits on a healthy almost $3-billion pipeline of opportunities, and with $766-million deployed since 2021 (excluding $50.5-million in potential milestone payments), remains on track to comfortably exceed the $850-900 million targeted by 2025, with no internal bottlenecks which would see the recent elevated pace subside ($391-million year-to-date),” he said. “In combination with a supportive environment where financing remains in high demand as an increasing number of drugs come to market and biotech companies approach the end of their cash runways, this allows the company to be increasingly selective on only the most accretive deals, with the latest transactions boasting higher IRRs and asymmetric levers (milestone payments) switching from outflows to inflows for DHT.”
Mr. Evershed also emphasized the Toronto-based Trust’s “upsized” credit facility provides added flexibility, estimating it has an undrawn borrowing capacity of over $300-million, “supplemented by a cash balance of $28.2-million at quarter end, and foresee $70-80-million in FCF generation annually.”
“Although our conservative base case scenario calls for only $35-million in annual deployments, seeing the trust reach its current target, we see no reason the company could not keep its foot on the gas to the tune of $250-million over the next two years, leading to cumulative deployments of $1,250-million from the IPO and bringing the balance sheet to the targeted 3.0 times,” he said. “The latter scenario, all else equal, would add $3 to our target.”
Revising his estimates with the introduction of his 2025 expectations, Mr. Evershed raised his target to $18.50 from US$11.75 previously, implying an estimated total return of almost 55 per cent. The average on the Street is $19.76.
“Given long-term tailwinds driving the pharmaceutical and healthcare space forwards, and the asset-light, defensive nature of the royalty business model, we rate DHT Outperform,” he said.
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Scotia Capital analyst Ovais Habib sees Galiano Gold Inc.’s (GAU-T) acquisition of Gold Fields Ltd.’s 45-per-cent interest in the Asanko gold mine as a “positive” move, creating an “emerging mid-tier producer.”
Shares of the Vancouver-based company surged 26.4 per cent on Thursday following the premarket announcement of a binding share purchase agreement with its joint venture partner. Both Gold Fields and Galiano currently own 45-per-cent stakes in the mine with the Government of Ghana holding the remaining 10 per cent.
“In our opinion, this transaction represents a positive catalyst for GAU shares as: (1) it removes the JV overhang on the stock while retaining ownership and control in a familiar asset at a minimal dilution, (2) it allows GAU to more fully participate in a rising gold price environment, and (3) the transaction is NAV accretive as we value GFI’s 45-per-cent interest at $253-million (including attributable JV cash) while the all-in acquisition cost stands at $179-million,” said Mr. Habib.
He maintained a “sector perform” recommendation for Galiano shares, raising from target to $1.50 from $1.20. The current average on the Street is $1.36.
Elsewhere, BMO Nesbitt Burns’ Raj Ray upgraded Galiano to “outperform” from “market perform” with a $1.50 target, up from $1.20.
“This is a long-awaited transaction which, in our view, simplifies the ownership structure and gives Galiano operational and strategic flexibility over the asset’s future,” he said. “In addition, the transaction appears well-structured which minimizes dilution for existing Galiano shareholders while also maintaining balance sheet flexibility. ... Despite [Thursday’s] 26-per-cent share price move Galiano remains highly discounted.”
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While acknowledging “kinks in the macro picture still need to be ironed out, but on the whole,” RBC Dominion Securities analysts Pammi Bir, Jimmy Shan and Tom Callaghan see “support for stronger 2024 returns and fund flows” for Canadian real estate investment trusts, pointing to “an anticipated pivot to monetary easing, moderate economic growth, stabilizing long-bond yields, healthy earnings growth, and reasonable valuations.”
“With the BoC tightening cycle seemingly done, rate cuts anticipated to start in Q2/24, and forecasts for long-bond yields to stabilize at levels well below the early October highs (based on RBC Economics’ calls), we think the setup for 2024 looks better,” they said. “Indeed, as recent weeks have demonstrated, a rally in the sector could be front-end loaded as CDN REITs have a strong track record of outperformance in the 3-12 months leading up to the initial rate cut of past easing cycles. As well, we believe the sector remains on sound footing to navigate an economic slowdown with 1) healthy fundamentals across most property types, 2) moderate earnings growth (2024 estimate up 3 per cent), 3) strong liquidity, 4) potential easing of upward pressures on cap rates, and 5) valuations that are well within reason. Furthermore, we think deal flow could ramp-up in a more stable rate environment, providing better visibility into pricing.”
In a research report released Friday, the analysts said they expect the sector’s organic net operating income growth to “moderate from record levels (up 5 per cent over last 12 months) as the economy slows.”
“That said, we expect comparatively stronger operating results from multi-family (demand tailwinds from outsized population growth, housing affordability), seniors housing (pent-up demand, fading cost pressures), industrial (significant mark-to-market opportunity on in-place rents), and self-storage,” he said.
While valuations have “recouped some lost ground,” the analysts think they are now “quite reasonable.”
“Aided by the sharp drop in bond yields, the TSX REIT Index has staged an impressive 18-per-cent rally since hitting year-to-date lows in Oct,” they said. “The sector’s NAV discount, however, remains substantial at 24 per cent. We think current levels provide a good margin for error but acknowledge that slow price discovery has investors placing more weight on cash flow multiples & implied cap rates. ... In short, with the 2024 setup teed up more favourably, we see room for further upside in valuations.”
The analysts’ securities with “outperform” recommendations are:
- Allied Properties REIT (AP.UN-T) with a $21 target. The average target on the Street is $21.20.
- BSR REIT (HOM.U-T) with a US$15 target. Average: US$15.09.
- CAP REIT (CAR.UN-T) with a $60 target. Average: $55.04.
- Colliers International Group Inc. (CIGI-Q, CIGI-T) with a US$121 target. Average: US$122.86.
- Chartwell Retirement Residences (CSH.UN-T) with a $14 target. Average: $13.63.
- Dream Industrial REIT (DIR.UN-T) with a $16 target. Average: $15.96.
- Flagship Communities REIT (MHC.U-T) with a US$20 target. Average: US$20.25.
- First Capital REIT (FCR.UN-T) with a $17 target. Average: $16.53.
- FirstService Corp. (FSV-Q/FSV-T) with a US$187 target. Average: US$167.14.
- Granite REIT (GRT.UN-T) with a $86 target. Average: $86.75.
- InterRent REIT (IIP.UN-T) with a $16 target. Average: $14.39.
- Killam Apartment REIT (KMP.UN-T) with a $23 target. Average: $21.29.
- Minto Apartment REIT (MI.UN-T) with a $20 target. Average: $18.14.
- Morguard North American Residential REIT (MRG.UN-T) with a $20 target. Average: $21.
- RioCan REIT (REI.UN-T) with a $22 target. Average: $21.63.
- SmartCentres REIT (SRU.UN-T) with a $29 target. Average: $26.03.
- StorageVault Canada Inc. (SVI-T) with a $6 target. Average: $5.80.
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ATB Capital Markets analyst Waqar Syed and Tim Monachello see 2024 in the North American Energy Services sector as a “stock picker’s market,” expecting outperformance from companies that possess “minimal cyclical U.S.-exposure, high cash-return to shareholders profiles, and ‘Alpha’ opportunities.”
In a research report released Friday, the analysts said the focus for the first half of the year will centre on slowing production growth south of the border “even as long-cycle investments continue.”
“We enter 2024 with WTI at about US$70 per barrel and HHUB gas price at US$2.50 per thousand cubic feet,” they said. “Rising U.S. oil production (1.0 million barrels per day year-over-year year-to-date) offset the impact of OPEC+ voluntary cuts for Q1/24, negatively impacting the oil macro. U.S. production rose in 2023, despite a nearly 20-per-cent cut in U.S. active rigs and pumping crews.
“As a result, we believe downside risk exists to the consensus view of rising U.S .D&C activity in H1/24, and any sequential improvements will likely be modest at best. We further reduce our U.S. rig activity forecast, and now project only a 30-rig increase between Q4/23 and Q4/24. Given the downside risk to the US outlook, we see downside risk to US cyclically levered companies including HAL-N, HP-N, NINE-N and NBR-N; as such, we downgrade HAL-N and NBR-N to Sector Perform, and lower the PT for several US cyclically exposed companies, PUMP-N being the exception.”
The analysts named five stocks as their “top picks” for the year ahead. They are:
* Enerflex Ltd. (EFX-T) with an “outperform” rating and $10.50 target, down from $11 previously. The average target on the Street is $10.94.
* TechnipFMC PLC (FTI-N) with an “outperform” rating and US$30 target. Average: US$25.17.
* Nov Inc. (NOV-N) with an “outperform” rating and US$33 target. Average: US$25.38.
* Trican Well Service Ltd. (TCW-T) with an “outperform” rating and $6 target. Average: $5.97.
* Total Energy Services Inc. (TOT-T) with an “outperform” rating and $15.50 target. Average: $14.75.
The analysts explained: “We emphasize three themes: (1) Growth: Our top picks FTI-N and NOV-N offer high leverage to the high-growth international/offshore markets. They offer the highest 2023-2025 estimated EBITDA CAGR [compound annual growth rate] of 41 per cent and 19 per cent in the peer group, (2) Strong Cash Return to Shareholders: FTI-N, NOV-N, TCW-T and TOT-T are expected to increase cash return to shareholders. NOV-N will likely initiate a share buyback program in February-2024; TCW-T is likely to increase quarterly dividend per share by 6-13 per cent in Q1/24, while buying back 10 per cent of shares outstanding; and TOT-T has ample capacity to increase distributions and maximize its share repurchases in 2024. (3) ‘Alpha’: Following FCF bleed in seven out of the past eight quarters, NOV-N should see a FCF inflection in Q4/23 and throughout 2024, with FCF increasing from an outflow of $264-million in 2023 to positive FCF of $724-million in 2024. TOT-T’s discounted valuation (1.6 times 2024 estimated EBITDA) strong balance sheet and upside to shareholder returns offers opportunity for a rerating, while we believe EFX-T has been significantly oversold and remains well-positioned for strong FCF generation and deleveraging in 2024 which could catalyze a rerating, in addition, EFX’s exposure to U.S. gas production growth offers upside across our forecast horizon.
“On the theme of debt reduction in 2024, we highlight AKT.A-T, EFX-T, ESI-T, and PD-T as they should be able to pay down substantial debt in 2024, transferring value from debt-holders to equity-holders.”
For Canadian companies, they made these other target adjustments:
- Akita Drilling Ltd. (AKT.A-T, “outperform”) to $3.25 from $3.50. Average: $3.50.
- Cathedral Energy Services Ltd. (CET-T, “outperform”) to $1.30 from $1.40. Average: $1.78.
- Ensign Energy Services Inc. (ESI-T, “outperform”) to $5 from $7. Average: $4.54.
- North American Construction Group Ltd. (NOA-T, “outperform”) to $44 from $40. Average: $43.83.
- PHX Energy Services Corp. (PHX-T, “outperform”) to $11 from $11.50. Average: $9.90.
- Precision Drilling Corp. (PD-T, “outperform”) to $140 from $145. Average: $131.71.
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Expressing an “increasingly bullish view of further EV share gains and margin stabilization in 2024,” Wedbush analyst Dan Ives thinks Tesla Inc. (TSLA-Q) will reach a US$1-trillion market cap in 2024 “despite growing skepticism by the Street.”
“The Street bear narrative for Tesla heading into 2023 was demand was eroding and competition was increasing across the board,” he said in a research note. “Instead Musk made a poker move for the ages and cut prices globally with China front and center to catalyze volumes/units which should now impressively be in the 1.8 million range for 2023.”
Mr. Ives predicts Tesla’s fourth-quarter volumes in China are likely to hit a new high, declaring “the Category 5 storm that hit Tesla early in 2023 appears to have passed with the company now raising prices and seeing steady demand in this key region.”
“For 2024 we believe 25-30-per-cent year-over-year unit growth is very achievable putting units in the 2.2 million to 2.3 million range with upside surprises likely in the cards driven by Model Y sales in China and Europe,” he said. “While overall EV demand has clearly moderated globally we are still in the early days of this massive transformation with Tesla leading the way as we estimate by 2030 roughly 20 per cent of autos will be EV based. Also noteworthy is that as Detroit stalwarts GM and Ford among others appear to be tempering the EV transformation, Tesla is now doubling down with Cybertruck and we expect another sub $30k vehicle to be announced over the next 6 to 9 months.”
He also sees margins continuing an “upward trajectory” into the new year.
“The big debate on the Street is around the price cuts and what the path looks like ahead into 2024 for Tesla with margins the key hot button issue among investors,” said Mr. Ives. “To this point we believe margins have now stabilized and should move up from these levels with Auto GM heading back above the key 20-per-cent threshold during the course of 2024.”
Reiterating his “outperform” rating for Tesla shares, he raised his target to US$350 from US$310. The average on the Street is US$225.58.
“The ‘golden vision’ at Tesla is now monetizing its super charger network with batteries and AI/FSD [artificial intelligence/full self-driving] next adding to the sum-of-the-parts story for Tesla,” he concluded. “We view Tesla where Apple was in the 2008/2009 period as Cupertino was just starting to monetize its services and golden ecosystem with the Street not seeing the broader golden vision at the time. We believe FSD and the Supercharger network are worth an incremental $75 per share to the Tesla story over the next 12 to 18 months and the Street will start to factor this dynamic into the stock as Tesla executes on its strategic vision with the next phase of the growth story abound.”
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In other analyst actions:
* BMO’s Fadi Chamoun lowered his target for Chorus Aviation Inc. (CHR-T) to $4.15 from $4.75 with an “outperform” rating. The average target on the Street is $3.76.
“CHR is on track to meet its 2023 financial targets and is well positioned to continue transitioning its asset leasing operations into a more scalable and higher ROE [return on equity] asset-light model,” he said. “While we are reducing our 12-month target price to $4.15 from $4.75, in large part to recognize lower valuations in the aviation sector, we note that CHR’s highly contracted business model and favorable long-term outlook should continue to support significant upside from current levels.”
* After updating her estimates to account for the updated technical report for its Copper Mountain mine, BMO’s Jackie Przybylowski cut her Hudbay Minerals Inc. (HBM-T) target to $8.50 from $9.50, below the $9.71 average, with an “outperform” rating.
“Hudbay has taken a more conservative approach as compared with the previous owner’s 2022 technical report,” she said. “This is consistent with previous company commentary and we do believe that Hudbay considered a more conservative approach in its acquisition price for Copper Mountain.”
David Leeder