Equity analysts at iA Capital Markets unveiled their “2022 Top Picks” in a research report released Monday.
The list of 14 preferred equity selections is smaller than last year’s 17, due to a recent change to the company’s real estate coverage team.
The 2021 list delivered a total return of 9 per cent, outperforming the 5.2-per-cent jump in the TSX Composite Index. That result was down from a 15.7-per-cent gain in the first half of the year in an “extremely dynamic environment” that prompted analysts to adjust five of their 17 picks midway through the year.
The firm’s 14 selections for 2022 are:
Diversified Industries
* GDI Integrated Facility Services Inc. (GDI-T) with a “buy” rating and $72.50 target price. The average target on the Street is $68.21, according to Refinitiv data.
Analyst Neil Linsdell: “As society struggles to return to normalcy amid an ever-evolving pandemic, we are reminded that we will not soon take hygiene and air quality for granted. After an initial surge of enthusiasm for GDI’s intensive cleaning services, we did see a lull in 2021 as some businesses paused their re-opening plans and GDI’s Complementary Services struggled against exaggerated comps. Despite that, we remain convinced that both janitorial services and technical services will be in high demand for the foreseeable future. We are particularly focused on opportunities in HVAC, as we see air quality being a growing focus in offices, shopping centres, government buildings, sporting arenas, etc … GDI has also continued with its M&A plans as it further extends its product offering and geographic reach, specifically into the US, most recently with a sizeable acquisition in the southeastern U.S., which increased our Janitorial USA segment revenue forecast for 2022 by 71 per cent.”
* Premium Brands Holdings Corp. (PBH-T) with a “buy” rating and $145 target. Average: $148.40.
Mr. Linsdell: “We switched out Premium Brands in July 2021 as the stock had gained 26 per cent in the first half of the year. Our call was timely as PBH ended 2021 at about the same level that we had left it in July. Since then, however, the Company has continued to perform well in a difficult environment that included commodity cost inflation and labour constraints. With those 2023 targets firmly within sight, we are confidently picking PBH as a Top Pick for 2022.”
* Mullen Group Ltd. (MTL-T) with a “strong buy” rating and $16 target. Average: $15.
Analyst Matthew Weekes: “We believe that Mullen’s stock offers very solid risk-adjusted upside, particularly as we believe the relatively low-risk nature of the Company’s underlying asset base, being over 50% real estate by net book value, is not given proper credit by the market. Given the uncertainty around the Omicron variant and headwinds in certain areas of Mullen’s business, we believe that a tempering of expectations was warranted following the Q3 results and 2022 guidance update. Going forward, with Mullen’s exposure to the robust e-commerce consumer market, we believe that its operations have resilience to the downside in the event of tighter pandemic restrictions, as well as exposure to the upside if economic recovery, energy, and industrial markets are strong in the year ahead. Additionally, we believe that Mullen’s margins will improve as it integrates its acquisitions completed in 2021, which in aggregate, were some of the most significant transactions Mullen has ever done. Finally, investors that enter the stock now will receive a dividend that is currently yielding over 5 per cent, and we believe is sustainable based on our payout projections”
* Hydro One Ltd. (H-T) with a “buy” rating and $35 target. Average: $33.12.
Mr. Weekes: “Following its outperformance in 2020 in which H displayed its defensiveness, the stock underperformed its peer group and the TSX in 2021, which is likely attributable in part to lower YoY earnings growth as the prior year was heavy in tailwinds, including weather. We believe H remains on track to hit the high end of its three-year EPS growth range, and is positioned for continued growth over the long-term, underpinned by growing energy demand in Canada’s largest province and the need for more robust electricity networks to enable decarbonization. H appears to be trading at a premium to peers based on its dividend yield, however, as the Company also has the lowest payout ratio, which is an indication of its excess financial capacity, we see the stock trading at a very reasonable price on a “payout-equivalent” basis. In terms of headwinds and tailwinds, we believe that H has solid protection against inflation through its incentive-based rate framework, which adjusts rates upward annually for an inflation factor minus assumed productivity gains. As the Company is currently in a rate application for 2023-2027, we believe that it will have the opportunity to work with regulators to incorporate higher cost of capital assumptions into the cost of service rebasing as interest rates rise. Finally, although we expect some negotiation with the regulator, H’s Joint Rate Application (JRAP) has the potential to expand the Company’s rate base growth profile.”
Healthcare & Biotechnology
* CareRX Corp. (CRRX-T) with a “buy” rating and $9.50 target. Average: $9.03.
Analyst Chelsea Stellick: “Despite the rapid growth already achieved, less competition, a strengthened fulfillment network and an ageing population tailwind will facilitate further market share expansion through organic contract wins as well as tuck-in acquisitions in the highly fragmented seniors home pharmacy market. CareRx has a goal to reach $500-million in run-rate revenue (currently $370-million) and we conservatively estimate Adj. EBITDA margin to be 12-per-cent-plus, which is achievable given the opportunities for growth in bed count that can be serviced with existing infrastructure. CareRx also has a number of technology partnerships and a subsidiary that offers prescription delivery. This kind of ‘other bets’ portfolio benefits its brand value and provides moonshot opportunities to reinvest cash flow into.”
* Quipt Home Medical Corp. (QIPT-X) with a “buy” rating and $13.50 target. Average: $12.68.
Ms. Stellick: “QIPT had a steady stream of small acquisitions in 2021, which translated to a modest share price appreciation of 10 per cent for the year. However, beneath the surface the Company was preparing for more rapid expansion, which we anticipate will enable scaling up the pace of M&A as QIPT tries to beat its guidance of US$180-190-million run-rate revenue with US$38-43M run-rate Adj. EBITDA at year end on its way to US$250-million in run-rate revenue with US$63-million-plus Adj. EBITDA. Constructive steps were taken in 2021, including uplisting to the Nasdaq, requesting an increase in the size of the undrawn credit facility to US$100-million to allow for some leverage, and a key hire to lead the M&A and Integration Team.”
Power & Infrastructure
* Northland Power Inc. (NPI-T) with a “strong buy” rating and $50 target. Average: $47.83.
Analyst Naji Baydoun: “Overall, we view NPI as the best investment vehicle for investors to gain exposure to the offshore wind investment theme. NPI offers investors an attractive mix of (1) stable cash flows from contracted power assets (more than 2.5GW net in operation, 10-year weighted average contract term), (2) strong potential long-term FCF/share growth (primarily driven by offshore wind projects), (3) longer-term potential upside from organic development activity and accretive M&A, and (4) an attractive dividend profile (approximately 3.0-per-cent yield, 50-70-per-cent long-term FCF payout). We expect NPI to successfully achieve significant milestones on its offshore wind growth prospects in 2022 (particularly in Taiwan), which should further de-risk these initiatives and allow the Company to move forward with the next phase of the projects. We believe that continued progress on offshore wind initiatives should provide investors with (1) greater confidence in NPI’s ability to execute on its long-dated offshore wind growth potential, and (2) additional clarity on the value of the Company’s growth projects.”
* Brookfield Infrastructure Partners LP (BIP.UN-T) with a “strong buy” rating and US$71 target. Average: US$67.60.
Mr. Baydoun: “We view BIP as a unique and diversified way for investors to play the broad long-term infrastructure investment theme, with (1) access to a global, large-scale infrastructure investment platform (ownership interests in more than US$60-billion of assets), (2) defensive cash flows (90 per cent of FFO regulated/contracted), (3) visible and sustainable organic cash flow growth (6-9 per cent per year, CAGR 2020-25E), (4) potential upside from accretive M&A, and (5) attractive income characteristics (3.5-per-cent yield, 60-70-per-cent long-term FFO payout, and a 5-9 per cent per year dividend growth target). In 2021, BIP’s management (1) deployed more than US$2.5-billion of equity capital (a record year by our calculations), (2) delivered record financial results, and (3) executed on US$2-billion of capital recycling initiatives to fund new growth and maintain a solid balance sheet position (also a record by our calculations).We believe that the full potential value of the Company’s recent initiatives has yet to be reflected in its share price; although BIP’s shares have maintained their relative valuation premium to other publicly listed infrastructure peers, their valuation multiples have compressed to 15-times forward EV/EBITDA, 13-times forward P/FFO, and ~19-20× forward P/FCF (vs. 16 times, 14 times and 20-21 times in early 2021, respectively). Therefore, as (1) BIP’s recently completed growth initiatives begin to flow through 2022 financial results, (2) current macro-economic tailwinds continue to support strong organic growth, and (3) the Company successfully executes on its advanced-stage investment opportunities (deploying current excess capital), we see further near-term upside potential in the shares. We continue to see BIP as a standout growth vehicle for long-term shareholders in the current macro-economic context.”
Metals & Mining
* Copper Mountain Mining Corp. (CMMC-T) with a “strong buy” rating and $5 target. Average: $5.
Analyst George Topping: “The Copper Mountain (CM) mine in British Columbia has just increased throughput from 40 thousand tons per day (kptd) to 45ktpd – the first phase of CMMC’s expansion plans to increase throughput to 65ktpd. Bulk tonnage, lower-grade mines are levered towards economies of scale. CMMC remains on track to produce 100 million pounds of Cu this year at US$2.00 per pound all-in costs. The permitted Eva copper-gold deposit (Australia), an US$550-million capex, 100Mlb pa at US$2.00 per pound AISC mine plan starting in 2025 (our estimates) will be very attractive for growth, size, and FCF in a sub-$1-billion company based in safe jurisdictions– all very attractive to other producers. While the stock returned an outstanding 89 per cent in 2021, the recent pullback in copper prices allows a good entry point to enjoy the secular copper bull market.”
* Wesdome Gold Mines Ltd. (WDO-T) with a “strong buy” and $16 target. Average: $14.77.
Mr. Topping: “Wesdome was a strong outperformer when the gold price was rising and will be so once again when the commodity recovers and funds flow into the sector resumes. The Company’s excellent drilling results at both Canadian mines, strong management team, and cash flow have allowed Wesdome to attract almost all of Canada’s top, specialist knowledge-based resource funds as shareholders. The new footwall zone discovery at Kiena and down plunge extensions of the Falcon/Mine 7 zone at Eagle are both showing that the Company is consistently making and expanding on brownfield discoveries. We estimate that Eagle will produce 100Koz this year at US$1,000/oz. The Kiena mine, restarted in late Q3/21, should build to 80Koz Au in 2022 and +110Koz Au in 2023. Between Kiena and Eagle, Wesdome will be a 200-270Koz producer at sub-US$1,000/oz AISC, probably within two years.”
* Hudbay Minerals Inc. (HBM-T) with a “buy” rating and $14 target. Average: $12.71.
Analyst Puneet Singh: “Hudbay saw turbulence in 2021 mostly from sentiment related to Peru politics, and that has rendered HBM’s shares way too cheap given our outlook for copper. Mining accounts for 10 per cent of Peru’s GDP and 60 per cent of its exports. If taxes are too high, it prevents re-investment by current operators and will push others away from investing in Peru altogether, thus we believe President Castillo won’t be as harsh on miners as some are predicting. In 2022, HBM will benefit from a full year of increased copper production from its higher-grade satellite Pampacancha at Constancia in Peru that it started accessing last year, and a full year of increased gold production from its Lalor mine in Manitoba that just re-started its fully refurbished gold plant last year. The market is discounting this growth and overlooking HBM’s key Arizona catalyst in 2022. HBM’s Copper World discovery is looking like it will help Rosemont finally get the green light in a private land scenario. A PEA is expected on Copper World in H1/22 and will allow investors to ascribe value once again to the asset (currently a free option for shareholders).”
* Osisko Gold Royalties Ltd. (OR-T) with a “strong buy” rating and $25 target. Average: $23.27.
Mr. Singh: “Royalty/streamers outperformed producers in 2021 and until gold sentiment fully returns, we continue to believe these gold equities are the best play amongst the larger cap gold equities as the business model is insulated from the cost inflation producers face. Osisko Gold Royalties remains our top royalty pick. OR has the largest portion of NAV in low-risk jurisdictions and will grow GEOs 20 per cent year-over-year in 2022 and 15 per cent year-over-year on average per annum over the following five years. We note, OR’s development pipeline is also sector leading and the Company does not have to buy growth (harder to do accretive deals with higher gold prices than in years past), unlike its larger peers. Additionally, we view the downside of OR’s current share price as limited as it trades at a discount to NAV (peers trade at much higher premiums) and management is buying back stock below $15.00 per share. For long-term investors, this is the gold royalty stock to own as OR’s returns will rise along with its embedded GEO growth over the coming years.”
Quantitative/Technical Analysis
* MEG Energy Corp. (MEG-T) without a specified rating and target. Average: $15.30.
Analyst Joseph Farrell: “The stock has reversed the primary downtrend in force since 2014 to the upside and is now incurring a multi-year base breakout just below the $12.00 zone.
“A sustained breakout projects further technical upside in excess of $20.00.″
* Crescent Point Energy Corp. (CPG-T) without a specified rating and target. Average: $9.50.
Mr. Farrell: “The stock is breaking out above the neckline of a deep three-year inverse head and shoulders reversal pattern.
“A sustained breakout above $6.00 projects minimum technical upside back to the early 2018 high just below $12.00.”
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
David Leeder