Equity analysts at Industrial Alliance Securities unveiled their “Top Picks” for 2021 in a research note released Wednesday.
The list of 18 Canadian equities were chosen from the 124 names in the firm’s coverage universe and are meant to be the best ideas by sector.
While the research firm didn’t provide performance data on its 2020 top picks, it highlighted some accomplishments by its equity team last year: “Despite the struggles of the last year, iA’s Research Group did enjoy a few bright spots,” said Head of Research Niel Linsdell. “The team continued to be recognized for its stock picks and analysis. In the Canadian StarMine Analyst Awards, Elias Foscolos was ranked the #1 Stock Picker in the Oil, Gas & Consumable Fuels segment, as well as the #2 Top Stock Picker in Energy Equipment & Services. This is Elias’ third consecutive year in being recognized by StarMine. In September, we welcomed Frederic Blondeau to our Research Team. Fred was also recognized by Starmine in 2020 as the #1 Stock Picker in Equity Real Estate Investment Trusts (REITs).”
The firm’s selections are:
Diversified Industries
Aecon Group Inc. (ARE-T, “strong buy” rating, $24 target)
Mr. Linsdell: “Aecon was initially impacted during the pandemic lockdown as certain provinces halted construction activity and as the airport in Bermuda, which Aecon runs, halted flights. Although no projects in the Company’s backlog have been cancelled, only delayed, the shares have continued to trade below pre-pandemic levels. With a current backlog of $6.7-billion and active bid pipeline of over $40-billion, we see the Company as well positioned for the next few years, with the flexibility to pick and choose which projects to bid on, which reduces the need to take on risky or lower-margin contracts. In addition, we expect that the Canadian government will once again turn to infrastructure projects to help revive the economy post-pandemic, providing even more opportunities for Aecon over the coming years.”
Premium Brands Holdings Corp. (PBH-T, “buy” rating, $115 target)
Mr. Linsdell: “Premium Brands Holdings had both positive and negative impacts at the start of the pandemic. While sales to food service, airlines, and cruise ship customers declined, retail demand picked up as more people ate at home, and even opted for premium food offerings as an alternative to restaurants. Although Premium Brands initially paused its M&A activities, by the end of August the Company was back on track, announcing two acquisitions from its pipeline of 66 transactions that were indicated to include potential revenue contribution of over $10-billion, which would definitely help to support the Company’s 2023 targets of $6-billion in revenue (up from $4-billion in 2020e) and $600-million in Adj. EBITDA (up from $286-million in 2020e). Most recently, Premium Brands also announced the acquisition of Clearwater Seafoods, with a coalition of Mi’kmaq First Nations, in a transaction valued at $1-billion. This significantly boosts Premium Brands’ seafood operations, leveraging other recent acquisitions and capacity expansions, aswell as diversifying sales internationally.”
Real Estate and REITs
Canadian Apartment Properties REIT (CAR.UN-T, “buy” rating and $59.50 target)
Calling it the “ultimate ‘low operating vol’ pick,” analyst Frederic Blondeau said: “Management mentioned seeing greater amounts of potential acquisitions both in Canada and the Netherlands. Post-Q3/20 financial results announcement, management indicated that the REIT had closed on acquisitions located in Ottawa ($96-million), Vancouver ($29-million), and Halifax ($12-million). That said, the REIT continues to focus on risk management in the current environment, notably in regards to its development pipeline. In the meantime, the portfolio continues to perform exceptionally well. More specifically, overall SS-AMR [comparable average monthly rent) increased 3.3 per cent year-over-year in Q3, while Total Operating Revenues increased 2.8 per cent. Total Operating Expenses increased 0.5 per cent , resulting in an overall SS-NOI increase of 4.0 per cent.”
InterRent REIT (IIP.UN-T, “buy” rating and $18.50 target)
Mr. Blondeau: “Although risks remain material, we ... think that the margin of safety is appreciable. More specifically, management indicated that the REIT was able to collect 99 per cent of rents due for Q3/20, while trends for October and November were in line with previous months. As at Q3/20, the REIT had access to $38.5-million in cash, as well as $292.0-million of available credit, while D/GBV [debt to gross book value] was a very conservative 30.9 per cent.”
Healthcare and Biotechnology
Protech Home Medical Corp. (PTQ-X, “buy” rating and $3.20 target)
Analyst Chelsea Stellick: “PTQ trades at a significant discount to its peers (6.0 times vs. 11.0 times fiscal 2021 estimated EV/Adj. EBITDA), which we believe is unwarranted given its strong track record of successfully improving profitability.”
HLS Therapeutics Inc. (HLS-T, “buy” rating and $35 target)
Ms. Stellick: “HLS had an extremely active year, most notably in the advancement of Vascepa. HLS expanded its private payor coverage to full-label coverage with 50 per cent of the lives covered by private drug plans, including 49 per cent in Ontario and 61 per cent in Quebec, the country’s two biggest markets. While subject to the impacts of COVID-19 in 2021, we expect potential public reimbursement for Vascepa sometime in mid-to-late 2021. In December, Health Canada approved the MyCare Psychiatry Lab Assays for use in diagnostic lab settings. This diagnostic tool allows for the measuring and monitoring of blood concentration levels of the most commonly used antipsychotics (clozapine, risperidone, quetiapine, aripiprazole, olanzapine and paliperidone). The point of care (POC) device is currently still under review and could be approved in H1/21. We expect that, if approved, the device will launch in H2/21. Vascepa and Clozaril will increasingly dominate HLS’s performance and we anticipate strong growth in both of these products to drive accelerating top line and bottom line growth throughout 2021.”
Power and Infrastructure
Northland Power Inc. (NPI-T, “buy” rating and $51 target)
Analyst Naji Baydoun: “Overall, we view NPI as the best investment vehicle for investors to gain exposure to the offshore wind investment theme, which supports strong long-term growth. NPI offers investors an attractive mix of (1) stable cash flows from contracted power assets (more than 2GW net in operation, 10-year weighted average contract term), (2) healthy FCF/share growth (4-7 per cent per year, CAGR [compound annual growth rate] 2019-24E, excluding the Taiwan offshore wind projects), (3) longer-term potential upside from organic development activity and accretive M&A, and (4) an attractive dividend profile (3-per-cent yield, 50-70-per-cent FCF payout through 2024). We believe that NPI’s competitive positioning in the offshore wind market will help the Company successfully source and execute on new large-scale development projects over time, which could drive substantial long-term growth. We expect further updates from NPI at its upcoming Investor Day in early 2021, which could provide investors with greater visibility on the overall outlook.”
Brookfield Infrastructure Partners LP (BIP.UN-T, “buy” rating and US$52 target)
Mr. Baydoun: “BIP remains a well-diversified vehicle for investors to play the broader infrastructure investment theme, with (1) access to a global infrastructure platform (ownership in more than US$30-billion of assets), (2) defensive regulated/contracted cash flows (95 per cent of funds from operations), (3) visible cash flow growth (6-9 per cent per year, compounded annual growth rate 2019-24E), and (4) attractive income (4-per-cent yield, 60-70-per-cent FFO payout, and a 5-9 per cent per year dividend growth target). We expect 2021 financial performance to be materially stronger year-over-year, driven by (1) dissipating macro headwinds that impacted 2020 results (e.g., forex headwinds, COVID-19-related impacts), and (2) greater than US$1-billion of recently completed external growth initiatives. Furthermore, we see the potential for BIP’s growth to accelerate as capital recycling initiatives and M&A activity return to more normal levels in 2021. We continue to see BIP as a standout growth vehicle for long-term shareholders in the current macro-economic context.”
Oil and Gas Services and Energy Infrastructure, Utilities and Midstream
TC Energy Corp. (TRP-T, “strong buy” rating and $70 target)
Analyst Elias Foscolos: “Since the onset of COVID-19, TRP’s outlook has essentially not changed. The Company provides investors with stable cash flows, largely underpinned by regulated or long-term contracts, which have enabled the delivery of near-record financial results to date in 2020. At TRP’s 2020 Investor Day held in November, the Company highlighted its growth guidance, projecting DPS growth of 8-10 per cent in 2021 followed by 5-7 per cent per year thereafter, supported by growth in earnings and cash flow. Near-term growth is under pinned by $37-billion in secured capital projects through 2023. In our view, TRP’s Keystone XL pipeline project, which faces an uncertain future amidst the changing political climate in the US, is now likely priced out of market expectations, leaving investors with upside potential. It is also priced out of our outlook. As such, we believe TRP currently offers compelling risk-adjusted upside, and long term, we believe natural gas transmission & distribution infrastructure is a relatively well-positioned asset class in the changing energy landscape in terms of growth and ESG risk.”
Fortis Inc. (FTS-T, “buy” rating and $60 target)
Mr. Foscolos: “FTS’s financial results have been largely insulated from COVID-19, as regulatory decoupling mechanisms and strong residential sales, which tend to carry higher margins, have provided a good offset to lower commercial and industrial load. In our view, the Company has been negatively impacted by deferred rate proceedings at Tucson Electric Power (TEP). However, these proceedings have been resolved, which will result in new rates effective January 1, 2021, thus reducing the earnings drag. Over FTS’s five-year forecast range from 2021-2025, the Company projects $19.6-billion of CAPEX to drive 6-per-cent CAGR in rate base and dividends. We view the regulatory compact and growth outlook in the US, where FTS has 65 per cent of its rate base, favourably relative to Canada. We believe that trends in electrification, decarbonization, and resiliency, aided by policies under the incoming Biden administration, will support robust near- and long-term growth in the sector.”
Mullen Group Ltd. (MTL-T, “buy” rating and $14 target)
Mr. Foscolos: “MTL’s operations are highly diversified, with its two trucking and logistics business segments generating the majority of the Company’s revenue. Its Specialized & Industrial Services division contains the legacy oil & gas-related business lines, which are themselves diversified with minimal direct exposure to drilling. As such, MTL’s financial results have held up fairly well to date in 2020, which have been further aided by the Company’s expert control over margins. The temporary suspension and subsequent reinstatement of the dividend were likely viewed negatively by investors but allowed MTL to improve its financial flexibility. During the dividend suspension, MTL aggressively repurchased shares, maxing its NCIB, and reduced its debt. We expect MTL to continue delivering stable results moving forward, with upside to grow through tuck-in acquisitions. We find the Company’s valuation compelling, particularly given that its assets are highly concentrated in real estate and it is trading at a discount to logistics peers.”
Oil and Gas Exploration and Production
Tourmaline Oil Corp. (TOU-T, “strong buy” rating and $28 target)
Analyst Michael Charlton: “Early this year and in response to crumbling prices, Tourmaline’s management stated it would carefully monitor the supply/demand balance in conjunction with commodity prices and adjust its capital and production mix accordingly. One must ‘trust the plan’ because management at Tourmaline has seen a commodity price cycle or two in the past, and lived to prosper. At this time, the Company looks to have extremely low production costs of $9.11 per boe or $1.52 per mcfe, margins should be strong at current prices, and the outlook for higher prices can only enhance Tourmaline’s profitability. The Company’s 78-per-cent gas weighting will capture natural gas price appreciation and its significant liquids production will capture the positive outlook for rising oil prices. The Company’s $1.1-billion 2021 capital program looks to be fully funded by our $1.9-billion cash flow forecast at current prices, which we believe to be the required flexibility and provides the significant level of safety investors are presently seeking. Add in the recent dividend increase, guidance increase, and significant free cash flow on the horizon at strip pricing and we can see significant upside potential in this well-managed company with hedges in place protecting the downside. Tourmaline is pushing forward according to its plan and looks to have significant operational momentum heading into 2021 with strong production and an acquisition appetite. Tourmaline is offering free cash flow, even at strip prices, and a stable dividend yielding 3.1 per cent at today’s share price.”
Whitecap Resources Inc. (WCP-T, “buy” rating and $5.50 target)
Mr. Charlton: “Whitecap was hammered hard last year on the back of falling oil prices and its 84-per-cent liquids weighting, but with financial discipline and operational strength, the Company has been able to capitalize on opportunities. WCP has made two significant acquisitions that look to move the Company into large cap territory at $4-billion enterprise value and over 100,000 boe/d of light oil-weighted production (78 per cent), with a view to generating sustainable long-term value for shareholders.”
“At the present time, and factoring in the acquisitions, we believe that the Company is better positioned to survive any future downturn with a strong balance sheet that looks to exit the year with 1.8 times net debt/cash flow. Without risk, there can be no reward, and we believe the dividend approaching 3.4-per-cent yield is a fairly good reward in the interim as the Company maintains tremendous torque to the upside with higher crude prices ... .”
Metals and Mining
Wesdome Gold Mines Ltd. (WDO-T, “strong buy” rating and $17 target)
Analyst George Topping: “As Wesdome gets closer to a restart at Kiena (Val-D’or, Quebec) the stock will move higher. We estimate that WDO produced 95Koz in 2020, which we expect to increase to 107Koz in 2021 as Kiena is restarted. A Kiena pre-feasibility study will be the final decision maker prior to management ultimately restarting the mine, probably towards the end of 2021.”
Copper Mountain Mining Corp. (CMMC-T, “strong buy” rating and $5 target)
Mr. Topping: “From their March lows to their highs in December, copper prices rose 76 per cent and CMMC rose 445 per cent, showing how levered the stock is to rising copper prices. Next year, the Copper Mountain (CM) mine in British Columbia will increase throughput from 40ktpd to 45ktpd, the first phase of CMMC’s expansion plans. Higher grades (2020E: 0.29-per-cent Cu, 2021E: 0.32-per-cent Cu) are anticipated earlier in the mine plan, which are well-timed with higher copper prices. We see copper production increasing from our 4Mlbs this year to 90+Mlbs next year.”
Agnico Eagle Mines Ltd. (AEM-T, “strong buy” rating and $142 target)
Analyst Puneet Singh: “Agnico posted a strong rebound in Q3 after operational issues and pandemic-related shutdowns weighed on the stock in H1/20 but gold’s pullback in H2/20 held the shares back from fully recovering. This year, AEM’s investors will benefit from one of the highest year-over-year growth profiles amongst its Senior peers with gold production expected to increase from 1.7Moz to 2.0+Moz led by AEM’s expanding Nunavut operation.”
Osisko Gold Royalties Ltd. (OR-T, “strong buy” rating and $24 target)
Mr. Singh: “Osisko Gold Royalties spun out its development assets, which included the Cariboo gold project, into Osisko Development Corp. (ODV-X, Not Rated) last year, however, market reaction was muted. OR has the largest portion of NAV in low-risk jurisdictions (80 per cent plus of NAV in Canada and the US) and the best year-over-year (30 per cent) royalty sub-sector growth and per annum (more than 20 per cent) growth over the next five years. Thus, we would expect royalty purists to gradually return as funds flow moves down capitalization into the higher growth and heavily discounted (trades below NAV) OR in 2021.
Quantitative Technical Analysis Top Picks
Premium Brand Holdings Corp. (PBH-T)
Analyst Joseph Farrell: “The stock is lifting out of the two-year trading range highlighted just above $100.00. A sustained breakout projects further technical upside back to the early 2018 high just below $123.00.”
Lundin Mining Corp. (LUN-T)
Mr. Farrell said: “The stock is probing the top of the decade-long trading range at the $10.00 zone. A sustained breakout would target further technical upside to a retest of the 2007 high just below $15.00.”
David Leeder