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

Following the release of the company’s second-quarter update last week, Industrial Alliance Securities analyst Elias Foscolos raised his rating for Mullen Group Ltd. (MTL-T) to “buy” from “speculative buy,” believing its “solid” performance reflects the company’s “resiliency in what is more or less a worst-case scenario.”

Based on the first two months of the quarter, the Okotoks, Alta.-based company announced revenue is trending lower by 22 per cent year-over-year. It's now projecting revenue of $240-$260-million, falling in line with the Street's expectations.

"The most positive takeaway was how effectively MTL is controlling its margins," said Mr. Foscolos. "The company’s operating income before depreciation & amortization (OIBDA) is trending 15 per cent below the prior year, with OIBDA for Q2/20 projected to be $40-million, excluding the expected $10-million from government wage subsidies (we have not included this item in our operating income for valuation). MTL noted that several of its business units improved margins and gained market share. MTL has rehired 20 per cent of its furloughed workforce to date, conveying sentiment that the worst is behind."

Seeing “a lot more breathing” room on its convenants and noting it continues to return value to shareholders through a “substantial” issuer bid, Mr. Foscolos raised his target for Mullen shares to $8 from $6.25. The average on the Street is $7.23.

“We believe that MTL’s solid performance to date in Q2/20 is proof of the Company’s ability to manage through cyclical lows,” he said. “The results will also take pressure off of debt covenants.”

Elsewhere, Raymond James analyst Andrew Bradford raised his target for Mullen shares to $8 from $6.50 with an "outperform" rating.

Mr. Bradford said: "We think it's safe to view the $40-million EBITDA in 2Q as base-level EBITDA for the balance of the recovery. Mullen reiterated that it is seeing improving demand in both of its trucking and logistics segments (Less-than-Truckload and Warehousing and Logistics) as consumer spending and business investment recovers from the COVID-19 induced shutdowns.

“We expect demand for MTL’s Specialty Services segment (primarily the old Oilfield segment) is likely to see a more muted response in the second half of 2020 and into 2021. The Canadian seasonally adjusted rig count remains at record lows and the sub-US$40 WTI crude pricing environment is unlikely to inspire major changes in producer spending habits.”


In a separate note on Canadian energy services and diversified energy firms, Mr. Foscolos raised his rating for Pulse Seismic Inc. (PSD-T).

“Following last week’s pullback in markets, we believe that select opportunities remain within the sector, although we would consider most of these stocks to carry above-average risk,” he said. "We highlight MTL as our top pick, as we believe it carries the best risk-adjusted upside among its peer group.

"We are upgrading PSD from a Hold to a Speculative Buy due to share price weakness combined with reduced uncertainty due to a) amendments made to the company’s credit facility covenants and b) Q2/20 sales trending toward being similar to or better than Q1/20."

Mr. Foscolos maintained a target price of $1.40 for shares of Pulse, a Calgary-based provider of seismic data to the energy sector. That matches the consensus target on the Street.


With the shift to “hybrid healthcare” accelerating amid the COVID-19 pandemic, WELL Health Technologies Corp. (WELL-T) is emerging as a consolidator of digital health services, according to Canaccord Genuity analyst Doug Taylor.

“Taking advantage” of a pullback in price from its recent highs, he raised his rating for the Vancouver-based company to “speculative buy” from “hold” upon resuming coverage of the stock.

“The company’s VirtualClinic+ telehealth service has transformed WELL into a national provider of hybrid in-person and virtual care, with provincially insured coverage in B.C, Alberta, and Ontario, and out-of-pocket availability in other provinces,” he said. "We noted an accelerating trend of telemedicine adoption in our recent initiation report on CloudMD , and we believe WELL’s VirtualClinic+ increases the flexibility of its brick-and-mortar network of 20 clinics in delivering omni-channel healthcare. Over the coming quarters, we see more clinics adopting hybrid healthcare solutions such as WELL’s as they look to expand their practices and improve patient care delivery while complying with social distancing measures.

“Recall WELL’s OSCAR EMR software and services support 1,900 clinics representing 10k physicians across Canada. The company has consolidated OSCAR EMR services, most recently through its acquisitions of MedBASE’s EMR business in May and Indivica in June. WELL is building a platform for the digital care ecosystem, with management recently noting its pursuit for accretive, tech-enabled digital health assets in both digital patient engagement and telehealth, such as online bookings, artificial intelligence, and triage. To that point, in May the company invested $250k in, a Toronto-based digital health company, in exchange for the rights to use and sublicense its clinical assistant automation software to its OSCAR EMR userbase.”

Though Mr. Taylor trimmed his revenue expectations for fiscal 2020 and 2021, he raised his EBITDA expectations, expecting it to reach positive earnings by the fourth quarter of this fiscal year and break-even free cash flow in the first quarter of 2021.

He maintained a target price of $3.25 per share, which represents a 25-per-cent return from current levels. The average is $3.41.


Citi analyst Stephen Trent sees a “slightly” improved fundamental outlook for U.S. airlines, including “somewhat better capacity growth expectations and slightly better-than-expected seat mile cost performance.”

After raising his financial expectations across the sector, Mr. Trent increased his target price for the five companies in his coverage universe.

"In light of COVID-19s impact on aviation, key investor questions for each airline include: (A) do they have enough capital to weather the crisis; (B) as demand recovers, can they resume operations with relative ease; and (C) meanwhile, have they had to issue so much capital that it swamps the equity story?," he said. "Neutral-rated Southwest and Buy-rated Delta look most attractive on all three measures, while Sell-rated American Airlines looks less sturdy."

"Normally, fuller flights are welcome news for airline shareholders, even though passengers do not necessarily welcome such conditions. However, under the socioeconomic stresses of a pandemic, ultra-full flights could become an issue for those carriers that fill planes too often, especially if COVID-19 infections spike in areas they service. While no one knows with certainty whether there will be a meaningful second wave of infections, carriers weighing public health vs. profits could become the sector’s social investing topic of the day."

Mr. Trent made the following changes:

  • American Airlines Group Inc. (AAL-Q, “sell” to US$14 from US$9. The average on the Street is US$12.75.
  • Delta Airlines Inc. (DAL-N, “buy”) to US$38 from US$30. Average: US$35.13.
  • Southwest Airlines Co. (LUV-N, “neutral”) to US$38 from US$32. Average: US$40.25.
  • Spirit Airlines Inc. (SAVE-N, “buy”) to US$22 from US$14. Average: $14.25.
  • United Airlines Holdings Inc. (UAL-Q, “buy”) to US$47 from US$38. Average: US$38.

“Citi closes its positive catalyst watch on Spirit Airlines and maintains a Buy rating on the shares – even as we’re a few days late, a ca. 80-per-cent bounce from the open was faster and stronger than we had anticipated,” he said. “At this time, we also (A) open a 30-day positive catalyst watch on Buy-rated United and (B) a 30-day negative catalyst watch on American. Although American’s cash burn expectations have improved, its financial leverage looks excessive, while short covering might have driven the recent rally. On the other hand, United Airlines’ healthier financial leverage profile and its lower short interest mean that the shares could have an easier time finding real buyers.”


Industrial Alliance Securities analyst Neil Linsdell thinks its unlikely that rival bid for Seven Aces Ltd. (ACES-X) will materialize after the gaming company agreed to an agreement with Dallas-based Trive Capital Management LLC for $2.15 per share in cash late last week.

Accordingly, he moved Seven Aces to “tender” from “buy” with a $2.15 target, down from $2.60.

"Under the current regulatory environment, entities with gambling licenses outside Georgia would not be eligible to own Lucky Bucks, which reduces the potential bidders for Seven Aces," he said.

“Although the $2.15 offer is below our previous target price, we believe the 20 per cent-plus premium, within the context of the currently uncertain market, represents a good value to shareholders, and as such, we are revising our target price to the $2.15 offer price and recommendation.”


In the wake of Cineworld Group Inc. walking away from its $2.2-billion deal to acquire Cineplex Inc. (CGX-T), Canaccord Genuity analyst Aravinda Galappatthige expects the Canadian company to commence legal proceedings as well as focusing on stabilizing its balance sheet and revising hits credit arrangements “as many in the space have done.”

In its announcement late Friday, U.K.-based Cineworld said Cineplex breached conditions of the agreement, including failing to operate its business “in the ordinary course.”

“It appears that Cineworld is relying on two legal arguments to support its position,” the analyst said. "First, the position that Cineplex has breached its covenants under the arrangement by not operating the business in the ordinary course; second, it has invoked the material adverse effect clause in the arrangement agreement.

“On the latter, as we had published in our own prior research, the definition of ‘Company material adverse effect’ expressly excludes the outbreak of a pandemic (unless it disproportionately impacts Cineplex vs comps) in the arrangement agreement. Hence, we are skeptical of that line of argument. With respect to the point on ordinary course of business, Cineplex’s actions (staff layoffs, cashflow protection, etc.) during the current COVID19 crisis does not appear to have been materially different to other cinema chains or similar businesses affected by the conditions. Thus, the definition of ‘operating in the ordinary course’ needs to be scrutinized. In other words, how can a cinema chain operate under normal course in the midst of a pandemic with all locations shut down for months? The timing here is also interesting as Cineworld served its notice of termination just before the ICA review was expected to conclude on June 15th. On that point, Cineplex also alleges that Cineworld breached its obligations by not making a reasonable effort to obtain regulatory approval and if it had done so the transaction would have closed months ago.”

Keeping a "speculative buy" rating for Cineplex shares, Mr. Galappatthige trimmed his target to $17 from $21.50. The average on the Street is $18.43.

“In assigning a TP, we have opted for a combination of stand-alone value for Cineplex of $12 (up from $9 previously to reflect a recovery among peers) plus a valuation for the legal remedy,” he said. “Given the early stages of legal proceedings and the lack of reliable precedent on the matter, we initially assign a 25-per-cent probability to the aforementioned $20 per share value. This returns a TP of $17. We note that the standalone value of $12 is based on F2021 estimates (which are still partly affected by COVID19) and represents a blended multiple of 6.9 times EV/EBITDA. We note that our standalone value is not meant to reflect an intrinsic long-term value for Cineplex, but rather a near to medium-term trading value in the current market backdrop. One also has to consider that as part of the transaction process, Cineplex sought other buyers for the company; and while no buyer reached $34 in cash, we understand that there was interest. Hence, this too is a consideration in assessing the stock.”


Scotia Capital analyst Jason Bouvier lowered Crescent Point Energy Corp. (CPG-T) to “sector perform” from “sector outperform” upon assuming coverage of the stock from colleague Patrick Bryden.

“CPG’s implied return is now 22 per cent which is more in line with our other Sector Perform rated companies,” he said. “The current commodity price environment (WTI more than $40 per barrel) remains challenging for E&P companies as it is difficult to keep production flat while spending within cash flow. In our view, the risk increases going into 2021 as the company’s hedges roll off and cash flow falls.”

Mr. Bouvier raised his target to $2.75 from $2.50. The average is $2.86.

Concurently, Cameron Bean lowered Arc Resources Ltd. (ARX-T) and Peyto Exploration & Development Corp. (PEY-T) to “sector perform” from “sector outperform” after assuming coverage of both from Mr. Bryden.

His target for Arc slid to $7 from $8 and below the $7.78 average.

His target for Peyto is $3.50, down from $4. The average is $3.10.


Following weaker-than-anticipated first-quarter results, RBC Dominion Securities analyst Sabahat Khan is maintaining a “cautious” view toward Roots Corp. (ROOT-T) despite expecting a “ramp-up period” as stores continue to reopen.

"Beginning in mid/late-March, COVID-19 related store closures in North America weighed on DTC [direct-to-consumer] sales and stores remained closed through the remainder of Roots' fiscal Q1," he said.

“We believe that the COVID-19 related sales decline likely bottomed towards the end of fiscal Q1/beginning of fiscal Q2. Management commentary indicates that its store network is gradually beginning to reopen, albeit under social distancing guidelines. While the store re-openings are encouraging, we expect traffic trends to remain below pre-COVID-19 levels amidst social distancing guidelines and weaker consumer sentiment.”

On Friday, the retailer reported consolidate sales of $29.9-million for the quarter, down 44.9 per cent year-over-year and below the projections of both the analyst and the Street ($40.4-million and $37.5-million, respectively). Adjusted EBITDA of a loss of $7.5-million also fell short of estimates (losses of $6.8-million and $4.5-million).

“n the Q1 earnings call, management noted that it is assessing its current footprint,” said Mr. Khan. “In our view, this could include reducing the number of stores, reassessing store sizes and layouts, further optimizing its e-commerce capabilities, and offering curb side pickup for online orders. Management commentary is consistent with the broader messaging we are seeing across the retail landscape in response to COVID-19 as many consumer companies are reviewing their store network and how their stores could better serve consumers given recent shifts in consumption patterns.”

Keeping a “sector perform” rating for Roots shares, Mr. Khan raised his target to $1.50 from $1. The average on the Street is $1.66.

“Our $1.50 price target is based on 5.5 times our 2021 Adjusted EBITDA forecast of $26 million,” he said. “We are maintaining our Speculative Risk qualifier to Roots to reflect the heightened leverage amidst this challenging period. We believe our valuation multiple fairly reflects Roots’ top-line and earnings growth outlook, and a number of risks that could impact earnings. We view Aritzia as the most comparable peer and note that our valuation multiple is below Aritzia’s current trading multiple.”

Elsewhere, Canaccord Genuity's Matthew Lee raised his target to $1.25 from $1 with a "hold" rating (unchanged).

Mr. Lee said: “In our view, Roots has a brand that resonates well with consumers and will drive long-term growth. While the reopening of stores is a positive indicator (74 of 116 are now open), we opt to remain conservative on our estimates given the uncertainties around COVID-19.”


Believing its risk/reward profile has improved “significantly,” Scotia Capital analyst Benoit Laprade raised Pinnacle Renewable Energy Inc. (PL-T) to “sector outperform” from “sector perform.”

"The strong growth outlook for industrial wood pellet demand remains virtually unchanged at an 15-per-cent CAGR (2018-2022)," he said. "PL's own strong revenue and adjusted EBITDA growth should resume shortly on the back of (1) its largest plant (Entwistle, Alberta) ramping up to capacity following a full restart in Q4/19; (2) two new facilities to be commissioned in Q4/20 (High Level, Alberta) and Q2/21 (Demopolis, Alabama), increasing capacity 64 per cent from 2019 and bringing capacity outside of British Columbia to about 44 per cent; and (3) benefits of investments in fibre procurement mitigation initiatives, strategic fibre inventory, and harvest residuals processing equipment, compounded by efficiency gains in the processing of harvest residuals."

Mr. Laprade maintained a $7.50 target for Pinnacle shares. The average is currently $7.


In other analyst actions:

Piper Sandler analyst Brent Bracelin upgraded Shopify Inc. (SHOP-N, SHOP-T) to “overweight” from “neutral” with a target of US$843, up from US$733. The average on the Street is US$733.40.

RBC Dominion Securities upgraded Major Drilling International Inc. (MDI-T) to “outperform” from “sector perform”

CIBC World Markets analyst Kevin Chiang raised TFI International Inc. (TFII-T) to “neutral” from “underperformer” and raised his target to $47 from $38. The average is currently $48.37.

National Bank Financial analyst Greg Colman cut Tervita Corp. (TEV-T) to “sector perform” from “outperform” with a $5 target, up from $4.75. The average is $4.85.

Mr. Colman lowered Pason Systems Inc. (PSI-T) to “sector perform” from “outperform” with a $10 target, exceeding the consensus of $8.42.

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