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

Calling it a “finely tuned machine,” RBC Dominion Securities analyst Alexander Jackson thinks Russel Metals Inc. (RUS-T) offers a “compelling” investment opportunity at its current valuation.

Accordingly, he initiated coverage of the Mississauga-based company with an "outperform" rating in a research report released Monday.

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“Russel is a top-ten metals distribution and processing company in North America by revenue and has an existing network of facilities located close to customers,” said Mr. Jackson. “Russel has established relationships with both customers and suppliers, scale to maintain a wide and deep inventory of products, and value-added processing capabilities to attract and retain business. Russel also has experienced management who understand how to manage inventory and operations through the cycle.

“Russel shares offer unique exposure to the cyclicality of the steel market whereby shareholders will benefit from share price appreciation in an upswing as earnings rise with steel demand and prices (earnings have a 0.73 correlation coefficient with steel prices), but generate cash to meet near-term obligations in a downturn. In down markets, when steel prices and revenues are falling, Russel tends to generate strong operating cash flows via working capital as the company collects receivables and reduces inventory levels to match demand. On a shorter-term basis, this works well to protect the dividend and meet near-term obligations.”

Seeing it providing leverage to a recovery in both the steel and energy markets, Mr. Jackson set a target price of $22 for Russel shares. The average on the Street is $19.25.

“Russel shares are trading at 9.6 times 2021 estimated price-to-earnings versus peers at 12.8 times and its historical average of 13.0 times,” he said. “On an EV/EBITDA basis, the shares are trading at 6.8 times our 2021 estimate versus peers at 9.0 times and its historical average of 8.0 times. Our $22 price target implies a 7-per-cent dividend yield, in line with the historical average of 6 per cent.”

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Seeing reduced uncertainty and risks, CIBC World Markets analyst Oscar Cabrera raised Turquoise Hill Resources Ltd. (TRQ-T) to “outperformer” from “neutral.”

“TRQ’s updated Oyu Tolgoi feasibility study (OTFS20) summary (technical report to be filed in 45 days) and revised Hugo North mineral reserves have improved our confidence on OT’s revised mine plan, with two structural pillars north and south of Panel 0 designed to protect ore handling infrastructure,” the analyst said. “Also, the exclusion of the Tavan Tolgoi (TT) power plant capex nder the amended Power Source Framework Agreement (PFSA) with the Government of Mongolia (GoM) has improved TRQ’s liquidity, reducing nearterm funding requirements. Lower mineral reserves from Hugo North have reduced recoverable copper production by 18 per cent. However, this was more than offset by a lower funding requirement by the end of 2020 ($1.6-billion) and a lower OT discount rate (12 per cent vs. 14 per cent previously). We expect the market focus to shift to project execution and the OT definitive estimates in H2/20.”

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Mr. Cabrera increased his target to $1.60 from 85 cents. The average on the Street is $1.59.

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Desjardins Securities analyst Bill Cabel expects Northland Power Inc.‘s (NPI-T) three offshore wind assets to underperform in the second quarter, prompting him to lower his earnings projection for the Toronto-based company.

“With June complete, we now have a solid view of 2Q wind speeds in the North Sea as well as production on NPI’s three offshore wind (OFSW) assets,” he said. “As usual, we use the Gemini asset’s actual production data, as provided by its app, vs our estimate of LTA for the quarter, and apply the relative performance to NPI’s two other OFSW assets in the North Sea. We believe the data is a reasonably good proxy for their production. Combined, these three assets are expected to contribute 50 per cent of our 2Q20 EBITDA estimate — note that 2Q is generally a seasonally weaker quarter for wind assets.

“Overall, based on Gemini’s data, it appears reasonable to conclude that wind resources for all three OFSW projects were very likely well below LTAs. Gemini came in almost 15 per cent below our estimate of LTA for the quarter and we therefore believe a similar decline is highly likely at Nordsee One and Debu. While we recognize that the three OFSW farms could experience different wind resources, we have decreased our expected 2Q20 generation for all of NPI’s OFSW assets. We have reduced our generation estimate for all three assets by 15 per cent — in line with the difference between Gemini’s actual production, as per the app, vs our expectation of Gemini’s LTA in the quarter.”

Mr. Cabel trimmed his EBITDA estimate for the quarter to $228-million from $246-million, but he emphasizing any share price weakness stemming from quarterly misses should be taken advantage of by investors.

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Calling NPI “a preferred name as we remain bullish on offshore wind over this coming decade,” he maintained a “buy” rating and $36 target for Northland shares. The average on the Street is $33.58.

“We expect significant global offshore wind growth over the next decade and believe NPI is the best way for Canadian investors to play the space,” he said. “Further, we believe there is valuation upside potential from the offshore wind assets. Coupled with NPI’s unwarranted discounted valuation (given its significant growth pipeline), we believe the current share price offers an attractive buying opportunity.”

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Though the rising popularity of camping stemming from the COVID-19 pandemic has created a new pool of potential buyers, Citi analyst Shawn Collins thinks the current valuation for recreational vehicle companies "appears stretched" at "heightened levels without discounting for potential economic softness in 2H20 and beyond from the impact of COVID-19."

"RVs are a consumer discretionary purchase with a high ticket price, ranging from $25,000 to $125,000," he said. "Given potential middle-American economic duress, we expect consumers to become net-net more cautious about such high priced expenditures over time. In 2009, the three public RV companies experienced an average drop in Sales of 40 per cent and it took several years for Sales levels to regain their peak from prior to the GFC. We do not expect the same level of sales decline, but nonetheless we are concerned about potential softness in results over the next several years."

In a research note released Monday, Mr. Collins said a broad U.S. consumer survey found that of consumers planning to buy an RV in 2020 prior to the pandemic, three quarters are now more likely to make a purchase.

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"RV Sales in the month of May and June have been as strong as ever as the industry experienced pent-up demand from the April closing of the economy," he said. "In addition, new RV customers have emerged."

"Since 2010, RV growth has been at a robust CAGR [compound annual growth rate] of 9, where 457k RVs were sold in 2019. Favorable demographic trends (+Baby Boomers, +Millennials), the cost effective nature of an RV vacation (ex-airfare, hotels, and restaurants), and access to Internet-anywhere are behind the strong growth in the industry."

Despite that potential, Mr. Collins initiated coverage of the industry with a "neutral" rating, despite acknowledging their stocks are on "quite the ride."

"Over the past 5 years, RV stocks have returned almost 100 per cent from 2015 to 2019 (versus S&P 500 return of 50 per cent)," the analyst said. "Over those 5 years, the stocks moved more than 50 per cent in three of those five years (up 2 times, down 1 time). Beta for the group is 1.5 times. Trading in 2020 has been no exception. At one point, RV stocks were down as much as 55 per cent (March 18) and are currently up 25 per cent in 2020-year-to-date on average. The RV industry is viewed as a leading economic indicator."

He set "neutral" ratings for the three stocks in his coverage universe, pointing to "expected economic softness driven by the COVID-19 outbreak." They are

  • Thor Industries Inc. (THO-N) with a US$118 target. The average on the Street is US$110.29.
  • Winnebago Industries Inc. (WGO-N) with a US$74 target. Average: US$66.50.
  • LCI Industries (LCII-N) with a US$130 target. Average: US$110.50.

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In a separate note, Mr. Collins initiated coverage of Harley-Davidson Inc. (HOG-N) with a “buy” rating, seeing the potential for a turnaround and a “compelling” risk-reward proposition for investors.

“Harley is an iconic American brand but even before Covid the company faced headwinds in the U.S. market (65 per cent of sales), including five years of declining sales driven by demographic headwinds and increased competition. The recent stock price collapse reflects a likely further near-term collapse in volumes and margins but gives no credit for the significant turnaround potential under a new CEO. We expect further details at the next earnings report in July. The new CEO, Jochen Zeitz’s track record and marketing acumen as CEO of PUMA sporting goods (Germany) augurs well.”

Though he emphasized investment concerns exist, Mr. Collins thinks the potential for a recovery has not yet been priced in.

“By turnaround, we mean that Sales stabilize and Margins get back closer to levels experienced in 2016 (15-per-cent HDMC EBIT margin in 2016) versus recent Margins (7-per-cent HDMC EBIT margin in 2019),” he said. At current valuation levels, Harley does not need to gain significant market share or grow new lines of business in order reward an investor. The new management should look to stabilize the business and use the one-of-a kind 117 year old brand (with a dominant 50-per-cent market share in U.S.) to its advantage. Our base case calls for an EBITDA level of $500-million in 2022 compared to $800-million in 2017. This type of stabilization or turnaround would reward a patient Harley investor.”

Mr. Collins set a target of US$33 per share. The average is US$24.11.

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Pointing to organic tailwinds in a fragmented market and seeing it as a potential takeout canidate, Canaccord Genuity analyst Tania Gonsalves initiated coverage of Kentucky-based Protech Home Medical Corp. (PTQ-X) with a “buy” rating.

“Protech Home Medical is a U.S. distributor of durable medical equipment (DME), namely non-invasive ventilation (NIV), oxygen concentrators and positive airway pressure (PAP) machines to manage respiratory disorders at home,” she said. “Over the past six years, it has acquired $75-million in sales (net), which together with organic growth has brought run-rate revenue to $100-million today. Management targets doubling sales to $200-million-plus and expanding EBITDA margin from 20 per cent to 25 per cent in 3-5 years. We believe this is achievable given PTQ’s net cash of $14-million (post-$32-million equity offering in June), which alongside FCF we estimate is sufficient to acquire $12-million in sales per year.

"Should the stock continue to trade at less-than 5 times forward EBITDA versus peers at more than 10 times, we believe it will catch the eye of larger competitors, offering an alternative exit opportunity."

Seeing its current discount to peers as “unwarranted,” Ms. Gonsalves set a $2 target for Protech shares. The average is $2.36.

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Canaccord Genuity analyst Matt Bottomley resumed coverage of a pair of TSX-listed cannabis companies on Monday.

He has a “speculative buy” rating and $2.25 target for MediPharm Labs Corp. (LABS-T). The average on the Street is $1.98.

“Although we expect 2020 to largely be a transition year for LABS, we believe that MediPharm is in the process of building a multi-national portfolio of assets that positions the company to capture cannabis extract and oil-based products demand share within the growing global market,” he said. “Specifically, we believe that the combination of the company’s pharmaceutically focused production capabilities and its position as the first Canadian extraction company to secure GMP certification in multiple international jurisdictions allow it to compete for a leading position in global medical markets while still benefiting from growth in the domestic industry. Overall, we believe the company has positioned itself as a leading global supplier of medically focused cannabis inputs and finished goods products, and the lead candidate for partnership for pharmaceutical companies looking to enter the space.”

Mr. Bottomley also has a “speculative buy” rating for the The Valens Company (VLNS-T) with a $6.50 target, which falls below the $7.06 average.

“Valens has amassed the most diverse manufacturing capabilities within the Canadian cannabis arena that, we believe, can be leveraged into a leading position in the cannabis 2.0 segment – a segment we forecast to drive industry growth in the medium-to-long term,” he said. “In our view, the company has already demonstrated the ability to generate high operating leverage as it achieved the No, profitability profile of any licensed producer in 2019. As a result, we believe Valens is well positioned to see accelerated top-line and EBITDA growth as it continues to capture an outsized portion of end-to-end product development and white-labeling business in the domestic market.”

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Calling it “a key player in the East Coast gold renaissance,” Laurentian Bank Securities analyst Jacques Wortman initiated coverage of Galway Metals Inc. (GWM-X) with a “buy” rating.

“We believe that Clarence Stream is an emerging gold camp, with significant upside potential,” he said. “Although there is a very good likelihood that the resource estimates for the North and South zones will increase in Q1/21, we conservatively assume no change from the Sep/17 resource estimate in our NAV [net asset value]. For the George Murphy (GMZ), Richard and Jubilee zones, we conceptually estimate 647,000 ounces of gold inventory may be added in the new resource based on drilling to date and the success in filling in the gaps between these zones. That said, we view our 1.31 mm ounce total resource inventory as a snapshot, with excellent potential for future growth based on all five (5) zones being open in all directions, the tendency for grades and widths to increase down plunge, and importantly, a significant number of untested regional targets. GWM’s five (5) known zones are within a 7 km strike extent, with a 4 km soil anomaly further to the SW, and numerous targets across the entire 65 km strike extent along the key Sawyer Brook Fault. On this basis, we believe Clarence Stream has the potential to be an important new gold camp.”

He set a $1.20 target. The average is $1

“In our view, GWM has benefited from both increased interest in junior gold developers and market recognition of a new frontier in East Coast gold assets,” said Mr. Wortman. “Combined with a strong management and exploration team with a proven track record, GWM is well positioned to benefit from potential continued growth in its resource base at Clarence Stream, and with success would be a likely M&A target.”

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In other analyst actions:

* Bellus Health Inc. (BLU-Q, BLU-T) was downgraded to “hold” from “buy” by Bloom Burton Securities analyst David Martin after it announced that Phase 2 Relief trial of BLU-5937 in patients with refractory chronic cough “did not achieve statistical significance for the primary endpoint of reduction in placebo-adjusted cough frequency at any dose tested.” His target fell to US$5 from US$14. The average on the Street is US$18.29.

“While the missed primary endpoint, and the resulting uncertainty re: long term competitive positioning of the BLU-5937 are disappointing, we believe there likely is a path forward for BLU-5937, and that the drug can still potentially be competitive (although class-leading positioning has become more difficult to envision),” he said.

* National Bank Financial analyst Endri Leno started Andlauer Healthcare Group Inc. (AND-T) with a “sector perform” rating and $35.25 target. The average on the Street is $34.75.

* BMO Nesbitt Burns resumed coverage of Endeavour Mining Corp. (EDV-T) with an “outperform” rating and $45 target. The average target is $40.71.

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