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

Industrial Alliance Securities analyst Elias Foscolos said the second-quarter results for TSX-listed Energy Services companies reflected recent “drastically” reduced spending in North American oil and gas.

However, he said the Canada Emergency Wage Subsidy as well as cost cutting maneuvers and other cash flow management initiatives “provided a material boost for several companies.”

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“The expected shape of a recovery in drilling activity is still unclear, but we believe that E&Ps will prefer to pay down debt and bring back shut-in production as commodity prices improve, as opposed to drilling new wells,” said Mr. Foscolos in a research note released Monday.

“Growth will also be constrained by access to capital markets, which will likely be limited until there is line of sight for a sustained period of more supportive fullcycle E&P economics. We are not forecasting drilling to return to pre-pandemic levels in the U.S. any time soon and our 2021 rig forecasts remain essentially at or below the low end of the five-year historical range. In Canada, drilling was at a five-year low in the second half of 2019, and we believe that rig counts in 2021 will remain below 2019 levels. Increasing rig counts through H2/20 and 2021 will reflect a post-pandemic return of shut-in production.”

Following a quarter that saw year-over-year declines in revenue of 36 per cent and EBITDA of 62 per cent for companies in his coverage universe, Mr. Foscolos lowered his rig count assumptions for both Canada and the United States.

“We are tempering our expectations for Canadian drilling in H2/20 and 2021, and in the U.S., we are forecasting a slower pickup than we had previously, pushing our recovery profile further to the right,” he said. “The week before last, U.S. land rig count trended positively for the first time since March with a 10-rig week-over-week gain. Last week, rigs in the U.S. were flat despite Hurricane Laura hitting the U.S. Gulf Coast, causing production shut-ins. We remain cautious, but we are building in a gradual improvement through Q4/20 and H1/21 before more meaningful rig additions in H2/21.”

With those changes, Mr. Foscolos made “minor” estimate revisions for several companies, noting he’s taking a “cautious approach to forecasting a recovery.”

Currently, based on valuation adjustments, he adjusted his target prices for four stocks.

Mr. Foscolos raised the following:

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* Pason Systems Inc. (PSI-T, “hold”) to $7 from $6.50. The average on the Street is $8.29.

“As PSI is a pure-play drilling technology company, excluding small early-stage investments outside of the energy space, we expect it to lag in the recovery in energy markets,” he said. “Commentary from the Company is consistent with this thesis, suggesting that the drilling market will bottom in Q4/20 (iA est: Q3/20) and gradually recover through 2021. PSI maintains large cash reserves and has no debt, and has also adjusted its dividend and cost structure downward to account for medium-term expectations. Weighing weakness and uncertainty in the North American drilling market against safety in the balance sheet (the Company has $2.00/share in cash), the stock will likely be in the penalty box for a while.”

* Shawcor Ltd. (SCL-T, “hold”) to $4 from $3.75, which is the current average on the Street.

“SCL expects to increase its international project execution going forward, and for the base business to gradually recover, resulting in improved results in H2/20 and 2021 off of Q2/20 lows,” he said. “Beyond the execution of work already in SCL’s backlog, the outlook for large international projects remains murky, as E&Ps are unlikely to sanction new projects in the current macroenvironment. At present, we do not forecast a breach on SCL’s new debt covenants but believe that it could be close in Q4/20 when covenants are no longer waived. As such, despite a decent return profile on the stock, we are staying on the sidelines and rating SCL as a Hold.”

Mr. Foscolos lowered the following:

* Mullen Group Ltd. (MTL-T, “strong buy”) to $12.50 from $12.75. The average on the Street is $10.54.

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“MTL has continued to repurchase its shares at an aggressive rate and is on pace to max out its NCIB soon,” he said. “MTL has strengthened its balance sheet, which combined with a restored but reduced dividend should position it to pursue M&A as the market finds its footing and we begin to see price expectations between buyers and sellers converge. We now forecast that MTL will essentially meet its prepandemic guidance for 2020 on lower share count, and thus give the Company a pre-pandemic target price.”

* Secure Energy Services Inc. (SES-T, “speculative buy”) to $2.50 from $2.75. Average: $2.99.

“Anecdotal evidence suggests that production is coming back online, which should benefit SES ahead of a recovery in drilling, and SES commissioned a new feeder pipeline in Q2/20 which will add stable cash flows secured by 15-year commitments,” he said. “We do not forecast any debt covenant issues, and the biggest consideration for SES will most likely be managing its liquidity ahead of upcoming debt maturities in 2021. SES is still pursuing planned divestitures of drilling & completion-related service lines but expects that the completion of these divestitures will be delayed until 2021. A successful sale would most likely be a catalyst for the stock.”


Desjardins Securities analyst Michael Markidis thinks the Ontario provincial government’s plan to freeze rents on rent-controlled apartments in 2021 will not have a material impact on real estate investment trusts.

However, he thinks “heightened uncertainty will arguably weigh on investor sentiment until the proposed legislation is tabled in the fall.”

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“We believe those with the greatest amount of Ontario exposure (CAR, IIP and MI) will be most impacted,” said Mr. Markidis.

On Friday afternoon, Steve Clark, the province’s Minister of Municipal Affairs and Housing, announced the plan on Twitter.

“A separate statement issued by the government, which to our knowledge was not broadly disseminated, suggests the scope of the proposal will be limited to the maximum increase that can be levied on existing tenancies without the approval of the Landlord and Tenant Board (LTB),” said Mr. Markidis. “Based on the prescribed formula, we believe the rent increase guideline for 2021 would otherwise have been 1.5 per cent. Should this be the case, a landlord’s ability to set the rent at market on turnover should be preserved.”

" At 80 per cent, MI and IIP derive the greatest proportion of their revenue from unfurnished suites at rental residential properties in Ontario. CAR’s (50 per cent) concentration is also significant. KMP (20 per cent) and BEI (7 per cent) are least exposed. We have adjusted our NOI outlooks to account for the anticipated reduction in renewal spreads that will be captured next year. The impact to our 2021 FFO/unit estimates is not material.”

Calling a “populist political move,” Mr. Markidis trimmed his target price for a pair of REITS due to “anticipated multiple contraction in response to this announcement.”

He moved Canadian Apartment Properties Real Estate Investment Trust (CAR.UN-T, “buy”) to $55 from $58. The average on the Street is $56.56..

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His target for Minto Apartment Real Estate Investment Trust (MI.UN-T, “buy”) slid to $23 from $24.50. The average is $23.97.


In response to stronger-than-anticipated third-quarter results, Desjardins Securities analyst Doug Young raised his financial expectations for Canadian Western Bank (CWB-T).

“Cash EPS and pre-tax, pre-provision (PTPP) earnings topped our estimates, driven by better-than-expected NIMs and a lower PCL rate,” he said. “The AIRB transition remains on track for FY20.”

On Friday, the bank reported cash earnings per share of 74 cents, blowing past both Mr. Young’s 48-cent projection and the 58-cent consensus estimate. Its provision for credit losses rate of 0.33 per cent also beat his expectation (0.5 per cent).

The results prompted him to increase his cash EPS forecast for both 2020 and 2021 to $2.77 and $2.70, respectively, from $2.37 and $2.54 previously.

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Maintaining a “buy” rating for CWB shares, he hiked his target to $30 from $26. The average on the Street is now $28.64.

“Valuation is compelling, an improved funding mix should help temper NIM compression and the conversion to calculating RWA under the AIRB methodology remains on track for approval by year-end FY20,” the analyst said. “That said, CWB’s exposure to western Canada, while lower versus a few years ago, remains a concern.”

Elsewhere, Scotia Capital’s Meny Grauman raised his target to $29 from $25 with a “sector perform” rating (unchanged).

Mr. Grauman said: “Heading into reporting, the Street was looking for margin pressure to weigh on CWB’s Q3 results given significant pressure from rates and the bank’s outsized reliance on net interest income. This expectation was further solidified by management commentary during the Q2 earnings call which noted that the bank’s April NIM was 10 bps below the Q2 average. And yet, the bank’s Q3 margin actually came in flat to Q2 as rate pressure was offset by lower funding costs on both branch-raised and broker deposits. Management expects Q4′s margin to be roughly in line with Q3, and while we expect further (modest) downward pressure in F2021, there is no doubt that margins will be less of a headwind than we (or the Street) had expected.

“We adjust our forward numbers to reflect the beat to our forecast and a better outlook for margins. We continue to be conservative on credit, especially in the first half of next year. While we expect impairments to accelerate, only a very small fraction of those impairments should be written off.”


Skeena Resources Ltd. (SKE-T) is “revitalizing a Canadian classic,” said Canaccord Genuity analyst Michael Pettingell.

He initiated coverage of the Vancouver-based junior mineral exploration/development company, which is focused on its flagship Eskay Creek gold project in the Golden Triangle region of B.C., with a “speculative buy” rating.

Skeena acquired a 100-per-cent interest in Eskay, a past producing mine, from Barrick Gold Corp. in 2017.

“With Skeena actively advancing the project to prefeasibility, the focus has shifted from underground to open pit, where an updated resource estimate and subsequent PEA (2019) have outlined 2.9 million ounce of high-grade, pit-constrained mineralization,” he said.

“We see significant upside to the project’s current global resource and, in turn, the project scope outlined in the 2019 PEA. This within the context of (1) ongoing drilling (more than 90,000 metres) extending the project’s known mineralized zones; (2) the potential to uncover additional centres of new mineralization within/outboard of the mine area; and (3) drilling within the imposed buffers surrounding historic workings/stopes, where high-grade mineralization is known to exist.”

Mr. Pettingell sees “attractive” project economics and called Eskay “a clear standout amongst its peer group, given it’s one of the highest-grade open pit development projects held by a junior.”

“Relative to its peer group, Eskay has a comparatively low initial CAPEX (2019 PEA: $303-million) with AISCs largely in line with that of the group average,” he said. “We further highlight the project’s established infrastructure (access, power etc.) within a well developed mining jurisdiction, as another clear distinguishing factor.”

The analyst set a $5 target for Skeena shares. The current average on the Street is $4.62.


After a period of underperformance, the risk-reward proposition for Beyond Meat Inc. (BYND-Q) is “more balanced,” according to Citi analyst Wendy Nicholson.

Since initiating coverage of the Los Angeles-based company in early July, its shares have slid 10 per cent, versus an 11-per-cent rise in the S&P 500. In response to that divergence, Ms. Nicholson raised her rating to “neutral” from “sell.”

On Aug. 4, Beyond Meat reported revenue growth for the second quarter of 68 per cent to US$113-million, exceeding the consensus projection of US$100-million despite “significant” weakness in its foodservice business due to the COVID-19 pandemic.

“Growth in the U.S. plant-based meat category in Nielsen-measured channels plateaued at 45 per cent for the last 2 months,” said Ms. Nicholson. “While BYND’s market share has ticked down as a result of increased competition in the category (especially from Impossible Foods), BYND’s year-over-year growth in Nielsen-tracked channels remains at 60 per cent plus. We note that Nielsen does not track the club store channel, which contributed to BYND’s strong reported sales growth in 2Q.”

“Given COVID-19, it seems as if many foodservice operators have chosen to streamline their menu offerings. However, as we move past the worst of the pandemic, we expect more foodservice operators will add plant-based meat offerings to their menus, and we expect BYND will get a share of that incremental foodservice business over time – both in the U.S. and overseas (particularly in China where the market is growing rapidly and BYND believes could be its next leg of growth).”

Also seeing its new direct-to-consumer site, launched last week, as a potential source of growth, Ms. Nicholson raised her target for Beyond Meat shares to US$141 from US$123. The average on the Street is US$120.31.

“Beyond Meat has a strong brand (with household name recognition related to its positioning in the meat refrigerator) and a number of relevant plant-based meat alternatives,” she said. “We believe that the plant-based meat industry is very competitive, but at this juncture, it seems as if growth in the category is strong enough and has potential to be large enough that it can support multiple brands and product offerings. Balancing our outlook for strong top line growth for the company with our still-uncertain outlook for profitability for the business, and considering the stock’s current valuation, we rate the shares Neutral today.”


Calling it a “short-term junior leveraged gold play, long-term growing intermediate player,” Echelon Capital Markets analyst Gabriel Gonzalez initiated coverage of Argonaut Gold Inc. (AR-T) with a “buy” rating.

“Argonaut Gold is currently a 200,000 ounce per year junior gold producer in the process of executing on its growth strategy to become a 325-350,000 ounce per year high margin intermediate producer by 2023/24,” he said. “The Company’s strategy cornerstone asset is the Magino gold project in Ontario, which is currently in the process of being financed, and expected to be able to produce 120-150,000 ounce per year and potentially even more – a proper intermediate-sized gold mine.”

“Argonaut currently trades at 0.4 times P/NAV [price-to-net asset value] compared to the junior peer group average of 0.7 times We believe its current discount is a lingering effect of the cancelled San Antonio project, and subsequent merger with Alio Gold to acquire Florida Canyon and avoid a production cliff which could have complicated Argonaut’s ability to finance Magino. With Magino now being solely financed by Argonaut, we see a revaluation path potentially beyond the Junior P/NAV average and towards Intermediate P/NAV valuation territory.”

Mr. Gonzalez currently sees the “right juncture for both short- and long-term investors.”

“Argonaut has been a levered play to the gold price given its relatively high operating costs in the high-third/low-fourth AISC quartile, making it an attractive short-term investment during rising gold prices,” he said. “Given the high price of gold however, it is also well-positioned to finance its development strategy under favourable terms as it evolves into a high-second/low-third AISC quartile intermediate producer, supporting increased margins and a revaluation as the gold bull market subsides.”

He set a target price of $5 per share, which exceeds the $4.43 average on the Street.

“We see two main sources of return for investors: Argonaut’s leverage to a rising gold price in the short term and multiple revaluation as the Company executes on its growth strategy over the medium to longer term,” the analyst said.


CIBC World Markets analyst Nik Priebe raised the firm’s rating for ECN Capital Corp. (ECN-T) to “outperformer” from “neutral” upon assuming coverage of the stock.

“The business has demonstrated better resiliency throughout the pandemic than we had anticipated, and appears poised to deliver on strong earnings growth,” said Mr. Priebe. “If the company can deliver on its ambitious growth objectives, we see room for multiple expansion and think the stock could justifiably trade at a P/E multiple in the teens. Although we remain conservative on our estimates, we see good momentum in the company’s core businesses and a de-risked funding model with new partner commitments.”

He set a $7 target. The average on the Street is $6.92.


Analysts on the Street took a generally positive view of Rocket Companies Inc. (RKT-N) upon initiating coverage of the Detroit-based mortgage giant after coming off research restriction following its initial public offering.

Calling it a “tech driven growth story,” Citi analyst Arren Cyganovich gave the parent company of Quicken Loans and Rocket Mortgage a “buy” rating.

“Rocket has created a disruptive technology-driven process to increase the ease and speed of mortgage applications,” he said. “We expect that its recent market share gains will extend further as a large cohort of millennials will enter the first-time home buyer market in the coming years. Additionally, the capital light balance sheet creates very high returns on equity and excess capital that can be used for future M&A opportunities or share buybacks, providing potential upside to our forecasts.

Also touting its “leading brand”, Mr. Cyganovich set a US$25 target for its shares.

RBC Dominion Securities analyst Daniel Perlin also feels Rocket’s “tech-led innovation” is likely to drive market shares gains, leading him to give it an “outperform” rating and US$32 target.

“We believe the company’s proprietary technology-driven approach will enable it to continue profitably taking share in both refinanced and new purchase loans in the large and fragmented U.S. mortgage market where there are near-term catalysts from rates and demographics,” he said.

Credit Suisse’s Timothy Chiodo set a “neutral” rating and US$29 target.

“While we are bullish on the business and technology, a well-known and respected brand (marketing prowess, estimated $900-million in 2020 spend), prospects for share gains ahead, and a management team with a strong track record, we start at Neutral on valuation (up more than 50 per cent since IPO),” he said. “We look for an opportunistic entry point, further signs of purchase market share gains, and/or potential for capital allocation for more optimism on the shares.

Others starting coverage included:

  • Wells Fargo with a “equal weight” rating and US$29 target.
  • JP Morgan with a “neutral” rating and US$31 target.


Several firms on the Street also initiated coverage of cloud services firm Rackspace Technology Inc. (RXT-Q) after a restricted period following its early August IPO.

Seeing the Texas-based company as “tethered to a large addressable market” and touting “positive mix shift dynamics,” RBC Dominion Securities analyst Daniel Perlin gave Rackspace an “outperform” rating and US$29 target. The stock closed at US$19.33 on Friday.

“We believe RXT’s current valuation only gives credit to where the company is today in its transition, but does not underwrite the positive mix shifts that are occurring in the underlying business,” said Mr. Perlin. “We believe the stock can re-rate higher, as additional proof-points of the transition emerge.”

Citi’s Ashwin Shrivaikar gave it a “buy” rating and US$24 target.

“Rackspace’s sustained investments in the large and growing multicloud end market – in technology, service levels, partnerships, and sales – put it in a good position to sustain a healthy level of bookings and grow at above-market rates, with eventual flow-through to profits and cash flow (capital discipline and debt pay-down also help FCF growth),” he said. “We acknowledge that bookings growth inflected within the past 12 months and revenue growth more recently … and so execution risk must be considered. In our view, the current valuation (approximately 9 times 2021 EV/EBITDA) mitigates the execution risk. So we view RXT as an asynchronous opportunity with limited valuation downside from current levels and material upside possible if Rackspace executes and earns the higher valuation (over 12-24 months) that such performance should deserve.”


In other analyst actions:

* Echelon Capital Markets analyst Douglas Loe downgraded Acasti Pharma Inc. (ACST-X) to “sell” from “speculative buy” after it announced its late stage study for treatment of blood fat failed to meet its main goal. His target slid to 15 cents from $1.40, which is the current consensus.

* Several firms resumed coverage of Boralex Inc. (BLX-T) following its recent $201.3-million common share offering.

They included:

  • TD Securities’ Sean Steuart with a “buy” rating and $40 target. The average is $38.09.
  • BMO’s Ben Pham with an “outperform” and $35 target.
  • Scotia Capital’s Justin Strong with a “sector outperform” and $38.50 target.


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