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

Citi analyst Sergio Matsumoto sees an improving outlook for Restaurant Brands International Inc. (QSR-N, QSR-T) heading into 2021, pointing to “the virtuous cycle of better performance” of its 3 brands (Tim Hortons, Burger King, and Popeyes).

Believing that environment “elevates the unit economics among the franchisees, that in turn enables the long-term guidance of reaching 40,000 units in 8 years,” Mr. Matsumoto projects more upside potential in Restaurant Brands than rival McDonald’s Corp. (MCD-N) given the Street’s forward earnings recovery still lags.

In a research report released Monday, he initiated coverage of Restaurant Brands with a “buy” rating and McDonald’s with a “neutral” recommendation.

“Restaurant sector valuations are generally above pre-COVID levels reflecting the eventual recovery in earnings and EBITDA,” said Mr. Matsumpoto. “Interestingly this recovery happened sooner than expected, well before the Pfizer vaccine rollout news that began on November 9. We believe this in part reflects the resiliency demonstrated by certain companies with access to digital and off-premise, which could prove to become a source of stronger competitive position in the post-pandemic world. In contrast, many of the smaller players suffered if they had less access to capital and liquidity, or if the concepts were dependent on dine-in experiences.”

Though the analyst emphasized customer spending continues to lag pre-pandemic levels, he expects a “gradual” recovery to continue over the medium term and “pent-up demand will bring consumers to spend in dining out as we approach herd immunity threshold.”

“Earnings growth outlook (or recovery) appear as the most important driver of restaurant stock valuations, particularly because the discretionary spending that the sector captures,” said Mr. Matsumoto. “In addition, greater exposure to on-trend concepts/channels drive valuation because those companies capture more of those spending dollars. Conversely, the maturity level of the concept lifecycle appear to play a role given the wide distribution of valuation among our 22 stock sample. Names with focus on off-premise and digital are have higher valuations, and COVID-19 accentuated the need to have those capabilities.”

Mr. Matsumoto sees Restaurant Brands in a “virtuous cycle of growth and superior cash flow and dividend yields.”

“QSR’s long-term guidance is to reach 40,000 units in 8 years (by 2028), implying a 5-per-cent CAGR [compound annual growth rate],” he said. “The source of this restaurant unit growth is particularly in the international markets where QSR expects to grow in the mid- to high-teens, leveraging its international partnerships. BK has opportunity for further penetration in Europe as well as in Asian and LatAm markets. Popeyes should also see double-digit growth in the U.S. driven by the success of its chicken sandwich launch increased its brand recognition.

“QSR’s long-term guidance is organic comparable sales growth of 2-3 per cent, which adds to the 5-per-cent new unit growth mentioned above, resulting in a mid- to high-single digit EBITDA growth.”

For its Tim Hortons brand, he expects comparable sales to recover “driven by recent improvements in the core coffee menu items, as well as modernization efforts such as the installments of outdoor digital menu boards and loyalty program.”

He added: “The improvements were beginning just before the pandemic. And these efforts combined with the Canada-centric brand marketing during the pandemic should make the brand be on track for a renewed growth in the Canadian market.”

Mr. Matsumoto set a target price of US$74 for Restaurant Brands shares. The average on the Street is US$64.69, according to Refinitiv data.

He set a target of US$230 target for McDonald’s shares. The current average is US$241.92.

“[The ‘neutral’ rating] reflects earnings growth from the recently announced initiative ‘Accelerating the Arches’ that addresses guest count growth, which is offset by current valuation that already reflects MCD delivering on those initiatives and by our concern for a slow recovery in international markets,” he said.

“It is possible that restricted mobility from inoculation delays of the COVID-19 vaccine, the aspirational nature of the McDonald’s brand in slower economic environment, and the sales mix that skews to on-premise would delay sales recovery especially in emerging markets in the Developmental Licensed Markets.”


RBC Dominion Securities analyst Geoffrey Kwan has a “constructive” outlook for Canadian diversified financial companies in 2020, however he reaffirmed the fallout from the COVID-19 pandemic remains a key risk.

In a research report released Monday, Mr. Kwan said his coverage universe “could do significantly better” in 2021 following a year of underperformance.

“By sector, we think Private Equity shows the best riskreward, owing to solid NAV growth; potential catalysts, including if M&A picks up (monetizations & new investments); and discount valuations (almost all significantly underperformed our coverage in 2020),” he said. “We remove our prior cautious outlook for mortgage stocks and believe the sector could outperform in 2021 reflecting: (1) continued, but moderating, home sales and home price strength as a result of historically low mortgage rates, COVID-19 impacts and further evidence that the Canadian Government and mortgage lenders/insurers have been mostly effective mitigating COVID-19 impacts on the housing and mortgage market; and (2) potentially significant returns of capital if OSFI lifts its ban on buybacks and dividend increases/special dividends.

“We think investors should put asset/ wealth managers on their radar screen as: (1) fund flows are showing early signs of sustaining positive monthly net sales; (2) companies have potential catalysts; and (3) valuations are amongst the most inexpensive vs. historical averages within our coverage along with 3.5–8.0-per-cent dividend yields.”

Mr. Kwan said his three best ideas for the year are in order of preference:

1. Element Fleet Management Corp. (EFN-T) with an “outperform” rating and $17 target. The average on the Street is $15.88.

“We believe EFN provides investors an attractive blend of growth, defensive attributes, multiple potential positive catalysts and an attractive valuation,” he said. “We think 2021 will demonstrate the high FCF generation of the business (we estimate 5-per-cent share buybacks in 2021) and if EFN is reasonably successful winning new customers, we believe our forecasts are likely conservative and EFN’s P/E multiple is likely to re-rate higher.”

2. Brookfield Asset Management Inc. (BAM-N, BAM.A-T) with an “outperform” rating and US$52 target, up from US$51 and above the $48.25 average.

“We believe BAM can deliver double-digit NAV growth in 2021; trades at a 12-per-cent discount to NAV; and with US$76-billion in ‘dry powder’, is well-positioned to capitalize on investment opportunities,” he said. “BAM will likely be fundraising for its flagship funds in 2021 and with its new verticals (Impact funds, Reinsurance, Secondary), could further increase NAV growth via Fee Related Earnings and principal investment returns.”

3. Onex Corp. (ONEX-T) with an “outperform” rating and $91 target, up from $85. The average is $87.10.

“Onex Hard NAV growth improved to 13 per cent year-over-year, yet we see a mispriced stock as the shares trade at a 22-per-cent discount to NAV,” he said. “Onex is also well-positioned to capitalize on growth opportunities with almost US$5.5-billion in cash/uncalled committed capital (similar to BAM after adjusting for fee-bearing AUM).”

Mr. Kwan’s top “sleeper ideas” are: Fiera Capital Corp. (FSZ-T), Home Capital Group Inc. (HCG-T) and ECN Capital Corp. (ECN-T).

“While our Best Ideas have attractive riskreward profiles in our view, we recognize other stocks in our coverage could outperform our Best Ideas, but have relatively higher risks and tend to be less defensive,”

On Monday, he upgraded three stocks:

Equitable Group Inc. (EQB-T) to “outperform” from “underperform” with a $128 target, rising from $97. The average is $107.75.

“We think housing and mortgage data suggest that the start of 2021 is likely to see a continuation of strength in housing and mortgage activity, which we think should benefit EQB through higher EPS and a higher P/BV multiple. We think EQB has done a good job executing on its growth strategy (driving loan growth profitably; diversifying funding; and although it’s not a material part of earnings, diversifying into non-mortgage and consumer banking products/services),” he said.

Fiera Capital to “outperform” from “sector perform” with a $13 target. The average is $12.56.

“Fiera is one of our ‘Sleeper’ ideas for 2021 as we think the stock has the potential to have one of the highest total returns in our coverage given its discount valuation and high dividend yield (7.8 per cent), but is contingent on: (1) demonstrating more consistent positive net sales; and (2) sustaining, or ideally improving, more than 30-per-cent adjusted EBITDA margins,” he said.

Home Capital to “outperform” from “underperform” with a $36 target, up from $30. Average: $33.29.

“Home Capital is one of our ‘sleeper’ ideas for 2021 as we think the stock has the potential to have one of the highest total returns in our coverage given favorable housing/mortgage market conditions; significant excess capital; growth potential; and discount valuation. However, in order to have one of the highest total returns in our coverage in 2021, we think it will be contingent on: (1) continuing strong EPS growth and getting greater clarity on the trajectory of EPS growth as HCG is close to getting back to pre-liquidity crisis EPS; and (2) OSFI lifting its ban on share buybacks/dividend increases/special dividends as this could see HCG return a significant amount of capital to shareholders given their 19.3-per-cent CET1 ratio, which we forecast to reach almost 21 per cent at the end of 2021,” he said.

Mr. Kwan also made the following target changes:

  • AGF Management Ltd. (AGF.B-T, “sector perform”) to $6.50 from $6. Average: $6.50.
  • Brookfield Business Partners (BBU-N, BBU.UN-T, “outperform”) to US$50 from US$42. Average: US$42.29.
  • CI Financial Corp. (CIX-T, “sector perform”) to $19 from $21. Average: $20.
  • ECN Capital Corp. (ECN-T, “outperform”) to $8 from $7.50. Average: $7.35.
  • First National Financial Corp. (FN-T, “sector perform”) to $42 from $38. Average: $41.
  • IGM Financial Inc. (IGM-T, “sector perform”) to $39 from $36. Average: $36.21.
  • Power Corp. of Canada (POW-T, “sector perform”) to $31 from $29. Average: $31.57.
  • Sprott Inc. (SII-T, “sector perform”) to $43 from $47. Average: $44.22.
  • TMX Group Ltd. (X-T, “sector perform”) to $148 from $150. Average: $145.29.


In response to recent share price appreciation, RBC Dominion Securities analyst Nelson Ng downgraded Methanex Corp. (MEOH-Q, MX-T) to “sector perform” from “outperform” on Monday.

“We believe the shares have benefited from the recent surge in methanol prices, which has been largely driven by a recovery in economic activity and near-term supply constraints,” he said. “We note that global methanol prices are generally near or above the 10-year average of $350 per metric ton, and we believe prices could pull back in H1/21 as additional capacity comes online and supply constraints are resolved.

Mr. Ng did raise his financial expectations for Vancouver-based company following the release of its North America and Asia Pacific non-discounted reference prices for January, which rose 21 per cent and 16 per cent, respectively, from the previous month. His 2020, 2021 and 2022 earnings before interest, taxes, depreciation and amortization (EBITDA) estimates jumped to US$365-million, US$592-million and US$656-million, respectively, from US$344-million, US$463-million and US$582-million.

“The adjustments to our 2020 estimates reflect lower production costs and marginally higher realized prices (smaller discount from posted prices), while the increase in our 2021/22 forecast reflects Methanex’s January and Q1/21 reference pricing and IHS’ updated methanol price forecast,” he said.

“We believe that the recent surge in pricing has been partly due to supply side constraints (e.g., unplanned outages, a fire, and gas supply restrictions) and we expect the supply constraints to be resolved in H1/21. There are also two large methanol plants (CGCL in Trinidad and YCI Methanol One in the U.S.) with 2.7 million MT/year of capacity expected to start commercial operation in H1/21.”

With an increase in his methanol price assumption, Mr. Ng raised his target for Methanex shares to US$50 from US$48. The average on the Street is US$42.85.

Elsewhere, Raymond James’ Steve Hansen raised his target to US$55 from US$45 with an “outperform” rating.

“By most accounts, global methanol markets have entered full ‘fly-up’ mode, an observation reflected in the large price increases to all three regional contracts in recent weeks,” said Mr. Hansen. “While it would be easy to dismiss this move as seasonal/temporary, history also reminds us these events have the ability to persist (& deliver outsized alpha). We point to the most recent fly-up in late 2017 as case in point, an event that lasted for 14 months before prices finally retraced lower (triggered by a collapse in crude).”


H.C. Wainwright analyst Heiko Ihle sees Uranium Royalty Corp. (URC-X) “poised to benefit from improving market dynamics.”

He initiated coverage of Vancouver-based company with a “buy” recommendation, emphasizing its “reduced risk profile amid strong upside potential.”

“While royalties yield fewer risks than a traditional owner/operator model, the company still maintains added upside potential from future exploration and resource expansion,” said Mr. Ihle. “Looking ahead, we believe that URC is positioned to leverage its low-cost profile amid a potential upswing for uranium.

“URC maintains strategic investments in the debt and equity of uranium companies, as well as exposure to physical uranium through its roughly 9.6-per-cent ownership in Yellow Cake PLC (YCA.L), which holds over 9 million pounds of uranium.”

Noting Uranium Royalty’s assets do not currently provide cash flow, Mr. Ihle thinks future success will be heavily reliant on rising uranium prices.

“We believe that positive future market developments, amid persisting supply and demand imbalances, are likely to yield stronger uranium prices in the long-term,” he said.

The analyst set a target of $2.20 per share. The average is $1.60.


In a research report previewing 2021 for his coverage universe, which includes, TSX-listed transportation stocks, CIBC World Markets analyst Kevin Chiang lowered Bombardier Inc. (BBD.B-T) to “underperformer” from “neutral” with a 50-cent target on Monday. The average target on the Street is 47 cents.

“While we view BBD as a recovery name, given the share price move we have seen amongst the aviation/aerospace companies we cover the last eight weeks (up on average 40 per cent since early November), we argue a more tactical approach is required when sizing up these recovery names looking out over 2021 as the risk/reward trade-off is less compelling than it was two months ago,” he said. “As such, our downgrade of BBD reflects that: 1) 2021 is likely to be another challenging year for the company as we expect negative free cash flow (FCF) and continued levels of high debt; 2) there is an uncertain recovery path to reach sustainable FCF generation; and, 3) BBD is a “show me” story and we do not foresee any additional catalysts that are not already priced in (i.e., sale of Transportation). Our preferred names in the airline/aviation space to partake in the recovery are AC and CHR.

Mr. Ng also made raised his target price for these stocks:

  • Linamar Corp. (LNR-T, “outperformer”) to $81 from $73. Average: $66.67.
  • CAE Inc. (CAE-T, “neutral”) to $36 from $33. Average: $36.10.
  • NFI Group Inc. (NFI-T, “outperformer”) to $28 from $25. Average: $24.57.

“The key themes within our 2021 Transportation/Industrials Outlook are: 1) vaccine rollout is a tailwind for cyclicals; 2) we expect governments to maintain accommodative fiscal policies; 3) we foresee improving operating leverage as revenues rebound, accompanied by permanent cost savings; and 4) we believe M&A activity will accelerate,” he said. “Looking into 2021, our preferred names are those that benefit from the re-opening of economies, have good market positioning, and generate above average growth. Of the sectors we cover, we prefer the Canadian auto suppliers given our positive outlook for auto production and reasonable valuation. Our top picks within each sector are CP (surface transportation), AC and CJT (airlines and aerospace), WCN (waste), MRE (auto suppliers), and PKI.”


The acquisition of Austria-based lottery technology solutions provider Next Generation Lotteries AS is a “substantial step forward” in Pollard Banknote Ltd.’s (PBL-T) digital strategy, according to Canaccord Genuity analyst Robert Young.

The Winnipeg-based company announced the $50-million deal on Dec. 31, less than 24 hours after it revealed the acquisition of Compliant Gaming LLC, a leading provider of electronic pull-tab gaming systems and products to the charitable gaming market, for US$19-million.

“The acquisition of NGL is a strategic move for Pollard to assemble a complete end-toend digital lottery offering,” he said. “Pollard Banknote does not yet provide segmented disclosure of its ilottery business. That said, Pollard has highlighted iLottery as a strong driver of growth in 2020, particularly in Q3 as consumers looked for digital alternatives to their normal lottery and casino entertainment. iLottery growth from the existing customers, particularly Michigan Lottery, was compounded by ramps in Virginia and Alberta. We view the recent two acquisitions as Pollard’s management moving more urgently into the digital domain to capture lottery upside. The move is consistent with the company’s build and buy strategy.”

Pointing to “increased estimates and to reflect the strong growth in iLottery and recent peer multiple expansion, particularly Neogames,” Mr. Young raised his target for Pollard shares to $40 from $25, keeping a “buy” rating. The average is $32.67.


Though the near-term for Airbnb Inc. (ABNB-Q) “appears rosy,” Citi analyst Jason Bazinet expressed concern about its valuation, saying it looks “full.”

“Airbnb is justifiably viewed as the stock to own during the COVID recovery: 1) Prior to COVID, Airbnb was growing faster than peers, 2) During the COVID depths (2Q20), Airbnb contracted less than peers and 3) Following the COVID trough (3Q20), Airbnb recovered more quickly than peers,” he said. “This suggests – unlike OTAs – Airbnb’s 2022 revenue will likely handily eclipse 2019 revenues.”

“After COVID, Airbnb has two primary levers to keep guest demand aloft: spending more on advertising and rejiggering its fee structure to put more of the burden on hosts (and less on guests).”

In a research note released Monday, Mr. Bazinet initiated coverage of the stock, which began trading on the Nasdaq in early December, with a “neutral” rating and US$165 target.

“The market is enamored with growth stocks. And, Airbnb has all the hallmarks of a growth stock that will perform exceptionally well as the COVID vaccine rolls out,” he said. “But, we suspect after this, growth will likely slow due to host availability. Even if we are wrong, at prevailing valuations, investors need to make some remarkably aggressive assumptions to justify higher equity values. As such, we prefer to rent rather than own at these levels.”

Mr. Bazinet was one of several analysts to initiate coverage after coming off research restrictions. Others include:

* Credit Suisse’s Stephen Ju with a “neutral” rating and US$156 target.

“Over the past decade, alternative accommodations as a share of total lodging have increased from 6 per cent to 11-per-cent dollar share,” he said. “This represents in our view an ongoing shift in consumer preference away from traditional to alternative lodging. We expect this substitution effect to accelerate further due to pandemic-driven changes in behavior, with incremental consumers likely trying the category for the first time and choosing to stick after a positive experience.”

* DA Davidson’s Tom White with a “buy” rating and US$17 target.

“ABNB has created an entirely new category of travel product with its platform that enables (not just distributes) home sharing on a global scale,” he said. “The pandemic continues to disrupt travel demand but has also highlighted the uniquely adaptable/resilient nature of ABNB’s business and re-focused management on what we view as ABNB’s most critical(and perishable) competitive advantages: 1) reinforcing the company’s globally recognized brand and 2) facilitating authentic connections/experiences for guests and hosts. We expect these unique strengths, combined with a $2-trillion market opportunity for short + long-term stays, will support durable growth at ABNB for years to come and long-term EBITDA margins more than 30 per cent.”

* BTIG’s Jake Fuller with a “neutral” rating and an unspecified target.

“We’ve spent a lifetime covering OTAs and ABNB is nothing like them with a globally recognized brand (one of only a few platforms that is a noun/verb) and unique value proposition (largely proprietary inventory base),” said Mr. Fuller. “As compelling as that is, ABNB is worth as much as Expedia (EXPE: Buy, $145 PT), Hyatt Hotels (H: Not Rated), Hilton Hotels (HLT: Not Rated) and Marriott (MAR: Not Rated) combined. That is outside of our comfort zone, and we initiate at Neutral. Highlights: 1) ABNB sits largely alone (others have rentals, but not the individually-owned stuff on ABNB) atop one of the few eTravel growth pockets and should be at the leading edge of recovery; 2) Unlike OTAs (and pretty much every other consumer-facing Internet platform), ABNB is not beholden to Alphabet, Inc. (GOOG: Not Rated) with more than 90 per cent of traffic direct this year and that should ultimately translate to a strong margin; 3) We model 2022 ahead of 2019, with a 20-per-cent topline CAGR from there and an EBITDA margin approaching 30 per cent by 2025.”


In other analyst actions:

* Following the closing of its $143.8-million bought deal financing, concurrent $63.3-million private placement with Caisse de dépôt et placement du Québec and acquisition of HyGear, Desjardins Securities analyst Frederic Tremblay resumed coverage of Xebec Adsorption Inc. (XBC-X) with a “buy” rating (unchanged) and $11 target, up from $6.25 and exceeding the $8.95 consensus.

“In our view, this is a pivotal moment in Xebec’s evolution. The company has significantly strengthened its status as a key participant in the on-site gas generation and service industry.”

* Raymond James analyst Steve Hansen bumped his target for Canwel Building Materials Group Ltd. (CWX-T) to $9 from $8.50, maintaining an “outperform” rating. The average is $8.29.

“We are increasing our target price ... based upon sustained macro tailwinds (housing activity, LBM prices) that we believe portend a robust earnings outlook and commensurate balance sheet benefits in 2021. We also see the potential for further strategic M&A,” he said.

* Following the $99.1-million acquisition of Tundra Process Solutions, Raymond James’ Bryan Fast raised his target for Wajax Corp. (WJX-T) to $18.50 from $14.50 with a “market perform” rating. The average is $18.

“The acquisition of Tundra represents the most meaningful addition to the Engineered Repair Services business (ERS) since the company implemented the ‘One Wajax’ model,” said Mr. Fast. “With a goal of more significant contribution from lower working capital and less cyclical Industrial Parts/ERS categories, this acquisition moves the needle in this effort. That said, the company has enjoyed a recent run in share price (up 220 per cent from Mar-20 lows vs. the TSX up 40 per cent) to what we view as fair market value based on our historical valuation models.”

* RBC Dominion Securities analyst Paul Treiber raised his target for Lightspeed POS Inc. (LSPD-T) to $80 from $67, maintaining a “sector perform” rating. The average is $74.74.

* RBC’s Nik Modi increased his Primo Water Corp. (PRMW-N, PRMW-T) to US$19 from US$17 with an “outperform” rating. The average is US$18.09.

* Scotia Capital lowered his target for shares of Air Canada (AC-T) to $29 from $30 with a “sector outperform” rating. The average on the Street is $26.91.

* Scotia’s Ben Isaacson hiked his target for Parkland Corp. (PKI-T) to $52 from $45 with a “sector outperform” recommendation. The average is $47.69

* Evercore ISI analyst James West raised his target for Trican Well Service Ltd. (TCW-T) to $1.30 from $1 with an “in line” rating. The average is $1.53.

* BMO Nesbitt Burns analyst John Gibson increased his target for shares of Ensign Energy Services Inc. (ESI-T) to $1 from 65 cents with a “market perform” recommendation. The average is 89 cents.

“ESI announced several amendments to its $900 million credit facility, which should allow the company to stay within its covenants for the duration of 2021, especially considering the recent activity level tailwind and improved commodity price environment,” he said.

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