Inside the Market’s roundup of some of today’s key analyst actions
Pointing to warmer-than-expected winter conditions through the fourth-quarter of 2020 and into 2021 as well as “strong” share price appreciation in recent months, Raymond James analyst Steve Hansen lowered his rating for Superior Plus Corp. (SPB-T) on Monday, seeing a reduced projected return to his target price for its shares.
“4Q20 winter weather proved demonstrably warmer versus last year (4Q19), with some obvious regional variances, including: 1) in Canada, the national weather was 2 per cent warmer year-over-year, with western Canada proving 7 per cent cooler year-over-year vs. eastern Canada that was 4 per cent warmer; and 2) in the eastern United States, weather was 9 per cent warmer year-over-year,” the analyst said. “Coupled with lingering COVID headwinds & depressed oilfield activity, we expect 4Q20 Canadian propane volumes will be 15 per cent lower year-over-year. In the eastern U.S., by contrast, while weather-related headwinds proved even more difficult, we still expect U.S. volumes to be 5-10 per cent higher year-over-year owing to recent acquisitions (Rhymes, 88 thousand U.S. customers). While still very early in the period, we also flag that January has also proven unusually balmy thus far.”
“While SPB’s solid stretch of margin performance is expected to continue, we do expect modest year-over-year compression in Canada associated with weaker regional differentials. In the U.S., we expect margins to remain largely consistent with last year.”
Moving the stock to “market perform” from “outperform,” Mr. Hansen maintained a target price of $13.50. The average on the Street is $13.96, according to Refinitiv data.
“While we continue to admire the company’s long-term, M&A driven growth prospects, we feel the risk-reward scenario is more balanced at this juncture, hence our tactical decision to move to the sideline,” he said.
Citing recent share price outperformance and limited upside to her target price, BMO Nesbitt Burns analyst Jackie Przybylowski downgraded First Quantum Minerals Ltd. (FM-T) to “market perform” from a “outperform” recommendation on Monday.
“We believe the momentum behind leveraged copper names will decline as we expect that investors take profits,” she said.
Ms. Przybylowski kept a $23 target, which falls below the $25.95 average.
Elsewhere, Morgan Stanley analyst Alain Gabriel hiked his target to $25.50 from $22.50 with an “overweight” recommendation.
Those making changes included:
* BMO Nesbitt Burns’ Tim Casey to $120 from $117.70 with a “market perform” rating.
“We expect H2 to see more normalized broadband trends and the return of some deferred spending,” said Mr. Casey. “Wireless ambitions hinge on clarity from the CRTC’s Wireless Review.”
* CIBC World Markets’ Robert Bek to $121 from $120 with an “outperformer” rating.
“We have raised our estimates to incorporate a Q1/21 beat and the earlier-than-anticipated closing of the DERYtelecom acquisition,” he said. “Beyond solid financials in Q1, we particularly highlight the growth acceleration in the U.S. segment, the success of which is not reflected in valuations, in our view.
“Our thesis remains unchanged, as we continue to see stability in the Canadian cable segment and a long growth runway in the U.S. footprint. FCF continues to benefit from operational and capital cost efficiencies. We continue to argue that current valuation levels are attractive.”
* Scotia Capital’s Jeff Fan to $132 from $129 with a “sector outperform” rating
* National Bank Financial’s Adam Shine to $126 from $120 with an “outperform” rating.
* TD Securities’ Vince Valentini to $140 from $125 with a “buy” rating.
The average target on the Street is $123.33.
After rebounding from mid-March lows, ATB Capital Markets analysts Waqar Syed and Tim Monachello see “further positive momentum” ahead for TSX-listed energy service companies, tracking an improving outlook for oil prices and increased rig activity.
“We expect Canadian upstream budgets to be up low-to-mid single digit percentage year-over-year in 2021, while for International markets we expect spending to be flat to down low-single digit percentage in 2021,” they said. “For the U.S. upstream market, we expect low-to-mid single digit decline in upstream spending.”
In a research report released Monday previewing 2021 in the sector, they recommended a “laggard-to-leader trade amongst large caps” and called Schlumberger N.V. (SLB-N) their top pick.
“Unlike the prior cycles, we expect international activity to respond quicker to increases in oil demand/oil prices,” the analysts said. “We see activity in the Middle East rapidly increasing starting Q2/21, and see pockets of strength in other areas where COVID sharply reduced activity in 2020. U.S. completion-leveraged stocks have benefited greatly since March, with HAL being the top large cap performer, but for 2021, we prefer the 2020 laggard SLB for cyclical and secular reasons.”
Mr. Syed made a pair of rating changes:
* STEP Energy Services Ltd. (STEP-T) to “outperform” from “sector perform” with a $2 target, rising from 60 cents previously. The average on the Street is $1.09.
“The driver behind the upgrade and increase in price target is higher estimated 2022 EBITDA (now $86-million versus $62-million previously), as well as the reduction in our discount rate from 50 per cent to 25 per cent,” he said. “Our new price target offers 160-per-cent upside.
“STEP-T offers high beta to improving NAM activity, particularly in the U.S.. In 2021 and 2022, we project STEP will now average three active crews (versus two previously), and estimate the Company will generate EBITDA of $12.4-million and $17.3-million, respectively, in the US versus our previous estimate of $3.2-million and $4.5-million, respectively. This helps show how sensitive STEP’s US EBITDA (and consolidated EBITDA) can be to improving activity. While there is similar downside risk if activity were to disappoint, we are highly confident that NAM activity will continue its uptrend, which is due to COVID vaccines being deployed (supporting demand) and OPEC signalling that they’ll continue to support oil prices in the near-term.”
* Calfrac Well Services Ltd. (CFW-T) to “sector perform” from “outperform” with a $5.50 target (unchanged). The average is $12.69.
“CFW-T was the worst performing stock in our coverage in 2020, rightly so given the significant dilution that equity holders experienced due to the recapitalization transaction,” he said. “However, in our view, the worst is now over for the equity holders and we see limited further downside risk.
“Moreover, on a more fundamental basis, we think that the outlook for the Company’s businesses in Canada, the U.S, Argentina and Russia are improving, and given the Company’s high financial and operational leverage, it could be a beneficiary of improving activity.”
National Bank Financial analyst Gabriel Dechaine raised his rating for Sun Life Financial Inc. (SLF-T) to “outperform” from “sector perform” with a $67 target, up from $59. The average on the Street is $64.75.
He also made these target price changes:
- Manulife Financial Corp. (MFC-T) to $25 from $22 with a “sector perform” rating. Average: $25.15.
- IA Financial Corp. Inc. (IAG-T) to $66 from $60 with an “outperform” rating. Average: $62.56.
- Great-West Lifeco Inc. (GWO-T) to $32 from $30 with a “sector perform” rating. Average: $31.
Echelon Capital Markets analyst Rob Goff expects Converge Technology Solutions Corp. (CTS-X) to “move forward executing against its deep pipeline of strategic, accretive acquisitions” following its upsized $86.4-million equity issuance.
“Our prior and current price target moves reflect the prospects of resumed momentum on the acquisition front where the Company’s ability to source and execute accretive deals has enabled it to achieve a scale where its cross-selling revenue generation, vendor advantages and platform efficiencies support continued accretive inorganic growth,” he said. “Furthermore, with its debt costs now lowered to roughly 2.5-3.0 per cent from 8-9 per cent, with cash reserves of $140-million and the Company’s legacy acquisitions fully integrated onto one platform, it is in its strongest position to date as an acquirer. We look for both tuck-in acquisitions and modestly larger targets in N. America before the Company executes on its stated goal of acquiring in Europe post Brexit. We are bullish towards the Company’s ability to maintain its acquisition and organic growth momentum.”
Mr. Goff said Converge’s latest acquisition, a $32-million deal for Vicom Computer Services announced on Jan. 4, “fits the model” and “re-established the momentum of larger acquisitions clearly addressing any questions around use of proceeds for CTS’s cash balances.”
“The Company describes its acquisition pipeline as robust. Prospective deals are expected to see earnouts as part of structuring more inline with past transactions,” he said.
Following the Vicom deal, he raised his 2021 revenue and EBITDA projections to $1.294-billion and $98.8-million, respectively, from $1.167-billion and $89.8-million. Both exceed the consensus estimates on the Street ($1.154-billion and $85.8-million).
“With CTS shares currently valued at 9.8 times 2021 EV/EBITDA marking the pro forma $6.5-million EBITDA to CTS’s current valuation would represent a gain of $58-million or $0.35 per share for an acquisition that itself cost $15-million,” Mr. Goff said. “Further gains are realized through cross-selling into the client lists which then adds to upside. As an example, vendors subsidize pre-sales events by $4-5-million. CTS’s ability to acquire at private market values significantly below its own public valuation prior to generating revenue/cost synergies supports continued shareholder value gains. We could see CTS move to acquire larger, higher growth targets with higher valuations considering its current scale and valuation. Its ability to drive synergies and low cost of capital supports aggressive moves.”
Maintaining a “speculative buy” rating, Mr. Goff hiked his target to $8.20 from $6.25. The average is $6.17.
Elsewhere, Canaccord Genuity initiated coverage of Converge with a “buy” recommendation and $8 target.
Equity analysts at Acumen Capital unveiled their list of “2021 Dark Horse Picks” on Monday.
The six stocks are a “collection of names have either lost a surprising amount of investor conviction or remain under the radar,” said the firm.
Their selections are:
* Black Diamond Group Ltd. (BDI-T) with a “buy” rating and $4 target. The average on the Street is $2.85.
Analyst Trevor Reynolds: “BDI made headway on the diversification of revenue in 2020 through organic MSS growth and acquisitions. Proforma the Vanguard acquisition revenue contribution from energy decreased to 16 per cent (from 31 per cent) while the education market increased to 29 per cent (from 7 per cent). Enhanced industry diversification over the past few years has driven a reclassification of BDI to an Industrial from an O&G Service Company. BDI continues to trade at a discount to the peer group and offers several meaningful potential catalysts aside from improved WFS activity in 2021 including continued growth of LodgeLink, and FID (June 2021) on the Goldboro LNG project.”
* H2O Innovation Inc. (HEO-X) with a “buy” rating and $3 target. Average: $2.69.
Analyst Nick Corcoran: “HEO had a strong year in 2020 with a return of 106.1 per cent. We expect HEO to have continued momentum in 2021 as (1) it is the only pure play water play listed on the TSX or TSX Venture, (2) organic growth and acquisitions drive top line growth, and (3) margins expand with increased scale and other initiatives.”
* IBI Group Inc. (IBG-T) with a “buy” rating and $11 target. Average: $9.86.
Analyst Jim Byrne: “IBI had a strong year in 2020, returning 45 per cent to equity holders over the course of the year. We have liked the story as an undervalued play on economic recovery following the pandemic, and we believe 2021 will continue to see investors recognize that thesis. With trillions of economic stimulus hitting the global economy, infrastructure, schools, hospitals, and ongoing urbanization demand will drive IBI higher. The company has executed on its ‘technology pivot’, and this move should continue to drive margin expansion and organic growth in the future.”
* MTY Food Group Inc. (MTY-T) with a “buy” rating and $62 target. Average: $53.29.
Mr. Corcoran: “MTY proved the strength of its business model in 2020. Despite concerns early in the pandemic about permanent restaurant closures and debt levels, MTY posted two solid quarters. We see the opportunity to acquire a marquee name that will benefit from the economy reopening.”
* Sylogist Ltd. (SYZ-X) with a “buy” rating and $16 target. Average: $15.38.
Mr. Byrne: “With a newly hired CEO in Bill Wood, we believe SYZ could see rekindled investor interest in 2021. The company’s shares are trading at a steep discount to its SaaS peers, and with a renewed focus on growth and acquisitions there is plenty of runway for SYZ in 2021.”
* Waterloo Brewing Ltd. (WBR-T) with a “buy” rating and $8 target. Average: $7.25.
Mr. Corcoran: “WBR strengthened its position in 2020 as the largest independent brewer in Canada and a co-packer of choice in both Canada and the U.S. NE. The Company had a strong year outperforming all large and small competitors in its respective markets, added a co-pack agreement, and made a significant investment in a can line expansion. This sets WBR for a strong 2021.”
Echelon Capital analyst Andrew Semple hiked his 2021 and 2022 financial projection for Cresco Labs Inc. (CL-CN) following its $213-million, all-stock acquisition of Bluma Wellness Inc., which allows it to enter the “huge” Florida cannabis market.
“We view the announcement positively as we believe Cresco will execute on delivering solid growth in Bluma’s operations,” said Mr. Semple. “The Company also announced an overnight offering of shares, expected to raise $125-million of gross proceeds at $16.00 per share.
“Bluma’s operations are still very early stage, and we do not believe historical results will be reflective of go-forward performance. With Cresco’s balance sheet available to support future growth, we believe the operations can scale more meaningfully than Bluma could manage on a standalone basis, unlocking value for shareholders. We estimate that the Florida operations will reach annual revenue/EBITDA of $74-million/$26-million in 2022, implying Cresco is paying a multiple of 2.9 times/8.2 times our 2022 sales/EBITDA estimates. Moreover, with the long-term growth potential of the Florida medical market (and possible adult-use market), we expect the valuation paid will look even more attractive over a longer time horizon.”
Mr. Semple expects the Florida medical cannabis market to surpass $2-billion in sales with “much more upside” if recreational, adult-use is legalized.
“The market is heavily supply constrained, with only a handful of producers able to offer a full product assortment and keep shelves stocked to meet patient demand. Cresco has long maintained an interest in Florida’s cannabis market,” he said. “It previously announced the acquisition of VidaCann in 2019, but that failed to close as Cresco chose to prioritize limited capital resources elsewhere.”
“Bluma has developed high quality dried flower production capabilities at its 54,000 SFT facility, which has allowed it to achieve one of the highest levels of dried flower sales per dispensary in Florida. Key to Cresco’s success in the Florida market will be to further expand Bluma’s upstream production capabilities. We believe Bluma requires additional investment cultivation capacity while maintaining its high-quality standardsfor dried flower products, more fulsome processing capabilities, and the introduction of edibles production. These opportunities represent low hanging fruit to increase sales per store and support the rollout of additional dispensaries that are currently under development, but which require capital investment.”
Though he trimmed his fourth-quarter 2020 revenue and earnings projections based on lower-than-anticipated wholesale results, Mr. Semple raised 2021 and 2022 estimates based on contributions from Bluma.
Maintaining a “buy” rating, he raised his target to $18 from $16. The average on the Street is $18.70.
“With the long-term growth potential of the Florida medical market (and possible adult-use market), we expect the valuation paid will look even more attractive over a longer time horizon,” he said.
Expecting the feasibility study for its 3Q project in Argentina to show “robust” economics when released later this year, Paradigm Capital David Davidson initiated coverage of Toronto-based Neo Lithium Corp. (NLC-X) with a “speculative buy” recommendation.
“Neo Lithium Corp. (NLC) is one of a handful of junior lithium development companies with a line of site to construction and production of new high-quality lithium supply to an emerging undersupplied market,” he said. “NLC has quickly become a prominent new name in lithium brine development by virtue of its high-quality 3Q (Tres Quabradas) project and experienced team. The company is rapidly advancing its 100%-owned 3Q project — a unique high-grade lithium brine lake and salar complex in Latin America’s Lithium Triangle. The 3Q project is in the Catamarca Province, the largest lithium-producing area in Argentina, covering 35,000 hectares, including a salar complex of 16,000 hectares. A Feasibility Study is underway and is expected to be delivered in Q3/21 and should solidify 3Q as one of the higher-return brine projects being developed today.”
Mr. Davidson set a $4 target. The average on the Street is $3.14.
In other analyst actions:
* National Bank Financial analyst Endri Leno lowered K-Bro Linen Inc. (KBL-T) to “sector perform” from “outperform” with a $40 target, up from $25. The average on the Street is $42.88.
* CIBC World Markets analyst Robert Bek raised his target for Cogeco Inc. (CGO-T) to $101 from $97, keeping a “neutral” rating. The average is $120.50.
“The return to our price target is attractive and implies a material upside, although, in our view, the main driver of the buying opportunity still rests with CCA shares currently. Given liquidity constraints, our bias is to get exposure to the Cogeco story directly through CCA at this point,” said Mr. Bek.
* Cormark Securities analyst Richard Gray trimmed his Barrick Gold Corp. (ABX-T) target to $41 from $47 with a “buy” rating. The average is $33.86.
* Cormark’s Jeff Fenwick raised his target for goeasy Ltd. (GSY-T) to $120 from $110, reiterating a “buy” rating. The average is currently $104.67.