Inside the Market’s roundup of some of today’s key analyst actions
Changes taking place in the oil and gas industry in a time of “unprecedented” demand erosion are “systemic in nature, and could fundamentally change the landscape in which we operate going forward,” said ATB Capital Markets’ William Lacey.
In a research report titled Walking on a Knife’s Edge, the equity analyst initiated coverage of four large-cap Canadian energy companies that have significant investments in the oil sands.
“It is our belief that the nature of the oil sands assets, wherein the capital has essentially been spent and the decline rates associated with the production are exceptionally low, position investors for an environment of significant free cash flow generation; focus on generating shareholder returns is pushed to the forefront,” said Mr. Lacey.
“There is significant public discourse related to energy transition, and crude oil is a focal point in terms of carbon reduction strategies. The reality is that transition takes time, and many of these companies are at the forefront in terms of investment and innovation as it relates to reducing the carbon footprint. Meanwhile, the economic collapse of Venezuela and the move by Mexico to refine more of its production within the country has created market opportunities for Canadian heavy oil producers.”
Mr. Lacey said the numerous headwinds facing the energy sector, accelerated by the COVID-19 pandemic, have brought a “ruthless focus on re-setting the cost structure and focusing on efficiencies, generating scale, and ensuring there is a business to run in the years ahead has been front of mind for all management team.”
“2020 was a true litmus test to see how things have progressed in terms of sustainability, as the focus of industry must be on generating returns for shareholders and treating their capital model as though the last dollar they raised is the last dollar they are going to raise,” said the analyst. “Though many positive steps have been made, and this message seems to be resonating, the reality of the business is that US$40 per barrel is an environment that does not work for many.”
“Underinvestment and best in class cost structures will be well positioned to capitalize on opportunities in front of them. Hydrocarbons are an essential component of the global economy due in large part to the unique nature of energy density and the interwoven nature of the products that society consumes and is dependent upon. That is not to say that the industry cannot do better, and they will. The Canadian regulatory standards are touted as some of the most stringent in the world. Canadian energy producers have been at the forefront in terms of investment in clean tech, innovations related to carbon sequestration, and leaders in terms of methane reduction. We believe that the sector will adapt and adjust to these changing dynamics all the while focusing on attracting investors back by showing how investors can benefit by being part of this sector.”
In the note, he initiated coverage of three companies with “outperform” recommendations. They are:
* Canadian Natural Resources Ltd. (CNQ-T) with a $39.50 target. The average on the Street is $37.15.
Calling it “The Bobby Clarke” in reference to the Hockey Hall of Fame player, he said: “Everyone wants to be a winner, but few are prepared to do whatever it takes. Like the Canadian hockey legend, Canadian Natural Resources seems to share a similar mindset of being focused on winning, and are happy to show off a toothless grin when they are the victor. We’ve seen the Company opportunistically playing in the M&A market, all the while building an energy behemoth that has earned the respect of the entire energy sector. Winning is at the forefront of their mantra, and they often do.”
* Cenovus Energy Inc. (CVE-T) with a $12.75 target. The average is $8.73.
“In late 2020 Cenovus undertook the bold initiative to acquire Husky Energy and transform itself into a truly integrated producer with operated assets that now stretch from the wellhead to the refinery gate,” he said. “2021 will likely be a noisy one, as the firm lays out its strategy and what is viewed as being core, and it looks to transform itself into a stronger and more durable participant in the Canadian energy landscape.”
* Suncor Energy Inc. (SU-T) with a $27.50 target, which is below the $29.44 average on the Street
“After having weathered a punishing 2020, Suncor looks well positioned to mount a challenge to try and regain the crown as the largest Canadian energy producer by market capitalization, but it won’t go uncontested,” he said. “2021-2022 will be the timeline to prove whether the initiatives undertaken will result in Suncor being able to show investors that patience will indeed pay off.”
Mr. Lacey gave Imperial Oil Ltd. (IMO-T) a “sector perform” rating and $29.50 target. The average is $25.38.
“Imperial Oil earns the status of stay at home defenseman due to the nature of how it runs the business. They have a long-term focus, do nothing too flashy, maintain a core focus with their business, with a disciplined outlook on generating shareholder returns through maintaining a strong balance sheet, payment of dividends, and a share buyback program that its core shareholder, ExxonMobil (XOM-N, not rated), participates in lockstep.”
Following U.S. President Joe Biden’s decision to revoke the permit for the Keystone XL pipeline, Citi analyst Prashant Rao remains bullish on Western Canadian Select (WCS) through 2022, emphasizing the cancellation is “not impactful” to his investment thesis.
“Existing pipeline and unutilized rail look capable of providing sufficient egress to allow for 2021 Western Canadian production growth of 2 per cent over pre-pandemic levels and 9 per cent pr more in 2022, on controlled inventory levels until 2023,” he said in a research note. “Citi Commodities sees Brent headed into the $60s; contained WCS differentials and limited growth capex against this sets up well for the Canadian Oils.”
“Within our broader Global coverage, investors largely have participated in the oil price rally to-date through traditional global large cap names. But Canadian trading valuations remain half pre-pandemic levels on 2022/2023 DACF [debt-adjusted cash flow] estimates, despite rising benchmark oil price and good egress for production. We think investors would be better rewarded taking on more oil torque with a secular overlay.”
For Cenovus, he increased his funds from operations (FFO) per share projection for the fourth-quarter of 2020 by 2 cents to 35 cents to incorporate it latest operational data and Citi’s macro assumptions.
Keeping a “buy” rating for its shares, he raised his target to $11 from $8. The average on the Street is $8.73.
“CVE will announce its 2021 budget and production guidance on 28th January (Thursday),” said Mr. Rao. “While the outlay numbers are important, our primary focus is on disposals; specifically, the APAC gas interests acquired via Husky. We think these could fetch at least $4-billion ($1-billion per annual cash flows on a 4 times multiple) and help to delever to a p.f. sub-1.5 times at year-end 2021 – well below the less-than 2 times target.”
For Imperial Oil, the analyst raised his fourth-quarter 2020 and full-year 2021 FFO per share estimates by 33 cents each to 65 cents and $4.12, respectively.
“For 4Q, we expect total Upstream production of 457,000 barrels per day, up 25 per cent quarter-over-quarter, primarily driven by higher Kearl production after Q3 turnarounds, and modest improvement in Refining earnings, driven by slightly higher utilization and margins,” he said.
“CVE’s superior oil sands SAGD assets are disproportionately discounted in the equity’s valuation (20+ year reserve life at implied sub-5 times EV/DACF [enterprise value to debt-adjusted cash flow] using Citi’s proprietary Oil Vision analysis). Furthermore, we see a softer, firmer path for Canadian commodity price resolutions in the coming quarters. Finally, we believe that the perceived overhang from a future sale of COP’s 17-per-cent stake at $17-plus per share is overdone, and perhaps more importantly, fairly remote given where shares currently trade.”
Maintaining a “neutral” recommendation, he increased his target to $29 from $23.
“IMO’s strong balance sheet and ample liquidity should allow the company to maintain its dividends during this downturn. After a significant pullback in IMO’s stock price, current risks/rewards appear to be balanced,” he said.
BMO Nesbitt Burns analyst Tom MacKinnon downgraded IGM Financial Inc. (IGM-T) to “market perform” from “outperform” with a $37 target (unchanged). The average is $36.94.
“With a continued low- to mid-single-digit EPS growth rate outlook in more ‘normal’ equity markets, versus the consistent 10 per cent for the Canadian banks wealth management operations, we downgrade IGM ... in part on valuation,” he said.
“A 6-per-cent yield/reasonable net inflows provides support, but we see better risk/reward/GARP in other names we cover, particularly MFC at 7.6 times, IAG 8.9 times, or CIX (6.3 times 2021 estimated EPS and 5.8 times FCF), versus IGM at 9.6 times 2021 EPS, 10.3 times 2021 FCF per share, and an implied 10.1 times 2021 (ex strategic investments after holdco discount).”
National Bank Financial analyst Jaeme Gloyn raised his target prices for the TSX-listed diversified financial stocks in his coverage universe. His changes are:
- Home Capital Group Inc. (HCG-T, “outperform”) to $42 from $34. The average on the Street is $33.57.
- Equitable Group Inc. (EQB-T, “outperform”) to $138 from $110. Average: $112.75.
- First National Financial Corp. (FN-T, “sector perform”) to $46 from $39. Average: $41.40.
- ECN Capital Corp. (ECN-T, “outperform”) to $9 from $7.50. Average: $7.85.
- Trisura Group Ltd. (TSU-T, “outperform”) to $161 from $114. Average: $113.88.
- Goeasy Ltd. (GSY-T, “outperform”) to $122 from $93. Average: $109.50.
Wedbush’s Dan Ives thinks the “iPhone 12 supercycle hype” is set to become “a reality” this week when Apple Inc. (AAPL-Q) reports its results after the bell on Wednesday.
“With more order activity kicking in over the last few months for iPhone 12 our reads are very bullish for the March/June quarters and give us incremental confidence in our supercycle thesis on iPhone 12,” the analyst said. “Based on our recent Asia checks we believe the supply chain saw low to mid 90 million iPhone unit builds for the December quarter. To put this in context, in mid December we had this in the 80 million range with a stretch goal in the mid-80 million range and heading into late October we were anticipating 75 million units as the line in the sand and roughly three months ago we estimated 65 million - 70 million units. This is roughly a 35% increase from our original forecasts. For the March quarter we believe builds for total iPhones ticked up again another 5 per cent over the last few weeks and are now in the 60 million to 70 million range. For the June quarter we believe initial builds are in the low 40 million range with potentially an upward bias. We have not seen a launch uptrend such as this in a number of years for Apple and the only iPhone trajectory similar would be the iPhone 6 in 2014 based on our analysis.”
Though the Street is current projecting 220 million iPhone units in fiscal 2021, Mr. Ives thinks Apple has the potential to sell more than 240 million, which would top its previous record of 231 million in 2015.
“Importantly, with our estimation that 350 million of 950 million iPhones worldwide are currently in the window of an upgrade opportunity, we believe this will translate into an unprecedented upgrade cycle for Cook & Co. and represents a ‘sweep the leg’ moment against the lingering bear camp,” he said.
“China remains a key ingredient in Apple’s recipe for success as we estimate roughly 20 per cent of iPhone upgrades will be coming from this region over the coming year. To this point, we are seeing considerable strength from the China region thus far with positive trends heading into 2021. While services growth remains the key to the Apple re-rating story over the past six months, the hearts and lungs of the Apple growth story are built around iPhone installed base upgrades. With 5G now in the cards and roughly 40 per cent of its ‘golden jewel’ iPhone installed base not upgrading their phones in the last 3.5 years, Cook & Co. have the stage set for Mahomes-like growth.”
In order to reflect his “increasing confidence in the supercycle thesis playing out,” Mr. Ives raised his target for Apple shares to US$175 from US$160 with a new bull case of US$225 (versus US$200 previously). The average on the Street is US$136.09.
He maintained an “outperform” recommendation.
“If Apple continues to execute at this pace, a $3 trillion+ market cap could be on the horizon over the 12 months,” he said.
MCI Onehealth Technologies Inc. (DRDR-T) possesses “a strong primary care network foundation to build upon,” according to Canaccord Genuity analyst Doug Taylor.
Touting its “substantial footprint” and seeing several growth vectors, included an expanded mix of higher-margin private pay revenue and synergies from R&D investment, he initiated coverage of the Toronto-based company, which began trading on the TSX on Jan. 6, with a “buy” recommendation.
“MCI has grown its footprint of primary care clinics since 2012 to a sizable network of 25 locations, generating normalized revenue approaching $50-million on a prepandemic basis,” said Mr. Taylor. “The company invests heavily in its proprietary digital strategy, which should allow it to grow and consolidate additional locations efficiently, increase the proportion of private-pay revenue and ultimately begin monetizing its growing data asset. As these trends unfold in 2021 and beyond, we expect accelerating revenue growth and a return to positive and expanding EBITDA, which we believe will make the existing valuation (4.4 times NTM [next 12-month] revenue) appear increasingly attractive relative to peers that command much higher multiples.”
Currently the lone analyst covering the stock, he set a target of $5.50 per share.
“2020 represented a challenging year for walk-in traffic, given the company’s ordinarily well situated locations in downtown areas,” said Mr. Taylor. “We believe that, in a more normalized year, the current footprint generates $50-million in run-rate revenue; we model the company returning to this level in H2/21, generating 23-per-cent organic growth in 2022. While MCI is currently profitable with expectations of an improving revenue mix, we expect near-term EBITDA compression as it re-invests heavily into its upcoming technologies over our forecast period. We model EBITDA of a loss of $1.4-million in 2021 followed by a return to profitability in 2022 ($1.2-million EBITDA; 2.2-per-cent margin).”
“We expect that the share price will be driven by the resumption of revenue growth, better surfacing of the value of technology investment, and an increased mix of private/employer pay revenue. We are initiating coverage with a SPECULATIVE BUY rating given the company’s intention to operate with small EBITDA losses as it invests in certain elements of its growth strategy that remain unproven to this point.”
After announcing Friday it has been approved to begin sales of recreational cannabis in Arizona, Canaccord Genuity analyst Matt Bottomley raised his target for Harvest Health & Recreation Inc. (HARV-CN) to $7 from $6 with a “speculative buy” rating. The average is $4.32.
“The company currently has 15 retail locations up and running (with an additional three licenses in hand), four cultivation sites and two processing facilities and has long held the No. 1 market position in the state’s medical market,” said Mr. Bottomley. “As Arizona makes up the highest proportion of its top line, we believe HARV’s Q1/21 growth profile is likely set to outpace many of its peers in the industry. Further, with 2021 now underway, we have taken this opportunity to roll forward our valuation by one year.”
After it received approval from the U.S. Food and Drug Administration to sell its drug for a severe form of lupus, a group of equity analysts raised their targets for Aurinia Pharmaceuticals Inc. (AUPH-O, AUP-T).
* HC Wainwright’s Ed Arce to US$35 from US$30 with a “buy” recommendation. The average is US$24.
Calling the approval a “watershed event in the treatment of Lupus Nephritis,“ Mr. Arce said: As the first FDA-approved oral therapy for LN, we remain confident that the LUPKYNIS treatment regimen is poised to quickly establish itself as the new SoC therapy for new and uncontrolled or unresponsive active LN patients. We believe the entire Aurinia commercial team is aligned for a launch that aims for LUPKYNIS to be quickly and widely adopted by the LN community, including having previously reached payors covering over 100 million lives.”
* Bloom Burton analyst David Martin to US$23 from US$31 with an “accumulate” recommendation.
“This is a positive event, although one we had expected (90-per-cent probability) based on the strong results of the phase 3 AURORA trial,” he said.
* Cowen and Co. analyst Kevin Cacciatoreto US$35 from US$30 with an “outperform” rating.
Citing “expectations for further phosphate (DAP) price appreciation,” Citi analyst P.J. Juvekar raised his rating for fertilizer producer Mosaic Co. (MOS-N) to “buy” from “neutral.”
“Global phosphate markets shot up last week (up $45 per ton to $450 per ton), driven by lower phosphate exports from China and underlying strength in the grain markets,” he said. “MOS will be the primary beneficiary of continued DAP momentum, and most of this strength should be reflected in its 1H21 results. [Nutrien Ltd., NTR-T] will also be a beneficiary, but less so given a smaller phosphate exposure. Plus, potash prices have gone up with the corn rally, but to a smaller extent than DAP. MOS’s execution during the pandemic was solid, and this move in fertilizer prices should go straight to the bottom-line. We expect Ag strength to last through mid-2021, at which point prices may seasonally moderate.”
Expecting its multiple gap to Nutrien to narrow, he hiked his target to US$33 from US$26 after raising his estimates for the fourth quarter of 2020 through 2022. The average on the Street is US$27.50.
In other analyst actions:
* After coming off a research restriction following the close of the acquisition of Tundra Process Solutions, Scotia Capital Michael Doumet upgraded Wajax Corp. (WJX-T) to “sector outperform” from “sector perform” with a $25 target, up from $22. The average on the Street is $18.
“The shares have had a strong run from their lows,” he said. “Regardless, we see the macro setup as very favorable for Wajax; its higher operational and financial leverage provide the torque we think investors should look for at this stage in the cycle. Based on that view, we also think the timing of the Tundra deal looks good, and the deal metrics, even better.
“WJX’s trading multiple lags its peers by a wide margin. It shouldn’t – not in this environment. Directly or indirectly, the favorable commodity backdrop will be a boon for Wajax. Moreover, the Tundra deal should act as an accelerant to ERS growth as well as act as a platform for further consolidation. We expect ERS and Industrial Parts to play a bigger role in the next leg-up in earnings growth – which means the next cycle will be much less capital-intensive. All told, we see upside to our above-consensus EPS estimates and a path to deleveraging. Combined with multiple expansion, we expect the equity value to accrue outsized gains.”
* H.C. Wainwright analyst Kevin Dede initiated coverage of Voyager Digital Ltd. (VYGR-CN), a New York City-based cryptocurrency brokerage firm, with a “buy” rating and $12 target. The average is US$6.40.
“Voyager’s meteoric and sudden stock rise has clearly complicated the valuation process, but note our $12 price target sits modestly above recent closing high of$8.39 hit on January 19,” said Mr. Dede. “Note too, while not statistically validated, it clearly appears that Voyager Digital shares trade in line with the fluctuations of bitcoin pricing, and perhaps more interestingly, bitcoin has emerged as the bellwether of public company whipsaws across the entire cryptocurrency industry. Some may see the current Voyager Digital entry point as a touch difficult, to phrase it diplomatically; however, we see the company well positioned, and its fundamentals improving rapidly as clearly evidenced by the increase in assets under management.”
* CIBC World Markets analyst Robert Bek cut his target for Spin Master Corp. (TOY-T) to $33 from $35 with an “outperformer” rating. The average is $31.86.
“We have lowered our Q4/20 and FY21 estimates, as new lockdowns globally through late Q4 and into Q1 push out the expected timeframes of recovery,” said Mr. Bek. “U.S. dollar weakness has also become a headwind. We continue to view Spin Master as an attractive investment, and encourage investors to look past current disruptions, as the company’s fundamentals remain well positioned for the rest of 2021 and beyond.”
* After meetings with CEO Arun Menawat and CFO Aaron Davidson, Lake Street Capital Markets analyst Frank Takkinen increased his target for Profound Medical Corp. (PRN-T) to $32 from $27 with a “buy” rating. The average is $32.24.
“Overall, we remain bullish on Profound’s prospects,” said Mr. Takkinen. “We believe the reimbursement landscape is shaping up better than anticipated with consistent, successful facility reimbursement for TULSA under an already in place C-code for MRI guided ultrasound therapy. We believe utilization trends remain favorable, in line with Q3 commentary, as super-users trend over 60 annual procedures 12 months post launch (50 per cent better than initial expectations of 40). Although robust data is in development and limited, we believe over time 3+ year old TULSA users could trend over 100 annual procedures (our valuation is based on 100 sites doing 100 annual procedures). Similar to our broader HC universe, we expect COVID resurgence has impacted sales efforts and therefore we believe conservatism is the best practice in this environment. We continue to believe the sales funnel remains strong but sense limited access to decision makers and reduced patient flow could result in a temporary pause in new, active placements. Overall, we continue to believe Profound’s innovative, MRI guided transurethral ultrasound therapy platform will become a standard of care in the multi-billion-dollar prostate cancer treatment market.”