Inside the Market’s roundup of some of today’s key analyst actions
The merits of Canadian Pacific Railway Ltd.’s (CP-T) proposed US$25.2-billion takeover of Kansas City Southern (KSU-N) are “extensive,” according to RBC Dominion Securities’ Walter Spracklin.
In a research note released Monday before the bell titled A deal that fits like a glove, the analyst said he views the deal price as “fair” and sees the three-year synergy and double-digit accretion as “attractive.”
“With CP’s network literally ending where KSU’s begins, we could not envisage a more complementary network fit. CP’s CEO Keith Creel will oversee the integration, further reducing risk,” said Mr. Spracklin.
“The network advantage is by far the most compelling merit providing the combined entity with a significant reach advantage compared to each on their own. With an unparalleled network reach that would cover Canada, the U.S. and Mexico, we point to significant new opportunities in Grain, Fertilizer, Intermodal, Auto and Crude.
Mr. Spracklin also emphasized both the double-digit earnings per share accretion brought by the deal and “a higher quality earnings stream as well - and view multiple expansion as a likely result.”
“The valuation implied by the deal is 30.5 times, which we view as fair value given the strategic nature,” he said. “Synergies of US$780-milion (77 per cent/33 per cent revenue/cost split) underline the top-line growth upside from the combination (pre-tax cost synergies are only 3 per cent of combined entity’s expenses). The deal is expected to be accretive in year 1 and double digit accretive upon capture of the full synergy benefit. These forecasts are consistent with our revised estimates. Debt/EBITDA leverage upon combination is estimated at 4.0 times; and with management forecasting US$7-billion in FCF over the first 3 years, leverage is expected to decline to 2.5 times - which we view as very reasonable.”
Reiterating CP as his “preferred name in rail” and keeping an “outperform” rating on its shares, Mr. Spracklin increased his target to $587 from $509. The average on the Street is $496.76, according to Refinitiv data.
Elsewhere, calling it a “game-changing transaction,” Desjardins Securities’ Benoit Poirier raised his target to $520 from $486 with a “buy” rating.
*We are pleased with the proposed acquisition of KSU given the strong cross-selling opportunities between the two rail franchises. We are confident that the transaction should close and encourage investors to revisit the story and buy the shares,” he said.
Other analysts make target prices adjustments included:
* Raymond James’ Steve Hansen to $500 from $485 with an “outperform” rating.
“We view the proposed marriage as a historic and transformational opportunity, one where the unrivaled, synergistic footprint of the combined network is expected to co-mingle with one of the most accomplished management teams in the industry to deliver best-in-class growth for years to come,” he said. “While not expected to close until mid-2022 due to a formal STB review, we view this hurdle as ultimately surmountable given the geographic positioning of the two networks and CP’s clear and deliberate plans to ‘enhance’ competition.”
* CIBC World Markets’ Kevin Chiang to $560 from $490 with an “outperformer” rating.
“We see significant synergies, especially as the combination of the two rails should allow for accelerated revenue growth,” said Mr. Chiang.
* National Bank Financial’s Cameron Doerksen to $490 from $445 with a “sector perform” rating.
* Scotia Capital’s Konark Gupta to $510 from $480 with a “sector outperform” rating.
* TD Securities’ Cherilyn Radbourne to $585 from $505 with a “buy” rating.
* Cowen and Co.’s Jason Seidl to US$410 from US$378 with an “outperform” rating.
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Though prices have pulled back from recent highs RBC Dominion Securities mining and materials equity team thinks the backdrop for bulks and base metals “remains positive” and expect many companies to see a free cash flow inflection this year.
“Rising yields and a stronger USD have taken the air out of the macro push higher, but underlying fundamentals remain strong and we expect this to continue for the foreseeable future,” they said in a research note. “The copper market remains tight which combined with strong demand growth should keep prices elevated for several years, while strong steel production and supply constraints support elevated iron ore prices. Valuations do not appear stretched yet and we could see potential for multiple expansion as funds continue to flow into the mining sector as free cash flow improves.”
Seeing “several catalysts on the horizon,” analyst Sam Crittenden raised his rating for Capstone Mining Corp. (CS-T) to “outperform” from “sector perform” with a $5.50 target, rising from $4.50. The average is $4.31.
“We upgraded Capstone Mining which despite, its strong performance, continues to screen well on a valuation basis, and demonstrating value at Santo Domingo could be a meaningful catalyst this year,” he said.
Conversely, seeing it recent rally putting it closer to its historical valuation, Mr. Crittenden cut Labrador Iron Ore Royalty Corp. (LIF-T) to “sector perform” from “outperform” with a $42 target, up from $40 and above the $39 consensus.
“Although we think the yield remains attractive at current iron ore prices,” he added.
With changes to the firm’s metals price forecasts, Mr. Crittenden also made a series of target price adjustments for North American miners with “outperform” recommendations. They are:
* First Quantum Minerals Ltd. (FM-T) to $36 from $31. Average: $30.42.
“We expect significant growth in FCF from First Quantum as Cobre Panama ramps up and capex comes off,” he said. “We believe the shares can continue to re-rate as CP reaches its potential as a top 10 global copper mine and see potential for further upside on operating costs as the mine has performed well thus far. A sale of a stake in Zambia and/or Ravensthorpe could help reduce debt and are potential catalysts. We expect Ivanhoe to shift from developer to producer next year as its world-class Kamoa-Kakula mine is on track for first production in July and could see shares more fully reflect the value of that asset. Exploration and continued development at Platreef could also provide additional catalysts.”
* Teck Resources Ltd. (TECK.B-T) to $35 from $32. Average: $31.28.
“Teck Resources has been held back by weak coal prices, however, sales into China at higher prices should help, but more importantly the transition into a more copper-focused company should start to gain traction,” he said. “Completing Neptune, de-risking QB2, and divesting Fort Hills are potential catalyst this year. Teck is trading at 0.7 times our NAVPS at spot prices vs. copper peers at 1.0 times showing the potential to unlock value over the next 2 years.
* Champion Iron Ltd. (CIA-T) to $7 from $6. Average: $6.65.
“Champion Iron announced the approval of its Phase 2 expansion in Q4/20,” he said. “We think the shares should rerate as the project is developed and de-risked. At current spot prices Champion is generating strong FCF to help fund development and putting the company in a position to be able to start returning capital to shareholders following the ramp-up of Phase 2.”
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After reducing his earnings expectations for the next two years to reflect lower containerboard realization assumptions, CIBC World Markets analyst Hamir Patel said he’s “moving to the sidelines” on Cascades Inc. (CAS-T), downgrading its shares to “neutral” from “outperformer.”
“With the US$60/ton spring containerboard price hike only seeing one-third implementation so far, we are now only building in half of the hike going through, down from our prior assumption of full implementation,” he said. “While Cascades continues to show signs of improved execution with a high-return containerboard growth project underway (Bear Island), we see better risk/reward opportunities in wood.”
Mr. Patel cut his target for Cascades shares to $19 from $22 and below the $19.57 average on the Street.
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Scotia Capital analyst Orest Wowkodaw thinks shares of Ivanhoe Mines Ltd. (IVN-T) “warrant a premium valuation given the company’s world-class asset base, strong growth profile, impressive management track record, and takeover optionality.”
In a research report released Monday, he initiated coverage with a “sector outperform” rating ahead of the first copper production at its flagship Kamoa-Kakula project in the Democratic Republic of Congo, which he called the “world’s largest, undeveloped, discovered high-grade copper deposit.”
Calling its current valuation “attractive,” Mr. Wowkodaw set a target of $10 per share. The average on the Street is $8.71.
“Given the scarcity of world-class mining assets, we expect IVN shares to trade at a significant premium to other developers,” he said.
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Despite continuing to view it as “very attractive debt reduction story,” Credit Suisse analyst Manav Gupta downgraded Canadian Natural Resources Ltd. (CNQ-T) to “neutral” from “outperform” on Monday.
“On July 1, 2020, we added CNQ to our top pick list,” he said. “Our thought process back then was that as CNQ can prove to the market that it can fully cover the dividend and even pay down debt, the yield will normalize to 4.5 per cent. That yield normalization process is now almost complete even after we take into consideration the recent dividend hike of 10.5 per cent. At this point XOM’s yield is 5.7 per cent while CNQ’s is 4.7 per cent and so there better yield normalization stories in energy, and as a result we are moving the rating.”
He raised his target for its shares to $52 from $49 The average is $44.55.
Meanwhile, Mr. Gupta increased his Imperial Oil Ltd. (IMO-T) shares to $39 from $32 with a “neutral” rating. The average is $30.17.
“IMO’s corporate all in break-even including dividend is WTI $36 per barrel, breakeven has dropped by $8-10 per barrel in just a couple of years (major positive),” he said. “Asset reliability along with cost reductions have played a key role in reducing break-even. With WTI at $65 per barrel, IMO expects to generate a significant amount of discretionary FCF in 2021 and 2022.”
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Despite the Canadian technology sector being increasingly volatile in recent weeks after “many years of outperformance,” Desjardins Securities Kevin Krishnaratne feels attractive potential remain for investors.
“While we recognize the potential for near-term pressure on the tech trade on rising yields, sector rotation and the flow of funds from growth to value, we see many investment opportunities across a number of subsectors,” he said. “Furthermore, although valuations in tech, which had been rising pre-pandemic and saw further boosts in 2020, appear to have investors on edge now more than ever, we still see Canadian tech at a discount to most U.S. peers. Meanwhile, many of the names in our coverage enter 2021 in a position of financial strength with healthy balance sheets and streamlined cost structures, which we see as poised to deliver strong free cash flow.”
In a research report, Mr. Krishnaratne initiated coverage of the sector with eight companies while resuming coverage of four other stocks.
“We have a positive bias on the IT services sector, with many global systems integrators and technology providers pointing to strength in the back half of 2021” he said. “With cloud adoption at just 20 per cent of enterprise workloads and software at 13 per cent of overall IT spend, we see multiple years of growth for IT service providers and technology enablers. Within media tech, we see opportunities related to the digitization of the ad industry as consumers seek content anytime, anyplace, and increasingly on mobile. Global advertising looks poised to rebound in 2021 on the economic recovery, which we believe can be a positive driver for related stocks. E-commerce & payments is another area where we see opportunities for upside, even as global economies reopen. While we recognize that online shopping trends may normalize as lockdowns ease, the shift toward omnichannel retail, where commerce is enabled everywhere, is here to stay, with brick-and-mortar businesses increasingly leveraging technology such as commerce platforms and payments processing/point-of-sale solutions.”
Mr. Krishnaratne gave “buy” ratings to 11 of the 12 stocks in his coverage universe. They are:
* Absolute Software Corp. (ABST-Q, ABST-T) with a US$20 target. The average on the Street is US$18.75.
* AcuityAds Holdings Inc. (AT-T) with a $30 target. Average: $27.59.
* BBTV Holdings Inc. (BBTV-T) with a $19 target. Average: $20.40.
* CGI Inc. (GIB.A-T) with a $120 target. Average: $109.23.
* Converge Technology Solutions Corp. (CTS-T) with a $10.50 target. Average: $8.49.
* Haivision Systems Inc. (HAI-T) with a $12.50 target. Average: $13.50.
* Martello Technologies Group Inc. (MTLO-X) with a 35-cent target. Average: 50 cents.
* mdf commerce inc. (MDF-T) with a $21 target. Average: $17.90.
* Photon Control Inc. (PHO-T) with a $3.50 target. Average: $3.63.
* Quisitive Technology Solutions Inc. (QUIS-X) with a $1.75 target. Average: $1.51.
* Stingray Group Inc. (RAY.A-T) with a $9 target. Average: $8.79.
Mr. Krishnaratne gave Alithya Group Inc. (ALYA-T) a “hold” recommendation with a $3.25 target, which falls 3 cents below the consensus.
“Some of our favourite names that trade at attractive valuations, feature healthy balance sheets, have demonstrated strong FCF growth trends and are exposed to high-growth areas of IT include CGI Group and Converge Technology Solutions,” he said. “We see Photon Control as an intriguing way to play the current semiconductor cycle, which is being driven by big themes such as the cloud, 5G and AI. Absolute Software is aligned with cybersecurity trends that we see becoming ever more important as enterprises enable ‘work from anywhere’ offices.
“For investors seeking exposure to high-growth industries, we believe both AcuityAds and BBTV Holdings provide opportunities to participate in the rapid shift to digital ad spending, with trends poised to accelerate as cord-cutting drives increased usage in connected TV and video platforms such as YouTube. While Quisitive does trade at a premium to peers on its core IT services business, we still see upside in the stock on optionality for its LedgerPay product which looks well-positioned to disrupt the brick-and-mortar retail payments space.”
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Scotia Capital analyst Gavin Wylie increased his target prices for a group of stocks in his coverage universe on Monday.
His changes included:
* Vermilion Energy Inc. (VET-T) to $11.50 from $9.25 with a “sector perform” rating. The average on the Street is $9.40.
* Parex Resources Inc. (PXT-T) to $30 from $28 with a “sector outperform” rating. Average: $30.35.
* Gran Tierra Energy Inc. (GTE-T) to $1.20 from $1 with a “sector underperform” rating. Average: $1.07.
* International Petroleum Corp. (IPCO-T) to $5 from $4 with a “sector perform” rating. Average: $5.06.
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Citing its “first-mover advantage, its scalable, capital-light business model, and excellent organic and inorganic growth opportunities,” Canaccord Genuity analyst Yuri Lynk initiated coverage of Good Natured Products Inc. (GDNP-X), a Vancouver-based bio-plastic technology company, with a “speculative buy” recommendation on Monday, seeing it “disrupting the US$1 trillion petroleum-based packaging industry.”
“We see the unique flexibility and scalability of GDNP’s business model as a key advantage,” he said. “According to management, the plant-based materials developed and sourced by good natured deliver equal or greater performance than their petroleum counterparts and do not require special equipment. The company’s model is capital-light and highly scalable for both external partners and GDNP’s own manufacturing capabilities; GDNP outsources 60 per cent of its production. The company has a three-pronged value proposition. It sources the bio-based ingredients, designs the products, and finally delivers a product that is as environmentally friendly as required by the customer.”
Mr. Lynk thinks M&A represents further upside for the company, complimenting its organic growth initiatives.
“We believe the strategy of acquiring businesses, which can be petroleum-based, at attractive multiples and transforming them into biobased producers should prove highly accretive,” he said. “GDNP targets businesses that have positive EBITDA, extensive product offerings, and a diverse customer base. Once acquired, these companies’ products are rebranded, reformulated, and relaunched under the good natured brand. GDNP has completed five acquisitions to date, the last four at an average EV/Sales multiple of 1 times. The two most recent and largest acquisitions to date were financed primarily with cash.”
Projecting revenue to increase 123 per cent in 2021 and 20 per cent year-over-year in 2022, Mr. Lynk set a $1.80 target for its shares, exceeding the $1.56 average on the Street.
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Seeing it “getting the edge on the agtech revolution,” Canaccord Genuity analyst Doug Taylor initiated coverage of Farmers Edge Inc. (FDGE-T) with a “buy” rating and $25 target.
The Winnipeg-based company began trading on the TSX on March 3 following the close of its initial public offering.
“Farmers Edge is a leading independent provider of technology solutions for the agriculture industry,” he said. “As multiple secular trends converge, the company is seeing an acceleration in the adoption of its software solutions, driving exceptional organic growth targeted at 45–50 per cent annually over the medium term. We believe this premium growth, along with the company’s position as one of the few pure-plays of size participating in this agtech theme, warrants a premium valuation. Our target price is DCF-based and equates to 10 times EV/Sales based on our 2022 estimates. We believe there is upside to our valuation as the company executes against this substantial growth opportunity and as better profit conversion follows with increased scale. Our target price equates to a 43.4-per-cent projected one-year return.”
Elsewhere, CIBC World Markets’ Jacob Bout initiated coverage on Monday with an “outperformer” recommendation and $23 target.
Mr. Bout said: “FDGE is bringing the right technology to grain farming at the ideal time (best grain fundamentals in a decade), amalgamating the best in precision ag. technology to drive higher yields with the ability to provide verifiable data that can be used in the carbon offset and crop insurance industries. While many companies provide parts of the digital agronomy package, FDGE distinguishes itself by providing a comprehensive end-to-end, brand-agnostic solution. Our $23 price target is based on 6 times EV/Sales on FDGE’s 2023 estimated sales. We believe this multiple is warranted given the high growth expected in digital agronomy, carbon credits and the Brazilian crop insurance industry, the U.S. market penetration opportunity, and the primary SaaS nature of the business.”
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In other analyst actions:
* Raymond James analyst Brian MacArthur lowered Centerra Gold Inc. (CG-T) to “market perform” from “outperform” with a $17.50 target, down from $18.50 and below the $18.89 average.
* JP Morgan analyst John Royall lowered his target for Alimentation Couche-Tard Inc. (ATD.B-T) to $51 from $52 with an “overweight” recommendation. The current average is $47.78.
* National Bank Financial analyst Endri Leno raised his K-Bro Linen Inc. (KBL-T) target to $42 from $40 with a “sector perform” rating, while TD Securities’ Paul Bilenki increased his target to $54 from $48 with a “buy” recommendation and Raymond James’ Michael Glen moved his target to $46 from $44 with an “outperform.” The average is $44.36.
* National Bank’s Michael Robertson increased his Ag Growth International Inc. (AFN-T) target to $54 from $48, keeping an “outperform” rating. The average is $52.71.
David Leeder