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

Pointing to an “improving fundamental outlook” and its “leaner, lower-risk business post-restructuring,” iA Capital Markets’ Elias Foscolos upgraded Shawcor Ltd. (SCL-T) in the wake of a recent pullback of almost 25 per cent in its stock from record highs.

The analyst thinks the Toronto-based company now possesses a “much stronger” balance sheet following the US$91.5-million sale of its Products business to Arsenal Capital Partners, a New York-based private equity investment firm, in late 2020.

“In response to challenging conditions in the global energy industry in 2020, SCL took steps to restructure the business which should result in $80-milion of annualized cost savings, the closure of six pipe coating facilities including four that provided low-margin anti-corrosion services for the North American onshore market, and the sale of the Products business,” he said in a research report released Monday. “We believe that these changes were made with medium- to long-term expectations in mind, and that SCL will be able to maintain its global reach, market-leading position and reputation for quality, and ability to win and execute large projects with its right-sized asset base. As such, we believe that SCL is well-positioned to deliver improved profitability over the near term as activity improves.”

“Margins in Pipeline & Pipe Services (PL&PS) have historically significant fixed-cost torque and are dependent on utilization of facilities, and as such have struggled in recent years. This is where we expect to see the most significant impact from restructuring going forward. As composite pipe demand has been weakened by lower oil & gas development in North America, we expect composite tank sales to comprise a greater proportion of segmented revenues in the near term, resulting in a fairly stable segmented margin. We expect A&I to deliver stable margins at approximately the recent historical average. Overall, we believe that SCL will be able to achieve consolidated EBITDA margins within the potential 9-12-per-cent range by 2022.”

Seeing end-market diversification providing “a degree of cash flow defensiveness,” he added: “Since 2013, the proportion of revenues from non-oil & gas operations has increased from 10 per cent to 33 per cent. This is partially due to a decline in oil & gas, but also to growth in the Automotive & Industrial (A&I) business and the addition of composite tanks. These businesses typically generate stable cash flows and provide avenues for growth.”

Also saying he’s “cautiously optimistic” on its international outlook and seeing covenant worries diminished, Mr. Foscolos raised Shawcor to “speculative buy” from “hold” with a $7.50 target. The average target on the Street is $8.18, according to Refinitiv data.

“We believe much of the risk associated with SCL’s stock has been alleviated, and the Company’s leaner, diversified business is well-positioned to deliver improved profitability as global energy investment recovers in the near term,” he said. “We note that we still expect a weak Q1/21, but this should be built into investor expectations.”


Tesla Inc.’s (TSLA-Q) first-quarter delivery results were a “paradigm changer,” according to Wedbush analyst Dan Ives, who thinks “pent-up demand globally for Tesla’s Model 3/Y is hitting its next stage of growth as part of a global green tidal wave underway.”

In a research report released before the bell, he raised his rating for its shares to “outperform” from “neutral” and added it to the firm’s “Best Ideas list.”

On Friday, Tesla announced the delivery of 184,800 vehicles in the quarter, exceeding the Street’s expectation of 172,230. Mr. Ives called it “drop the mic” results, noting “the company yet again defied the skeptics and bears.

“The strength in the quarter was driven by Model 3/Y which was a jaw dropper and came in at 182,780 deliveries and crushed the consensus estimate of 160,230 for the quarter with Model S/X at 2,020 vs. 12,060 with the miss chip driven and well telegraphed to the Street,” he said. “Production was 180,338 vehicles for the quarter.”

“We believe China and Europe were particularly robust this quarter as the trajectory now puts Musk & Co. to exceed 850k for the year which is well ahead of whisper expectations. With a green tidal wave kicked off by Biden last week in the U.S., and global EV demand skyrocketing (as also seen in the Nio and Xpeng numbers) going after a $5 trillion TAM over the next decade, we believe these delivery numbers are a paradigm and sentiment shifter for the space going forward. With 3 per cent of auto sales EV today globally and on a trajectory to be 10 per cent by 2025, we believe the EV market is just starting to play out as the auto sector is transformed green over the coming years with Tesla leading the charge.”

After raising his 2021 and 2022 revenue and earnings expectations, Mr. Ives increased his target price for Tesla shares to US$1,000 from US$950. The average target on the Street is US$621.60.

“While the EV sector and Tesla shares have been under significant pressure so far this year, we believe the tide is turning on the Street and the ‘eye popping’ delivery numbers coming out of China cannot be ignored with the trajectory on pace to represent 40 per cent of deliveries for Musk & Co. by 2022,” he said. “We believe Tesla’s profitability/FCF profile significantly improves over the next 3 to 4 years with $20 of annual EPS potential by 2026 based on our projections.”


Telus Corp.’s (T-T) recently closed $1.3-billion equity offering provides additional flexibility going into the coming spectrum auction, according to Canaccord Genuity analyst Aravinda Galappatthige.

“We believe this was the prudent move for TELUS to make going into the 3500 MHz spectrum auction, particularly on the back of a 3.4 times (net debt/ EBITDA) balance sheet leverage following active M&A and investment in fibre,” he said. “This likely staves off risks of negative headlines on the credit front, although a minor downgrade would have had fairly minimal financial impact in any case. Perhaps more importantly, it gives good flexibility to TELUS in the event of a more competitive (and thus expensive) auction outcome. Recall BCE and Rogers already have a head start in the 3.5GHz band due to ownership of Inukshuk, which retained 30MHz (each) of spectrum even after the clawback.”

Based on the dilution from the offering as well as the expectation for higher capital expenditures, Mr. Galappatthige trimmed his free cash flow estimates for both 2021 and 2022, however he emphasized “meaningful” upside exists beyond that point.

“We must note, however, that visibility on 2022 capex is still low, and recognize that given where the fibre program is currently (81 per cent of intended footprint as of Q4/20), the incremental spend in F2022 may be less than the $400-million we built into our model,” he said. “We note that at $200-milion additional capex (instead of $400-million), TELUS FCF would be $1.10 per share.

“This naturally shifts the focus in terms of FCF to F2023. While we have not formalized our F23 estimates, we note that a retreat back towards the $2.5-billion capex benchmark cited by the company releases $0.68 per share in incremental FCF (over F2022), while EBITDA growth of 5 per cent could translate to a further $0.21/sh, paving the way for a number north of $1.80 per share in FCF. This comfortably covers the $1.24 per share dividend and the projected 7-per-cent dividend growth.”

Believing Telus’ investment thesis “remains attractive,” Mr. Galappatthige trimmed his target to $29 from $29.50, maintaining a “buy” rating. The average on the Street is $28.80.

“Despite the near-term drag on FCF, we see TELUS’ investment thesis as quite unique in the sector, with a compelling mix of yield and growth,” he said. “With the high growth assets (TI, Health, Ag-tech) within the business mix reaching toward 20 per cent of overall EV and future organic growth and M&A likely to further progress that metric, TELUS’ valuation multiple does have upside over time, and well ahead of its peers, in our view. At the same time, the stock also offers a 4.9-per-cent yield with 7-per-cent dividend growth annually.”


After previously doubting the “material benefits from the firm’s nascent podcast pivot,” Citi analyst Jason Bazinet returned Spotify Technology SA (SPOT-N) to a “neutral” recommendation from “sell” after the stock “retrenched a bit recently” and seeing encouraging subscription trends.

“We downgraded Spotify to Sell earlier this year. The thesis was fairly simple: while we didn’t expect Spotify to miss 4Q20 financials, we saw little evidence that its podcast pivot was causing an acceleration in app downloads, higher gross adds, or lower churn,” said Mr. Bazinet. “The stock has pulled back a bit recently. And, the Sensor Tower data is in for 1Q21. The data suggest the app download trends have moderated a bit to 51 million in 1Q21. That’s about the same level as 1H19.

“But, in the same breath, management’s guidance for 1Q21 premium subs seems achievable. That is, when we look at the historical ratio of app downloads to Premium net adds, during 1Q it typically runs between 9 times and 15 times. Based on 51 million app downloads, this suggests between 3 million and 6 million net additions during 1Q21. Recall, management’s guidance calls for 0 to 3 million net adds versus 4Q20.”

Based on that link between downloads and Premium subscription additions, the analyst said he does not expect Spotify to miss near-term estimates, adding: “Indeed, the firm may see a small subscriber beat in the upcoming quarter.”

He maintained a target price of US$310 per share, which falls narrowly below the US$311.14 consensus on the Street.

“The firm has a garnered a substantial user base and delivered significant revenue growth to-date,” said Mr. Bazinet. “Due to its revenue growth profile, investors have placed a substantial premium on Spotify’s equity. As such, Spotify shares don’t appear particularly compelling to us at current levels. In our view, to the extent that Spotify’s growth begins to moderate in the coming years, we suspect the equity may offer investors a better risk-reward profile.”


The Mosaic Company (MOS-N) is “at a critical transition point as operations and underlying fundamentals have improved significantly,” according to RBC Dominion Securities analyst Andrew Wong, who sees “an opportunity for shares to re-rate higher as long-held views are revisited.”

In a research report released Monday, Mr. Wong touted “significant” potential upside for the Florida-based potash miner from “closing the valuation gap.”

“We think the Mosaic of 2021 has evolved from the Mosaic of the past and deserves to see its historical valuation discount to peers close,” he said. “Many of the historically valid reasons for a discount have been addressed by a more aligned and efficient business footprint, a material decline in costs, strong execution over the last two years, an inflection point for FCF, and improvement in underlying fertilizer markets, especially phosphates. Mosaic is included in RBC’s “Top 30 Global Ideas for 2021” report, which was updated for Q2/21 on April 1, 2021.

“Mosaic currently trades at 6.3 times EV/EBITDA, compared to the peer average of 8.6 times, and currently sits at one of the widest valuation differentials observed over the last 10 years. If Mosaic were to just get back to the historical average 1 times discount to peers, that would imply 27-per-cent share price upside, while completely closing the gap would imply 49 per-cent upside.”

Believing its historical discount is “no longer warranted” and expected sector tailwinds to “further propel valuations and free cash flow generation higher,” Mr. Wong raised his target to US$42 from US$36, keeping an “outperform” rating. The average on the Street is US$33.65.

“We expect EBITDA to increase significantly in 2021 to $2.8-billion, from $1.6-billion in 2020, primarily due to stronger phosphate and potash prices, and helped by cost savings and growth in Brazil,” he said. “We expect this level to be sustainable over the next several years beyond 2021, as ag markets are positive, phosphate markets remain light, potash markets are balanced, and the company realizes further cost savings. We also believe Mosaic’s FCF is at an inflection point due to the combination of improved underlying market fundamentals, cost savings, and declining capex.”


Following a fourth-quarter earnings beat and “solid” 2021 guidance, Raymond James analyst Steve Hansen raised his rating for Itafos (IFOS-X) to “outperform” from a “market perform” recommendation, citing “sustained phosphate price tailwinds and an improved focus under new management that we believe provide a reasonable path to deleveraging over the next 24 months.”

“Management issued better-than-expected 2021 guidance that calls for EBITDA of $80-90-million, a fairly dramatic lift versus 2020 ($15.0-million), largely owing to the rejuvenated price outlook and management’s new domestic-first strategy,” he said. “Coupled with a more capital light envelope that prioritizes Conda and its Husky 1/North Dry Ridge mine extension, FCF is also expected to improve markedly in 2021, guided at $25-30-million, which is expected to underpin management’s efforts to repair (delever) and optimize (refinance) its balance sheet over the next 18-24 months. While this outlook and plan still require solid execution, we believe they contain solid merit and should ultimately prove beneficial to shareholders, hence our upgrade decision.”

Mr. Hansen, currently the only analyst covering the fertilizer maker, raised his target for its shares to $1.50 from 90 cents.


Seeing it with a first mover advantage and poised for a “rapid growth trajectory,” Laurentian Bank Securities analyst Mona Nazir initiated coverage of Altius Renewable Royalties Corp. (ARR-T) with a “speculative buy” recommendation on Monday.

“Interest continues to accelerate within the renewable space,” she said. “Renewables is the only category of energy that increased at a double-digit pace over the past decade (over 14-per-cent CAGR). With the costs of solar and wind power having declined 85 per cent and 50 per cent, respectively, over the last decade, there are both financial and environmental incentives to investors. US$282-billion was spent on renewable capacity in 2019, with approximately half of the capital earmarked for wind. With an increased demand for a stake in projects, we believe investors will look to early-stage opportunities, one of which includes renewable royalty financing; cue ARR.”

“ARR is effectively a shell company that is investing money in renewable projects at the developer level. The contract structure is rather simplified in that ARR is entitled to receive a minimum 8-12-per-cent return threshold. If projects get delayed or PPA prices, terms, etc. shift, the portfolio of projects adjusts in order to ensure the required return is met. Furthermore, without having to invest incremental capital, the intrinsic project value can increase, due to a shift in a multitude of variables, including project-life extensions, on-site battery storage, and co-location to name a few upside drivers.”

Calling it a “pure play green investment,” Mr. Nazir set a target of $13.50 per share. The average on the Street is $13.67.

“With greater emphasis on sustainable investing and over 90 per cent of institutional investment decisions factoring in ESG criteria, ARR offers a pure play investment opportunity with direct exposure to a portfolio of wind and solar projects,” she said. “Renewable energy assets provide investors with relatively strong, stable and long-term “bond-like” returns that align with long-term investment time horizons.”


Paradigm Capital analyst Adam Gill applauded the shift in focus by Tamarack Valley Energy Ltd. (TVE-T) to the Clearwater oil play late last year, seeing it “set up a new growth asset” for the Calgary-based company.

“We believe this is a smart move to ensure the long-term growth potential of the company in a play that offers the strongest development returns in the basin,” he said.

“The market has also recently noticed the strong FCF generation in the story, with TVE having outperformed its peers, up 89 per cent year-to-date versus the intermediate/junior oils up 59%. While there has been some re-rating of the stock, we believe TVE is still offering a good value proposition relative to the oil-focused peers given the quality of the company.”

Mr. Gill initiated coverage with a “buy” rating and $3.50 target. The average is currently $3.10.


Equity analysts at RBC Dominion Securities added three TSX-listed stocks to the firm’s “Q2/21 Global Mining Best Ideas Portfolio” on Monday.

“For Q2/21, we are maintaining Diversified/Bulk Commodities and Fertilizers at Overweight, Base Metals at Market Weight and Uranium at Underweight, and recommend Precious Metals at Market Weight,” they said.

These stocks were added to the list, which consists of 21 equities for the second quarter:

* Capstone Mining Corp. (CS-T)

RBC: “We expect Capstone shares to continue to re-rate as the company executes on its growth strategy. We forecast copper production to grow by 50 per cent from 2020 to 2023 driven by debottlenecking at Cozamin from the one-way ramp project and optimization projects at Pinto Valley. Additionally, we believe Capstone offers investors significant leverage to copper prices and an attractive cost profile at current prices. Based on 2021 copper production of 181Mlbs, we estimate that every $0.25 per ounce change in copper will result in a $43-million change in EBITDA (12 per cent). This provides the opportunity for Capstone to generate significant free cash flow at current copper prices – we estimate 11-per-cent FCFY at RBC forecast and current spot prices. Capstone’s Santo Domingo asset offers further copper growth potential and the opportunity to unlock upside from the asset’s cobalt project. Capstone has noted it is open to bringing on a partner to help fund part of the initial capex and would be willing to bring on a financial partner or a larger miner who would operate the project. We currently value CS’s 70-per-cent interest in Santo Domingo at $328-million in our NAVPS (19 per cent of our operating NAVPS estimate) reflecting outstanding financing and execution risk.”

* Hudbay Minerals Inc. (HBM-T)

RBC: “HudBay provides investors with significant exposure to copper (47 per cent of 2021 estimated revenue), zinc (24 per cent), gold, silver & other (29 per cent) and with geographic diversification with producing assets in Manitoba, and Peru. Hudbay’s released updated mine plans for Peru and Manitoba confirm strong growth potential through 2023. Copper production in Peru is expected to grow to 118kt from 73kt in 2020 (61 per cent), and gold in Manitoba to 185koz, from 112koz in 2020 (65 per cent). We expect an FCF inflection in the second half of this year following investments in Manitoba and Peru, which should carry over into 2022 when the company has lower capital spending requirements. Longer term, Hudbay could realize copper production growth from its Rosemont project in Arizona beginning in the mid-2020s.”

* Wheaton Precious Metals Corp. (WPM-T)

RBC: “Our Outperform rating is predicated upon WPM offering favourable production and cash flow growth upside in upcoming years, supported by a low-cost, long-duration portfolio.

Concurrently, Labrador Iron Ore Royalty Corp. (LIF-T) and Glencore International PLC were removed from the portfolio.


In other analyst actions:

* RBC Dominion Securities analyst Wayne Lam upgraded Roxgold Inc. (ROXG-T) to “outperform” from “sector perform” with a target price of $2.25, up from $2. The average target on the Street is $2.58.

* National Bank Financial analyst Zachary Evershed upgraded Uni-Select Inc. (UNS-T) to “outperform” from “sector perform” with a $14 target, rising from $10, while BMO Nesbitt Burns’ Jonathan Lamers raised his target to $12.50 from $10.50 with an “outperform” recommendation. The average on the Street is $13.

* National Bank’s Ryan Li cut his Goodfood Market Corp. (FOOD-T) target to $13 from $13.75 with an “outperform” recommendation. The average is $14.50.

* TD Securities analyst Tim James raised his target for Exchange Income Corp. (EIF-T) shares to $46 from $43 with a “buy” rating. The current average is $43.73.

* BMO Nesbitt Burns analyst Ray Kwan increased his target for shares of Crescent Point Energy Corp. (CPG-T) to $7 from $5, exceeding the $6.03 average, with an “outperform” rating.

* BMO’s Devin Dodge raised his Russel Metals Inc. (RUS-T) target to $26 from $24 with a “market perform” rating. The average is now $27.21.

* Desjardins Securities analyst John Chu cut his target for Heritage Cannabis Holdings Corp. (CANN-CN) to 30 cents from 35 cents with a “buy” rating after trimmed his forecast following weaker-than-anticipated first-quarter results.

“While the company continues to be impacted by COVID-19, we remain bullish on its sales outlook as several interesting sales drivers should start to kick in,” he said. “Despite our slightly more conservative sales outlook, we are still forecasting very strong sales growth for both FY21 and FY22.”

* After a “solid” fourth quarter, Desjardins Securities analyst David Newman raised his target for Spark Power Group Inc. (SPG-T) to $2.25 from $1.75 with a “hold” recommendation. The average on the Street is $2.58.

“We are maintaining our Hold given the going concern and liquidity overhang, but we recognize SPG’s resilience throughout the pandemic (solid organic growth), a potential recovery in Technical Services post-COVID-19, robust momentum in Renewables (U.S. wind and solar) and long-term opportunities in Bullfrog’s PPAs,” he said.

* Scotia Capital analyst Konark Gupta trimmed his target for Transat AT Inc. (TRZ-T) to $4 from $5.50 with a “sector perform” rating, while TD Securities’ Tim James dropped his target to $3.25 from $7.50. The average is $5.30.

* Scotia’s Mario Saric raised his Artis Real Estate Investment Trust (AX.UN-T) target to $11.75 from $11 with a “sector perform” recommendation. The average is currently $12.01.

* IA Capital Markets analyst Chelsea Stellick increased her Valeo Pharma Inc. (VPH-CN) target to $3.10 from $2.20 with a “buy” rating.

“Last week, Valeo reported Q1/F21 results with lacklustre growth and higher expenses. However, the weak quarter was far outweighed by last week’s transformative in-licensing of Enerzair and Atectura Breezhaler. To commercialize and support these products along with Redesca and others, VPH requires a large scale up of operations in F2021. We believe this investment will yield an excellent ROI thanks to VPH’s nascent, valuable product portfolio that will expand revenue by more than an order of magnitude in the coming years while rapidly increasing profitability,” she said.

* Raymond James analyst Steven Li bumped up his Converge Technology Solutions Corp. (CTS-T) target by a loonie to $8.75 with an “outperform” rating. The average is $9.31.

“Converge M&A playbook has been to acquire inexpensive product resellers at 4-5 times EBITDA and turn those 10-per-cent GM reseller relationships into 30-per-cent GM recurring managed services contracts over time,” said Mr. Li. “Dasher, with strong relationships but no recurring revenues, fits that mould perfectly. .... Given management commentary around an active and full M&A pipeline, we believe CTS will remain very active in M&A this year, and we are baking in the next acquisition once again. CTS is our 2021 Best Pick.”

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