Inside the Market’s roundup of some of today’s key analyst actions
Though he continues to see good value in units of Artis Real Estate Investment Trust (AX.UN-T), RBC Dominion Securities analyst Matt Logan predicts “a wide range of potential outcomes — good and bad — over the next 2–3 years.”
Based on that “uncertainty,” he lowered his rating for the Winnipeg-based REIT to “sector perform” from an “outperform” recommendation on Monday.
“We are moving our rating .... , due to: 1) what we see as an increased risk profile, owing to a continued lack of details surrounding Artis REIT’s (“AX”) transformation plan and execution risk in accomplishing these objectives; and, 2) limited conviction in the future trading multiple, given a lack of comparable companies for the business that AX aspires to become,” said Mr. Logan.
With its quarterly results, Artis said it could sell $0.5-$1-billion in assets in 2021 with sales of $1.0-$1.5-billion over the next 2-3 years.
“With a view towards selling industrial assets initially, this would leave an income producing portfolio of $3.1–3.6B focused on office and retail— perhaps with industrial exposure via public securities,” said Mr. Logan. “Overall, AX indicated that it expects the ownership of direct assets will continue to represent the majority of its asset base. ... but many questions still remain.
“Our most pressing questions relate to potential tax implications and the nature of the relationship with Sandpiper Group going forward. With respect to the former, AX declined to comment given the unknowns of potential transaction structures. For the latter, AX aims to finalize the details in advance of the May 21st AGM. To this end, we believe unitholders would also be well-served to know Sandpiper’s investing track-record, given potentially significant reliance on the firm for AX’s planned investments in public securities and portfolio companies.”
Also doubting its ability to improve its net asset value “meaningfully” while reducing its debt, Mr. Logan cut his target for Artis units to $11 target from $13. The average on the Street is $11.79, according to Refinitiv data.
A pair of analysts on the Street lowered their ratings for Centerra Gold Inc. (CG-T) after Kyrgyzstan’s parliament passed a law last week allowing the state to temporarily take over the Kumtor gold mine.
“We are not surprised - we have been anticipating something like this since President Japarov took power on January 10; however, the speed and breadth of these reforms has caught us off-guard,” said Canaccord Genuity’s Dalton Baretto. “We believe this opens the door to what is likely going to be a multi-year degradation of the relationship with the Kyrgyz State, and while CG will leverage all available avenues of international trade disputes, we believe these are unlikely to be effective in the long term. Mr. Japarov has made no secret of wanting to align himself with Russia and China at the expense of Western relationships, and we believe there is a reasonably high probability that Kumtor could be a casualty of this geopolitical paradigm shift. Nonetheless, we do not believe this is imminent, but rather will likely take years to play out if it happens.”
Mr. Baretto moved Centerra shares to “hold” from “speculative buy” with an $11.50 target, down from $14.50. The average on the Street is $13.53.
Elsewhere, CIBC World Markets analyst Anita Soni downgraded Centerra to “underperformer” from “neutral” with a $10 target, falling from $16.50.
“We have updated our model to reflect the negative headwinds out of Kyrgyzstan (including the $170M tax assessment),” Ms. Soni said. “We are now using an NPV target multiple of 0.7 times and a 2021 CFPS multiple of 2.0x. We view these developments as a negative for the stock and will wait for further details. Kumtor represents 52 per cent of our NAV5%, or $6.68 per share (using the CIBC gold price deck, and $6.01 using spot prices). Per our estimates, CG represents 70 per cent of the company’s cash flow from operations in 2021 (on our CIBC price deck).”
Others making target changes include:
* Scotia Capital’s Trevor Turnbull to $8 from $19 with a “sector perform” rating.
“We are maintaining our Sector Perform rating, given we expect a severe share price decline that will likely price much of Kumtor’s value out,” he said. “We note that previous political crises have been resolved with Centerra able to continue operating Kumtor profitably. However, they usually take an extended period of negotiations spanning months to years that impede Centerra’s ability to participate fully in its gold price leverage. We would be cautious buying the dip as resolution is uncertain and in our opinion unlikely to be rapid.”
* National Bank Financial’s Michael Parkin to $10.25 from $18.50 with an “outperform” rating.
With the urban, multi-family leasing market showing signs of a recovery, Raymond James analyst Brad Sturges sees “greater potential upside” for Minto Apartment Real Estate Investment Trust (MI.UN-T), leading him to upgrade it to “strong buy” from “outperform.”
“We believe Minto can offer relatively greater total return potential by capturing improving Canadian urban multifamily fundamentals,” he said. “In our view, Minto’s discount valuation to pre-covid levels provides an above-average P/AFFO multiple expansion opportunity as conditions improve, given Minto’s above-average organic growth recovery prospects that reflect greater unfurnished occupancy rate upside, and rising AMRs year-over-year.”
Seeing the demand trend starting to “showcase encouraging signs of improvement,” Mr. Sturges increased his target by $1 to $26. The average is $24.28.
Pointing to “multiple avenues driving robust demand for Canadian self storage space,” Mr. Sturges also raised his rating for Storagevault Canada Inc. (SVI-X) to “outperform” from a “market perform” recommendation, suggesting it could generate “strong” organic growth in 2021.
“Despite reduced foreign immigration levels in Canada as a result of COVID-19 restrictions, multiple other demand drivers have improved StorageVault’s lead generation and leasing activity for its self storage facilities,” he said. “Some of these drivers include increased home renovation and general housing transactional activity, greater non-discretionary demand (i.e. the 6 D’s), remote working and learning, and higher commercial tenant demand. With a greater focus on increasing penetration rates with the millennial cohort, StorageVault’s increased pricing power can drive strong organic growth year-over-year in 2021.”
Mr. Sturges raised his target for the Toronto-based company’s shares to $5.25 from $4.50. The average is $4.86.
“We are upgrading StorageVault ... to reflect: 1) the company’s strong lead generation and leasing activity that can capture accelerating demand fundamentals for Canadian self storage space, supporting a runway for StorageVault to generate robust NAV/share growth year-over-year in the coming quarters; and 2) StorageVault’s improved relative valuation to its US storage peers, as its relative premium has somewhat narrowed recently,” he said.
Elsewhere, TD Securities analyst Jonathan Kelcher raised his target to $5 from $4.75, reiterating a “hold” rating.
A group of equity analysts on the Street adjusted their target prices for shares of Air Canada (AC-T) on Monday in response to its weaker-than-anticipated first-quarter results.
On Friday, the airline reported an earnings before interest, taxes, depreciation and amortization loss of $763-million, exceeding the Street’s expectation of a $632-million loss.
TD Securities analyst Tim James raised Air Canada to “buy” from “hold” with a $30 target, up from $27. The average on the Street is $27.97.
Elsewhere, RBC Dominion Securities analyst Walter Spracklin said he’s putting “very little emphasis” on the quarterly results outside of in-line cash burn and its balance sheet, which he thinks is “well positioned to weather the storm.”
Keeping an “outperform” rating for its shares, he raised his target to $26 from $24.
“We are maintaining our OP recommendation on the view that near term trends are expected to trend significantly more positive, which we expect will be favourable to the stock,” said Mr. Spracklin.
Others making adjustments include:
* Scotia Capital’s Konark Gupta to $28 from $29 with a “sector perform” rating.
“While AC is well-positioned, in terms of liquidity and resource readiness, for a multi-year recovery, we prefer waiting for a more opportunistic entry point or more FCF visibility as recovery may not be smooth initially,” he said. “AC’s enterprise value is already at 90 per cent of the pre-pandemic peak ($16.4-billion, which equated to 4.5 times peak EBITDA) and could close the gap by year-end (at current share price) as we project net debt to increase by $1.8-billion by year-end. At the same time, we are not expecting EBITDA to fully recover until 2024, although FCF could recover by 2023 as capex has likely normalized.”
* JP Morgan’s Jamie Baker to $29 from $31 with an “overweight” rating.
Projecting the uranium market to remain in “recovery mode” and expecting a slow price recovery, RBC Dominion Securities analyst Andrew Wong thinks Cameco Corp. (CCO-T, CCJ-N) are currently overvalued.
“We continue to expect the uranium market recovery will be longer term and gradual as the market is in relative balance in the medium term and enters a deficit in the mid-2020s,” he said. “We think increased speculative spot market purchases by juniors and financials is incrementally positive, but do not expect a true market recovery until utility end-users enter the market. We also see some risk to the pace of market recovery if the material purchased by non-utilities re-enters the market or if the recent equity raises by junior developers accelerate mine development plans such that new supply is added to our outlook.
“We think recent policy developments for nuclear power are net positive and forecast nuclear capacity to grow at a 2-per-cent CAGR [compound annual growth rate] through 2035. We view recent support for nuclear in the U.S. and Europe as supportive for existing nuclear plants to continue operating – but we also note that ongoing nuclear capacity in Western countries has been our base-case scenario and does not add significant new demand to our forecasts. We think China’s growth in nuclear capacity is positive and the recent increased pace of construction is encouraging, but China’s commitment to nuclear is not new, and the country has also worked to be less reliant on outside parties for nuclear fuel supply.”
Mr. Wong estimate Cameco shares currently trade at 1.8 times price to net asset value or 9 times enterprise value to EBITDA based on $60 per pound uranium. He said that the last time Cameco traded at “similarly high” valuations was during “the significant uranium price run-up in 2004-06, when price expectations were being continually revised upwards.”
“While we expect uranium prices to rise longer term, we do not believe the current market environment is similar to the 2004-06 period,” he emphasized.
However, after raising his 2021 and 2022 EBITDA projections based on an earlier-than-expected re-start of its Cigar Lake mine and lower costs, he raised his target to $17 from $15, reiterating an “underperform” recommendation seeing its shares as “fully valued with downside risk and limited upside potential.” The average on the Street is $22.02.
Elsewhere, BMO Nesbitt Burns analyst Alexander Pearce downgraded Cameco to “market perform” from “outperform” with a $23 target, citing recent share price appreciation.
“Cameco remains a ‘go-to’ stock for many investors looking for uranium exposure due to its size and liquidity,” he said. “However, with a strong positive share price reaction following its results, the stock moved through our $23 per share target price.
“Looking ahead, ongoing improving sentiment could see further upside, particularly if Cameco successfully delivers on further L/T contracts, which could drive trading multiples through its historical range, however, at this point we believe the stock is fairly priced.”
Others making target changes include:
* Raymond James’ Brian MacArthur to $24 from $22 with an “outperform” recommendation.
“We believe Cameco provides investors with lower-risk exposure to the uranium market given its diversification of uranium sources,” said Mr. MacArthur. “These sources are supported by a portfolio of long-term contracts that provide some downside protection in periods of depressed spot uranium prices, while maintaining optionality to higher uranium prices. In addition, the company has multiple operations curtailed that can be brought back should uranium prices increase. Although the September 2018/June 2020 tax court decisions apply only to the 2003, 2005, and 2006 tax years, we view it as a positive for the company given we believe it will be relevant in determining the outcome for subsequent years and reduces risk related to the CRA dispute.”
* TD Securities’ Greg Barnes to $25 from $22 with a “hold” rating.
After “mixed” first-quarter results, Desjardins Securities analyst Frederic Tremblay says he’s remains “on the sidelines” on KP Tissue Inc. (KPT-T), citing “near-term demand dynamics and an unfavourable input cost environment.”
On Friday, the Mississauga-based company reported revenue of $310.4-million, down 17.3 per cent year-over-year and well below both Mr. Tremblay’s $375-million forecast and the consensus estimate of $362.3-million due to higher-than-anticipated destocking and continued low volume in Away From Home (AFH) tissue paper. At the same time, adjusted EBITDA of $37.5-million was a drop of 26.5 per cent but exceeded expectations ($35.3-million and $36.7-million, respectively).
“Despite demand pressures, the company gained market share sequentially across its bathroom tissue, facial tissue and paper towel product categories,” he said. “We are also pleased that the new TAD Sherbrooke plant is ramping up faster than anticipated. We are optimistic that continued investments in brand equity, product innovation and asset modernization can support incremental gains in Canada and/or the U.S.”
Despite those market share gains, Mr. Tremblay emphasized a “mixed” outlook lingers for the company despite his view that its management is “taking appropriate measures to position the company for long-term success.”
“We expect KPT to lap tough comps in 2Q21 as customers work through the rest of their excess reserves (a sharp difference with the year-ago period when exceptional performance was fuelled by pantry loading),” he said. “On the cost side, we expect a severe impact from higher input costs, particularly pulp prices, which have remained on a sharp upward trend in early 2Q. While KPT and others have announced selling price increases to offset recent cost inflation, their impact should be felt starting in 3Q, and it is unclear if they will ultimately provide a full offset. Overall, our current view is that 2H21 should be sequentially better than 1H21 (and 2022 better than 2021) based on improved pricing, consumer demand gradually returning to more normalized levels following the destocking, contributions from TAD Sherbrooke and the initial stage of a recovery in the AFH market.”
After reducing his financial expectations through 2022, Mr. Tremblay cut his target for KP Tissue shares to $11.50 from $12.50. The average is $11.42.
Elsewhere, others making target changes include:
* Scotia Capital’s Benoit Laprade to $12.50 from $13 with a “sector perform” rating.
“We now expect KPT to generate similar EBITDA in Q2/21 with improvements postponed to Q3 when price increase implementations in Consumer and AFH should at least partially offset input costs inflation (pulp, freight, packaging, and energy costs),” he said.
* RBC Dominion Securities’ Paul Quinn to $10 from $12 with a “sector perform” rating.
* National Bank’s Zachary Evershed to $11 from $10.50 with a “sector perform” rating.
Citing its “history of conservatism,” RBC Dominion Securities analyst Robert Kwan thinks investors should not be concerned by Pembina Pipeline Corp.’s (PPL-T) decision to not raise its 2021 earnings guidance.
“While we believe actions speak louder than words in this market, we also believe Pembina is an outlier when it comes to its 2021 EBITDA guidance,” he said. “We would read nothing into Pembina not raising guidance and instead focus on the company’s commentary on its Q1/21 conference call and history of conservatism. If all Pembina did was deliver flat results for Q2-Q4 versus 2020, EBITDA would be roughly at the mid-point of its 2021 guidance range despite new projects coming into service throughout 2021 (e.g., Prince Rupert Terminal; Hythe expansion), volume improvement from 2020 and higher commodity prices.”
Mr. Kwan emphasized new growth projects appear to be “on the horizon,” noting: “With the current 2021 capital plan being fully funded by retained cash flow (i.e., no new debt), which will naturally deleverthe balance sheet, we believe it is increasingly likely that the company will announce the restart of previously mothballed projects (e.g., Phases VIII and IX forthe Conventional Pipelines) driven by a recovery in producer activity as well as EBITDA for 2021 coming in above management’s expectations (i.e., additional cash flow will create balance sheet capacity to fund 2022 capex).”
Mr. Kwan emphasized new growth projects appear to be “on the horizon,” noting: “With the current 2021 capital plan being fully funded by retained cash flow (i.e., no new debt), which will naturally delever the balance sheet, we believe it is increasingly likely that the company will announce the restart of previously mothballed projects (e.g., Phases VIII and IX for the Conventional Pipelines) driven by a recovery in producer activity as well as EBITDA for 2021 coming in above management’s expectations (i.e., additional cash flow will create balance sheet capacity to fund 2022 capex).”
Despite that optimism, Mr. Kwan trimmed his 2021 and 2022 EBITDA and adjusted funds from operations per share estimates to reflect a weaker U.S. dollar.
Keeping an “outperform” rating for Pembina shares, he raised his target to $42 from $40. The average is $39.15.
“We continue to view the stock as having attractive total return potential based on a combination of the dividend yield and our expected upside in the share price,” he said.
Elsewhere, National Bank Financial analyst Patrick Kenny raised his target to $39 from $38 with a “sector perform” rating and ATB Capital Markets’ Nate Heywood raised his target to $40 from $39 also with an “outperform” recommendation.
In other analyst actions:
* CIBC’s Robert Bek raised his Telus Corp. (T-T) target to $29 from $28 with an “outperformer” rating. The average is $29.36.
“We remain encouraged by TELUS’ fibre roadmap, and expect a more pronounced positive effect on financials in the coming quarters. In addition, the company’s Health platform continues to scale,” he said. “We continue to view TELUS as very well positioned relative to its peers, with strong non-traditional assets providing additional upside to the story. Further visibility on TELUS Health economics will ultimately be incremental to valuations, in our view.”
* CIBC’s John Zamparo increased his Recipe Unlimited Corp. (RECP-T) target to $22 from $19, exceeding the $21 average, with a “neutral” rating, while BMO Nesbitt Burns analyst Peter Sklar raised his target to $21 from $17.50 with a “market perform” rating and RBC’s Sabahat Khan raised his target to $20 from $19 with a “sector perform” recommendation.
“For Q2/21, as expected with the third-wave lockdowns (especially in Ontario, which comprises 55 per cent of Recipe’s network), system sales will continue to be pressured. However, we remain optimistic for H2/21,” said Mr. Sklar.
* Mr. Kuske raised his target for Enbridge Inc. (ENB-T) to $52 from $50 with a “neutral” rating. The average is $51.65.
* Desjardins Securities analyst Gary Ho raised his target for Sprott Inc. (SII-N, SII-T) to US$44 from US$40 with a “hold” rating and RBC Dominion Securities’ Geoffrey Kwan increased his target to $58 from $55 with a “sector perform” rating. The average is $53.82.
“SII is fairly valued, in our view,” Mr. Ho said. “That said, the stock stands to benefit from increased US investor exposure, the tuck-in acquisition of UPC (bolstering its physical trust line-up) and a renewed interest in the silver trade. Robust brokerage activities could continue near-term. SII should continue to be influenced by movements in the prices of gold, silver and their related equities.”
* RBC’s Paul Quinn raised his Interfor Corp. (IFP-T) target to $47 from $37 with an “outperform” rating, while TD Securities’ Sean Steuart increased his target to $47 from $44 with a “buy” rating and BMO’s Mark Wilde to $41 from $31 with an “outperform” rating. The average is currently $46.17.
“Interfor Corporation reported Q121 results that were in line with both our forecast and consensus expectations,” he said. “It has been a year to be recorded for posterity – do you remember when lumber was over $1,000? While the long-term impact of the record pricing and free cash flow remains to be seen, we like that producers have avoided exuberance regarding current pricing and continue to allocate capital conservatively. In our view, this is likely to drive further value creation even once prices normalize.”
* Mr. Quinn hiked his target for West Fraser Co. Ltd. (WFG-N, WFG-T) to US$125 from US$100 with an “outperform” rating, while BMO’s Mark Wilde hiked his target to US$99 from US$80 with an “outperform” recommendation. The average is US$95.
“West Fraser reported Q121 results that were in line with consensus expectations but below our forecast as the company shipped less lumber than we anticipated,” he said. “Looking ahead, lumber, OSB, and pulp pricing has continued to exceed our wildest expectations, which should translate into a huge amount of cash flow coming in the door at West Fraser. On our current estimates, we forecast $22 of free cash flow per share in 2021 (or a 32-per-cent FCF yield). We continue to see lots of value not only from the current windfall, but long-term as well.”
* Mr. Kelcher increased his Chartwell Retirement Residences (CSH.UN-T) target by $1 to $14 with a “buy” rating, exceeding the $13.08 average, while Scotia Capital analyst Himanshu Gupta raised his target to $14 from $13.25 with a “sector outperform” rating.
* Scotia Capital analyst George Doumet raised his target for Spin Master Corp. (TOY-T) to $45 from $39 with a “sector perform” rating. The average is $47.36.
“While we are positively surprised by the speed of the turnaround in operations (margin normalization) and expected jump in GPS for the rest of 2021 (driven by the rapid rise in POS coupled with low inventory levels in the retail system), we believe TOY shares are fairly valued (trading at 11 times EBITDA 2021 or a 1.5 times discount to MAT), especially in the context of what we believe could be a potentially tough comp headwind in 2022,” he said.
* TD Securities’ Sam Damiani bumped up his Crombie REIT (CRR.UN-T) target to $16.50 from $15.50 with a “hold” rating, while National Bank’s Tal Woolley increased his target to $18.50 from $17 with an “outperform” recommendation. The average is $16.89.
* TD Securities’ Craig Hutchison raised his Labrador Iron Ore Royalty Corp. (LIF-T) target to $48 from $44 with a “buy” rating. The average is $41.57.
* TD Securities’ Derek Lessard raised his Cineplex Inc. (CGX-T) target to $16 from $15, maintaining a “buy” rating. The average is $13.29.
* National Bank’s Vishal Shreedhar raised his Canadian Tire Corp. Ltd. (CTC.A-T) target to $201 from $199 with an “outperform” rating. The average is $194.18.
* National Bank’s Jaeme Gloyn raised his Intact Financial Corp. (IFC-T) target to $205 from $200, exceeding the $183.27 average, with an “outperform” rating.
* National Bank’s Zachary Evershed raised his GDI Integrated Facility Services Inc. (GDI-T) target to $65 from $59 with an “outperform” rating. The average is $64.14.
* JP Morgan’s Phil Gresh cut his Cenovus Energy Inc. (CVE-T) target to $12 from $13 with a “neutral” rating. The average is $12.03.
* Canaccord Genuity analyst Scott Chan raised his IGM Financial Inc. (IGM-T) target to $50 from $46 with a “buy” rating, while Scotia Capital’s Phil Hardie raised his target from $47 to $48 with a “sector perform” recommendation. The average is $48.89.
* Raymond James analyst Brian MacArthur raised his target for shares of Champion Iron Ltd. (CIA-T) to $7.75 from $7.25 with an “outperform” rating. The average is $7.80.
“We believe Champion offers investors good exposure to premium iron ore through its Bloom Lake asset, which is a long-life, lower-cost asset producing high-grade iron ore concentrate (~66% Fe) located in Quebec, Canada, a lower-risk jurisdiction,” he said. “In addition, we believe Champion
has potential for growth through its Bloom Lake Phase 2 expansion project at favourable capital costs, given the previous owners spent significant capital. Given Champion’s exposure to premium iron ore (which we believe should trade at a premium given structural changes in the iron ore industry), high-quality asset, growth potential, and low jurisdictional risk, we rate the shares Outperform.”
* TD Securities analyst Linda Ezergailis raised his Hydro One Ltd. (H-T) target to $30 from $28 with a “hold” recommendation, while Laurentian Bank Securities’ Nishita Mehta raised her target to $30 from $28 with a “hold” recommendation. The average is $31.73.
“The Q1/21 results were relatively in line with both LBS and consensus estimates,” Ms. Mehta said. “We continue to like Hydro’s stable fundamentals from a regulated business strategy, which has allowed the company to consistently increase dividends, up 5 per cent year-over-year. Additionally, the near-term catalyst for Hydro One is the favorable OEB’s decision on recovery of DTA, that would increase the FFO, thus give the company an opportunity to drive organic growth. However, due to the growth plans, LDC acquisitions, and corporate initiatives, Hydro One should continue to incur higher OM&A costs, thus negating some of its top-line growth.”
* TD’s Cherilyn Radbourne raised his Cervus Equipment Corp. (CERV-T) target to $21 from $19.50, keeping a “buy” rating. The average is $19.88.
* TD’s Derek Lessard bumped up his Dorel Industries Inc. (DII.B-T) target to $15.50 from $14.50, maintaining a “hold” rating. The average is $15.75.