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

Canadian National Railway Co.’s (CNR-T) current strategic plan is “a step in the right direction to unlock value,” according to Desjardins Securities analyst Benoit Poirier.

However, given concerns from its second-largest investor, TCI Fund Management, about its ability to execute on the plan, which targets $700-million of incremental operating income in 2022, he expects a proxy fight between both parties.

That led Mr. Poirier to maintain a “hold” rating for CN shares, saying “we prefer to wait for the outcome of the proxy fight and/ or early signs of progress with [operating ratio] improvement initiatives.”

“CN highlighted that an OR of 57 per cent would be optimal in the current context, with customers and regulators putting a strong focus on expanding customer choice, service and reliability,” he said. “In its latest letter to the board, TCI highlighted that CN should be the most efficient and fastest growing railroad in the industry. We therefore believe that it is reasonable to expect that TCI will continue to push for this agenda through a proxy fight to unlock the full potential of the business.”

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Despite TCI’s concerns, Mr. Poirier said the plan provides him “confidence that CN’s current management will focus on addressing the OR gap vs peers,” leading him to tweak his 2021 OR assumption to 61.7 per cent, down from 62.2 per cent and better than the 62.0 per cent consensus. That led him to raise his adjusted earnings per share projection to $5.55, up from $5.46.

“This would represent adjusted EPS growth of 7 per cent year-over-year vs management’s double-digit growth guidance,” said Mr. Poirier. “For 2022, we have reduced our volume growth assumption to 3 per cent (RTM basis), down from 6 per cent initially, to account for the weaker environment for grain in Canada. That being said, we increased the yield component (4 per cent vs 2 per cent initially) to reflect management’s pricing target ($150-million improvement to operating income in 2022). Meanwhile, we now forecast that CN will be able to generate an OR of 57.3 per cent in 2022 (vs management’s 57.0-per-cemt target), translating into an adjusted EPS of $6.69 (up 21 per cent year-over-year vs management’s 20-per-cent growth target; we initially expected $6.39). We expect execution to remain key.”

Maintaining a “hold” rating for CN shares, Mr. Poirier increased his target by $1 to $163. The average target on the Street is $153, according to Refinitiv data.

Elsewhere, Raymond James analyst Steve Hansen cut CN to “market perform” from “outperform” with a $158 target, up from $152.

“While many investors will undoubtedly view this plan as a reactionary tactic in the wake of mounting activist pressure, we still regard it as the right path for CN—even if it requires management to eat a little humble pie and undo past actions aimed at ‘feeding the beast’ (i.e. trucking acquisitions). The good news is that we view this ‘about face’ as a plausible plan. The challenge is that we feel investors are already paying up for much of the initial (easiest) upside. In this context, with grain traffic headwinds also emerging (i.e. weak harvest), we have elected to downgrade our rating,” he said.

TD Securities’ Cherilyn Radbourne raised her rating to “buy” from “hold” with a $175 target, up from $165.

“We believe that CN’s targets, which imply 2022 EPS of $7.00, will put a floor under the stock to some degree, and increase investors’ assessment of the company’s multi-year earnings potential, as the market anticipates TCI’s response. Attracting volume growth has never been a problem for the CN franchise, and in any likely scenario, the company’s operating leverage looks poised to improve. As such, we are upgrading our rating,” said Ms. Radbourne.

Meanwhile, BMO Nesbitt Burns’ Fadi Chamoun reinstated coverage with a “market perform” rating, down from “outperform” previously, with a $155 target, up from $150.

Other analysts raising their targets include:

* National Bank Financial’s Cameron Doerksen to $151 from $144 with a “sector perform” rating.

* Cowen’s Jason Seidl to US$119 from US$110 with a “market perform” rating.

* Stephens’ Justin Long to US$120 from US$114 with an “equal-weight” rating.

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Citi analyst Prashant Rao raised his financial expectations for Imperial Oil Ltd. (IMO-T) in response to an expectation for tighter than previously anticipated Canadian crude differentials over the next 12-18 months, reduced longer-term global refining expectations and higher implied weighted average cost of capital.

With his funds from operations expectations now below the Street by 8 per cent for the third quarter and full year 2021 and 6 per cent lower for 2022, Mr. Rao lowered his earnings per share projections for 2021 and 2022 to $3.70 and $5.29, respectively, from $3.84 and $3.99.

Keeping a “neutral” recommendation, he cut his target for its shares to $38 from $44. The average on the Street is $41.47.

“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.

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In a research note titled Five Reasons We Expect Continued Outperformance, Scotia Capital analyst Ben Isaacson upgraded Methanex Corp. (MEOH-Q, MX-T) to “sector outperform” from “sector perform.”

He said: “We see (at least) 5 reasons for continued outperformance: 1. Reduced operating rates and plant outages continue to limit near-term methanol availability; 2. We remain in a demand-driven methanol market, despite Delta-variant fears. We estimate the difference between a supply- and demand-driven market is worth $300-million in annual FCF; 3. Marginal cost has soared by about $100/mt over the past year, providing incredible cost curve support to pricing should demand collapse in an unchanged global energy complex; 4. We believe the Street will raise EBITDA estimates through ‘22 over the coming weeks, as investors begin to finalize their Q3 expectations; and 5. Last week’s buyback announcement doesn’t hurt, especially for a company that has repurchased one-third of its stock over the past 15 years.”

With those views, the analyst raised his 2022 EBITDA estimate to US$960-million, exceeding the Street’s expectation (US$840-million) by 15 per cent.

Mr. Isaascson raised his target for Methanex shares to US$50 target from US$40. The current average is US$45.85.

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RBC Dominion Securities analyst Sabahat Khan thinks Ritchie Bros. Auctioneers Inc. (RBA-N, RBA-T) is “positioning itself for growth across multiple channels.”

In a research report released Monday, he initiated coverage of the Burnaby, B.C.-based company with a “sector perform” recommendation, noting it has “undergone a significant transition over the last decade as it has increasingly evolved from an auctioneer of heavy equipment to a technology-led marketplace.”

“The auctions channel only accounts for 10 per cent of the $300-billion global annual used equipment market,” Mr. Khan added. “Transforming from an auctioneer to a marketplace should help the company make further inroads into the remaining 90 per cent of the used equipment market, which is comprised of the Midstream (private sales/brokerage) and Upstream (dealer/rental) channels, while also improving its competitive positioning in the auctions channel. This transition has been driven by investments in technology and a number of acquisitions, with the May 2017 acquisition of IronPlanet being the most significant inflection point in the company’s digital evolution.”

Mr. Khan set his rating reflects the “challenging” supply environment hampering the industry, difficult year-over-year comparables and the view that it may “could take longer than the market anticipates to generate ‘critical mass’ for Ritchie Bros.’ omni-channel platform.”

“We reflect this caution in our valuation multiple (at a 1.5 times discount to the company’s current trading multiple) and our 2022 and 2023 EPS forecasts, which are below consensus,” he said. “We see upside to our forecasts and valuation multiple if: 1) the supply environment improves earlier-than-anticipated; 2) the company is able to generate stronger-than-expected traction for its ecosystem; and, 3) the company is able to realize higher-than-expected revenue/cost synergies from the pending Euro Auctions acquisition.”

Mr. Khan set a target of US$65 per share. The average is currently US$62.67.

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ATB Capital Markets’ Chris Murray sees NFI Group Inc. (NFI-T) supply chain issues as a “a significant, albeit manageable, near-term headwind.”

The equity analyst said he was “surprised” after the Winnipeg-based bus manufacturer cut its full-year 2021 financial guidance on Friday, citing the “impact of escalating supply chain disruptions and logistics delays resulting from the ongoing COVID-19 pandemic.” It said conditions have deteriorated since the Aug. 4 release of its second-quarter results, where it reaffirmed its confidence in its financial targets, and now expects to see an impact from the difficulties extending into the first half of 2022.

However, Mr. Murray sees NFI remaining “well-positioned to benefit from a longer-term, secular shift towards zero-emission forms of public transportation with cost-savings sourced from NFI Forward supporting its medium-term (2025) EBITDA target of $400-million-$450-million.

“While we anticipate that the impact of the pandemic will result in some choppiness in results over the near-term, longer-term we see the company having a dominant position in electric vehicles in its class for several years,” he added.

“While our revised estimates call for leverage to increase through Q4/21, we see flexibility around the covenant structure given the impact of the pandemic with more normalized levels of EBITDA reducing leverage levels in 2022. Despite the headwinds, management projects that it will have $400-million in liquidity at Q4/21 which we view as sufficient to support near-term operations while maintaining the current dividend.”

Mr. Murray cut his 2021 adjusted EBITDA and fully diluted earnings per share projections to $175.6-million and a loss of 3 cents, respectively, from $238.5-million and 88 cents. His 2022 estimates slid to $271.8-million and $1.06 from $311.7-million and $1.58.

Keeping an “outperform” rating for NFI shares, he also lowered his target to $34 from $38. The average on the Street is $32.31.

Elsewhere, Stifel analyst Maggie MacDougall downgraded NFI to “sell” from “hold” with a $22 target, down from $27.50.

“The supply chain challenges unfortunately bring financial leverage once again to the forefront. We believe that NFI is likely to receive covenant relief for 2022; however, given a lack of visibility on supply chain resolution and high debt, we question the logic in maintaining a $45-million annual dividend,” she said.

TD Securities’ Daryl Young dropped his rating to “hold” from “buy” with a $31 target, down from $35.

“We continue to believe that NFI is well-positioned to capitalize on the evolution to ZEBs and view its long-term prospects favourably. However, we see few near-term catalysts, given management’s expectation of protracted supply-chain challenges and the elevated balance-sheet leverage,” Mr. Young said.

Others making changes include:

* Scotia Capital’s Mark Neville to $32 from $34 with a “sector outperform” rating.

“The fact that NFI is facing (seemingly escalating) supply chain challenges, including logistical delays/inflation, should not come as a surprise – as the issues are global, and impacting many industries and manufacturers,” said Mr. Neville. “As such, a 2021 guidance reduction likely won’t come as a major surprise. However, the magnitude of the revision might: 2021 adj. EBITDA was guided down 22 per cent, implying 2H/21 adj. EBITDA 40 per cent below management’s prior expectations.”

* CIBC World Markets analyst Kevin Chiang to $30 from $34 with a “neutral” rating.

“While we recognize that the issues plaguing NFI are out of its control (i.e., supply chain issues), we suspect its shares will remain in the “penalty box” until we have greater clarity on its earnings recovery coming out of the pandemic. Nonetheless, we have a constructive long-term outlook on NFI and believe that the stock gets interesting again in the mid-C$20s,” said Mr. Chiang.

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head of the release of its third-quarter financial results on Sept. 29, Desjardins Securities analyst Gary Ho reaffirmed AGF Management Ltd. (AGF.B-T) as his “top asset manager pick.”

“Continued retail sales momentum (fourth consecutive quarter of positive flows), the DSC ban tailwind benefiting EPS and FCF, and management’s pivot to growth through expanding its private alts platform should further re-rate the stock higher, in our view,” he said.

For the quarter, he’s projecting retail net flows of $228-million, up from $22-million in net redemptions a year ago, with earnings per share of 17 cents (versus 8 cents during the third quarter of 2020).

“Having turned around fund performance and improved net flows (in addition to crystalizing value on the S&W non-core asset), we believe management will gradually turn its focus to growth, particularly by deploying capital to build out its private alts platform. AGF has $50-million in net cash, generates $40–50-million in FCF and the DSC tailwind provides $30–35-million in FCF (beginning June 2022). Layering on top 1.5-times leverage gives AGF $250–300-million in dry powder. We expect more JV-like partnerships (sharing of economics with the partner having skin in the game). Management remains confident that it can hit its $5-billion private alt AUM by FY22 (vs $2.2-billion today.”

Maintaining a “buy” rating, Mr. Ho increased his target for AGF shares to $10.50 from $9.75. The average on the Street is $8.96.

“We foresee a few near- or medium-term positive catalysts: (1) retail net sales momentum; (2) redeploy capital for organic growth, seed new private alt strategies and share buybacks; (3) growth in fees/earnings from its alt platform; (4) execution on SG&A cost reduction to improve EBITDA and EBITDA margins; and (5) DSC ban benefiting FCF and EPS,” he said.

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In other analyst actions:

* Scotia Capital analyst Paul Steep raised his target for shares of Constellation Software Inc. (CSU-T) to $2,400 from $2,100, topping the $2,266.17 average, with a “sector outperform” rating.

“Our view is that Constellation’s ongoing M&A activity supports the efforts it took to modify its organizational structure to support an increased acquisition pace, with the firm having delivered a material increase in both acquisition and total capital deployed over the past several years,” said Mr. Steep.

* After a virtual chat with CFO Todd Ingledew, Scotia’s Patricia Baker raised her target for Aritzia Inc. (ATZ-T) to $44 from $41 with a “sector outperform” rating. The average is $42.25.

“With its arguably world-class e-commerce platform, small brick and mortar footprint (affording more opportunities for growth), outstanding boutiques providing an enhanced shopping experience, unique operating model, and brand positioning, we see the long-term opportunity for ATZ remains rich with growth potential,” she said.

* After the close its US$17.3-million equity financing, Desjardins Securities analyst John Sclodnick resumed coverage of Integra Resources Corp. (ITR-X) with a $6.75 target, down from $7, with a “buy” rating, while National Bank Financial analyst Rabi Nizami resumed coverage with an “outperform” rating and $6.50 target. The average on the Street is $7.50.

“With the stock trading at 0.43 times our revised NAV (a 20-per-cent discount to developer peers at 0.54 times), we see an attractive entry point, particularly given the catalyst-rich 4Q21,” said Mr. Sclodnick. “We expect to see more strong drill results, but the big catalyst will be the release of the PFS and updated resource estimate, all scheduled for 4Q21.”

* Following the close of its US$820-million acquisition of Alliance Healthcare Services, Canaccord Genuity analyst Tania Gonsalves raised her target for Akumin Inc. (AKU-Q, AKU-T) to US$5.75 from US$4.50 with a “buy” rating. The average is US$5.15.

“The stock is likely to remain under pressure until AKU files its Q2/21 results,” she said. “As a reminder, the delay in filing was due to AKU’s new lead auditor at Ernst & Young wanting to review and potentially modify the methodology used to convert financials from IFRS to US GAAP. A reassessment of accounts receivable and provisions for credit losses could result in either a positive or negative impact on past periods. We continue to patiently wait for this issue to be rectified. Given the implied almost 150-per-cent upside to our PT, we reiterate our BUY rating on shares of AKU.”

* In response to an increased lithium price forecast, Stifel analyst Anoop Prihar raised his target for Lithium Americas Corp. (LAC-N, LAC-T) to US$30.40 from US$24.50 with a “buy” rating. The average is US$25.68.

* Mr. Prihar also increased his target for shares of Neo Lithium Corp. (NLC-X) to $5.80 from $4.10 with a “buy” rating. The average is $6.43.

* National Bank’s Matt Kornack raised his target for Granite Real Estate Investment Trust (GRT.UN-T) to $105 from $94, exceeding the $95.30 average, with an “outperform” rating.

* Piper Sandler analyst Michael Lavery cut his Canopy Growth Corp. (CGC-Q, WEED-T) target to US$15 from US$19, maintaining a “neutral” rating. The average is US$22.99.

* MKM Partners analyst William Kirk lowered his Aurora Cannabis Inc. (ACB-T) target to $6 from $9 with a “sell” recommendation. The average is $7.99.

* CIBC World Markets analyst Todd Coupland raised his Lightspeed Commerce Inc. (LSPD-T) target to $195 from $155 with an “outperformer” rating. The current average is $137.79.

“Lightspeed peer Toast recently filed its S-1 for an IPO on the NYSE and set its pricing range,” he said. “Compared to Toast, Lightspeed has superior growth, higher gross margins and has had better business plan execution. This favorable comparison led us to increase our Lightspeed forecast and price target. Lightspeed is benefiting from Gross Transaction Value (GTV) and customer location growth as well as strong Lightspeed Payments adoption, positioning it for at least 50 per cent of customer locations to adopt Payments over the next few years. As a result, we expect its superior growth will continue.”

* RBC started I-80 Gold Corp. (IAU-T) with an “outperform” rating and $5 target, topping the average by 1 cent.

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