Inside the Market’s roundup of some of today’s key analyst actions
IA Capital Markets analyst Matthew Weekes is taking a “more constructive” long-term growth outlook on TSX-listed pipeline stocks after the Alberta government approved six proposals to develop carbon transportation and storage hubs in the industrial heartland region near Edmonton on Friday.
Moving from his previous “hold” rating for the sector, Mr. Weekes now sees the potential for significant growth “amidst the strong market momentum.”
“The provincial government in Alberta has historically been supportive of carbon capture, utilization and storage (CCUS) development, and the federal government has recently expressed its commitment to developing Canada’s CCUS strategy as part of the country’s goals to lower GHG emissions,” he said in a research note. “This will include a CCUS tax credit, which we should receive more details on this week with the federal budget review. While there are still further stages before construction, and these projects have multi-year development horizons, we are constructive on developments in CCUS as having the potential to provide new revenue streams and expansion opportunities for Pipeline companies over the long term, supplementing growth in the core, traditional asset bases.”
Mr. Weekes thinks government assistance should help ensure that these projects provide “reasonable economics and a rate of return for private sector investors.”
“The companies have stated that projects could be in service as early as 2025,” he added. “While initial buildouts of these transportation and storage systems will likely provide a modest boost to EBITDA for these companies compared to investments in the core, traditional asset bases, over time, these investments will have the opportunity to be scaled up to reach new regions and tie in more emitters, which could be either existing facilities adding carbon capture technology or new ones built with a low-carbon.”
Seeing TC Energy Corp. (TRP-T) as a “sector outperformer” and possessing “the ability to trade at a premium valuation as its dominant position in North American natural gas infrastructure should drive sustainable, long-term growth to fuel the energy transition,” Mr. Weekes raised his rating for its shares to “buy” from “hold” with a $74 target, rising from $72 and above the $69.21 average on the Street, according to Refinitiv data.
With his new view on the sector leading to increased terminal growth rate forecasts, he also raised his target for Enbridge Inc. (ENB-T, “hold”) to $59 from $57. The average is $56.57.
Concurrently, after “another solid” week, Mr. Weekes raised his target for Parkland Corp. (PKI-T, “strong buy”) to $47 from $46 with it “continuing its positive momentum since reporting Q4 results and committing to a near-term deleveraging focus.” The average is $48.77.
Equity analysts at iA Capital Markets updated their “2022 Top Picks” list on Monday.
It now consists of 11 stocks across the firm’s growing coverage universe.
“Recall that in 2021 our Top Picks delivered a return of over 34 per cent, beating the TSX Composite Index at just under 22 per cent,” said Neil Linsdell, the firm’s research head. “With the refreshed list that we published on January 10, 2022, we have managed to generate a return of just over 10 per cent year-to-date versus the TSX Composite at just under 4 per cent over the same period. With the extremely dynamic environment so far in 2022 and some changes in our analyst roster, we are locking in those gains from Q1 and providing an updated list to start Q2.”
“We started off the year with Hydro One as a top pick, focusing on risk-adjusted returns and relative value within the infrastructure space,” he said. “We believe that Hydro One represented a stable pick with relative value upside compared to regulated peers when considering the Company’s strong balance sheet, pure-play electric transmission and distribution business, and mid-single-digit run-rate growth profile. Utilities on average have performed essentially in line with the TSX year-to-date in what we would consider a mixed macro backdrop, with the outlook for rising interest rates, which is typically a headwind for sector valuations, competing with the stability and constructive growth outlook for these companies as providers of essential domestic energy infrastructure. The dynamic of higher interest rates and the compression of relative yield spreads will likely continue going forward, keeping P/E valuations in check. We are electing to revise our top pick in Energy, choosing instead to go with a name in the oil and gas Royalty space amidst the backdrop of high commodity prices, improving views on conventional energy development in North America, and the ability of low-cost businesses to provide natural protection against inflation.”
He has a “strong buy” rating and $19 target for Freehold shares, exceeding the $18.39. average on the Street.
“Within the sector, we believe FRU offers compelling relative valuation to peers, with the lowest leverage in the sector and unique U.S. exposure, which provide an additional layer of diversification and business sustainability,” he said. “Based on our commodity price sensitivity analysis, FRU’s debt will be fully repaid by mid-year at current commodity prices, assuming no acquisitions. However, we believe that FRU will continue to pursue acquisitions, focusing on US acreage and taking a patient approach that seeks reasonable valuations while near-term organic production growth is generated from existing acreage. Finally, our sensitivity analysis indicates that FRU’s dividend, which is currently yielding more than 6 per cent, is sustainable at low oil prices.”
Mr. Weekes’s other pick for the list continues to be Mullen Group Ltd. (MTL-T) with a “strong buy” and $16.50 target. The average is $14.86.
With the introduction of the real estate sector to the list for this quarter, analyst Johann Rodrigues added InterRent REIT (IIP.UN-T). He has a “buy” rating and $20 target, exceeding the $19.64 average.
“With best-in-class growth, an aligned management team that is among the best operators in Canada, and a portfolio heavily geared towards the hottest rental markets in Canada (85 per cent in the GTA/Ottawa/Montreal/Vancouver), we think InterRent is poised to enjoy a strong rest of 2022 and thus are making it our Top Pick,” he said.
The firm’s other returning picks include:
- Brookfield Infrastructure Partners L.P. (BIP.UN-T) with a “strong buy” rating and US$72 target. The average on the Street is US$67.92.
- CareRx Corp. (CRRX-T) with a “buy” rating and $10 target. Average: $9.19.
- Copper Mountain Mining Corp. (CMMC-T) with a “strong buy” rating and $6.30 target. Average: $5.21.
- GDI Integrated Facility Services Inc. (GDI-T) with a “buy” rating and $72.50 target. Average: $68.29.
- Premium Brands Holdings Corp. (PBH-T) with a “buy” rating and $145 target. Average: $145.30.
- Quipt Home Medical Corp. (QIPT-X) with a “buy” rating and $5.60 target. Average: $12.59.
- TransAlta Corp. (TA-T) with a “strong buy” and $16.50 target. Average: $16.09.
- Wesdome Gold Mines Ltd. (WDO-T) with a “buy” rating and $20 target. Average: $16.53.
Analysts at RBC Dominion Securities added Skeena Resources Ltd. (SKE-T) to their “Best Ideas Portfolio” of global mining stocks for the second quarter of the year.
It was the only company joining the list of 24 equities, replacing London-based Hochschild Mining PLC.
“The Q1/22 RBCCM Global Mining Best Ideas equal-weighted portfolio was up 23 per cent (USD) in the quarter, in line with the MSCI World Metals and Mining Index benchmark performance, which was also up 23 per cent. While all sectors were in the positive this quarter, fertilizers were up the most as supply disruptions on the back of Russia’s invasion of Ukraine drove fertilizer prices sharply higher. The Bulk Commodities & Diversified sector was up the second most on the back of much higher met coal and iron ore prices,” the firm said.
Seeing Skeena “checking the right boxes,” analyst Michael Siperco has an “outperform” rating and $21 target, exceeding the $22.09 average on the Street.
“Eskay Creek stacks up well vs. peer projects on scale, mine life, costs, and jurisdiction, and it should increasingly attract investor (and potential acquirer) attention as development milestones are met,” he said. “We continue to see re-rate potential as Skeena heads into feasibility/ project financing in 2Q22, with resource growth in a high-grade open pit driving an attractive risk/reward proposition at current levels. SKE trades at 0.65 times NAV at spot, in line with peers but meriting a more material premium, in our view.”
Other TSX-listed stocks on the list are: Agnico Eagle Mines Ltd. (AEM-T) Cameco Corp. (CCO-T); Capstone Copper Corp. (CS-T); Champion Iron Ltd. (CIA-T) Endeavour Mining Corp. (EDV-T) First Quantum Minerals Ltd. (FM-T); Hudbay Minerals Inc. (HBM-T); Ivanhoe Mines Ltd. (IVN-T); Nutrien Ltd. (NTR-T); Osisko Mining Inc. (OSK-T); SSR Mining Inc. (SSRM-T) and Teck Resources Ltd. (TECK.B-T).
Canadian Natural Resources Ltd. (CNQ-T) was added to RBC’s “Global Energy Best Ideas” list for the second quarter on Monday.
“CNQ is our favorite senior Canadian producer given its strong shareholder alignment, long-life/low-decline portfolio, significant shareholder returns, strengthening balance sheet, and best-in-class operating performance. CNQ is also on our Top 30 Global Ideas list,” said analyst Greg Pardy, who has an “outperform” rating and $90 target for its shares (versus the $82.56 average on the Street.)
He called the Calgary-based company “globally distinguished,” adding: “Canadian Natural Resources’ management committee structure and shareholder alignment are unique factors which distinguish the company globally. CNQ’s long-life, low-decline portfolio—anchored by low sustaining capital—provides the company superior free cash flow generation throughout the cycle.”
Overall, the list now includes 21 stocks, including these TSX-listed equities are: Cenovus Energy Inc. (CVE-T); Tourmaline Oil Corp. (TOU-T); Arc Resources Ltd. (ARX-T); Tamarack Valley Energy Ltd. (TVE-T); Secure Energy Services Inc. (SES-T) and Algonquin Power & Utilities Corp. (AQN-T)
“In March, the RBC Global Energy Best Ideas List was up 7.8 per cent compared to the iShares S&P Global Energy Sector ETF (IXC) up 7.6 per cent and a hybrid benchmark (75-per-cent IXC, 25-per-cent JXI – iShares Global Utilities ETF) up 7.1%. Since its inception in February 2013, the RBC Global Energy Best Ideas List is up 115.0 per cent compared to the S&P Global Energy Sector ETF up 14.9 per cent,” the firm said.
National Bank Financial analyst Jaeme Gloyn expects the first quarter of its 2022 fiscal year to be “relatively soft” for LifeWorks Inc. (LWRK-T) as the impact of COVID-19 lockdowns continue to be felt.
However, after meeting with CEO Stephen Liptrap and CFO Grier Colter last week, he sees an “inflection to come” in the second half of the year, believing margin improvement initiatives will “bear fruit.”
“Management is focused on increasing the EBTIDA margin from 18.5 per cent in Q4 2021 to 19.5-20.0 per cent by the end of 2022,” said Mr. Gloyn. “Improvements will come from i) adjusting the counsellor mix by the end of Q2-22, which will contribute 50 basis points of improvement in Q3-Q4 2022; ii) taking pricing action by the end of Q3-22, which will contribute 50 basis points of improvement in Q4-22; and iii) rebounding RFS activity as lockdown restrictions are lifted (though the timing is harder to predict).”
Mr. Gloyn also suggested the potential sale of non-core assets could be “left-field catalyst.” He suggested its Retirement and Financial Solutions1 (RFS) business “could be used to fund buybacks and/or higher growth M&A.”
Maintaining a “sector perform” rating, he trimmed his target to $26 from $28. The average is currently $26.80.
“While we remain positive on the long-term outlook, delays in resolving revenue/margin pressure could amplify negative investor sentiment,” he said.
Equity analysts at Echelon Capital Markets added a pair of stocks to their “Top Picks Portfolio” for the second quarter of the year.
The list now contains 16 companies.
“We unfortunately report that Echelon’s Top Picks Portfolio underperformed for Q122 with a decline of 7.6 per cent while the S&P/TSX Composite and S&P/TSX Small Cap Indices returned 3.8 per cent and 8.4 per cent, respectively,” they said. “Our performance was within the context of the Russell 2000 Index declining 7.5 per cent for the quarter as it underperformed the larger cap S&P 500 return of negative 4.6 per cent.
“We note that our lack of exposure to oil and gas impacted our relative performance. Energy companies within the S&P/TSX Small Cap index were up an average of 45.7 per cent for the quarter where they closed the year with a weighting at 20.3 per cent of the index. Our negative 7.6-per-cent return compares to the broader TSX Venture Composite Index return of negative 5.0 per cent.”
The additions to the list are:
* Playmaker Capital Inc. (PMKR-X) with a “speculative buy” rating and $1.20 target. The average is $1.20.
“Fresh off a strong Q421 earnings print that saw the Company deliver quarterly revenues/EBITDA of $7.0-million/$2.5-million and exceptional quarter-over-quarter growth of 47 per cent/28 per cent, we envision Playmaker continuing to positively reset expectations across 2022 on the strength of its potent organic growth engine and highly engaging digital sports media ecosystem,” said analyst Rob Goff. “Playmaker’s playbook is being revealed as one that seeks to acquire a foundation of engaging, authentic properties and platforms, before pulling multiple organic growth levers to supercharge monetization. Playmaker Bench – its proprietary, in-house tech stack – has emerged as a pivotal contributor to the Company’s monetization strategy, both in selling prospective targets on Playmaker’s vision, and then more importantly, executing on robust advertising yield improvements; Bench essentially acts as the rising tide that lifts all boats in the ecosystem. However, while it’s likely the strongest organic growth lever, it doesn’t work in isolation. Playmaker thrives on the cross-pollination of platform capabilities – or what the Company refers to as centres of excellence – where areas of expertise, such as Yardbarker’s syndication team, are being leveraged across the entire business, unlocking new revenue streams for platform siblings Futbol Sites (FSN) and The Nation Network (TNN). Finally, layering secular industry tailwinds on top – such as the launch of online sports betting (OSB) across the Americas, i.e., Playmaker’s backyard – reflects a company that we see firing on all cylinders throughout 2022 and beyond.”
* Flagship Communities REIT (MHC.U-T) with a “buy” rating and US$24 target. Average: US$23.88.
“Flagship owns a portfolio of manufactured housing communities (MHCs) across seven states in the central/Midwest U.S.,” said analyst David Chrystal. “The MHC industry has historically provided investors with consistent and stable organic growth throughout all economic conditions. We believe that Flagship is well-positioned to deliver strong organic revenue growth owing to (1) significant room to increase occupancy, (2) the rapidly rising cost of alternative accommodation options, and, (3) outsized wage growth among the REIT’s tenant base. The REIT trades at a substantial discount to our NAV estimate (18 per cent), and a materially lower 2022E FFO multiple than the U.S. peer group. We expect that as management establishes a public market track record, this discount will narrow.”
Returning stocks are: Silver X Mining Corp. (AGX-X); BSR REIT (HOM.U-T); RediShred Capital Corp. (KUT-X); Calian Group Ltd. (CGY-T); CloudMD Software & Services Inc. (DOC-X); Converge Technology Solutions Corp. (CTS-T); Quisitive Technology Solutions Corp. (QUIS-X); Osino Resources Corp. (OSI-X); Pan Global Resources Inc. (PGZ-X); Quipt Home Medical Corp. (QIPT-X); Diagnos Inc. (ADK-X); Verano Holdings Corp. (VRNO-CN); Ayr Wellness Inc. (AYR.A-CN) and E3 Metals Corp. (ETMC-X).
In other analyst actions:
* Following the acquisition of Detroit-based cybersecurity solutions provider Creative Breakthroughs, Canaccord Genuity analyst Robert Young raised his target for Converge Technology Solutions Corp. (CTS-T) to $14.50 from $14 with a “buy” rating. The average on the Street is $13.88.
“The move roughly doubles the size of Converge’s cybersecurity services business and adds to the managed services capability in a U.S. NFL city, consistent with the company’s communicated strategy,” said Mr. Young. “Given a higher skew toward software and services and EBITDA margins of approximately 8 per cent, the purchase multiple of 6.5 times (or 5.1 times assuming earnout) appears attractive. We expect that Converge will continue its active M&A momentum in the near term, backed by $400-450-million of liquidity including an unused revolver.”
* Berenberg’s Jonathan Guy cut his Endeavour Mining PLC (EDV-T) target to $42 from $44, keeping a “buy” rating. The average is $46.
* To reflect the potential divesture of its Russian assets, CIBC World Markets’ Anita Soni raised her target for Kinross Gold Corp. (KGC-N, K-T) to US$7.25, below the US$7.84 average, from US$7 with a “neutral” rating.
“We reiterate our Neutral rating given KGC’s high level of net debt vs. peers, the reduction of which should be the focus of future FCF generation prior to any potential increase of capital return to shareholders,” she said.
* Canaccord Genuity’s Shaan Mir trimmed his Medipharm Labs Corp. (LABS-T) target to 20 cents from 35 cents with a “hold” rating, while Alliance Global Partners’ Aaron Grey cut his target to 25 cents from 35 cents with a “neutral” rating. The average is 31 cents.
* Scotia Capital’s Ovais Habib raised his OceanaGold Corp. (OGC-T) target to $3.75 from $3.25 with a “sector outperform” rating, while BMO’s Brian Quast lowered his target to $3.25 from $3.40 with an “outperform” rating. The average is $3.23.
* Canaccord Genuity’s Doug Taylor lowered his Well Health Technologies Corp. (WELL-T) to $10 from $12 with a “buy” rating, while PI Financial’s Kris Thompson cut his target to $9 from $10.50 with a “buy” rating. The average is $10.12.