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

National Bank Financial analyst Dan Payne thinks the first-quarter financial results for North American oilfield services giants, like Baker Hughes Co. (BKR-Q) and Halliburton Co. (HAL-N), displayed the “uneven cadence of what is suggested to be an accelerating cyclic recovery.”

In a research report released Monday, he reaffirmed “universal optimism” for medium-to-longer term expansion in the sector despite “lagging” quarterly reports.

“A tight capacity market is being compounded by geopolitical risks, which should ultimately see annual results expand by a factor of 15 per cent with associated margin expansion to be experienced (200-300 basis points) and accelerating in to 2023 and beyond in a multi-year cyclic expansion,” he said. “That said, as we have witnessed through the rate of activity expansion to date (U.S. rig count up 15-20 per cent year-to-date, down 10 per cent vs. historical average, as a function of structural trends in the upstream), the pace of recovery has been muted so far, with the group reporting a 5-per-cent sequential revenue contraction (with margins also taking a step back by 100 basis points) and the most resilient segments reflected through traditional OFS (generally flat quarter-over-quarter ) and North American operations (up 5 per cent quarter-over-quarter vs. International down 6 per cent).”

Emphasizing a “preferential near-term orientations through North American activity-based operators,” Mr. Payne raised his rating for Trican Well Service Ltd. (TCW-T) to “outperform” from “sector perform.”

He said the upgrade was “driven by improving visibility to expanding fundamentals within the Canadian pressure pumping sector, for which it has the highest quality risk-adjusted exposure (to drive market share and margins.”

“Our estimates are generally aligned with consensus, projecting 34-per-cent sequential revenue expansion to $210-million (vs. consensus $213-million) and associated 38% EBITDA growth to $39-million (vs. consensus $42-million), to imply a margin of 18 per cent (FLAT quarter-over-quarter),” he said. “During the quarter, we expect the company maintained solid utilization (less-than 7 spreads vs. 6 prior quarter), while expectations remain for activity and pricing to press forward through the back half of ‘22 as levering off of extremely tight capacity of high quality equipment (largely sold out), as complemented by the expected deployment of its second Tier 4 (low-emissions spread), to drive pricing and margin improvement (with inflation being passed through to date) towards sustainable long-term levels in the mid-20-per-cents. That compounding outlook continues to support a solid backdrop for free cash flow generation, adding to a stout cash balance, and provides optionality to likely return of capital initiatives (through an active NCIB, institution of a base dividend, SIB or special dividend; in that order of priority).”

Mr. Payne’s target for Trican shares rose to $6.25 from $4. The average on the Street is $4.65.

He also hiked his target for Precision Drilling Corp. (PD-T), his preferred stock in the sector, to $120 from $80, exceeding the $106.19 average, with an “outperform” recommendation, saying it’s “supported by high-spec North American land drilling exposure (which needs to be further rebuilt in support of inventory, supply and DUCs), with compliments of its digital offerings and remains the best risk-adjusted orientation to the OFS trade.”

“Our top pick in the OFS space to date, its share price has appreciated by 107 per cent year-to-date (S&P/TSX Energy Index up 30 per cent), as investors target the highest relative participation in the recovery of the sector and its compounding value proposition (activity + pricing + margins),” he said. “On the quarter, we are generally aligned with consensus, projecting 10-per-cent sequential revenue growth to $326-million (vs. consensus $329-million) with associated EBITDA growth of 8 per cent to $76-million (vs. consensus $75-million; caution on mixed inclusion of SBC) that drives a 23-per-cent margin (down 1 per cent quarter-over-quarter). Activity has largely trended as expected, grinding higher at a muted pace, but continuing to evolve in line with our thesis (the market needs more primary drilling to rebuild inventory, supply and DUCs) with a step-change to come (per our forecast), and given the tightness of capacity in the market, with resonant benefits in positively evolving pricing to more than offset inflation and support margin expansion through the outlook. In sum, we continue to expect the company’s participation in the revival of activity to be strong, driving strong free cash and expanding shareholder returns (orientation to which it remains ahead of its peers), which hold solid risk-adjusted value potential.”

On the sector, he added: “Ultimately, opportunity remains ahead for the group, which has never been a Q1/22 story, and while the OSX index has been on the move (up 50 per cent year-to-date vs. S&P/TSX Energy Index up 30 per cent), solid risk/reward remains for the OFS peers as a function of a compounding fundamental backdrop (activity + pricing and margins) to support value off of a relatively discounted valuation stance (CDN activity-based peers trading at 4-4.5 times vs. U.S. peers at 6-6.5 times on 2023 estimates).”


Impressed with its progress during Max Rangel’s first year as its chief executive officer, BMO Nesbitt Burns analyst Gerrick Johnson upgraded Spin Master Corp. (TOY-T) to “outperform” from “market perform” ahead of the May 4 release of its quarterly results, calling its performance “surprisingly strong.”

“We are a year into Max Rangel’s CEO tenure and have been impressed with stewardship, performance, and execution,” he said. “Spin Master has performed well in the face of difficult circumstances. TOY has fixed its supply-chain issues, which had been a drag on performance well before the current global supply-chain problems were even on investors’ radar screens. TOY’s digital entertainment business continues to perform very well, and we anticipate positive investor reaction when it provides new, more detailed segment disclosures upon 1Q22 reporting. Over the longer term, we think TOY has some of the best long-term opportunities in our toy coverage to grow its business into new categories and geographies.”

Mr. Johnson emphasized the toy industry has been viewed historically as “defensive and recession resistant (though not recession proof).” Though he expects an economic slowdown and inflation to hurt discretionary spending, he thinks the industry will “feel only a minor impact, as it has in the past.”

“Given this reputation for defense, we anticipate valuation multiple expansion,” he said. “We have been impressed by the company’s performance under the leadership of CEO Max Rangel, the company’s first “professional” CEO. Mr. Rangel has led the company for a year. His focus on reducing complexity and his metrics-based approach have been refreshing, and exactly what we think the company needs at this critical juncture in its growth. The company’s supply chain had been a vexing area of frustration, well before the state of the current global supply chain was on investors’ radar screen. The company’s instock, on-time, and in-store execution over the past year has been very strong. Project Excel, initiated in late 2020, has rationalized and simplified the company’s distribution system, turning a liability into an asset. This area of concern is what previously kept us from being more constructive on the stock.

“In 2016, TOY acquired Toca Boca and Sago Mini, a solid children’s app businesses. The pandemic led to a wider embrace of app-based learning and activities. Now, even as stay-at-home mandates have been relaxed, TOY’s digital business has continued to grow. TOY is expected to provide more disclosure when it reports 1Q22 results on May 4. We think investors will like what they see.”

Increasing his financial estimates for fiscal 2022 and 2023 due largely to a stronger outlook for its digital gaming businesses, Mr. Johnson raised his target for Spin Master shares to $64 from $50. The average is $61.10.


Acknowledging the proposed changes to its share structure remain “contentious,” RBC Dominion Securities analyst Paul Treiber thinks Shopify Inc.’s (SHOP-N, SHOP-T) plan to convert CEO and founder Tobi Lutke’s multi-voting Class B shares to a Founder share class is a “defining moment” for the Ottawa-based e-commerce giant.

“The move to a Founder share provides Tobi with 40 per cent of voting power (unchanged after Klister Credit’s (controlled by Director John Phillips) pending conversion of Class B shares), requires Tobi to remain involved with Shopify, and does not allow inter-generational transfers,” he said. “The lack of inter-generational transfers is an important key favourable term for shareholders, in our view.”

“Some of the terms of the proposal are generous. For example, Tobi is able to sell up to 70 per cent of his stake and still retain 40 per cent of votes. The removal of the dilution clause separates voting control from economic ownership. The potential risk for shareholders of this structure is if Tobi stops acting in the best interests of Shopify and shareholders at some point in the future. That hypothetical risk is an acceptable trade-off, in our view, given Shopify’s (and Tobi’s) track record to date, third party studies showing founder-led companies tend to create more shareholder value, and the need for strong leadership in the near-term.”

David Milstead: Shopify restructuring boosts Lutke’s power rather than curtailing it

Mr. Treiber said Mr. Lutke’s “stewardship and vision of a ‘100-year company’ is one of the reasons for the company’s success to date. There are numerous examples of Tobi’s willingness to make difficult, but the best long-term decisions.”

“Shopify has a large TAM, but operates in an evolving industry,” he added. “The rapid value creation in technology understates the risks of subsequent disruption. A founder with voting control may provide Shopify with the best chance of long-term success. Strategies like SFN may appear to be sub-optimal for investors in the short-term (i.e. asset-heavy); however, these investments may be necessary to strengthen Shopify’s value proposition and ultimately maximize longterm shareholder value.”

Mr. Treiber also emphasized founder-led firms “create materially greater value than the broader market.” He pointed to an study published in the April 1, 2009 edition of the Journal of Financial and Quantitative Analysis called Founder-CEOs, Investment Decisions, and Stock Market Performance” that concluded founder-CEO firms earned a benchmark-adjusted return of 8.3 per cent annually.

“Even after adjusting for other factors, the study claims the abnormal return is still 4.4 per cent annually,” he added. “An article in the Harvard Business Review (HBR) on March 24, 2016 called Founder-Led Companies Outperform the Rest — Here’s Why makes similar assertions. The article claims “an index of S&P 500 companies in which the founder is still deeply involved performed 3.1 times better than the rest over the past 15 years.”

Expecting Shopify to announced in-line quarterly results on May 5, Mr. Treiber cut his target for its shares to US$1,000 from US$1,300 with an “outperform” rating, citing “higher risk-free rates and peer multiple contraction.” The average target on the Street is US$941.02.

“We believe Shopify is one of the most compelling growth stories in our coverage universe,” he said. “While the stock is likely to remain volatile in the short-term, we see Shopify continuing to rapidly scale and monetize its large TAM. The pullback in Shopify’s shares (down 56 per cent since 52-week high on November 19 vs. S&P500 down 6 per cent) predominately reflects, in our view, the risk-off environment for high-growth software stocks, not a change in Shopify’s fundamentals. Shopify is now trading at 9 times FTM EV/S [forward 12-month enterprise value to sales], below its pre-COVID average of 14 times and below peers at 13 times (vs. an average 3.9-times premium pre-COVID 3-year average).”


CIBC World Markets analyst Krista Friesen reaffirmed her expectation that first-quarter earnings season for Canadian auto parts manufacturers will be “difficult,” predicting some of the suppliers will lower their full-year guidance “given the incremental headwinds the auto industry has faced since reporting Q4 results.”

“After two years of black swan events, 2022 has proven thus far to be no different for the Canadian auto suppliers as they contend with the ongoing chip shortage, the impacts from the war in Ukraine, and inflation,” she said. “While we expect Q1 to be a difficult quarter, we do think the bad news is already, to some extent, incorporated into earnings and share prices.”

Ms. Friesen cut her targets for the following stocks in her coverage universe:

* Boyd Group Services Inc. (BYD-T, “neutral”) $175 from $180, below the $206.38 average,

* Linamar Corp. (LNR-T, “outperformer”) to $85 from $90. Average: $82.60.

* Martinrea International Inc. (MRE-T, “outperformer”) to $13 from $14. Average: $13.86.

* Magna International Inc. (MGA-N/MG-T, “outperformer”) to US$92 from US$96. Average: $89.78.

Conversely, Ms. Friesen raised his target for Autocanada Inc. (ACQ-T) to $46.50 from $45, reiterating an “outperformer” rating. The average is $55.34.

“Whether it be on balance sheet metrics or earnings metrics, the Canadian auto suppliers are trading at compelling valuations. On price to book, MGA is trading at 1.5 times, which has historically been a reasonable floor for the company outside of major recessionary periods and given that we are at the beginning of a new auto cycle. LNR and MRE are each trading below 1.0 times price to book and trending near 10-year lows,” said the analyst.


Seeing “more questions than answers” after the release of a comprehensive project level and corporate update last week, Canaccord Genuity analyst Kevin MacKenzie moved Pure Gold Mining Inc. (PGM-X) to “under review” from a “hold” recommendation previously.

“Since declaring first gold in December 2020, and commercial production in August 2021, the PureGold mine has significantly under performed relative to expectations,” he said. “Since facing initial ramp-up challenges, the company’s strategy has transitioned over time from (1) rapidly opening up the mine to support a higher throughput, in addition to bringing forward the higher-grade 8-Zone, to (2) a much more measured focus on building a local high-confidence stope inventory, while in the near term, reducing the overall throughput.

“At this time, it is not clear to what extent the ongoing challenges faced will be reflected in the pending updated LOM [life-of-mine] plan. This includes consideration for resource/reserve adjustments, mining method/sequencing adjustments, achievable throughput rates, and the net impact to OPEX and sustaining/expansion capital. With a lack of clarity surrounding these metrics and the uncertainty as to how the company will meet its near-term financing requirements, we are challenged to accurately value the company.”

Waiting to see “a more concrete basis from which to value the company,” Mr. MacKenzie removed a target for Pure Gold shares. His previous $1 target was 5 cents higher than the average on the Street.


Ahead of earnings season for machinery and construction stocks, Raymond James analyst Bryan Fast is looking for improved fundamentals amid commodity price strength, expecting “solid” bookings to provide a “compelling backdrop.”

“Acting as headwinds, companies face a shifting and complex supply chain, uncertainty surrounding equipment deliveries, and inflationary pressures,” he added. “We expect these will be over-arching themes during the quarterly earnings season.”

Pointing to commodity price strength and “reasonable” relative valuation, Mr. Fast said he favours Finning International Inc. (FTT-T) and North American Construction Group Ltd. (NOA-T) in his coverage universe, believing “both will benefit from improved earnings capacity relative to prior cycles.”

He raised his Finning target to $46 from $44, keeping an “outperform” rating. The average is $44.78.

Mr. Fast’s target for North American Construction Group shares increased by $1 to $27.50, just below the $27.70 average, with an “outperform” rating.

He also increased his target for Toromont Industries Ltd. (TIH-T, “outperform”) to $127 from $120. The average is $124.56.

“Supported by a rock solid balance sheet, we view TIH as a beacon of stability during market volatility, and expect investors to continue to turn to high-quality, liquid names during uncertain markets,” the analyst saud.

Conversely, he reduced his target for Ritchie Bros. Auctioneers (RBA-N/RBA-T, “market perform”) to US$55 from US$57, which is the current consensus.

“We continue to see Ritchie face equipment supply headwinds, though strength in used equipment prices is providing an offset,” said Mr. Fast.


While he thinks demand trends for Doman Building Materials Group Ltd. (DBM-T) remain “strong,” Stifel analyst Ian Gillies said he’s becoming “more cautious,” citing recent lumber price declines as well as inflationary pressure and rising interest rates that could slow down housing construction and renovation activities.

“Lumber prices trended upward in 1Q22 with an average of US$1,194 per thousand board feet, up 49 per cent from 4Q21,” he said. “The strength of pricing in 1Q22 is supportive of our 1Q22 revenue of $696-million, up 8.5 per cent quarter-over-quarter and 33.8 per cent year-over-year. In terms of volume, headwinds from weather, Omicron, and temporary truck shortage could partially temper growth during the quarter.

“As at April 22, 2022, the spot price lumber price was US$1,003/bft, which is down 17 per cent since our launch and a 29-per-cent decrease from this year’s peak of US$1,420 reached on March 15, 2022. Similarly, the strip price has declined with 2022 down 9 per cent and 2023 down 12 per cent, respectively, since our launch on February 10, 2022.”

In a research note released Monday, Mr. Gillies cut his 2023 estimates for the Vancouver-based company, expecting rising interest rates to hurt consumer spending, weighing on free cash flow and earnings.

With the decline in lumber prices, he cut his target for Doman shares by $1 to $9, keeping a “buy” rating. The average is $9.93.

“We believe Doman is well positioned with its expanded geographical presence, and the company stands to benefit from the following key items: 1) robust macro tailwinds indicate strong demand that bolsters revenue growth; 2) a high level of leverage could bring significant upside in a rising lumber price environment; and 3) the highly fragmented industry presents opportunities to execute more bolt-on acquisitions for expansion. In our view, the P/B ratio is a crucial indicator to invest in the stock, as we believe a low P/B ratio presents the most potential upside,” he said.

In a separate note previewing earnings season for diversified industrials, Mr. Gillies cut his target for Russel Metals Inc. (RUS-T) to $37.25 from $39, below the $40.29 average, with a “buy” rating.

“Our 2022 EBITDA estimate has declined by 4 per cent to $447-million, while our 2023 EBITDA is up 4 per cent to $399-million. The changes result from updated HRC strip pricing,” he said.

He also reduced his WSP Global Inc. (WSP-T) target to $180 from $190 with a “buy” rating. The average is $194.71.

“Our 2022 and 2023 EPS estimate declines by 7 per cent and 6 per cent, respectively. The decline is due to an updated depreciation and amortization forecast,” said Mr. Gillies.


Seeing it “well positioned” in the Lithium Triangle of South America, Paradigm Capital analyst David Davidson initiated coverage of Toronto-based Arena Minerals Inc. (AN-X) with a “speculative buy” rating.

“Argentina has recently become the mecca for investment into the growing lithium market and, in short order, should begin to rival its neighbour Chile as a leading lithium producer. Currently, there are two brine operations in Argentina producing about 37Kt of lithium carbonate equivalent (LCE) compared to 112Kt LCE in Chile. However, there are at last count eight projects either at the feasibility stage or under construction that could push production to in excess of 80Kt LCE by 2026. Arena has quickly become a prominent new name in lithium brine development by virtue of its high-quality Sal de la Puna and Antofalla projects and management team with 50 years of lithium development experience. Combined with a strategic partnership with Ganfeng Lithium, China’s largest lithium compounds producer, you have a company that should move to producer status in a reasonably short time frame.”

He set a $1 target for Arena shares, exceeding the 85-cent average.


In other analyst actions:

* RBC Dominion Securities analyst Geoffrey Kwan cut AGF Management Ltd. (AGF.B-T) to “underperform” from “sector perform” with an $8 target, down from $8.50 and below the $8.96 average.

* Mr. Kwan also lowered Alaris Equity Partners Income Trust (AD.UN-T) to “sector perform” from “outperform” with a $24 target, sliding from $25. The average is $24.21.

* Desjardins Securities analyst Brent Stadler cut his target for Vancouver-based EverGen Infrastructure Corp. (EVGN-X) to $8 from $10.50 with a “buy” rating. Others making changes include: Echelon Capital’s Michael Mueller to $10 from $11.25 with a “speculative buy” rating and RBC’s Nelson Ng to $6 from $7 with an
“outperform” rating. The average is $9.75.

“We have modelled expected expansion project delays, which reduces our 2023 estimates, and have also increased our cost of equity,” Mr. Stadler said. “As a result, we have reduced our target ... We continue to believe that the RNG space is exciting and that EVGN’s outlook is positive with a significant pipeline which could lead to explosive growth. We look forward to the update on the expansion projects expected in 2 months and additional M&A in 2022.”

Follow David Leeder on Twitter: @daveleederOpens in a new window

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