Monday’s analyst upgrades and downgrades

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

In response to recent share price appreciation and its current valuation, iA Capital Markets analyst Naji Baydoun lowered his recommendation for Boralex Inc. (BLX-T) to “hold” from “buy” on Monday, seeing a limited return to his target price.

Shares of the Kingsey Falls, Que.-based power company have “performed well” thus far in 2022, rising 28 per cent versus a 5-per-cent increase for its Canadian independent power producer peers and a 5-per-cent decline for the broader S&P/TSX Composite Index.

“This outperformance has been mainly led by valuation multiple expansion, with some contribution from growth (2022 consensus EBITDA estimates have increased 4 per cent since the start of the year),” said Mr. Baydoun.

“BLX’s shares currently trade more than 13 times forward EV/EBITDA and 27 times forward P/FCF; these multiples are (1) up greater than 20 per cent year-to-date, (2) above their Canadian renewable IPP peer group average (11-13 times forward EV/EBITDA and 20-25 times forward P/FCF on average), (3) above the Company’s own historical average trading multiples, and (4) near their historical high.”

In a research note released before the bell, the analyst emphasized Boralex’s “exceptional” execution and “strong” growth outlook, however he thinks both are now properly account for in its share price.

“So far in 2022, BLX has executed on several initiatives that have created shareholder value and exceeded our (and market participants’) expectations,” said Mr. Baydoun. “These include (1) the sale of a minority stake in the Company’s French wind platform at attractive valuations, (2) the announced partnerships to potentially pursue up to approximately 1.2GW of new wind projects in Quebec (with further upside from additional growth opportunities in Quebec), and (3) the award of an impressive 540MW of solar and 77MW of co-located storage in New York’s latest renewable power solicitation round (an important validation signal of BLX’s organic growth strategy in the U.S.).

“We continue to like the Company’s overall growth profile, however, we believe that recent strong execution and overall outlook are now largely priced into the stock price. Although BLX’s shares could trade at higher relative valuation multiples, we do not expect the stock’s relative valuation to increase faster than peers going forward. Despite also having the potential to deliver above-expectations growth (which could lead to upward revisions to financial estimates), we believe that the substantial relative year-to-date share price appreciation and valuation multiple expansion have changed the risk-reward profile in BLX’s shares, which prompts our rating review. We note that given BLX’s strong cash and liquidity position, we would not be surprised to see the Company execute on one or more strategic investments/acquisitions; although this could represent an ear-term catalyst for the shares, we do not currently bake this into our estimates/valuation (for conservatism).”

Mr. Baydoun maintained his $45 target for Boralex shares. The average target on the Street is $46.90, according to Refinitiv data.

“Overall, we continue to like BLX’s (1) highly contracted operations (2-year weighted average contract term), (2) solid FCF/share growth (6-8 per cent per year, CAGR [compound annual growth rate] 2021-26), (3) potential upside from the Company’s development pipeline (more than 3.5GW of prospects), (4) stable dividend (2.0-per-cent yield, 30-50-per-cent long-term FCF payout), and (5) potential upside from M&A (excluded from estimates/valuation),” he said.

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While he sees “positive” booking trends for Transat AT Inc. (TRZ-T), National Bank Financial analyst Cameron Doerksen warns rapidly rising fuel costs are a significant headwind in the coming quarters.

On Thursday before the bell, the Montreal-based company reported second-quarter revenue of $358-million, below both Mr. Doerksen’s $469-million estimate and the consensus forecast of $378-million. An adjusted EBITDA loss of $51-million also fell short of expectations (losses of $25-million and $30-million, respectively).

“Transat’s system-wide bookings significantly recovered through the end of the quarter and into fiscal Q3, with management noting that in the last four weeks, net weekly bookings have surpassed levels seen in 2019,” said the analyst. “However, whereas the average spot price of jet fuel in Transat’s Q1 was $0.86 per litre, in Q2, fuel spiked to $1.44 and remains at similar levels so far in Q3. Transat has initiated a fuel hedging program to insure against any further price increases and positive pricing trends should also help offset higher fuel, but management still expects negative EBITDA and cash flow in Q3 due to the spike in fuel expenses.”

Mr. Doerksen also said the state of Transat’s balance sheet is also a significant concern moving forward.

“With $516 million in liquidity, Transat’s near-term financial situation is stable, but at the end of Q2, net debt stood at $1.3 billion, and even assuming a full travel recovery in 2023, we estimate leverage will be unsustainable at 6.1 times,” he said. “Transat has $364 million of debt and lease obligations maturing in the next four quarters, although management indicates talks to extend maturities are progressing well. Nevertheless, the company will ultimately need to significantly reduce debt and interest expense and the risk of shareholder dilution remains high, in our view.”

Maintaining an “underperform” rating, he cut his target for Transat shares to $3.75 from $4. The average on the Street is $3.55.

Elsewhere, CIBC’s Kevin Chiang trimmed his target to $2.50 from $3 with an “underperformer” rating.

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National Bank Financial analyst Rabi Nizami raised the firm’s recommendation for Foran Mining Corp. (FOM-X) upon assuming coverage of the Vancouver-based company, pointing to “recent progress made on permitting and development milestones and an expectation for exploration catalysts to “become more topical going forward.”

Foran is focused on its 100-per-cent owned McIlvenna Bay polymetallic project in Saskatchewan. Its recent released Feasibility Study for the property projects a 4,200 tons per day underground mine and mill with annual production of copper, zinc, gold and gold over an initial 18-year mine life.

“In our view, a primary value driver for Foran remains future exploration efforts as McIlvenna Bay,” said Mr. Nizami. “Geophysical modeling is proving to be an effective guide for exploration drilling, as evidenced by the recent Tesla Zone discovery, and should support confidence in future resource increases as more drilling is carried out. There are a number of catalysts throughout the coming months to confirm our technical assumptions, prove incremental resource addition, and provide more colour on carbon-neutral ambitions.”

Moving his rating to “outperform” from “sector perform,” the analyst raised his target to $3.50 from $3.25. The average on the Street is $3.41.

“Our Outperform thesis considers the recent feasibility study on the McIlvennay Bay project as a starting point, plus exploration upside in the nascent ‘Hanson Lake’ VMS district which hosts many targets worthy of follow-up drilling, the top mining jurisdiction of Saskatchewan (ranked among the best globally by the Fraser Survey), rounded out by the company’s strong ESG focus and vision to build the first carbon-neutral copper mine,” he said. “There are a number of catalysts throughout the coming months to both confirm our technical assumptions, prove incremental resource addition, and provide more clarity on carbon-neutral ambitions.”

Concurrently, Mr. Nizami adjusted his targets for three other Canadian base metal developers upon assuming coverage. They are:

* Adventus Mining Corp. (ADZN-X, “outperform”) to $1.10 from $1.40. The average on the Street is $1.57.

“Our Outperform thesis considers the discounted P/NAV valuation and the attractive economics of the high grade (more than 5-per-cent) Curipamba project, for which project financing has been completed and final permits are nearing completion,” he said. “We expect construction to begin next year following the final approval of the ESIA (technical approval is complete) and related permits, signing of a fiscal stability agreement with the Government (imminent), and completion of detailed engineering for a revised capex figure. The company also has a prospective large-scale porphyry drill target at Santiago (1 kilometre long drill holes planned this summer) and has a stake in a portfolio of exploration properties for which we ascribe minimal value at this time.”

* Filo Mining Corp. (FIL-T, “outperform”) to $35 from $25. The average is $26.23.

“We are Outperform rated on Filo as blockbuster exploration results from the current program demonstrate the potential for a significant Tier-1 discovery in the making,” he said. “The Filo del Sol property shows evidence of multiple, overprinted episodes of mineralization, both epithermal and porphyry, over significant strike and depth, for which the final extents have not yet been found. Drilling is ramping up to 11 rigs (from eight) by mid-year and we expect a steady flow of exploration results to support the stock over the next year. Exploration drilling is well funded notably with a $100-million private placement in Q1/22 from BHP Group Ltd. (BHP-N, US$166-billion market cap) which now owns 5 per cent and participates in an advisory committee to guide exploration, and in our view could be an acquiror in the longer term.”

* Trilogy Metals Inc. (TMQ-T, “sector perform”) to $1.75 from $2.50. The average is $2.44.

“Our Sector Perform thesis acknowledges multiple positives such as the high-grade economics of the UKMP Project, significant exploration potential of the surrounding land package which could further enhance the economics, mostly favourable community support, and a strategic 50/50 JV partnership with South 32 which lowers financing risk and ultimately increases the likelihood for acquisition,” he said. “Nevertheless, development is currently facing permitting headwinds while Federal authorities reassess a previously approved Environmental Assessment Statement and right-of-way agreement that is required to build the access road infrastructure.

“Over the coming months, we will look for more clarity on the scope and timing of the proposed supplemental work that is needed for these permits to be reinstated. While timing is uncertain for now, in the long term we think that permitting should be achievable. An indication of positive sentiment is the broad alignment of interests and support from the many interested parties.”

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After a record 2021 for mining royalty companies, Canaccord Genuity analyst Carey MacRury sees a “mixed” growth outlook ahead, seeing streaming deals “off to a good start but likely to pause on market volatility.

“Streaming transactions totaled $1.7 billion in 2021, the strongest year since 2015,” he said. “The sector has booked $487 million year-to-date compared to $455 million by this time last year. Wheaton has again been the most active with $366 million in streams, followed Osisko Gold Royalties with $110 million. While activity has been strong to date, we believe the recent market volatility could restrain activity. Most recent stream transactions have been a funding component for development projects along with debt and equity, with conditions for both appearing to have tightened significantly.”

“With many new royalty companies created over the past few years, some investors have been expecting to see some consolidation in the space. Sandstorm announced a pair of transformational acquisitions (Nomad Royalty and BaseCore) that, when closed, should see its market cap increase by approximately 50 per cent. Sandstorm expects its pro forma GEOs to increase to 155koz by 2025 from 68koz in 2021 (2.3 times) on the back of the acquisitions and from the start of deliveries under the Hod Maden stream. With a large valuation gap between the larger and smaller royalty companies (1.9 times NAV average for the senior royalty companies vs. 1.0 times for the intermediate/juniors), we expect more consolidation to come with the benefit of better diversification, scale, and cost of capital.”

Mr. MacRury emphasized royalty companies offer investors exposure to precious metals without the risk of cost inflation, which he said continues to be a “key theme” for producers.

“Against that backdrop, the royalties as a group outperformed in 2021, down approximately 4 per cent on average vs. the producers down 13 per cent and gold 4 per cent,” he said. “So far in 2022, the royalty sector is down 2 per cent, on average, against a flat gold price (up 1 per cent), and while slightly lagging the senior producers (up 2 per ceny), they are outperforming the intermediate and junior gold producers, down 12 per cent and 19 per cent, respectively. The best performers year-to-date (in US$ terms) have been Sandstorm (up 6 per cent) and Royal Gold (up 6 per cent).”

The analyst raised his rating for Colorado-based Royal Gold Inc. (RGLD-Q) to “buy” from “hold” based on return to his US$140 target, down from US$151 and below the US$156.33 average.

Citing “reduced multiples reflecting sector wide contraction,” He also made these target reductions:

• Altius Minerals Corp. (ALS-T, “buy”) to $27 from $28. Average: $26.14.
• Elemental Royalties Co. (ELE-X, “buy”) to $2.25 from $2.75. Average: $2.62.
• Franco-Nevada Corp. (FNV-T, “hold”) to $210 from $215. Average: $223.83.
• Maverix Metals Inc. (MMX-T, “buy”) to $8.50 from $9. Average: $8.36.
• Nomad Royalty Companies Ltd. (NSR-T, “buy”) to $15.75 from $16. Average: $13.86.
• Osisko Gold Royalties Ltd. (OR-T, “buy”) to $25 from $26. Average: $23.31.
• Sandstorm Gold Ltd. (SSL-T, “buy”) to $13 from $13.50. Average: $12.97.
• Wheaton Precious Metals Corp. (WPM-T, “buy”) to $80 from $81. Average: $76.

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Pointing to a “more favorable” near-term set-up and believing its “focus on supply chain and vertical integration will be a mid-term competitive advantage,” RBC Dominion Securities analyst Joseph Spak upgraded Tesla Inc. (TSLA-Q) to “outperform” from “sector perform” on Monday, believing sentiment around its growth and industry positioning will improve.

“Visible Alpha 2Q22 consensus delivery forecast is 279k units, though we believe the buyside expects a 250k print effectively in line with our new 249k forecast,” he said. “With investors primed for lower deliveries, we believe 2Q22 margins can surprise to upside. 1Q22 auto GM ex-credits was 30 per cent and walking quarter-over-quarter lower volume, higher depreciation weigh, but pricing can offset (see our walk inside). We forecast 2Q22 auto GM ex-credits at 28.6 per cent. Visible Alpha consensus 2Q22 auto gross margins ex-credits is 26.4 per cent, but that is also built on that 279k unit forecast which is likely to come down. So we see the potential for low margin expectations and hence a margin beat. Looking ahead we are positive as well. For 3Q22, RBC is at 396k deliveries vs. consensus at 378k and we see 2H22 auto gross margins more than 30 per cent as Shanghai gets back to pace, Berlin and Texas ramp and pricing gains continue.”

Mr. Spak said he’s “increasingly favorable” on Tesla’s position in the industry, which he sees in “the early innings of electrification,” over the medium and longer term.

“Tesla has benefited from an oligopoly-like positioning, for instance lack of competition has helped pricing and contributed to more than 20 per cent operating margins,” he said. “Now autos enters the next phase with more competition and while share loss will likely occur, it doesn’t overly concern us. TSLA has solid demand as evidenced by growing lead-times for their vehicles; pricing gains should continue. As EVs enter their 3rd phase in the mid-to-later part of the decade, we believe being able to deliver EVs will increasingly depend on supply chain. While TSLA is fairly secretive about the deals they have cut for supply of raw materials, we believe they have done more than other OEMs. TSLA’s early focus on vertical integration (not just batteries/raw materials but also motors, semis, software) is likely to pay off especially as industry supply of critical materials may become an issue in 2027/28 and TSLA may be able to control more of their own destiny. Indeed, it appears Elon’s Master Plan Part 3 is likely to focus on achieving very large scale to shift the transportation/energy infrastructure. TSLA earnings and cash generation over the coming years, in addition to their ability to use their stock as currency, can help them build out and secure materials giving them a strong competitive advantage.”

Mr. Spak trimmed his target for Tesla shares to US$1,100 from US$1,175. The average on the Street is US$915.47.

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In other analyst actions:

* Jefferies cut his Canopy Growth Corp. (WEED-T) target to $5.50 from $8.80, reiterating a “hold” rating. The average on the Street is $6.80.

* Canaccord Genuity’s Michael Fairbairn trimmed his target for O3 Mining Inc. (OIII-T) to $3.10 from $3.25 with a “speculative buy” rating following last week’s update on its ongoing Pre-Feasibility Study for the Marban Project near Val-d’Or, Que. The average is $4.52.