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

Credit Suisse’s Joo Ho Kim continues to “favor” Bank of Montreal (BMO-T) “long-term growth strategy from its commercial franchise across Canada and the U.S., particularly given the strong track record of performance.”

“BMO’s credit experience has also outperformed its peers, as measured by historical write-offs, and we believe the bank continues to hold a solid buffer of allowances,” he added. “[Bank of the West] significantly strengthens its west coast presence, and another avenue of long-term growth ahead.”

Mr. Kim was one of several equity analysts on the Street to resume coverage of BMO following the close of its $3.15-billion share offering, which came after Canada’s banking regulator increased the ceiling on banks’ required capital levels.

“BMO’s equity raise comes after OSFI’s announcement on December 8, which increased the DSB by 50 bassis points (also increased the top-end of the range by 150 bps to 0-4 per cent), effectively raising the Big Six banks’ capital threshold to 11.0 per cent,” said Mr. Kim. “In Q4, BMO guided to its CET1 ratio to be at or above 11.0 per cent in the quarter following the BotW acquisition, with the potential for the ratio to fall below 11.0 per cent should the deal close earlier than anticipated. The shares came under some pressure prior to the raise, and we were surprised by the size of the deal, as the shortfall relative to the new threshold was wider than expected. Post the offering, BMO is targeting a CET1 ratio at or above 11.5 pr cent as of February 1; we expect the raise to add 90bps to the bank’s CET1 ratio on a pro forma basis (Q4/F22) and estimate 11.5 per cent in Q2/F23.”

Following the deal, Mr. Kim’s fiscal 2023 core cash earnings per share projection declined 3 per cent to $13.49 (was $13.95), while his 2024 forecast slid 4 per cent to $13.61 (was $14.17).

That led him to lower his target for BMO shares to $143 from $152, keeping an “outperform” recommendation. The average target on the Street is $143.02.

Others resuming coverage include:

* Desjardins Securities’ Doug Young with a “buy” rating and $143 target, down from $146.

“While disappointing, we still like its tilt toward commercial vs retail banking and maintain our Buy rating,” he said.

* Scotia Capital’s Meny Grauman with a “sector outperform” rating and $151 target, down from $156.

“This raise was driven by an unanticipated regulatory change and not by any other factors. With the shares underperforming peers by 400 bps last week, in our view the market was already fully pricing in this issuance,” said Mr. Grauman.

* CIBC’s Paul Holden with a “neutral” rating and $135 target.

“BMO will have a greater capital buffer following the equity raise, an important positive given potential 2023 headwinds. However, we do have to contemplate what higher CET1 requirements mean for future loan growth and return on capital, particularly for BMO with its skew towards commercial lending,” he said.

* TD’s Mario Mendonca with a “buy” rating and $145 target, down from $150.

* National Bank’s Gabriel Dechaine with a “sector perform” rating and $134 target.


Keefe, Bruyette & Woods analyst Mike Rizvanovic cut his target prices for a trio of Canadian bank stocks on Monday.

His changes were:

  • Bank of Montreal (BMO-T, “outperform”) to $153 from $160. The average is $143.02.
  • Bank of Nova Scotia (BNS-T, “market perform”) to $71 from $74. Average: $78.37.
  • Canadian Imperial Bank of Commerce (CM-T, “market perform”) to $61 from $62. Average: $63.28.


“Taking profits after a strong run,” Scotia Capital analyst Phil Hardie lowered his recommendation for Element Fleet Management Corp. (EFN-T) to “sector perform” from “sector outperform” on Monday.

“Following a strong rally that has seen the stock rise 50 per cent over the last year, we are making a tactical downgrade given what we believe to be a shift in the risk/reward of holding the stock over the next 12 months,” he said. “We continue to have a solid earnings outlook for 2023 and 2024 and our long-term thesis remains intact, however we believe this is largely reflected in the stock price. With relatively muted expected returns for equity markets over the next twelve months, and likely some volatility ahead, we believe investors should look for tactical opportunities to generate alpha, and we recommend taking profits at these levels.

“The combination of an elevated valuation multiple and broad investor expectations for the company to deliver EPS above management’s target for 2023 will likely limit the upside and potentially introduce downside risks over the next twelve months.”

Mr. Hardie now sees an expected 12-month return in the mid-single digits for the next year, which he said is “well below” the average expected return of just over 25 per cent for his mid-to-large cap stock coverage universe.

“Investor expectations heading into 2023 are already set relatively high,” he added. “Street expectations for 2023 have been on the rise as 2022 progressed but now sit above management’s target range for the year. With the bar set high, this likely sets up for disappointment if results simply fall within the targeted range, and potentially an outsized sell-off if earnings miss.

“We see a relatively low margin of error with EFN’s valuation multiple nearing an all-time high (see Exhibit 2). We think valuation looks relatively fair, with limited opportunity for further expansion. P/FCF is likely an interesting secondary valuation metric, but we would not build an investment thesis around a valuation re-rate predicated on a migration to this valuation approach. We believe demonstrating continued resilience and the sustainable growth of the platform will remain the key drivers to support its valuation multiple.”

He maintained a target of $20 for Element Fleet shares. The average is $22.08.


Calling it a “high-value content provider with strong financial flexibility,” Scotia Capital analyst Maher Yaghi assumed coverage of Thomson Reuters Corp. (TRI-N, TRI-T) with a “sector perform” recommendation on Monday.

“Our view is that TRI has re-established itself to be able to consistently deliver mid- to high-single-digit revenue growth in the short to medium term,” he said. “Many of the initiatives that management has implemented during the company’s three-year transformation journey are taking hold as the firm seeks to deliver stronger FCF per share growth. Reasons to be bullish on the stock are (1) High level of recurring revenues, (2) organic growth, (3) solid FCF generation, and (4) mid- to high-single-digit dividend growth potential. However, we feel that short-term the stock could be range bound given current valuation and heading into 2023, margin upside could be capped by cost inflation.”

Mr. Yaghi said he expects “continued growth and momentum” from Thomson Reuters’ “Big 3″ segments.

“We believe the firm is benefiting from a ‘step change’ in compliance complexity associated with legal, tax, accounting, and risk, and that it possesses the right combination of AI, machine learning, and software to provide simplification for corporations, governments, and professional services firms,” he said. “Its Big 3 segments, namely, Legal Professionals, Corporates, and Tax & Accounting, represent 80 per cent of revenues (F2022) and feature high retention rates, strong recurring revenues, significant operating leverage, and strong FCF. The firm’s current financial targets call for annual total and organic revenue growth in the 5.5-6.0-per-cent range for 2023, driven by targeted organic revenue growth of 6.5-7.0-per-cent in the Big 3.”

Believing it “exhibits a solid historical financial profile in revenue growth and margin stability” and noting it has provided shareholders with consistent growing dividends over time, he set a target of US$126 per share. The average is US$116.


Believing it has “proven itself to be a top-tier manufacturer given its brewery’s efficiencies and capabilities,” Paradigm Capital analyst Alexandra Ricci thinks Waterloo Brewing Ltd.’s (WBR-T) $144-million deal to be acquired by the Carlsberg Group “a testament to [its] ability to rival global competitors.”

However, she lowered her recommendation for its shares to “hold” from “buy,” see the likelihood of limited EBITDA growth following weaker-than-anticipated third-quarter results.

The brewer, best known for its Laker brand name and the distribution of LandShark Lager and Seagrams-branded products, reported revenue of $26.2-million, down 3 per cent year-over-year and below the estimates of both the analyst and Street ($29-million and $28-million, respectively). EBITDA slid 2 per cent to $4.4-million, also missing expectations ($6-million and $5-million).

“We previously expected meaningful growth to come from expanding both the co-pack business and Waterloo’s owner brand portfolio through acquisitions,” said Ms. Ricci. “We have seen WBR execute on co-pack growth, but that business remains subject to supply chain headwinds. On the owner brand side, we have yet to see the execution of brand expansion. The acquisition price reflects the current value of the company in our opinion; with a longer path to unlocking future growth, the $4.00 per share provides immediate liquidity to shareholders.”

She lowered her target for Waterloo shares to $4 from $7. The current average is $4.44.

Elsewhere, Canaccord Genuity’s Luke Hannan moved Waterloo Brewing to “hold” from “buy” with a $4 target, down from $5.50.

“In our view, the strategic rationale for Carlsberg acquiring WBR makes sense: multinational brewers are looking to shorten supply chains and ultimately be closer to customers in certain end markets, particularly in an environment where supply chains, though improving, are still challenged,” said Mr. Hannan. “It makes even more sense when we take into account (1) the fact that WBR has been a contract manufacturer of Carlsberg’s products since 2019, so there was already a “commercial familiarity” between the two parties, and (2) Canada is viewed as a strategic market for Carlsberg.

“We believe the deal makes sense from the perspective of WBR shareholders as well. The 12.4 times TTM [trailing 12-month] EBITDA sale multiple compares favourably to the acquisition of Toronto-based Amsterdam Brewery Co. by Royal Unibrew, which was valued at 8.8 times TTM EBITDA, which should be particularly well received by shareholders considering how challenging the beverage alcohol environment has been of late.”


Following Eldorado Gold Corp.’s (ELD-T) announcement of a €680-million financing package to complete construction of its Skouries project in Greece and its board’s decision to approve its restart, Canaccord Genuity analyst Carey MacRury lowered his recommendation for its shares to “hold” from “buy” based on a limited return to his target price.

“While we view Skouries as potentially positive in the medium term and the financing terms as reasonable (blended rate of 5.0 per cent and non-recourse), we are downgrading our rating on Eldorado,” he said.

“With several years of negative free cash flow now potentially ahead, we view the risk/reward ratio for Eldorado as more balanced going forward.”

To reflect a lower discount rate on Skouries and “the clarity of the path forward,” Mr. MacRury raised his target to $12 from $10.50. The average is currently $13.55.


Touting its “impressive” resource and reserve base as well as “excellent price leverage and solid balance sheet,” iA Capital Markets analyst Ron Stewart initiated coverage of Copper Mountain Mining Corp. (CMMC-T) with a “buy” recommendation on Monday.

“CMMC is a junior copper producer operating its 75-per-cent-owned Copper Mountain (CM) copper-gold-silver mine in Southern British Columbia,” he said. “The Company has experienced a series of operational challenges over the last 12 months that have derailed production, increased costs, and led to the underperformance of its shares. As far as the Company is concerned, it believes that the problems are resolved and better days lie ahead. However, we believe that it might take a few quarters before investors embrace the stock with enthusiasm.”

After the Vancouver-based miner was forced to reduce its 2022 production and cost guidance twice, Mr. Stewart now expects it to make the low end of its revised production estimate of 55-60 million pounds with all-in costs modelled at US$4.54 per pound.

“Simply put, CMMC has dealt with some hard luck this past year but remains focused on the long-term future,” he said.

“We think under good stewardship, CMMC can provide investors exposure to a reliable junior copper producer with upside leverage to the metal price environment. Our model estimates copper production averaging 80-85 million pounds per year over the next four years at AIC of US$2.92 per pound, climbing to an average of 100 million pounds over the 27-year period from 2027 to 2053 at AIC of US$2.24 per pound. Providing the Company can execute its LOM [life-of-mine] plan, we think CMMC can enjoy a long and productive future.”

Mr. Stewart set a target of $2.50 per share. The average is $2.70.


Eight Capital analyst Puneet Singh thinks the market and the Street are “missing the opportunity” brought by Aya Gold & Silver Inc.’s (AYA-T) Boumadine polymetallic deposit in Morocco, seeing it providing “the second leg of growth” for the miner.

“At the current share price, we highlight Boumadine as a free option for shareholders,” he said. “We think this will potentially change over the course of 2023. Aya owns 85 per cent of the exploration stage asset in Morocco with an exploration permit that covers 32 square kilometres and has defined a 2.7-kilometres strike to date. In our opinion, our base case estimate of 15.9Mt at more 400 grams per ton yielding a 205Moz AgEq resource is conservative based on 1) historical drilling offering grade upside not included in our estimate; 2) the potential for the strike length to grow; and 3) Aya still needing to test the true depth potential of the asset. As Boumadine is further delineated (and Aya possibly releases a first resource) in 2023, we expect that the market and Street will likely begin to assign value to the asset which would serve as a major catalyst.”

Also touting the potential gains anticipated from expansion of its flagship 100-per-cent-owned underground Zgounder mine, he initiated coverage of the Montreal-based company with a “buy” rating, expecting a “funds flow influx prior to expansion start-up in 2024, improved precious metals sentiment, and Boumadine exploration”

“At today’s share price, we believe the market is pricing in Zgounder and its expansion but is missing the opportunity in Boumadine, the likely second leg of growth for Aya. As Zgounder is a pure silver mine, in a better precious metals tape, we expect Aya to outperform just based on the torque to the silver price,” he said.

Mr. Singh set a Street-high target of $17 per share, well above the $11.75 average.


Citi analyst Christian Wetherbee reinforced his positive view on Canadian railway companies heading into 2023, saying: “We think the trade has some legs left.”

“In terms of positioning, we remain defensive on our space and still believe that the Canadian rails offer the most potential near-term on the basis of strong Canadian grain volumes,” he said. “However, along our roadmap for 2023, the end of 2Q or 3Q has the potential to change the dynamic as the Canadians begin lapping tougher volume comps and the U.S. rails start to get back to productive resourcing and service levels.

“For the first half of 2022, Canadian volumes were either flat to down year-over-year, however beginning in June, volume inflected positively and really ramped in July (up 0.9 per cent and 9.2 per cent year-over-year, respectively). For the back half of the year, Canadian volumes have remained strong and were up 12.3 per cent year-over-year in November. The volume growth was led by coal in June and July followed by grain in August onward. For 1Q, Canadian volumes were down 6.8 per cent year-over-year while U.S. volumes were down 0.8 per cent year-over-year. The relationship changed in 2Q as Canadian volumes were flat year-over-year and U.S. rail volumes were down 1.8 per cent year-over-year. In 3Q, Canadian volumes were up 4.8 per cent year-over-year while U.S. volumes were up 1.0 per cent year-over-year. As we move out to 2Q and 3Q of 2023, it is likely that U.S. volumes will better comparatively, especially as this is the point where we’d expect service to largely normalize.”

Expecting the gap in value between U.S. and Canadian railway companies to slowly narrow through the year, Mr. Wetherbee maintained a “buy” rating and US$128 target for Canadian National Railway Co. (CNI-N, CNR-T) shares and “buy” recommendation and US$79 target for Canadian Pacific Railway Ltd. (CP-N, CP-T). The averages on the Street are US$127.26 and US$82.74, respectively.

In the report, Mr. Wetherbee named JB Hunt Transport Services Inc. (JBHT-Q) his “top pick” for 2023 in the North American transportation sector. He has a “buy” rating and US$190 target, which is 57 US cents below the average.

“Breaking away from the quarterly nature of our roadmap, we think JB Hunt could be one of the best plays to make in 2023 and it is our top pick for the year,” he said. “As the rails shift away from a focus on operating ratio and more towards growth, it is likely that most of the growth will come from intermodal as the rails gain back share lost during the pandemic. As the largest intermodal player, JB Hunt is poised to see the largest benefit of the rails’ fundamental change in strategy and we think Hunt could be a better way to get U.S. rail exposure before having to wait for ~3Q23. Norfolk’s multi-year growth strategy calls for 10-per-cent top line growth, however if the majority of that growth comes from intermodal, that could mean more than 10-per-cent revenue growth for JB Hunt which would likely translate to much better earnings, comparatively. While JB Hunt still retains some 4Q/1Q earnings risk, we think it can be a good way to participate in early cycle rallies and with Bull Case EPS of approximately $14 in 2025, we see an upside case to $250.”


Following better-than-expected fourth-quarter results, Desjardins Securities analyst Benoit Poirier thinks “we are starting to approach a turning point” for Transat AT Inc. (TRZ-T).

Despite seeing signs of “strong” demand for travel, he said he continues to “prefer to wait for additional signs of execution, especially given its elevated indebtedness.”

“Management introduced guidance for the year ahead, expecting adjusted operating margin of 4–6 per cent and capacity equivalent to 90 per cent vs 2019,” said Mr. Poirier. “We view this as a positive step in the company’s journey to profitability and now forecast EBITDA margin of 4.9 per cent in FY23. However, due to seasonality, we still expect margin to be negative in 1Q (3.6 per cent).”

Mr. Poirier thinks 2023 will be “transition year” for Transat, seeing a return to positive free cash flow coming in fiscal 2024.

“Cash burn in the quarter averaged $23-million per month, slightly up sequentially from$22-million per month in 3Q,” he said. “However, management outlined on the call that it expects to be cash flow–positive in FY24, with the goal of being as close to breakeven as possible in FY23. We now forecast FCF of $69.4-million in FY24, as the company continues to improve working capital and accelerates collection of credit card receivables (collected $75m-million following quarter-end; partnership signed with payments platform Nuvei in September should aid in this regard).”

“Given improving airline trends in North America and management’s positive comments on the future, we are introducing our FY25 estimates (revenue of $3.1-billion, EBITDA margin of 11.4 per cent and FCF of $135-million). If we assumed a more normalized EBITDAR multiple of 4.5 times on $376-million, we would derive a value of $8.14, well above the current stock price.”

Maintaining a “hold” rating for Transat shares, Mr. Poirier bumped his target to $3.50 from $3.25. The average is $2.54.

“We prefer to remain on the sidelines while awaiting additional signs of recovery and execution on the strategic plan,” he concluded.

Elsewhere, despite raising his financial forecast, Scotia Capital’s Konark Gupta maintained a “sector underperform” rating and $1.50 target.

“TRZ delivered a positive quarter with FQ4 EBITDA and F2023 margin guidance exceeding expectations,” he said. “Winter booking trends are also encouraging and further support our bullish thesis on Canadian air travel recovery, despite ongoing investor concern about a potential recession. We have materially raised our EBITDA estimates, based on recovery trends and margin guidance, and are introducing our F2025 estimates. However, we remain concerned about stock’s valuation with current EV at $1.7-billion, about 4.5-6.5 times the pre-pandemic levels in April 2019 when the stock was not affected by takeover discussions. Current EV equates to 6.5 times pre-pandemic EBITDAR, which is quite rich relative to the pre-pandemic multiples (1.7 times forward and 1.8-times trailing). We maintain our Sector Underperform rating and $1.50 target, which includes our assumed proceeds of US$1/sh from potential hotel land sale. Net debt remains the key determinant of our thesis given even a small change in debt tends to have a significant impact on valuation due to an elevated leverage ratio (net debt = 6.0 times pre-pandemic EBITDAR and 14x current market cap).”


A group of equity analysts on the Street downgraded shares of Maxar Technologies Inc. (MAXR-T) after private-equity firm Advent International announced Friday it will buy the satellite owner and operator for about US$4-billion.

“We view this transaction as highly favorable to Maxar’s investors, who are likely getting a much more attractive payout from PE than a defence prime would have offered in a difficult public market environment,” said Canaccord Genuity’s Austin Moeller. “Advent clearly sees the value of Maxar’s high-margin, cash-flow-generating Earth Intelligence business over the next several years, following the company’s successful collection of the NGA/NRO’s $3.24-billion EOCL imagery contract.

“We also expect that Advent should be able to achieve major synergies and increase market share within the lower-margin Space Infrastructure business in Palo Alto. Maxar will now have the resources to conduct some strategic M&A of NewSpace companies (many of which have seen valuations crumble in the current equity market/interest rate environment). We expect the new management to hone in on smallsat and satellite component manufacturing (in support of Maxar’s new 150 kg pLEO bus), in addition to EO data analytics and 3D mapping products to drive margin expansion and top-line growth in both the SI and EI businesses. The press release also implied that the transaction should enable construction of Legion units 7 and 8 to move to the left, which would directly benefit the Earth Intelligence segment and further open up the aperture on the constellation’s electro-optical imaging capacity.”

Mr. Moeller moved Maxar to “hold” from “buy” with a US$53 target to match the offer price, up from US$34.

Others making changes include:

* Baird’s Peter Arment to “neutral” from “outperform” with a price target of US$53, up from US$45.

* RBC’s Ken Herbert to “sector perform” from “outperform” with a US$53 target, up from US$30.

* TD’s Tim James to “tender” from “buy” with a US$53, up from US$34.


seeing “an out of this world valuation that deserves investor attention,” Echelon Partners analyst Tom Hems initiated coverage of Saturn Oil & Gas Inc. (SOIL-X) with a “buy” rating, believing it “offers investors a differentiated growth strategy and compelling valuation.”

“We expect that as Saturn executes on growth initiatives with successful well results, the Company will attract a broader investor base and demand a valuation re-rate closer to the peer group average,” he said. “That said, even in a non re-rate scenario we still see huge potential upside of 100 per cent given the strong FCF and growth profile we forecast through 2024. SOIL leads the oil-weighted peer group with an approximately 50-per-cent DAFCF [debt-adjusted free cash flow] yield in 2023, which is more than double the peer group average of 19 per cent. SOIL also trades well below our estimated PDP NAV on strip (implied oil price of only US$40 per barrel), which is a compelling buy signal in our view - especially given that roughly half of 2022 Viking activity has been on unbooked locations which should translate into significant reserve additions and NAV upside in the coming months. Given the significant hedge book, we feel that Saturn offers a differentiated option for investors who have a somewhat agnostic view on oil prices yet want exposure to small cap growth within the energy sector (i.e., SOIL could outperform if oil prices are range bound).”

Mr. Hems set a target of $6 per share. The average is $8.42.


In other analyst actions:

* ATB Capital Markets’ Amir Arif raised Vermilion Energy Ltd. (VET-T) to “outperform” from “sector perform” with a $39 target, up from $36, after assuming coverage of the Calgary-based company. The average target on the Street is $39.43.

“We believe that there is currently an overhang on the stock related to uncertainty surrounding the windfall tax, 2023 guidance, and the suspension of its share buyback plan with third quarter results,” he said. “We believe that clarity surrounding all three issues should be provided in early 2023, paving the way for improved certainty on the 2023 outlook, thereby allowing the stock to relatively outperform. Additionally, from a sum of the parts valuation perspective, we estimate that the market is only valuing the international assets at 1.2-1.5 times after-tax FFO [funds from operations] based on strip pricing ... Based on ATB commodity pricing, VET is trading at 1.9 times 2023 EV/DACF vs. the group at 3.5 times, with a FCF yield/market cap of 32.7 percent, creating a compelling valuation and entry point. With uncertainty to be reduced in early 2023 and with a positive multi-year outlook for European gas supply/demand fundamentals, we would use the current weakness and relative underperformance as a buying opportunity.”

* Deutsche Bank’s Brian Bedell downgraded TMX Group Ltd. (X-T) to “hold” from “buy” with a $147 target, up from $145 but below the $152 average.

* TD Securities’ Greg Barnes initiated coverage of Ivanhoe Mines Ltd. (IVN-T) with “buy” recommendation and $13.50 target. The average is $14.09.

* CIBC’s Stephanie Price raised her target for Enghouse Systems Ltd. (ENGH-T) to $34.50 from $33.50 with a “neutral” rating, while TD’s Daniel Chan increased his target to $36 from $32 with a “hold” rating. The average is $39.13.

“Enghouse reported a revenue beat driven by higher license sales in its seasonally strong FQ4. Vidyo revenue declines appear to be stabilizing (up slightly sequentially) although IMG continues to see elevated competition from SaaS players, making it difficult for Enghouse to compete for/retain business at its target gross margins. The company is reorganizing the IMG division to focus on micro-niches and is offering customers deployment choices (on premise/cloud). Enghouse continues to manage the business with financial discipline and we see upside from M&A as valuations become increasingly attractive. We have increased our F23 M&A assumptions to $20-million (prior $4-million) as management starts to deploy capital,” said Ms. Price.

* National Bank’s Dan Payne became the first analyst to initiate coverage of Lycos Energy Inc. (LCX-X). He gave it an “outperform” rating and $1 target.

* Jefferies’ Laurence Alexander cut his Methanex Corp. (MEOH-Q, MX-T) target to US$47 from US$56, keeping a “buy” rating. The average is US$44.09.

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