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

CIBC World Markets analyst Hamir Patel expects lumber equities to see the benefits from "stronger" industry profitability in 2020.

In a research report released Monday, Mr. Patel said growth is likely to be driven from a double-digit increase in prices stemming from improved housing demand and supply rationalization.

“After two highly volatile years in the Paper & Forest Products sector, during which many wood product companies saw earnings swing from peak to trough over 2018 and 2019 (as lumber prices plunged from $655 per thousand board feet (mfbm) to $285/mfbm), we see a stronger environment in 2020,” he said. “At the same time, pulp markets are expected to gradually strengthen this year, which should further boost the profitability of sawmills that depend on residual chip income for the 50 per cent of each log that is not converted into lumber.”

Pointing to a stronger housing starts forecast for 2020, he increased his commodity forecasts for 2020, including his SPF (Spruces, Pines and Firs) lumber projection 2020 by 4 per cent to $415 per thousand board feet from $400.

With those changes, Mr. Patel upgraded his rating for a trio of stocks:

Canfor Corp. (CFP-T) to “outperformer” from “neutral” with a $15, down from $16. The average on the Street is $26.58.

Analyst: “With the shares off sharply over the past month following the end of the Jim Pattison Group’s $16/share privatization bid, we see an attractive entry point. While we do not expect Pattison Group to make another offer over the short to medium term, we expect the multiple gap vs. peers to narrow over 2020 as profitability recovers with stronger U.S. housing starts (EBITDA expected to increase nearly fourfold this year). At 5.4-times mid-cycle EBITDA, Canfor is trading at a discount to both Interfor (5.8 times) and West Fraser (7.3 times).”

Canfor Pulp Products Inc. (CFX-T) to “outperformer” from “neutral” with a $12 target, rising from $10 and above the $11.65 average.

Analyst: “Although we anticipate a gradual recovery in prices over 2020, limited capacity additions and continued growth in tissue consumption should drive industry op. rates into the low 90s next year. Over our forecast horizon (now extending out to 2024), we see NBSK (China) net prices reaching as high as $800/tonne in 2022 (38 per cent higher than current levels). Canfor Pulp trades at only 2.7 times our 2021 EBITDA forecast (and 3.6 times mid-cycle), well below its closest peer, Mercer, which trades at 4.9 times 2021 and 4.8 times mid-cycle.”

Cascades Inc. (CAS-T) to “outperformer” from “neutral” with $14 target, which is 4 cents higher than the consensus.

Analyst: “The shares are trading at only 5.3 times 2021 estimated EBITDA, an unusually large discount to U.S. peers such as WestRock (6.7 times), International Paper (8.4 times) and Packaging Corp (9.6 times). While containerboard operating rates are expected to decline, structurally low recovered paper prices should provide an offset for Cascades. We note that China’s 2019 import quotas for recovered paper totaled 10.75 million tonnes (down 41 per cent year-over-year), and 2020 is reportedly expected to be even lower at 6.5 million tonnes (down 40 per cent year-over-year) as the country moves closer to a potential total ban in 2021. Additionally, the company appears to be executing well in recent quarters with new management delivering results in tissue and showing signs of improved capital allocation. In addition to opportunistic acquisitions (Orchids and increasing its Greenpac stake), Cascades has a very attractive containerboard conversion project under consideration at Bear Island.”

At the same time, Mr. Patel cut West Fraser Timber Co Ltd. (WFT-T) to “neutral” from “outperformer” with a $56 target, sliding from $58. The average is $68.

Analyst: “We believe Street estimates are overly optimistic, with our own forecasts 8 per cent lower than consensus in 2020 and 18 per cent lower than the Street in 2021. Our Q4/19 estimates are also 55 per cent lower than consensus. At the same time, West Fraser is trading at 7.3-times mid-cycle EBITDA, well above Canfor (5.4 times) and Interfor (5.8 times). We are also increasingly concerned about growing rhetoric in B.C. calling for the province to adjust its stumpage system to better approximate the regime in Alberta. This increased scrutiny could lead to the U.S. government eventually demanding a more punitive stumpage regime in Alberta (home to 25 per cent of West Fraser’s lumber capacity) as part of a future softwood lumber agreement.”


In a separate note, Mr. Patel initiated coverage of Richelieu Hardware Ltd. (RCH-T) with a “neutral” rating, saying it’s “executing well but late in the housing cycle.”

“We regard Richelieu as a well-managed specialty building products business, with a leading market position in the distribution of high-end hardware and complementary products across North America,” he said. “While Richelieu should see further benefits from continued innovation, market share gains and acquisitions, this upside appears largely priced in at present. At the same time, prospects for future growth in repair and remodeling (R&R) [50 per cent of Richelieu’s business] are less certain as the housing cycle matures and home price appreciation slows..”

Mr. Patel set a target price of $30 per share. The average is currently $28.50.


Cargojet Inc. (CJT-T) is “dominating the time-sensitive middle-mile in an age of Amazon,” said AltaCorp Capital analyst Chris Murray.

Emphasizing to its "unique positioning," he initiated coverage of the Mississauga-based company with an "outperform" rating.

"The Company is by far the largest air cargo service provider in Canada and currently represents over 90 per cent of available domestic overnight air cargo lift," said Mr. Murray. "Accordingly, a significant investment would be required to replicate the Firm’s fleet and, with most domestic air cargo volumes currently being serviced by a single operator, it would be difficult for a potential competitor to justify the investment. In addition, roughly 75 per cent of the Firm’s domestic revenues are generated under long-term contracts, including its contract with its largest customer, the Canada Post Group of Companies, which is effective through 2025. Given the high customer concentration in the industry in Canada, the Company’s dominant market share, the duration of its contracts, and the structure of the Canadian market it would be very difficult for a new entrant to successfully compete with Cargojet.

"In our view, the continued expansion in Canada of Amazon’s one-day and same-day delivery offerings is a significant growth catalyst for Cargojet. Given what we have seen play out in the U.S., we believe that Amazon’s roll out of these services in Canada will provide Cargojet’s domestic Network with incremental volumes, resulting in revenue growth and in significantly improved fleet utilization, which in turn should drive margin expansion for the Firm. We also see additional upside for the Firm due to the second-order impacts generally seen with Amazon’s announcements, as we expect that other Canadian retailers will continue to react defensively and launch their own expedited delivery offering, ultimately resulting in additional volumes for Cargojet."

Mr. Murray set a target of $120 for Cargojet shares, which exceeds the average on the Street of $115.45.


Though Corus Entertainment Inc. (CJR.B-T) continues to generate “healthy” cash flows, Desjardins Securities analyst Maher Yagji said he’s staying on the sidelines, seeing “significant” headwinds in the television industries.

On Friday before the bell, the Toronto-based media company reported first-quarter revenue of $468-million, slightly exceeding the consensus projection on the Street of $462-million.

Mr. Yaghi said the results showed that the company’s ad tech ventures are “starting to bear fruit.” However, he emphasized the initiatives caused higher costs and programming expenses, leading to a “slight” miss in earnings before interest, taxes, depreciation and amortization ($181-million versus a consensus of $187-million).

“In light of the company’s earnings release, we have adjusted our estimates,” he said. “First, we have increased our TV revenue forecast to reflect the uptake in certain ad tech ventures. However, we have decreased our radio revenue growth forecast following the quarter’s disappointing results. Our consolidated revenue forecast is now slightly higher than before the company reported. We have also reduced our adjusted EBITDA margin estimate, as we believe the investments in new platforms will take time before converting into significant additional revenue .”

Seeing "significant" headwinds stemming from the rise of over-the-top (OTT) services, like Netflix, Disney+ and Apple TV+, Mr. Yaghi lowered his 2020 EBITDA estimate to $576-million from $584-million.

He kept a “hold” rating and $7.25 target for Corus shares. The average on the Street is $8

“We maintain our Hold recommendation until more potential upside is offered by the stock or leverage is reduced toward the lower bound of 2-times net debt to EBITDA ,” the analyst said.


Concurrent with a “material” increase in their 2020 oil price assumptions, Raymond James analysts Chris Cox and Jeremy McCrea raised their cash flow estimates for TSX-listed oil and gas producers on Monday.

The firm raised its 2020 and 2021 WTI estimates to US$61.17 and US$55.62 per barrel, respectively, from US$52.18 and US$61.

Those changes brought increases to target prices for several stocks in their coverage universe.

However, Mr. Cox lowered his rating for Husky Energy Inc. (HSE-T) to “underperform” from “market perform” with an $11 target (unchanged). The average on the Street is $11.36.

“Over the near-term, we expect 4Q19 results to be a negative catalyst,” he said. “Beyond that, our revised forecasts point to negative free cash flow for both 2020 and 2021 after taking into account the cost for the Superior rebuild (with only 80 per cent likely to be covered by insurance) and the impact of capitalized interest. Accordingly, we believe it is too much to ask investors to look past at least two years of materially weaker free cash flow profile vs. peers, supporting a more pessimistic outlook for the stock.”

Among senior producers, their target changes were:

Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $50 from $40. Average: $46.04.

Cenovus Energy Inc. (CVE-T, “market perform”) to $14.50 from $13. Average: $15.02.

Imperial Oil Ltd. (IMO-T, “underperform”) to $37 from $31. Average: $36.05.

Suncor Energy Inc. (SU-T, “outperform”) to $53 from $48. Average: $49.71.


The North American engineering and construction (E&C) sector is "positioned well" for 2020, according to Canaccord Genuity analyst Yuri Lynk, who sees a "supportive" macro backdrop despite slowing growth.

"We see growth in civil and non-residential construction spending slowing dramatically in 2020 but remaining at extremely healthy levels," said Mr. Lynk in a research note released Monday. "After ten years of economic expansion, government tax receipts are supportive of increased spending on infrastructure. For example, the National Association of State Budget Officers forecasts U.S. states' total capital expenditures will increase nearly 8 per cent in 2019 when the final numbers become available. Most third-party forecasts peg growth in 2020 slowing to the mid to low single-digit range in both Canada and the U.S.. North American infrastructure spending growth should be led by the following verticals: transportation, water supply, highway & street, power, and sewage & waste disposal.

“The growth outlook for the Caterpillar dealers is more tempered. Caterpillar, the industry bellwether, saw its Q3/2019 backlog contract 16 per cent year-over-year with management calling for a ‘mid single-digit’ sales decline in Q4/2019. We doubt 2020 will feature much more than low single-digit growth and could very well decline. Finning has already guided to flat sales this year, but we expect self-help initiatives to drive record EPS in 2020.”

Though he noted the biggest risk to growth is a "rapidly tightening" labour market, Mr. Lynk said he sees that change as a "'champagne problem' for the industry."

“We continue to hear stories of major infrastructure projects being bid by just one or two companies or consortia,” he said. “This is a clear indication that pricing power has fully swung to the contractors – who can, for the time being, name their price and choose projects that best match their capabilities. This is not only accretive to as-sold margins but also, more importantly, materially lessens the likelihood of negative cost reforecasts. Thus, while some projects are being deferred due to tight labour we believe the prospect of more predictable earnings is a major offset.”

Given his bullish view of the year, Mr. Lynk adjusted his target prices for stocks in his coverage universe.

For engineering and construction companies, his changes were:

Badger Daylighting Ltd. (BAD-T, “buy”) to $48 from $46. The average on the Street is $44.25.

Bird Construction Inc. (BDT-T, “buy”) to $7 from $6.50. Average: $8.38.

Canwel Building Materials Group Ltd. (CWX-T, “hold”) to $7 from $6.50. Average: $5.27.

Fluor Corp. (FLR-N, “buy”) to US$25 from US$23. Average: US$20.91.

Hardwoods Distribution Inc. (HDI-T, “buy”) to $19 from $18. Average: $19.90.

North American Construction Group Ltd. (NOA-T, “buy”) to $28 from $27. Average: $24.70.

SNC-Lavalin Group Inc. (SNC-T, “buy”) to $43 from $42. Average: $35.23.

Stuart Olson Inc. (SOX-T, “hold”) to $2 from $1.60. Average: $1.80.

Stantec Inc. (STN-T, “hold”) to $37 from $33. Average: $40.05.

WSP Global Inc. (WSP-T, “hold”) to $95 from $88. Average: $90.38.

For equipment distribution and rental companies, his changes were:

Finning International Inc. (FTT-T, “buy”) to $28 from $27. Average: $27.20.

Toromont Industries Ltd. (TIH-T, “hold”) to $69 from $67. Average: $73.

Mr. Lynk lowered his target for Aecon Group Inc. (ARE-T, “buy”) to $26 from $27. The average is $25.09.

“Our E&C and equipment coverage universe currently trades at a 9-per-cent price-to-earnings (next 12-month) premium to the S&P/TSX Composite Index, compared to the 2 per cent premium witnessed, on average, over the last ten years," he said. “Valuations are bifurcated between very expensive and very cheap. Our best ideas for 2020 – ARE, NOA, and SNC – are all firmly in value territory having underperformed last year. In the case of ARE and NOA, both companies sport near-record backlogs and, therefore, excellent revenue visibility. Continued solid execution through 2020, including better FCF conversion, should allow for multiple expansion. Our Top Pick, SNC, is a turnaround story where we see tremendous valuation upside potential associated with management’s recent refocusing of the business.”


NexGen Energy Ltd. (NXE-T, NXE-N) is a “compelling investment for investors looking for exposure to uranium through a world-class deposit in a low-risk jurisdiction,” according to Canaccord Genuity analyst Katie Lachapelle.

She initiated coverage of the Vancouver-based uranium exploration and development company with a "speculative buy" rating.

Ms. Lachapelle pointed to four factors in justifying her rating.

  • Its Arrow Deposit in NexGen’s 100-per-cent-owned flagship Rook 1 project, which she called “one of the world’s best undeveloped high-grade uranium deposits.” Ms. Lachapelle added: “The size, grade and favourable geological setting of Arrow position it to be the largest, lowest-cost uranium mine in the world, supplying 14 per cent of global supply once in production at lowest quartile cash costs,” she said. “In our view, the disruptive potential of Arrow makes ownership of the asset highly strategic.”
  • Its portfolio is centered in the Athabasca Basin in Saskatchewan, which she calls “one of the world’s best mining jurisdictions.”
  • The development and financing of Arrow coincides with a turnaround in uranium. She said: “In our view, the fundamentals for uranium are improving, with increasing demand for nuclear energy and security of future supply becoming ever more important,” she said. “As long-term contracts expire, we believe utilities will begin to feel pressure to re-enter the market to ensure future supply for their reactors. We expect these contracts to occur at prices that are acceptable for miners.”
  • The company is led by an “experienced and reputable” management team.

Ms. Lachappelle set a target price of $4 for NexGen shares. The average on the Street is currently $4.97.

“Our 12-month target price is based on 1.0 times NAV [net asset value], forecast as at Jan 1, 2021,” she said. “Our 1.0 times NAV multiple is predicated on the fact that 12-months from now NXE will have completed a bankable Feasibility Study on the Arrow Project and submission of major permit documents to the CNSC. As a highly strategic asset, we believe these milestones put the project ‘in play’, increasing the attractiveness of NXE to existing major producers.”


Hecla Mining Co. (HL-N) is starting to demonstrate “stronger” fundamentals, said RBC Dominion Securities analyst Mark Mihaljevic following last week’s release of better-than-anticipated fourth-quarter and full year 2019 production results.

However, though it demonstrated capital “restraint” at its Nevada properties and started to de-lever its balance sheet, Mr. Mihaljevic cautioned that the Idaho-based company still has “additional work required to justify its current valuation.”

“We believe Hecla’s financial position improved materially in H2/19 given (1) improved operating results, (2) stronger metals prices, (3) lower rates in the high-yield debt market, (4) ATM offering and debt-to-equity swap, and (5) reduced expenditures in Nevada,” he said. “As a result, we believe pressure on Hecla to make a hard choice has eased and see the potential to refinance its $500-million in notes at a comparable interest rate (expected in H1/20). From a financial perspective, our focus is now on management demonstrating sustained capital discipline as financial pressure eases.”

“We believe Hecla’s near-term operational outlook has also improved driven by (1) Greens Creek continuing to exceed expectations, (2) end of the strike at Lucky Friday, and (3) rationalizing the Nevada operations. However, we still only forecast flat [silver] production with modestly lower costs over the next 3 years. To become more constructive on the operational outlook, we will be looking for management to demonstrate (1) the economic potential of the Hugh Zone and/or El Toro discovery to extend the life of San Sebastian, (2) a viable longer-term strategy for Nevada (third-party ore processing, improved productivity, and/or development of Hatter Graben), (3) a rebound in production and access to higher grade ore from the East Mine at Casa Berardi, and/or (4) successful ramp-up of Lucky Friday and integration of the Remote Vein Miner.”

Mr. Mihaljevic thinks Hecla's valuation "appears extended" relative to its peers, despite making strides both financially and operationally.

Accordingly, he maintained an “underperform” rating with a US$2.75 target, which is up from US$1.90. The average is US$2.96.


In other analyst actions:

* BMO Nesbitt Burns analyst Ben Pham raised Innergex Renewable Energy Inc. (INE-T) to “outperform” from “market perform” with a target of $20, rising from $17. The average on the Street is $17.44.

“We point to the company’s diversified footprint (North America, Chile, and France), strong development expertise and backlog, and limited commodity price exposure as three key items that position INE to deliver continued dividend increases and valuation expansion,” said Mr. Pham.

* Credit Suisse analyst Andrew Kuske hiked his target for Brookfield Asset Management Inc. (BAM-N, BAM.A-T) to US$68 from US$60 with an “outperform” rating (unchanged). The average target is US$66.28.

Mr. Kuske said: “Even with the stock’s 51-per-cent capital return in 2019, BAM core asset management business trades at a discount to all of the U.S. peers on a Price/Fee Related Earnings and well below the industry average – let alone the large delta to sector bellwether Blackstone (BX). We focus on three main debates: (1) with the core private funds business, the pace and quantum of BAM’s fund raising; (2) the public LPs outlook; and, (3) following a step-change year, the level of 2020 deployments and monetizations. Clearly, BAM’s core asset management momentum is positive and an effective doubling of distribution capability with the Oaktree Capital acquisition should help ultimately deliver positive funds flow.”

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