Inside the Market’s roundup of some of today’s key analyst actions
While he warns an economic slowdown in 2023 is “increasingly likely,” Canaccord Genuity analyst Mark Rothschild expects fundamentals in the real estate sector should “remain healthy” for most property types and believes REITs “appear more attractively valued on various valuation metrics.”
“We are forecasting total returns of, on average, 18.4 per cent, and we have the strongest conviction for the rental apartment REITs,” he said in a research report released Monday. “Our top picks are Killam Apartment REIT, BSR REIT, Minto Apartment REIT, Dream Industrial REIT, Granite REIT and Brookfield Corporation. Although we remain extremely cautious toward office fundamentals, there appears to be attractive long-term value for many of the office REITs.”
Mr. Rothschild expects “steady” operating performance from most REITs, “with cash flow growth remaining positive despite the negative impact of rising operating costs, higher interest rates on maturing debt, as well as the impact of slowing economic activity.
“In general, fundamentals are robust for most Canadian asset classes and markets,” he said. “In particular, rental apartment fundamentals are solid, industrial fundamentals across Canada continue to be very tight, and well-located retail space remains highly occupied. We believe these fundamentals will allow most REITs to achieve positive rental spreads on lease renewals and new leasing, leading to solid NOI and cash flow growth.
“For 2023, we expect positive FFO per unit growth across all sectors, with our forecast for a rise in FFO per unit of, on average, 4.7 per cent overall. The strongest cash flow growth is expected from industrial REITs/REOCs and seniors housing operators, while growth is expected to be weaker from office and diversified REITs. We note that excluding Tricon, weighted-average FFO per unit growth for the residential sector is 5.2 per cent and 6.0 per cent in 2023 and 2024, respectively.”
The analyst did downgrade both Automotive Properties REIT (APR.UN-T) and Choice Properties REIT (CHP.UN-T) to “hold” recommendations from “buy,” seeing them as “fairly valued.”
His target for Automotive remains $12.50. The average on the Street is $13.03.
“Following a total return of 10.8 per cent over the past month, we are reducing our rating of Automotive Properties to HOLD from Buy as we believe the units are fairly valued,” he said.
He reiterated a $14.50 target for Choice Properties. The average is $15.47.
“:Following a total return of 21.0 per cent since the end of Q3/22, we are reducing our rating of Choice Properties to HOLD from Buy as we believe the units are fairly valued,” the analyst said.
Mr. Rothschild also made these target adjustments:
- American Hotel Income Properties REIT LP (HOT.U-T/HOT.UN-T, “buy”) to $3.75 from $4. Average: US$2.81.
- First Capital REIT (FCR.UN-T, “buy”) to $19 from $18.50. Average: $19.
- Flagship Communities REIT (MHC.U-T, “buy”) to US$19 from US$18. Average: US$20.76.
- RioCan REIT (REI.UN-T, “buy”) to $23.50 from $22. Average: $24.18.
- Tricon Residential Inc. (TCN-N/TCN-T, “buy”) to US$11 from US$12.50. Average: US$10.97.
“Overall, REIT’s appear more attractively valued on various valuation metrics,” he concluded. “Investments in real estate are typically underwritten based on discounted cash flow or IRR models. We have therefore estimated what each REIT in our coverage universe is trading at on an implied IRR basis. Overall, our analysis suggests that, by asset class, REITs/REOCs offering the best value, through either trading at the highest implied IRRs or steep discounts to both NAVs and historical AFFO multiples are the industrial, seniors housing, and residential REITs/ REOCs.
“Implied IRRs are highest for industrial REITs at 11.2 per cent, and considering the strong internal growth expected from the sector over the next several years, current cash flow multiples are attractive, which should allow for healthy returns in 2023. Residential REITs currently trade at, on average, 19.8 times 2023E AFFO, well below the historical one-year forward AFFO multiple of 24.6 times over the past five years. Given the outlook for healthy cash flow growth as a result of the strength of fundamentals, we believe current valuations for residential REITs are attractive.”
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While the 2023 production guidance from Vermilion Energy Inc. (VET-T) fell below his expectation “amid a larger capital spend,” Desjardins Securities analyst Chris MacCulloch thinks investors “may appreciate the improved clarity on capital returns as VET navigates an extremely volatile commodity price environment.”
Before the bell on Friday, the Calgary-based company revealed a capital budget for the year of $570-million, higher than the analyst’s $500-million estimate, with “relatively modest” production growth from 2022 levels of 87,000–91,000 barrels of oil equivalent per day. That was also below Mr. MacCulloch’s forecast (97,500 boe/d).
“The primary driver of lower volumes is recent permitting in the BC Montney facilitating the construction of infrastructure to optimize and shift development from Alberta, which will delay the planned ~5,000 boe/d production ramp at Mica until 2024,” he said. “The company has also scheduled a plant turnaround at Corrib in mid-2023, which is expected to result in a 1,000 boe/d annual production hit.
“Meanwhile, VET has received formal consent from the Irish government for the previously announced consolidation of Corrib, which is now expected to close at the end of 1Q23, consistent with our modelling assumption. The planned maintenance at Corrib should help optimize volumes to mitigate EU windfall taxes which Ireland has set at a highly punitive 75-per-cent tax rate, significantly above the EU minimum of 33 per cent. For context, VET now expects to pay $250-milllion of windfall taxes in 2022 (vs a previous estimate of $300-million) and $300-million in 2023 (from $400-million) based on current strip prices; the latter primarily reflects the recent collapse in European natural gas prices. However, given the improved clarity on windfall taxes, the company has increased its quarterly base dividend to 10 cents per share (from 8 cents per share) while announcing plans to resume share buybacks, which are still expected to be the primary method of returning capital to shareholders.”
Maintaining a “buy” recommendation for Vermilion shares, Mr. MacCulloch trimmed his target to $35 from $38. The average target is $38.21.
“Our revised $35 target implies 3.5 times EV/DACF (2023E), which is significantly below the stock’s historical consensus multiple of 4.8 times,” he noted.
Elsewhere, others making target adjustments include:
* Scotia Capital’s Jason Bouvier to $32 from $40 with a “sector perform” rating.
“OUR TAKE: Negative,” said Mr. Bouvier. “Our FCF estimate (strip) in 2023 is down by 42 per cent (down 33 per cent in 2024). About 60 per cent is due to our inclusion of the windfall profits tax (previously not included), while the remaining 40 per cent is due to lower production, increased cash taxes, opex, transportation, G&A, and higher capex. We are not modeling the windfall profits tax beyond 2023, although if European gas prices remain high, the risk remains.”
* BMO’s Mike Murphy to $25 from $32 with a “market perform” rating.
“Although 2023 spending was in line with consensus, production volumes were considerably lower than expectations. The dividend was increased 25 per cent, however we expect debt reduction to remain the focus for free cash flow in the near term. With softer European gas prices and windfall tax headwinds, we are lowering our target price,” said Mr. Murphy.
* TD Securities’ Menno Hulshof to $35 from $38 with a “buy” rating.
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Desjardins Securities analyst Chris Li expects Saputo Inc.’s (SAP-T) third-quarter results will show it “remains on track for a strong recovery” during the current fiscal year.
Ahead of the scheduled Feb. 9 release, Mr. Li raised his earnings per share estimate for the quarter to 48 cents from 45 cents, which is the consensus on the Street, pointing to several factors, including: “healthy” dairy demand in North America, “stabilized” labour challenges south of the border and an “improved” cheese-milk spread.
His full-year 2023 and 2024 EPS estimates also increased to $1.61 and $1.92, respectively, from $1.58 and $1.58.
Mr. Li maintained a “buy” rating and $39 target for Saputo shares. The average is currently $40.
“We believe current valuation (11.2 times forward EBITDA vs 12.1 times average) partly reflects expectations for a strong EBITDA recovery in FY23. We expect further upside from better visibility on attractive EBITDA growth in FY24 (17–18 per cent). Since management remains comfortable with its $2.1-billion EBITDA target by FY25, this implies strong growth in FY24 to reach its target,” he said.
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Scotia Capital’s Benoit Laprade predicts inventory write-downs will lead to negative EBITDA for most lumber producers in the fourth quarter of 2022.
In a research report released Monday, the analyst moved his earnings projections largely lower to “reflect the actual commodity prices and FX in the quarter,” however he noted “valuations remain very attractive.”
“The key changes to our Q4/22 forecasts are lower-than-expected wood product prices, slightly lower than expected containerboard prices, and slightly higher than expected pulp prices. Paper prices were in line with expectations,” said Mr. Laprade.
With this changes, he lowered his target prices for these stocks:
- Canfor Corp. (CFP-T, “sector outperform”) to $30 from $33. The average is $31.50.
- Cascades Inc. (CAS-T, “sector outperform”) to $12 from $13. Average: $10.25.
- Interfor Corp. (IFP-T, “sector outperform”) to $30 from $36. Average: $36.17.
- Western Forest Products Inc. (WEF-T, “sector perform”) to $1.75 from $2. Average: $1.57.
- West Fraser Timber Co. Ltd. (WFG-T, “sector outperform”) to $132 from $138. Average: $102.74.
Conversely, he raised his target for Stella-Jones Inc. (SJ-T, “sector outperform”) to $59 from $51. The average is $56.
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ATB Capital Markets analyst Nate Heywood thinks energy infrastructure companies are “well situated for the current environment.”
“Following recent years of volatility, we would point to the sectors stringent capital deployment, which featured balance sheet maintenance and demonstrated defensive cash flow profiles,” he said. “In the current economic environment, with higher interest rates and looming recession concerns, we expect energy infrastructure names will continue to take a defensive approach to capital allocation, limiting growth outside of underpinned contracted opportunities and returning capital shareholders.”
In a research report released Monday previewing 2023, Mr. Heywood predicted capital allocation will continue to be a focus of the sector this year.
“In regards to capex, we believe the inclination of a company to invest in growth projects provides confidence in the future trajectory given the historically stringent investment criteria employed; however, we expect that capital program flexibility could be valued in 2023 given the current interest rate environment,” he said. “Names like SPB, SES, KEY, and PPL boast some of the lowest capex as a percentage of EV. We would note that while ALA offers a higher percentage capex of EV, the majority of ALA’s investment boasts near-immediate returns given its focus on Utility assets.
“Turning to alternative capital allocation priorities, we expect dividend distributions and NCIB activity to remain a priority for names with light capital demands in 2023. Top yields in the space are seen in RNW, KEY, GEI, SPB, and SES. Looking to share buybacks in 2022, PPL, GEI and TA have repurchased the largest aggregate value of shares, but we would note SES made significant strides after initiating its NCIB on Dec. 14, 2022. In general, we expect NCIB activity will be largely opportunistic across our coverage universe for 2023 but will be evaluated against balance sheet health.”
Mr. Heywood trimmed his target for shares of TransAlta Renewables Inc. (RNW-T) to $15.50 from $17.50 with an “outperform” rating after reducing his terminal growth outlook. The average on the Street is $14.50.
“With this update we have revised our price target lower for RNW to capture a slowed long-term outlook for growth given reduced TA drop-down potential. Our estimate revisions expect relatively flat results into 2024 and beyond. Additionally, we have revised our terminal growth rate lower from 1.0 per cent to 0.5 per cent,” he said.
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CIBC World Markets energy infrastructure analyst Robert Catellier
“Following a very strong 2021 on the reopening trade, 2022 was a flat year for our pipeline and midstream coverage list,” he said. “The year started with promise as first half returns were solid, with geopolitical tensions highlighting the importance of energy security. This was followed by a weaker second half as inflation, interest rates and recession concerns were in focus, and companyspecific issues emerged. We feel the current environment favors companies with manageable debt profiles and limited capex risk, providing capacity to grow dividends and/or repurchase shares. We see 2023 providing room for some positive return potential, especially if interest rate concerns moderate.
“Fundamentals remain quite strong, with volumes exceeding pre-pandemic levels. While off their highs, commodity prices are solid, with inventory levels generally below five-year ranges, with the notable exception of propane. Producers and OPEC+ continue to demonstrate market discipline. Although WCSB drilling activity continues to recover, we see more potential, especially if the Blueberry River First Nations issue (BRFN) is resolved.”
Mr. Catellier named a pair of top picks in the sector for the year:
* Keyera Corp. (KEY-T) with an “outperformer” rating and $35 target. The average is $34.08.
“Keyera is a top pick based on ability to enhance cash returns to shareholders, and substantial potential for catalysts. These include potential projects in support of the DOW ethylene cracker, a potential resolution of the Blueberry River First Nations issue (BRFN) issue, and the strategic implications of the recent increase in capacity in Keyera Fort Saskatchewan. The last two items can help with contracting the remainder of KAPS capacity over time. The company also has limited floating rate debt,” he said.
* Brookfield Infrastructure Partners LP (BIP-N/BIP.UN-T) with an “outperformer” rating and US$46 target. The average is US$43.38.
“Based on excellent inflation protection, limited refinancing needs, and visible FFO per unit growth of 10 per cent from 2022 acquisitions. While having more exposure to foreign currencies, BIP generally hedges OECD currencies for up to 24 months. Risk factors include market volatility and its impact on the ability to transact on M&A, and rising interest rates,” he said.
The analyst also made a group of target price adjustments to stocks in his coverage universe on Monday. His changes included:
- Enbridge Inc. (ENB-T, “outperformer”) to $62 from $50. The average on the Street is $58.45.
- Pembina Pipeline Corp. (PPL-T, “neutral”) to $52 from $50. Average: $51.13.
- TC Energy Corp. (TRP-T, “neutral”) to $63 from $65. Average: $64.25.
- Tidewater Midstream and Infrastructure Ltd. (TWM-T, “outperformer”) to $1.65 from $1.60. Average: $1.62.
- Tidewater Renewables Ltd. (LCFS-T, “outperformer”) to $19 from $19.50. Average: $19.25.
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National Bank Financial analyst Shane Nagle upgraded Capstone Mining Corp. (CS-T) to “outperform” from “sector perform” with a target of $6.50, rising from $5.50 and above the $6.27 average on the Street.
He also made these target adjustments on Monday:
- Copper Mountain Mining Corp. (CMMC-T, “outperform”) to $2.25 from $2.75. Average: $2.33.
- Ero Copper Corp. (ERO-T, “sector perform”) to $20 from $17.50. Average: $20.58.
- Hudbay Minerals Inc. (HBM-T, “sector perform”) to $8.50 from $7.50. Average: $9.47.
- Lundin Mining Corp. (LUN-T, “sector perform”) to $9.25 from $8.25. Average: $9.49.
- Sherrit International Corp. (S-T, “sector perform”) to 75 cents from 80 cents. Average: $1.
- Solaris Resources Inc. (SLS-T, “outperform”) to $12.50 from $14. Average: $19.10.
- Taseko Mines Ltd. (TKO-T, “sector perform”) to $2.40 from $1.90. Average: $2.48.
- Teck Resources Ltd. (TECK.B-T, “outperform”) to $65 from $56. Average: $54.15.
National Bank’s Rabi Nizami made these changes:
- Adventus Mining Corp. (ADZN-X, “outperform”) to 90 cents from 80 cents. Average: $1.02.
- Filo Mining Corp. (FIL-T, “outperform”) to $35 from $30. Average: $26.82.
- Foran Mining Corp. (FOM-X, “outperform”) to $3.75 from $3.30. Average: $3.53.
- Trilogy Metals Inc. (TMQ-T, “sector perform”) to $1 from $1.15. Average: $1.54.
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In other analyst actions:
* BoA Securities’ John Murphy downgraded Magna International Inc. (MGA-N, MG-T) to “neutral” from “buy.”
* Barclays’ Kannan Venkateshwar cut his BCE Inc. (BCE-N/BCE-T) target to US$47 from US$48 with an “equal-weight” rating. The average is $64.83 (Canadian).
Editor’s note: An earlier version of this article incorrectly listed the target changes by Canaccord Genuity's Mark Rothschild. It has been updated.
David Leeder