Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Shane Nagle sees Wheaton Precious Metals Corp. (WPM-T, WPM-N) “well positioned to fund growth objectives,” emphasizing its “stable financial position and high-quality, low-cost long-life asset portfolio.”
“While disproportionately exposed to any proposed increases in Global Minimum tax rates (approximately 8-per-cent impact to NAV at an adopted tax rate of 15 per cent), we have yet to formally incorporate any changes until more clarity on the expected timeline/tax treatment of streaming is better understood - something likely to remain on the back burner amidst rising interest rates, ongoing conflict in Ukraine, inflationary pressures and global supply chain issues,” he said in a note released Monday. “Wheaton is set to achieve strong organic growth in the coming years with completion of Salobo and expanded production at Stillwater, Constancia and Voisey’s Bay.”
Shares of the Vancouver-based miner rose 3.6 per cent on Friday in response to the release of its fourth-quarter financial results and reiteration of its 2023 guidance.
With sales and production prereleased in February, adjusted earnings per share of 23 US cents came in broadly in line with Mr. Nagle’s 24-US-cent estimate and the consensus forecast of 25 cents, while cash flow per share of 36 US cents was narrowly lower than anticipated (38 US cents and 39 US cents, respectively).
“NBF Estimates continue to adopt conservative ramp-up assumptions for WPM’s interests in single-asset development companies,” said the analyst. “As a result, our 5/10-year estimates for average annual production of 746,000/753,000 GEOs (using WPM price deck), remain below reiterated 5 and 10-year guidance of 810,000/850,000 GEOs owing to more conservative development assumptions across the portfolio.”
Believing Wheaton’s balance sheet “remains strong,” he added: “WPM ended Q4 with US$699-million in cash and a fully undrawn US$2.0-billion credit facility. At spot prices, WPM generates US$330-million in average annual cash flow from 2023-2025, to service ongoing dividends and fund the Salobo III expansion payment and additional growth within the portfolio.”
In response to the results and guidance, Mr. Nagle trimmed his target for Wheaton shares to $65 from $68, which is the current consensus on the Street.
“We maintain our Outperform rating which is based on WPM’s stable financial position, complemented by a portfolio of high-quality, low-cost, and long-life assets,” he said.
=====
In a research report titled (Trying to do) Everything Everywhere All at Once, Desjardins Securities analyst Chris MacCulloch expressed surprise over investors’ muted reaction last week to the fourth-quarter results from Vermilion Energy Inc. (VET-T), continuing to see it as “one of the most heavily discounted equities” in the firm’s energy sector coverage universe.
“After decimating Street expectations and announcing an attractively priced disposition of non-core assets in southeast Saskatchewan for $225-million —a price tag that will conveniently fund remaining closing costs on the Corrib consolidation ($200-million )— VET barely moved a muscle in the March 9 trading session. What gives?,” he said.
“For starters, there may have been some hesitancy to reward the large cash flow beat, seeing as roughly half of it was attributable to a lower-than-expected windfall tax hit of $223-million (vs previous guidance of $250-million), and the fact that it was paired with a quarterly production miss. There was also the announcement of two dry holes in Croatia coming off a string of disappointing results in Hungary, although we caution that Central and Eastern Europe (CEE) is very much a ‘Big E’ exploration play for the company with minimal capital costs associated on the wells. In our view, the key disappointment was the lack of visibility surrounding the Wandoo outage, an asset generating 10 per cent of corporate cash flow that has been offline since December with nary a disclosure from VET, including within its January 6 press release detailing 2023 guidance.”
While it “crushed expectations” with its results, Mr. MacCulloch said Vermilion “continues to languish as the worst-performing name (down 21.5 per cent) in the Desjardins E&P universe to date this year, which has expanded the valuation disconnect vs peers.”
“For context, based on current strip prices and our estimates, which conservatively assume the continuation of EU windfall taxes into 2024, we now see VET trading at 2.6 times DACF [debt-adjusted cash flow] (2024 estimates) while offering a 22-per-cent FCF yield. In other words, we should be nearing a point of capitulation for the stock, assuming no more surprises.”
Reiterating his “buy” recommendation, Mr. MacCulloch trimmed his target for Vermilion shares by $1 to $30 after modest reductions to his 2023 and 2024 estimates. The average is $31.50.
In a separate note titled Top Gas Maverick going into Cruise control, Mr. MacCulloch also lowered his Peyto Exploration & Development Corp. (PEY-T) target by $1 to $16, keeping a “buy” recommendation. The average is $17.25.
“We are trimming our target on Peyto ... reflecting estimate revisions following its 4Q22 financial results,” he said. “Specifically, we have walked down our capex assumptions while introducing additional conservatism within our production forecast, reflecting higher-than-expected corporate declines. We still believe the dividend is sustainable at strip prices, and we highlight that the stock is now the most attractively valued name in the Desjardins E&P coverage universe.”
=====
Despite its “strong” share price performance, Scotia Capital analyst Michael Doumet thinks there’s “meaningful potential upside” in ATS Corp. (ATS-T), leading him to initiate coverage with a “sector outperform” recommendation.
“From the outside looking in, it is often hard to fully appreciate how a change in a company’s strategy and operating framework will impact its performance – that is, until it demonstrates sustainable financial improvements,” he said. “A few years after Andrew Hider joined as CEO, ATS’s ability to achieve sustainable growth has become apparent. At the beginning, management’s focus was on strengthening the company’s operating backbone and refocusing ATS on the right market opportunities – i.e., decentralizing operations, implementing the ABM, increasing the focus on regulated end-markets, and expanding its standardized product and service offerings. Having achieved a baseline of operating success a few years ago, ATS accelerated its pace of M&A, adding capabilities and scale to its product (approximately 30 per cent of revenues) and services (30 per cent) offerings – areas of the business that are more repeatable, predictable, and higher-margin (and less-reliant on customer capex budgets). Today, ATS is faster growing, higher-margin, and more durable (i.e., less cyclical) – all factors that have positive implications for valuation.”
Mr. Doumet said ATS has become a “quality compounder” through that earlier decision to " focus the company on end-markets with favorable long-term growth prospects, execution that continues to improve, and a healthy recycling of FCF into accretive M&A.”
“Four years after setting the goal, ATS achieved its 15-per-cent EBIT margin target in F2022 (ex. acquisitions),” he added. “Since then, margins compressed due to supply chain challenges. Success is often easier the second time around – and there is increasing evidence that supply chains are easing. As we expect Transportation revenues to accelerate and margins to expand/recover, we believe ATS’s EBITDA will track above Street estimates starting in the 2HF24 (and potentially above ours). For 4QF22, we are below consensus due to higher stock comp (given the recent share price appreciation).”
Touting its “strong” organic growth, Mr. Doumet set a target of $67 per share. The average on the Street is $62.57.
“Despite the strong share price performance, we see several reasons to remain bullish, including continued momentum in backlog (i.e., book-to-bill more than 1 times in next several quarters), revenue (in F2024/F25) and margin (F2025) upside versus our/consensus estimates, and outsized product and service growth, all of which should lead to multiple expansion,” he said.
=====
Desjardins Securities’ Benoit Poirier expects ongoing capacity expansion will benefit The Lion Electric Co. (LEV-N, LEV-T) over the long term.
However, he thinks many investors will “want to see more evidence of order intake before fully committing,” given its order book is a “significant driver of the stock’s performance.”
“That said, we view Lion as ideally positioned to succeed given its product offering and governments’ push to decarbonize,” said Mr. Poirier.
He was one of several equity analysts on the Street to lower their 2023 and 2024 financial forecasts and target prices for shares of the Montreal-based manufacturer of all-electric medium and heavy-duty urban vehicles following Friday’s release of its fourth-quarter 2022 results, which he called “neutral.”
Lion Electric reported revenue of US$46.8-million, in line with Mr. Poirier’s US$46.1-million and the consensus on thr Street of $47.3-million. It delivered 174 vehicles (139 buses and 35 trucks) during the quarter, missing the analyst’s expectation of 176 deliveries (including 45 trucks) as global supply chain disruptions persisted.
“We view the uptick in truck deliveries as a positive development for the story,” he said. “Management stated that while it is seeing improvement in both critical and non-critical part of the supply chain, it expects some challenges to remain in 2023. Despite this, management signaled that the trend of the last five quarters is expected to continue into 2023. We expect a substantial step up in deliveries in 2023 following these comments and the capacity available to LEV in Montreal and Joliet, combined with the already procured inventory of BMW batteries on location and ready to be deployed. Consequently, we forecast 1,125 deliveries in 2023 (705 school buses, 420 trucks).”
“We view the flexibility to ramp up future capex on a need-be basis as positive given the current tightness in capital markets. All in all, we are pleased with the capex strategy for the year and forecast US$75-million in 2023 followed by US$40-million in 2024 and US$44-million in 2025.”
Citing a “higher risk premium in equity markets and macroeconomic uncertainty,” Mr. Poirier lowered his target for Lion Electric’s U.S.-listed shares to US$5.50 from US$7 with a “buy” rating. The average is US$3.83.
“The manufacturing efficiencies created by the capacity expansion projects and the early success of the school bus venture support our longterm bullish stance,” he concluded.
Others making changes include:
* National Bank Financial’s Rupert Merer to US$3 from US$3.50 with an “outperform” rating.
“LEV still trades at a discount relative to peers, at 1.0 times EV/sales on our 2024 estimates (FY2) versus peers at 3.1 times,” said Mr. Merer. “In the near term, our forecasts remain weighted to sales of buses (versus peers that have more exposure to truck markets). With the relatively larger addressable market for trucks, we believe that LEV could continue to trade at a discount until its truck orders pick up some momentum. The battery plant in Quebec should help boost margins in the future, although we are forecasting a drop in margins from high fixed costs in the short-term as they ramp up capacity at multiple facilities. With lower revenue and gross margins, we are lowering our target.”
* Canaccord Genuity’s George Gianarikas to US$2.50 from US$3 with a “hold” rating.
“While management has worked admirably to secure additional funding, we await additional cash cushion before recommending the stock. We also await more clarity on the company’s market share dynamics as awards related to the EPA’s school bus program become clear,” said Mr. Gianarikas.
* CIBC’s Kevin Chiang to US$3.75 from US$4.50 with a “neutral” rating
====
Canaccord Genuity analyst Yuri Lynk said he likes Doman Building Materials Group Ltd.’s (DBM-T) position in the North American building products distribution space, pointing to “the secular demand drivers we see in the longterm.”
However, he thinks earnings reached a cyclical peak in 2021, “and are likely to contract through 2024 on lower construction material prices, lower volumes, and the decremental impact on EBIT margin.”
After the bell on Thursday, the Vancouver-based company reported fourth-quarter 2022 results that largely fell in line with the analyst’s expectations. Revenue was down 10.7 per cent year-over-year to $572.9-million, narrowly lower than Mr. Lynk’s $579.9-million estimate as sales were hurt by a drop in average construction materials prices. Adjusted EBITDA was down 11.3 per cent to $32.9-million, topping the analyst’s $32.1-million projection.
“Lumber prices continue to exhibit volatility but are presently at levels that should allow for DBM to generate healthy, albeit lower, EBITDA,” said Mr. Lynk. “The benchmark Western SPF 2x4 CAD lumber price continues to trend down with the quarter-to-date (QTD) average decreasing 4 per cent quarter-over-quarter and 63 per cent year-over-year. However, thus far in 2023, lumber prices increased 40 per cent through early February before falling 30 per cent only to recover slightly to stand at US$413/mbf. Recall, DBM’s top line and margins benefit from periods of increasing prices, but declining price environments have the opposite effect. Meanwhile, sales volumes are being negatively impacted by the slowdown in the housing markets. As such, we believe margins in Q1/2023 will be about average and in line with our full year assumption of 14.5 per cent.
“The near term outlook for housing remains soft and repair and remodel spending is expected to moderate. The CMHC expects a broad and substantial slowdown in residential construction that could lead to an economic recession. In the U.S., housing starts decreased 3 per cent in 2022 and are expected to decline 27 per cent year-over-year in 2023. Further, after three years of double-digit increases in R&R spending, growth is expected to moderate to 3 per cent in 2023, according to the Leading Indicator of Remodeling Activity.”
With increases to his 2023 and 2024 EPS projections, Mr. Lynk raised his target for Doman shares to $6 from $5 with a “hold” rating. The average is $6.46.
“Our forecasts assume lumber prices stabilize around current levels (down 65 per cent year-over-year) and that volume remains weak throughout our forecast horizon,” he said.
Other analysts making changes include:
* RBC’s Paul Quinn to $9 from $8 with an “outperform” rating.
“We continue to think Doman is well positioned to evaluate M&A opportunities in this slowing market, and while building materials demand is likely to be muted, Doman is a firm that performs best in low pricing volatility environment,” said Mr. Quinn.
* CIBC’s Hamir Patel to $7.25 from $6.25 with a “neutral” rating.
=====
In other analyst actions:
* RBC’s Drew McReynolds lowered his target for AcuityAds Inc. (AT-T) to $3, below the $3.32 average, from $3.50 with a “sector perform” rating.
“In an unfortunate turn of events, the company announced that 90 per cent of its cash balance is deposited with SVB and is uninsured,” he said. “The ultimate amount to be recovered remains uncertain and the situation fluid. Pending FDIC determination of the advance dividend expected within the next week and a situational update from regulators, our $3 price target (from $3.50) factors in a 50-per-cent recovery rate with each 25-per-cent change in rate equating to $0.30/share.”
* National Bank’s Zachary Evershed cut his Dexterra Group Inc. (DXT-T) target to $8.50 from $10 with an “outperform” rating. The average is $8.
* CIBC’s John Zamparo cut his Diversified Royalty Corp. (DIV-T) target to $3.30 from $3.50 with an “outperformer” rating. The average is $3.98.
* CIBC’s Scott Fletcher moved his DRI Healthcare Trust (DHT.UN-T) target to $15.50 from $11.50 with an “outperformer” rating. The average is $13.65.
* RBC’s Paul Treiber reduced his Enghouse Systems Ltd. (ENGH-T) target by $1 to $48, remaining above the $41.13 average, with an “outperform” rating.
“Q1 missed RBC/consensus due to lower than expected organic growth. The assumption of year-over-year stabilization in Vidyo revenue was one quarter too early, per management’s comments,” said Mr. Treiber. “Although it has been difficult to call the bottom in Enghouse’s organic growth, cashflow was healthy (up 19 per cent year-over-year) and net cash is at an all-time high. Maintain Outperform, as we expect M&A to ramp over the coming quarters.”
* Desjardins Securities’ Kyle Stanley raised his Granite Real Estate Investment Trust (GRT.UN-T) target to $97 from $94 with a “buy” rating, while Raymond James’ Brad Sturges bumped his target to $95 from $93 with an “outperform” rating. The average is $95.60.
“GRT’s operational momentum only appears to be accelerating, with robust industrial demand and leasing spreads contributing to mid- to high-single-digit SP NOI and sector-leading 12-per-cent FFOPU [funds from operations per unit] growth guidance,” Mr. Stanley said.
* Mr. Stanley reduced his Minto Apartment Real Estate Investment Trust (MI.UN-T) target to $19.50 from $21.50 with a “buy” rating, while BMO’s Michael Markidis raised his target to $17.50 from $17 with an “outperform” rating.
“We are trimming our target ... reflecting a modest 4Q22 results miss, a slight revision to our NOI outlook, the flow through of higher-than-expected interest expense and 10 basis points of cap-rate expansion (NAVPU declines 8 per cent),” he said. “With that said, MI offers investors 8-per-cent annualized NAV growth and potential earnings upside by reducing variable-rate debt exposure, at an attractive 16.7 times 2024 FFO multiple and 27-per-cent discount to NAV (vs the peers at 17.6 times and a 14-per-cent discount).”
* Canaccord Genuity’s Yuri Lynk lowered his Greenlane Renewables Inc. (GRN-T) target to $1.15 from $1.30 with a “buy” rating. The average is $1.17.
* Canaccord Genuity’s Joseph Vafi trimmed his Hut 8 Mining Corp. (HUT-Q, HUT-T) to $5 from $6 with a “buy” rating. The average is $2.67.
* RBC’s Alexander Jackson cut his target for Largo Inc. (LGO-T) to $10, below the $11.83 average, from $13 with an “outperform” rating.
“We continue to believe Largo has significant potential value that may be unlocked if the company can execute on plan and we see several potential catalysts over the next 12-months — improved production and more high-purity sales; completion of the first LCE installation; potential JV agreement with Ansaldo; commissioning of ilmenite plant, potential strategic decision on further pigments development,” said Mr. Jackson.
* TD Securities’ Tim James lowered his Magellan Aerospace Corp. (MAL-T) target to $8 from $9.50 with a “hold” rating. The average is $10
* JP Morgan’s John Royall raised his Meg Energy Corp. (MEG-T) target to $24 from $22 with an “overweight” rating. The average is $24.83.
* Canaccord Genuity’s John Bereznicki lowered his targets for Tidewater Midstream and Infrastructure Ltd. (TWM-T) to $1.50 from $1.65 with a “buy” rating and Tidewater Renewables Ltd. (LCFS-T) to $15.50 from $18 with a “speculative buy” rating. The averages are $1.52 and $17.39, respectively.
* TD Securities’ Daryl Young raised his Westshore Terminals Investment Corp. (WTE-T) to $27 from $25 with a “hold” rating, while Scotia’s Konark Gupta increased his target to $25.50 from $23.50 with a “sector perform” rating. The average is $26.90.
David Leeder