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

Scotia Capital analyst Jason Bouvier is taking a more defensive approach to Canadian energy exploration and production companies, expecting the recovery to lead to a “significant” amount of shut-in volumes returning over the next few months.

“As the turnarounds are completed throughout the summer we expect those volumes to come back on-stream (50 per cent of all shut-in volumes),” he said in a research report released early Thursday. “In addition, with WTI in the mid-$30’s we expect 75 per cent or more of the remaining volumes to also return throughout the summer (as current prices are well above variable operating costs). We believe this is likely to cause Canadian differentials (more heavy oil than light) to widen (and when coupled with similar events happening globally, possibly world oil prices to fall). This should hurt companies with exposure to upstream pricing and help integrated producers who capture the full value chain.”

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Citing its 202-per-cent jump in share price since late March lows, Mr. Bouvier lowered Cenovus Energy Inc. (CVE-T) to “sector perform” from “sector outperform” on Thursday.

“The quick rebound in oil prices will allow CVE to bring back its 60 mbbl/d of shut-in production sooner than anticipated, helping the company to cover more of its fixed costs,” he said. “The increase in oil prices has also helped alleviate financial concerns (although we would still not characterize more than $40 WTI as healthy for the industry).”

Pointing to its “improved” financial situation, he increased his target for Cenovus shares to $6.50 from $5, which he said is more in line with his revised “sector perform” rating. The average target on the Street is $6.04.

Conversely, Mr. Bouvier raised Suncor Energy Inc. (SU-T) to “sector outperform” from “sector perform, emphasizing its “strong" balance sheet and “right-sized” dividend and in consideration of its current valuation.

“Although we continue to expect Q2 to be a very weak quarter for refining (low crack spreads and low utilization in a largely fixed cost business) we expect the situation to start improving in Q3,” he said. “Increased local supply is likely to curb feedstock costs and with parts of the economy starting (albeit slowly) to go back to work, end product pricing is likely to begin the healing process in Q3 and continually improve over the next 12 months.”

His $30 target (unchanged) exceeds the $29.57 average.


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Though headwinds continue to exist for Dollarama Inc. (DOL-T) as it deals with the shift in the retail landscape stemming from the COVID-19 pandemic, Industrial Alliance Securities analyst Neil Linsdell thinks its outlook is improving following Wednesday’s release of first-quarter 2021 results that exceeded expectations on the Street.

“We had been very cautious with our forecasts following Q4 results,” he said. “As Dollarama has shown good control over costs and impacts to its business, and as more stores have reopened as the broader economy somewhat recovers, we have increased our forecasts in anticipation of a less severe (than previously expected) impact in Q2 and gradual improvements through the remainder of the year.”

Before the bell, the discount retailer reported revenue of $845-million, up 2 per cent from the previous quarter and topping the consensus projection of $840-million. EBITDA of $214-million represented a drop of 27.4 per cent but also came in ahead of the Street ($207-million).

Mr. Linsdell noted costs related directly to the impact of the COVID-19 pandemic for the second half of the quarter came in at $15-million, with $13-million related to labour, including wage increases and a jump in staffing. He thinks those costs should "gradually" ease, however he expects to see continued lowered traffic.

"Although the next few quarters will continue to see headwinds including lower traffic and margin pressure on sales mix, we see a less severe impact than previously feared, and gradual improvement through the rest of fiscal 2021," said Mr. Linsdell, who raised his revenue and earnings expectations through fiscal 2023.

Keeping a “buy” rating, he raised his target for Dollarama shares to $53 from $41. The average on the Street is $49.25.

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Elsewhere, Desjardins Securities’ Chris Li increased his target to $51 from $49 with a “hold” rating.

Mr. Li said: “While DOL’s resilient business model and solid financial position make it a good defensive investment, this is balanced against expectations for a strong recovery next year, with the risk that heightened competition amid a recession would limit DOL’s ability to pass on higher costs to consumers.”

Canaccord Genuity's Derek Dley moved his target to $46 from $44 with a "hold" rating.

Mr. Dley said: “While we still believe in Dollarama’s long-term growth profile, a result of its lack of meaningful competition, industry-leading profitability and free cash flow generation, and healthy ROIC, we believe the softer near-term outlook is likely to leave the stock range-bound over the coming quarters.”


In a separate note, Mr. Linsdell said he thinks The North West Company Inc. (NWC-T) is “well positioned to serve customers” after the rural retailer reported better-than-anticipated first-quarter results.

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"Despite the uncertainty around COVID-19, the company’s role as an essential service, less out-of-community shopping, and government assistance payments are expected to further benefit Q2 results, although tourism-dependent islands in the Caribbean will likely face challenges," he said. "Cost reduction initiatives and restructuring efforts that were already in process before COVID-19 should enhance profitability, although the sale of most of the Giant Tiger stores, now expected to close in July, will hamper top line growth."

On Wednesday, the Winnipeg-based company reported a 19.8-per-cent jump in revenue to $593-million, exceeding Mr. Linsdell’s $509-million forecast. Adjusted EBITDA rose 32.6 per cent to $59.8-million, also ahead of his expectation ($51.6-million).

"As many customers received government assistance due to COVID19 and were restricted from travelling outside their communities, NWC, with certain investments in lower price programs, became a major beneficiary," he said.

After raising his revenue and earnings projections for fiscal 2021 through 2023, Mr. Linsdell increased his target for North West shares to $30 from $28 with a “buy” rating (unchanged). The average on the Street is $30.

“Q1 results were better than expected, as North West Company benefitted from the right mix of products, good logistics (including its own airline), a good pricing strategy, government support payments, and consumers that were restricted from travelling far from their communities,” he said. “We expect continued benefits in Q2, although stores in the Caribbean that are dependent on tourism and the cruise industry will be a drag on performance as we enter the latter half of the year.”


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With its shares up 75 per cent since the beginning of June (versus a 3-per-cent rise for the TSX), Ensign Energy Services Inc. (ESI-T) shares have “burst to life,” said Raymond James analyst Andrew Bradford.

However, he warned equity investors that the debt markets don't have share that enthusiasm and "haven't participated in the rally with the same degree of exuberance," prompting him to lower his rating to "underperform" from "market perform."

“We expect ESI equity will underperform its own debt until the two groups of investors share similar macro outlooks,” he said. "Consider that ESI’s equity is priced at $1.38 while its unsecured notes are priced at 44-45. The last time ESI shares enjoyed pricing in this range was in early March 2020. At that time, its unsecured notes due 2024 were priced at 89-90.

"Looking at it the other way, the last time Ensign's notes were priced at 44-45, ESI's shares were priced between $0.27-$0.30."

Calling it a “provocative disconnection” that he expects will be fixed through a reduced share price over the coming trading sessions, Mr. Bradford maintained a 35-cent target. The average is 71 cents.


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At the same time, Mr. Bradford lowered Precision Drilling Corp. (PD-T) to “market perform” from “outperform” following a 41-per-cent rally in June that has exceeded the TSX Energy Index’s rise (10 per cent) and blown past his target price for its shares.

"Precision's unsecured notes haven't participated in the rally with the same degree of exuberance as the equity," he said. "We believe we are already seeing the beginning of a 'reconvergence' in which PD's equity drops relative to its bonds.

“Precision’s shares are priced at $1.07 today and had closed at $1.30 two days ago. The last time PD’s shares were priced in this range was in early March-2020. At that time, Precision’s 2023 7.75-per-cent notes were priced between 77 and 95. Today, they are still only 59.8. We see a similar pattern with the 2024 and 2026 series: both are priced considerably below their early March levels while PD’s equity has jumped back to early March levels.”

Noting its bonds have been moving counter to its stock over the past two days, Mr. Bradford kept a 90-cent target. The average on the Street is $1.07.


As diversifies its revenue streams, Neptune Wellness Solutions Inc. (NEPT-T) is on “the path to positive EBITDA,” according to Desjardins Securities analyst John Chu.

"The two leading extraction players have posted positive EBITDA after several quarters of meaningful revenue. The sector has low cash operating costs (as does Neptune excluding non-cash items) and positive EBITDA appears to start once sales reach $10-million," he said. "Hence, with our sales forecast exceeding $20-million beginning in 1Q FY21, we estimate Neptune can reach positive EBITDA by as early as 2Q FY21 (unchanged from our previous forecast)."

On Wednesday after the bell, the Laval, Que.-based cannabinoid extraction company reported total sales of $9.5-million, hitting the top end of its guidance ($8.0-$9.6-million) and ahead of Mr. Chu's $8.5-million projection as cannabis-related sales exceeded expectations. Adjusted EBITDA of a loss of $8-million was also better than his estimate (a $14.3-million deficit).

"We increased our sales outlook to reflect the company’s $16.5-million hemp supply agreement announced last month," the analyst said. "We also believe revenue from hand sanitizers and contactless thermometers should generate meaningful sustainable revenue over the medium term at least given the current environment (we envision the majority of retail stores, restaurants and office buildings will likely have hand sanitizers on the premises for customer and employee use). We lowered our gross margin estimate to reflect lower-than-expected 4Q results and a different product mix (ie more hand sanitizer and hemp revenue and the margin uncertainty associated with each). As a partial offset, we also lowered our SG&A forecast to reflect a much lower run rate after excluding non-cash marketing expenses. As a result, we have reduced our EBITDA forecast for both FY21 and FY22 until we get more clarity on the margin potential for some of these segments."

Mr. Chu kept a “buy” rating and $8 target for Neptune shares. The average on the Street is $6.31.


After a “positive” operations update, Acumen Capital analyst Nick Corcoran thinks the impact of the COVID-19 pandemic on Hardwoods Distribution Inc. (HDI-T) has been “significantly less” than anticipated on both sales and margins.

“HDI’s sales (based on daily organic sales) were up 16 per cent month-over-month in May, compared to down 23 per cent month-over-month in April,” he said. "The positive momentum appears to have carried into June. Management indicated that the pace of construction has increased in many regions, and the current crisis (including associated cost reduction activities) have not had a significant impact on the productive capacity of the business.

“HDI initiated multiple cost reduction activities in April, which include reducing the workforce, lowering variable compensation, and curtailing non-essential operating expenditures. These reductions helped HDI generate positive change flow, before changes in working capital, for April and May. This is a significant change in tone from the Q1/20 results when Management appeared to cautiously indicate that they would be cashflow breakeven in Q2/20.”

Keeping a “buy” rating, Mr. Corcoran raised his target to $18 from $15. The average on the Street is $16.14.

“With the operating normalizing, particularly for the residential and commercial construction, we have revised our estimates to reflect the operational and financial momentum of the HDI’s business,” he said.


In other analyst actions:

* Scotia Capital analyst Himanshu Gupta raised Chartwell Retirement Residences (CSH.UN-T) to “sector outperform” from “sector perform” with a $12.50 target. The average is $11.43.

Mr. Gupta said: “We are upgrading CSH to Sector Outperform due to 3 reasons: (1) CSH Occupancy declines have slowed down: May 2020 RH occupancy declined by 1.2 per cent (month-over-month) versus 1.7-per-cent decline in April 2020. This is in consistent with commentary from large U.S. senior housing operators which has seen improving occupancy trends in the U.S. in recent weeks. (2) CSH as an Operator has done a good job in our view (more details below). (3) Valuation: We see CSH as a Value play trading at 26-per-cent discount to our NAV versus 5-per-cent premium on a historical basis. We have seen a general recovery in the REIT space in the recent days, but Senior Housing names have lagged the overall recovery.”

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