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

A recovery is beginning to “take hold” for North American railway companies, according to Citi’ Christian Wetherbee, who sees a rebound in volume that is exceeding his expectations.

In a research report released Thursday, the equity analyst said the second quarter of the year will likely mark the bottom for the sector, and he sees the potential for “robust” earnings in 2021 even if volumes fall below 2019 levels, particularly for Canadian companies.

“Commentary from the rails indicates that carloads bottomed in mid-April, when public Class 1 carloads were down 23 per cent year-over-year,” said Mr. Wetherbee. “This bottoming occurred earlier than we had anticipated. As the economy reopens and end markets ramp up we would expect carloads’ positive sequential trend to drive continued year-over-year improvement. Consequently we are increasing are 2020 carload growth estimates to a decline of 10.0 per cent year-over-year from a 12.7-per-cent decline year-over-year previously.

“Although the recent trend in weekly carloads is encouraging, public Class 1 carloads were still down 13 per cent year-over-year in Week 25. We believe that there will be several more weeks of significant sequential improvements driven by businesses reopening, but ultimately carloads will settle at a run rate that is still down on a year-over-year basis in later 3Q20. From that point forward we continue to expect the incremental gains to be more modest, driving total carloads positive in 1H21.”

Though he sees declines “moderating” south of the border, Mr. Wetherbee said the volume recovery in Canada has been “a bit more muted.” However, he added general carloads for both Canadian National Railway Co. (CNI-N, CNR-T) and Canadian Pacific Railway Ltd. (CP-N, CP-T) “have held up better, outperforming for much of 2Q20.”

While he increased his volume growth estimates for the quarter, he lowered his yield targets and cost assumptions, leading him to move his earnings per share forecasts by 6 per cent below average on the Street.

“That said, the skew is mixed, with beats expected for the Canadians (particularly CP) and misses expected for the U.S. carriers,” he said. “We expect the biggest beat to come from CP, where our estimate is currently 7 per cent above consensus. We also expect CN to beat by a more modest, 4 per cent.

“In our opinion, CSX, KCS and NS are the most likely to miss current consensus. We see the biggest miss from Norfolk Southern, with our EPS estimate currently coming in 20 per cent below consensus.”

For CN, the analyst raised his second-quarter, full-year 2020 and 2021 EPS estimates by 12 per cent, 9 per cent and 8 per cent, respectively, to $1.30, $5.45 and $6.15, due largely to “more favourable” operating ratio projections.

That led him to raise his target for CN shares to US$95 from US$80 with a “neutral” rating. The average on the Street is US$89.81.

“We rate Canadian National Neutral as it currently screens less attractively from a growth and valuation standpoint at a time when industry stock performance has been weak, while it also would have further to fall to reach a trough multiple,” he said.

For CP, Mr. Wetherbee raised his second-quarter, full-year 2020 and 2021 EPS estimates by 16 per cent, 5 per cent and 5 per cent, respectively, to $3.85, $17.40 and $19.10.

Keeping a “buy” rating, he hiked his target to US$295 from US$215. The average is currently US$260.44.

“We are constructive on its continuing meaningful operational improvement, which we expect to drive year-over-year improvements in OR in 2020 and 2021,” he said. “In addition, we see several actionable revenue catalysts driving elevated levels of growth in 2020 and beyond.”

For U.S. railways, he made the following target changes:

  • CSX Corp. (CSX-Q, “neutral”) to US$75 from US$68. Average: US$72.83.
  • Kansas City Southern (KSU-N, “buy”) to U$175 from US$154. Average: US$153.67.
  • Norfolk Southern Corp. (NSC-N, “buy”) to US$200 from US$196. Average: US$189.82.
  • Union Pacific Corp. (UNP-N, “buy”) to $195 from US$167. Average: US$172.85.


Maritime Resources Corp. (MAE-X) is a “microcap with major potential,” said Industrial Alliance Securities analyst George Topping, pointing to the “positive” possibilities at its Hammerdown Gold project in Newfoundland.

He initiated coverage of the Vancouver-based miner with a "speculative buy" rating.

Hammerdown, located in the Green Bay property near Springdale, was previously operated by Richmont Mines and closed in 2004. Mr. Topping thinks the project has "the building blocks for value growth."

"For investors, we highlight the potential rerating of shares as the project gets de-risked," said Mr. Topping. "We point to Rubicon (RMX-T, "Buy" rating, Target $2.50) as a similar low capex, infrastructure mostly already in place, high IRR project, nearing production decision company as a future valuation comparison for Maritime in the medium term. In the long term, we highlight similar scale Pure Gold (PGMV, Not Rated) as a comparison to where the shares could eventually upgrade to post-funding, nearing completion of construction, and start of commercial production."

Currently the lone analyst covering the stock, Mr. Topping set a target price of 25 cents per share.

“There are various routes to development that will become apparent as the project progresses. Starting out, we are satisfied that even the worst-case scenario works fine,” he said. “However, we fully expect that the actual outcome will be significantly better. With a PEA completed, the experienced management team is pressing towards a quick, low-cost restart. Approximately 10,000 metre of drilling is planned, of which half will support an FS [feasibility study] in H1/21 and production in 2022.″


Maxar Technologies Ltd.‘s (MAXR-N, MAXR-T) US$140-million acquisition of the remaining 50 per cent in its Vricon Inc. joint venture from Saab is a “solid move to further strengthen its leadership position in satellite imagery/analytics,” said RBC Dominion Securities analyst Steve Arthur.

Seeing Vricon’s 3D technology having a range of commercial and government applications, Mr. Arthur expects “meaningful” contributions to Maxar’s earnings.

“Our forecast moves higher (adding $10-million to 2021 estimated EBITDA, $16-million to 2023) with 100 per cent of Vricon now counted,” he said. “Perhaps as importantly, it extends confidence in Maxar’s ability to achieve the $540-million EBITDA target in 2023 as previously laid out. Vricon adds more vectors of growth as new applications are developed and customers are brought online. As well, it strengthens Maxar’s position (already strong, in our view) for pending contract opportunities such as the NRO’s move for greater commercial procurement of satellite imagery/analytics (followon/extension of EnhancedView).”

Mr. Arthur said he now sees an “attractive” risk-reward proposition for “Maxar’s unique technology base and market position” and a discounted valuation.

Keeping an “outperform” rating for its shares, he increased his target to US$21 from US$20. The average on the Street is US$18.21.

Elsewhere, Credit Suisse analyst Robert Spingarn raised his target to US$19 from US$18 with a “neutral” rating.

Mr. Stingarn said: “We view the acquisition of Vricon favorably and believe it will be moderately additive to MAXR’s top line and adjusted EBITDA. We reflect this in our model, as well as the benefits of recent financing actions taken by management. On the downside, we are also taking this opportunity to risk-adjust our revenue and adj. EBITDA growth estimates through 2022 to account for potential repricing risk on the EnhancedView contract and the risk that of WV1, WV2, and/or GeoEye1 fail prior to their replacement by Legion, noting that each of these satellites is over the age of 10 and nearing the end of their serviceable lives.”


Diversified Royalty Corp.‘s (DIV-T) “resilient” portfolio is “attractive” during the COVID-19 pandemic, said Canaccord Genuity analyst Matthew Lee upon resuming coverage of the stock.

“As a result of the global pandemic, DIV has seen significant sales declines across its portfolio,” he said. “Management has actively waived royalty payments for its partners that are closed, while royalties in other businesses have been negatively impacted by lower customer visits driving declining sales. That being said, DIV has $9.5-million in cash and $4-million undrawn on its operating line, which could be used to pay dividends if the payout ratio remains above 100 per cent in the near term. Looking into F21, we expect royalties to make a near-full recovery to F19 levels, with the potential exception of Mr. Mikes.”

Mr. Lee set a “buy rating and $2.75 target for the Vancouver-based company. The average target on the Street is $3.34.

“DIV’s portfolio of royalties offers investors a solid 11-per-cent dividend, with both growth upside and downside protection, in our view,” the analyst said. “While we expect the portfolio of companies will undoubtedly be impacted by COVID-19 in the near term, we believe that DIV’s solid balance sheet and well-diversified selection of operators insulate investors from dividend decreases. Additionally, we believe that DIV is beginning to see a recovery in several of its businesses, which reinforces our opinion that royalties should make a near-full recovery by F21, with further growth expected in F22. Given the medium- to long-term growth potential and downside protection that we see, we believe DIV’s current valuation (9 times fiscal 2021 estimated EBITDA and 11-per-cent dividend yield) represents an attractive buying opportunity.”


Following the release of “decent” second-quarter financial results, AGF Management Ltd.‘s (AGF.B-T) “substantial cash provides optionality,” according to Desjardins Securities analyst Gary Ho.

On Wednesday before the bell, the Toronto-based firm reported wealth management EBITDA of $19.4-million, exceeding Mr. Ho's $16.1-million projection due largely to lower-than-anticipated expenses. Adjusted earnings per share of 7 cents fell a penny short of his estimate.

“We caution investors in relation to valuing AGF strictly on a price-to-earnings basis due to the substantial amount of net cash on its balance sheet post closing of the S&W transaction,” said Mr. Ho. “We are encouraged to see solid momentum on retail net flows and continued focus on SG&A cost containment.”

The analyst trimmed his 2020 and 2021 EPS estimates to 37 cents and 31 cents, respectively, from 40 cents and 33 cents.

He kept a "buy" rating and $6.25 target for AGF shares. The average on the Street is $5.33.

“We foresee a few near- or medium-term positive catalysts: (1) closing of S&W in fall 2020; (2) management paying down debt and buying back stock with the S&W proceeds; (3) growth in fees/earnings from its alt platform; (4) execution on SG&A cost reduction to improve EBITDA and EBITDA margins; and (5) the shares provide an attractive 6.5-per-cent dividend yield,” said Mr. Ho.


In other analyst actions:

* CIBC World Markets analyst Anita Soni initiated coverage of Endeavour Mining Corp. (EDV-T) with an “outperformer” rating and $40 target. The average on the Street is $39.22.

“The stock currently trades at a discount to peers given its M&A overhang and risk around regulatory approval for the acquisition of SEMAFO Inc.,” she said. “We believe these issues will be resolved in due course. Additionally, Endeavour is moving forward with some significant catalysts: new mine plans at Ity and Houndé driven by high-grade exploration, and FCF delivery after a mine-building phase, which will likely move the stock, despite the overhang of the SEMAFO deal.”

* National Bank Financial analyst Matt Kornack raised Dream Office Real Estate Investment Trust (D.UN-T) to “outperform” from “sector perform” with a $24 target. The average on the Street is $26.78.

* Eight Capital initiated coverage of Trisura Group Ltd. (TSU-T) to “buy” with a $77 target. The average is $59.60.

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