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

Parkland Corp. (PKI-T) is “entering the fast lane on the road to recovery,” according to Desjardins Securities analyst David Newman.

In a research report released Thursday, he raised his third-quarter earnings before interest, taxes, depreciation and amortization forecast to $279-million from $237-million and “not far off” its $302-million result from the same period a year ago.

Mr. Newman pointed to several factors, including a “strong” recovery in fuel volumes and “robust” margins; “solid” same-store sales growth for its Canadian convenience stores as they shift to higher-margin categories; “lagging but sequential” improvement in its international operations; stronger-than-expected crack spreads and refinery utilization rate for its Supply division as well as lower corporate costs.

“We currently model Canada fuel volumes to average 11 per cent year-over-year lower, but 21 per cent higher than in 2Q20 given the reopening of provinces, staycations and back-to-school,” he said. “While the pace of recovery could slow, as highlighted by OPIS data, especially with the potential resurgence of COVID-19 cases, fuel margins remain robust (we estimate 8.4 cents per litre versus 7.6 cpl in 3Q19). The pricing environment has been more benign versus the hyper-competitive conditions that existed last year, which has aided fuel margins. With its peers reporting positive c-store SSSG, we estimate PKI could post SSSG of 5 per cent with a shift toward higher-margin car wash, fresh food and beverage offerings vs tobacco and alcohol.”

Maintaining a “buy” rating for Parkland shares, Mr. Newman also raised his target price for Parkland shares to $44 from $42. The average on the Street is $45.08, according to Refinitiv data.


Scotia Capital analyst Orest Wowkodaw thinks an “improving” met coal price environment is “clearly positive” for shares of Teck Resources Ltd. (TECK.B-T, TECK-N), attributing a 23-per-cent jump in price over the last week to a recovery in hard coking coal (HCC) from COVID-19 lows.

“While its bulk cousin Fe [iron] has enjoyed a banner year driven by ferocious Chinese demand following a pandemic-induced Q1 slowdown, the seaborne met coal market has been decimated by weak ex-China steel demand, particularly in India, Japan, Korea, and Europe,” he said. “China is one of the world’s largest importers of HCC (it ranked #3 in 2019), but the country is largely self-sufficient in coal via lower quality domestic mine production. Following relatively anemic summer demand (premium HCC spot prices bottomed at US$103 per ton in mid-August), seaborne HCC spot prices are now at US$122 per ton, up 18 per cent from the recent low, anecdotally attributed to improved demand from both India (#1 ranked importer last year) and China. The spot demand from China is somewhat surprising given existing import quota restrictions.”

“Despite relatively strong steel prices, Chinese mill margins have begun to compress due to elevated Fe prices and now, recovering HCC prices. We estimate current mill margins at only US$40 per ton based on seaborne input costs, below the long-term average of US$50 per ton. Moreover, the estimated mill margin using domestic HCC is now a worrisome (US$7 per ton). This suggests that in the absence of higher steel prices, HCC prices appear to have relatively limited near-term upside unless Fe prices materially decline. At current steel prices, we estimate that a lower 62-per-cent Fe price of US$110 per ton combined with a higher HCC price of US$150 per ton (our long-term price) would be sufficient to restore mill margins to the US$50 per ton level. We believe this is a very plausible scenario in the months ahead as ex-China steel demand slowly recovers.”

Keeping a “sector outperform” rating for Teck shares, Mr. Wowkodaw increased his target to $23 from $21. The average on the Street is $21.24.


Badger Daylighting Ltd.'s (BAD-T) outlook is “trending positively,” according to Industrial Alliance Secuities analyst Elias Foscolos, who is now forecasting a restart to hydrovac growth in the third quarter with a “more significant” ramp up to follow into 2021.

“When BAD released its Q2/20 results, the company indicated that activity levels in July-August were trending at 85-90 per cent of prior year levels,” he said. “BAD’s operations have been resilient to COVID-19 because the company’s customers operate in diversified industrial sectors, providing essential infrastructure.”

“BAD has stated that the strategic targets for its business remain intact, chief among them being doubling the U.S. business in a three- to five-year period from 2019. Ambitious growth like this will require significant net additions to the US fleet, which we forecast will require gross builds of more than 350 trucks per year given an expected increase in retirements. Given that customer demand has more or less recovered from COVID-19 and BAD’s financial strength remains intact, we believe the company will have begun building inventory in Q3/20.”

Mr. Foscolos did warn that Badger’s decentralized business model brings margin volatility, making projections difficult.

“While we believe BAD’s regionally segregated operating structure is ideal from an agility standpoint, we believe it makes enterprise cost management more challenging,” the analyst said. “We believe that addressing this challenge and achieving a more efficient cost structure across the enterprise was one of the key drivers in implementing BAD’s ERP [enterprise resource planning] system. While we are constructive on the common business platform’s ability to facilitate efficiencies across the business, we are cautious regarding BAD’s ability to manage its cost structure through varying levels of utilization and achieve targeted adjusted EBITDA margins of 28-29 per cent on a normalized basis. Until we gain more clarity on BAD’s new cost structure, we are assuming that Q2/20 was an anomaly.”

Mr. Foscolos lowered his 2020 forecasts, seeing a stronger Canadian dollar offsetting projected hydrovac builds. However, he raised his 2021 expectations with his average truck count.

He maintained a “hold” rating for Badger, saying its stock “screens expensively,” but the analyst raised his target for its shares to $38 from $36. The average on the Street is $38.38.


Stelco Holdings Inc. (STLC-T) is “quickly repositioning” into an industry leader, said Credit Suisse analyst Curt Woodworth, who expects free cash flow to improve “significantly” in 2021.

“The myriad of investments made by Stelco management team since the IPO in late 2017 has yielded significant upside to mid-cycle margins and significantly de-risked balance sheet risk at the bottom of the cycle,” he said. “Case in point Stelco was fully sold out in 2Q-20 owing to the tactical flexibility inherent in their business model. Stelco CEO Alan Kestenbaum noted at our conference that post the reline and modernization investment at the Lake Erie Works blast furnace, HRC unit costs could decline to $400/st and hot metal capacity will increase by 300,000 tonnes. Stelco noted the reline would account for ~$30/ton of permanent cost down.”

“Stelco should see much improved FCF in 2021 owing to increased capacity at Lake Erie, continued growth in value add shipments, flat to down coking coal costs, and cost down from the reline and productivity. Stelco noted that the new co-gen facility should further lower unit costs by $6/ton, once on-stream in 2H-22. Management also noted a likely project to upgrade the coke batteries with mid-2021 completion. Monetization of real estate remains a focus with significant opportunities in data centers, film content, distribution, and other industrial uses.”

Seeing a “strong” near-term look, he increased his target for Stelco shares to $12 from $10, maintaining a “neutral” rating. The average is $11.07.


EQ Inc.'s (EQ-X) investment thesis is “attractive” because of its data solutions business, according to Canaccord Genuity analyst Aravinda Galappatthge, who sees the potential for it to grow “exponentially” over the next several years.

In a research report released Thursday, he initiated coverage of Toronto-based Internet strategy, marketing, and website development company with a “speculative buy” rating.

“The core offering of EQ is centered on the objective of efficient media, where it serves advertising clients by discovering and formulating highly targeted audiences for their products and services and then buying media that is targeted accordingly,” he said. “A unique element of EQ is the use of its extensive location behaviour data, which is extracted by essentially tracking the movement of millions of mobile devices anonymously. This data is, in turn, overlaid with a multitude of demographic information and mobile app activity to form a highly valuable and complete picture for marketers.”

“More recently, the company has been focusing on delivering its service under a self-serve model (also offered on a managed-services basis) by giving clients access directly to its platform. This platform, known as LOCUS, allows businesses (EQ’s clients) to carry out in-depth analysis of their markets and customer segments by utilizing EQ’s data, combining that with the client’s own data, and then leveraging the wide-ranging functionality offered by LOCUS, including visualization, data transformation and analytics.”

Mr. Galappatthige said EQ remains in the early stages in its move to monetize its platform, currently seeing run-rate revenues of $10-11-million annually with data solutions contributing 20-25 per cent with the remainder coming from ad services. However, he’s projected triple-digit growth in its data-solutions segment, leading to total revenues exceeding $20-million and break-even EBITDA by fiscal 2022.

“The balance sheet is quite strong with $5-million in cash, adequate in our minds to take the company into F2022,” he said. “Thus, any financing would likely be opportunistic with a view to accelerating growth or supporting tuck-in M&A.”

Also touting its “solid” client basis, including Walmart and Bell, which he said “speaks to the quality of the offering,” Mr. Galappatthige set a target of $2 per share.

“While there have been a number of early stage entities in this space in North America and Europe, we believe that EQ’s traction with a high-quality client base, status as a public company (others are private), and the quality of its LOCUS platform, which serves as a holistic B2B solution for markets and customer analysis, sets it up to first make its mark as a leader in this space in Canada and then grow internationally,” he said. “The company has plans to grow in the U.S. over the medium term, which currently makes up only 16 per cent of total revenue. We understand that accumulating location data in the U.S. is far easier than in Canada due to a broader group of data providers, and we believe that with some incremental investments (and perhaps an acquisition), EQ may be able to materially lift its U.S. revenue levels in the medium term.”


Seeing demand for renewable natural gas (RNG) increasing “exponentially” in some regions, including North America and Europe, Canaccord Genuity analyst Yuri Lynk resumed coverage of a pair of TSX Venture Exchange-listed companies on Tuesday that aiming to capitalize on the trend with “speculative buy” ratings.

"Gas utilities are badly trailing their electric peers in the race to decarbonize in order to meet stringent environmental standards,” said Mr. Lynk. “In our view, upgraded methane from biogenic (organic) waste, known as renewable natural gas (RNG), can represent at least part of the solution. Assuming no pipeline leaks, RNG can be produced in a carbon neutral or even carbon negative fashion and is completely interchangeable with conventional (fossil-based) natural gas, allowing distribution through existing natural gas pipelines. Additionally, RNG appears to be a compelling solution for the tougher-to-decarbonize transportation sector where we believe it makes sense to replace diesel fuel with RNG for busses, parcel carriers, and other heavy-duty vehicles.”

Vancouver-based Greenlane Renewables Inc.'s (GRN-X) addressable market is “quite large” and “growing quickly,” according to the analyst, calling it “a market leader in the nascent but rapidly growing RNG space."

“No company in the world has supplied more RNG upgrading capacity than Greenlane," he said. "These strong references speak to the company’s proven service offering, positioning it well to capitalize on the industry’s growth potential. The early results are promising.”

Mr. Lynk called Greenlane “a pure-play on growing demand for technology and know-how to transform low-grade biogas to high-value RNG” and expressed an appreciation for its sales model, which he thinks is “technology agnostic and asset light.”

“The company outsources all manufacturing, shortening lead times by leveraging its global partners," the analyst said. "On the technology front, Greenlane sells its proprietary water wash technology and the two other leading biogas upgrading technologies (Pressure Swing Adsorption (PSA) and membrane systems) to help optimize/match technology solution with unique project needs. Further, GRN recently commercialized its own PSA system (previously it was selling third-party PSA systems), which should positively impact margins. Since June 2019, GRN has won contracts for PSA and water wash systems, showing its ability to compete no matter the technology.”

Mr. Lynk expects sales to growth from $24-million in 2020 to $59-million in 2022, noting backlog has increased almost four-fold to $42-million in the second-quarter.

He set a target of $1.20 per share. The average is currently $1.19.

Montreal-based Xebec Adsorption Inc. (XBC-X) has “exciting” growth potential given its position as a leading manufacturer of equipment used in the production of RNG," said Mr. Lynk.

“Xebec is a profitable and fast-growing renewable energy equipment provider,” he said. "Its Cleantech Systems segment (77 per cent of sales) designs and manufactures equipment that separates and purifies biogas, recovers hydrogen, separates air, and enriches oxygen for medical applications. This segment’s pressure swing adsorption (PSA) technology is particularly adept at improving methane recovery rates with lower operating costs in biogas to RNG applications.

“The legacy Industrial Services & Support segment (23 per cent of sales) has an attractive roll-up opportunity that can build a stream of highly recurring revenue. This segment, which services Cleantech Systems, is focused on consolidating the smaller North American competitors for 4-6 times EV/EBITDA. Xebec is trading at 37 times EV/2021E EBITDA, which offers significant valuation multiple arbitrage. Further, the growing footprint should competitively position Xebec to secure O&M contracts on the back of equipment sales by the Cleantech segment.”

Projecting revenue to rise by 67 per cent to $82-million this year, he set a $6 target for Xebec shares. The average on the Street is $5.56.


The macro backdrop for Caterpillar Inc. (CAT-N) is “supportive of further stock outperformance” into 2021, said Citi analyst Timothy Thein, pointing to the benefits of a weaker greenback and rising inflation expectations.

“Global monetary conditions are likely to remain loose, and supportive for reflationary assets especially if the Fed wants to create persistent 2-per-cent-plus inflation,” he said. :With key relative interest rate differentials sitting at multi-year highs, and U.S. deficits set to rise further, we think further USD weakness is most likely."

“We show the historical lagged relationship between certain lead indicators (PMI & durable goods orders) and CAT retail sales. Those indicators are flashing positive, suggesting a turn is forthcoming. Reviewing 200+ rolling 24-month periods we find CAT outperformed the XLI in 80 per cent of instances when retail sales were positive on a 2-year stack basis. The market has clearly discounted this to an extent, but we see more scope for outperformance ahead.”

In a research report released Thursday, Mr. Thein raised his financial expectations for Caterpillar largely due to rising inflation, noting it comes “on the back of significant upgrades to Citi’s iron ore and copper price deck, which flowed-through to material (30 per cent plus) earnings/cash flow upgrades for most miners.”

He added that the firm’s latest global mining survey pointed to notable capex growth in 2021 as several miners cited rising fleet ages as a catalyst for higher spending on replacements.

“Given the reflationary nature of a lower USD, cyclically-exposed sectors and stocks like CAT tend to perform well during periods of USD weakness,” said Mr. Thein. "It is bullish for USD-linked commodities, which in turn helps to support capital spending. The miners are one good example. Citi’s Commodity team recently made material upward revisions to their copper price forecast, and expect iron ore prices to remain higher for longer due in part to more positive Chinese steel demand.

“This triggered significant positive revisions to earnings and cash flow estimates from Citi. The magnitude of EPS upgrades is staggering, with average increases of 30per-cent-plus to FY21 earnings estimates. In the case of CAT’s largest global mining customer (BHP), net debt is now at the low end of its targeted range.”

Keeping a “buy” rating for Caterpillar shares, Mr. Thein raised his target to US$175 from US$150. The average on the Street is US$145.67.

“Overall, based on our client conversations, sentiment on the stock is not nearly as positive (i.e. high) as would be suggested by Citi’s crowding index,” he said. “From the hedge fund side, based on data from Citi’s stock lending desk, we can observe more of a bearish tilt as the stock has risen. Reported short interest has risen a bit, and our prime desk believes that this is likely to continue with the next reported figure based on demand in the borrow market (evident in the bottom line - rising shares on loan). In short, we think continued improvement in macro indicators would likely drive upside in the stock, as investor positioning hardly feels stretched to us.”


In other analyst actions:

* Pointing to its “attractive” valuation and improviding liquidity, BMO Nesbitt Burns analyst Rene Cartier initiated coverage of Maverix Metals Inc. (MMX-T) with an “outperform” rating and $6.50 target. The average on the Street $8.03.

“We expect as trading liquidity improves, additional portfolio assets begin contributing, and as development asset visibility is enhanced, Maverix Metals has potential to rate towards larger peer multiples,”he said.

* Seeing decreasing downside risk, BoA Global Research analyst Jason Gerberry upgraded Bausch Health Companies Inc. (BHC-N, BHC-T) to “neutral” from “underperform” with a US$19 target, rising from US$16. The average on the Street is US$26.76.

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