Inside the Market’s roundup of some of today’s key analyst actions
Though he warned it continues to possess “relatively high” recovery risks given its international exposure, Citi analyst Stephen Trent called Air Canada (AC-T) “a scarce asset” after a reassessment of its valuation.
“With domestic market share above 50 per cent, flag carrier Air Canada is the only meaningful network airline that trades on the Toronto Stock Exchange,” he said in a research note released Thursday. “As a private equity fund was on its way to taking rival WestJet private last year, Air Canada’s subsequent trading volume increase might have been part of the market assigning greater scarcity value to the carrier’s shares. This year so far, North American airline trading liquidity increased significantly, even though Air Canada’s trading liquidity still lags its U.S. peers'.”
“U.S. airline operational results certainly are not booming now. U.S. airport passenger numbers have rolled off, following the country’s Labor Day holiday, and it is possible that network airlines' heftier exposure to international, long-haul routes augurs a slower recovery for them, versus their discount airline competitors. In Air Canada’s case, the carrier seems to have even more international, long-haul exposure than the U.S. majors, including the likes of Toronto-Frankfurt, Toronto-London and Vancouver-Hong Kong among its top routes. Considering Air Canada’s higher international exposure and its pre-tax margins undershooting Delta’s, a purely fundamental view suggests that the shares should trade at a fair value discount to Delta. However, in spite of this view, we are giving Air Canada the benefit of the doubt on the scarcity value argument.”
Mr. Trent called Air Canada “the only opportunity in town,” noting the lack of Canadian options for public equity investors to enter the sector following WestJet’s acquisition.
However, when comparing the airline to U.S. carriers, he called the results “a mixed bag.” It currently trades at enterprise value to earnings before interest, taxes, depreciation discount (EV/EBITDA), which he attributed to improved financial and operational metrics. However, its price-to-earnings valuation is “a different story” with it trading at a premium.
“Over the past several months, the impact of the pandemic has created challenges, in terms of trying to discuss North American network airline valuations,” said Mr. Trent. "Looking at Air Canada versus the U.S. big three, Delta Airlines is the only member of this quartet with positive 2021 consensus earnings.
“As global aviation gradually recovers from the pandemic, it is possible that Air Canada’s operational recovery could be slower versus what could occur for the U.S. big three, considering Air Canada’s greater exposure to international long-haul flights. For this reason, putting Air Canada’s fair value on par with Delta’s could be generous.”
Citing a “challenging, expected near-term pricing environment from soft corporate travel demand,” he trimmed his revenue forecast for Air Canada, expecting near-term capacity to remain depressed. That led to “material” declines in his near-term earnings per share expectations and “more moderate” drops over the longer term.
Keeping a “neutral” rating for Air Canada shares, Mr. Trent raised his target to $17 from $16. The average on the Street is $21.79, according to Refinitiv data.
The macro backdrop remains supportive for precious metals producers, according to analysts at Raymond James.
In a research report released Thursday, the firm raised its gold price forecast for 2021 and 2022 by 16 per cent and 13 per cent, respectively, and increased its silver expectations by 38 per cent and 25 per cent. Its long-term gold price also jumped to US$1,600 per ounce from US$1,500.
“Our price forecast changes reflect our views that the significant increase in monetary stimulus and Central Banker indications that interest rates are expected to be lower-for-longer have created a macroeconomic back drop that supports increased investment demand for gold, driving prices higher,” the firm said. “Correspondingly, our silver price forecasts increase as we model silver prices in a ratio function to gold prices. We also have made minor price changes in the base metals and bulk commodities.”
With those changes, the analysts increased their target prices for the majority of companies in their gold coverage universe.
“Among the senior producers we continue to prefer AEM, GOLD, KGC and NEM given the potential for meaningful free cash flow over the next year and the potential for increased shareholder returns which we believe is a focus of many generalist investors looking at the sector,” they said. “Similarly, we continue to believe the royalty/streamers offer good exposure to precious metals and growing free cash flow at lower risk than the producers and prefer WPM and FNV.”
Analyst Craig Stanley upgraded his rating for Teranga Gold Corp. (TGZ-T) to “strong buy” from “outperform,” expecting “investor attention will re-focus on the high-grade Massawa Project with first ore now being processed in the Sabodala Mill and exploration drill results expected in 4Q20.”
His target for Teranga shares rose to $21.75 from $19.50. The average on the Street is $20.39.
Mr. Stanley also raised Silvercrest Metals Inc. (SIL-T) to “outperform” from “market perform” with a $14.50 target, up from $13.50 and 5 cents higher than the consensus.
“We believe recent exploration results will result in a 4Q20 resource update and feasibility study better than market expectations,” he said.
Conversely, analyst Farooq Hamed lowered OceanaGold Corp. (OGC-T) to “outperform” from “strong buy” with a $4 target, down from $5 and below the $4.21 consensus.
“We are downgrading OGC ... as despite a relatively low valuation in comparison to peers, we expect the higher capex at Haile, ongoing closure of Didipio and shortage of catalysts in the near term could continue to weigh on the stock,” he said. “Despite the downgrade, we note that an extension of the FTAA at Didipio, dependent on Presidential sign-off, could be a significant positive catalyst for the stock.”
The firm’s target price changes included:
- Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “outperform”) to US$94 from US$82. Average: US$87.75.
- Barrick Gold Corp. (GOLD-N/ABX-T, “outperform”) to US$38 from US$35. Average: US$33.48.
- Centerra Gold Inc. (CG-T, “outperform”) to $23 from $20. Average: $20.65.
- Franco-Nevada Corp. (FNV-N/FNV-T, “outperform”) to US$175 from US$165. Average: US$131.73.
- IAMGOLD Corp. (IAG-N/IMG-T, “market perform”) to US$6.50 from US$5.50. Average: US$5.86.
- Kinross Gold Corp. (KGC-N/K-T, “outperform”) to US$14 from US$12. Average: US$11.57.
- Newmont Corp. (NEM-N/NGT-T, “outperform”) to US$85 from US$80. Average: US$78.31.
- Wheaton Precious Metals Corp. (WPM-N/WPM-T, “outperform”) to US$64 from US$58. Average: US$56.40.
- Yamana Gold Inc. (AUY-N, AUY-T, “market perform”) to US$8.50 from US$7. Average: US$7.09.
In a separate note, Raymond James raised its price forecasts for base metals and bulk commodities, pointing to supply uncertainty and a rebound in demand.
“In the base metals complex, we are increasing our 2020-2021 price forecasts for copper and nickel and our 2020 forecast for zinc and lead,” the firm said. "The price increases primarily reflect a tighter supply/demand environment caused by supply disruptions from Covid-19 related mine shutdowns and a strong rebound in demand, particularly from China, in 3Q20. We continue to favor copper in the base metals complex on a long-term supply deficiency thesis.
“In the bulks, we are increasing our 2020-2022 price forecasts for iron ore to reflect stronger than expected demand, specifically in China as Chinese steel production has been near record highs, and tight supply. In coking coal we have reduced our 2020 coking price to reflect the weakness in Q3, but note coking coal prices in September are improving.”
Also expecting an increase in uranium prices, the firm’s equity analysts made several corresponding target price changes to stocks in their coverage universe. They included:
- Adventus Mining Corp. (ADZN-X, “outperform”) to $2 from $1.90. Average: $1.80.
- Altius Minerals Corp. (ALS-T, “outperform”) to $14.50 from $14. Average: $15.79.
- Ero Copper Corp. (ERO-T, “outperform”) to $21.50 from $21. Average: $21.57.
- First Quantum Minerals Ltd. (FM-T, “market perform”) to $18 from $17. Average: $16.53.
- Freeport-McMoRan Inc. (FCX-N, “market perform”) to US$17 from US$13.50. Average: US$17.35.
- Hudbay Minerals Inc. (HBM-T, “market perform”) to $6.50 from $6. Average: $6.42.
- Ivanhoe Mines Ltd. (IVN-T, “outperform”) to $7.50 from $7. Average: $7.08.
- Lundin Mining Corp. (LUN-T, “market perform”) to $9 from $8.50. Average: $9.81.
- Teck Resources Ltd. (TECK.B-T, “outperform”) to $23 from $20. Average: $21.57.
- Trevali Mining Corp. (TV-T, “market perform”) to 15 cents from 10 cents. Average: 14 cents.
- Champion Iron Ltd. (CIA-T, “outperform”) to $3.75 from $3.50. Average:$3.70.
- Labrador Iron Ore Royalty Corp. (LIF-T, “outperform”) to $32 from $30. Average: $30.29.
WildBrain Ltd.'s (WILD-T) fourth-quarter results brought “a turning point on visibility,” said RBC Dominion Securities analyst Drew McReynolds, who thinks “steady” progress made under its new management team is “encouraging.”
“Q4/20 results were in line with our expectations,” he said. “However, we believe the completion of fiscal 2020 with largely stable EBITDA and improved FCF [free cash flow] along with management’s outlook that calls for growth in fiscal 2021 despite COVID-19 headwinds represent a turning point for investors on visibility.”
“We believe the company has turned the corner on a period plagued by execution challenges, a sooner-than-expected shift in content demand and a levered balance sheet following major content investment and M&A. We continue to have greater confidence in execution under the new management team and see the potential for upside in the shares in a successful turnaround and de-levering scenario. While we remain patient for more attractive and/or timely entry points balancing the lagged impacts of growth initiatives with ongoing COVID-19 headwinds and still high leverage, we are encouraged by the progress to-date.”
Though it did not provide guidance for 2021, Mr. McReynolds said management remains focused on “building a strong foundation for long-term growth.” It expects modest earnings and free cash flow increases driven by “a growing production pipeline of premium content and a gradual recovery in WildBrain Spark and consumer products revenues as the further re-opening of economies translates to greater retail demand.”
Based on this increased confidence, he removed the “speculative risk” qualifier from his unchanged “sector perform” rating. His target for WildBrain shares remains $1.50, which exceeds the $1.18 average.
Elsewhere, CIBC World Markets analyst Robert Bek upgraded the Halifax-based company, formerly known as a DHX Media Ltd., to “neutral” from “underperformer” with a $1.25 target.
“We continue to see risks to the Spark valuation, given unknowns on YouTube mitigation strategies, the duration of the macro-environment downturn, and the post-crisis advertising backdrop,” said Mr. Bek.
“We have been on the sidelines for a number of years with our Underperformer rating, given a myriad of concerns over execution, strategy, and balance sheet risks. COVID disruption, with a dialed-back advertising spend, and YouTube changes are the most recent test to the company’s strategy. While those risks remain, together with debt leverage concerns, visibility has improved, and the shares are more fairly priced at these levels, hence our upgrade.”
“The worst appears to be behind” dealers of Caterpillar products, according to Canaccord Genuity analyst Yuri Lynk, who thinks demand for equipment, parts and service “bottomed” in the second quarter.
“In Canada, construction and mine sites have nearly returned to pre-COVID-19 activity levels,” said Mr. Lynk. “On the construction side, several construction and engineering companies boast record backlogs, which bodes well for construction equipment demand in 2021 and 2022. Furthermore, various levels of governments in Canada have begun to let new mega-contracts after a pause caused by COVID-19.”
“On the mining side, we believe we are in a bottoming process for new equipment demand and product support. Gold, in U.S. dollar terms, has increased 24 per cent year-to-date while copper is 7 per cent higher year-to-date and breached the psychologically important US$3.00 per pound barrier. As such, we expect mine production in Quebec, Ontario, and Western Canada to be robust. The outlook is less bright for the oil sands due to low prices and short-term disruptions caused by a fire at Base mine and a diluent pipeline leak at the Kearl mine. Nevertheless, from a peak of 30 per cent of the fleet being parked in Q2/2020, we believe fleet utilization will approach full utilization by month’s end.”
After raising his third quarter and 2021 earnings per share estimate for both companies, Mr. Lynk raised his target for Finning shares to $25 from $24. The average on the Street is $22.81.
“For Finning, this improving macro economic picture should drive a sequential improvement in EPS in Q3/2020 with management’s guidance calling for higher year-over-year EPS in Q4/2020 on modestly lower revenue looking achievable, in our view,” he said.
His target for Toromont jumped to $82 from $77. The average is $76.
“Toromont appears well positioned to recover from Q2/2020 lows,” the analyst said. “The company’s territory of Manitoba to Atlantic Canada is seeing the bulk of the megaproject activity on the construction side while gold producers represent 50 per cent of its mining business. We believe mine production is recovering nicely and continue to track a large equipment package we believe Toromont could be awarded at IAMGOLD’s $1.3-billion Cote gold mine. Additionally, we continue to see the opportunity for further upside from Toromont QM as efficiencies are realized on the rental fleet and on the migration to a common ERP system.”
Despite its third-quarter results falling short of his expectations, Desjardins Securities analyst Gary Ho raised his target price for shares of AGF Management Ltd. (AGF.B-T), seeing a “game plan put in place for growth.”
"While Wealth Management EBITDA and adjusted EPS [earnings per share] were below our estimates, the SIB [substantial issuer bid] announcement should boost the share price, he said. “Continued retail net sales momentum, ongoing growth in its private alt platform, cost-containment discipline and earnings/FCF benefits from the DSC ban are all potential near- to medium-term catalysts.”
Before the bell on Wednesday, the Toronto-based firm reported EBITDA for its Wealth Management business of $17.1-million, below Mr. Ho’s $19.7-million projection. Adjusted EPS of 8 cents was a penny below his forecast.
However, he called the announcement of a substantial issuer bid, using $40-million of the cash received as a result of the merger between Tilney and Smith & Williamson, a “pleasant surprise.” He sees AGF buying back 6.7 million shares at a price of $6 each.
Keeping a “buy” rating for its stock, he bumped up his target by a loonie to $7. The average on the Street is $6.13.
“We foresee a few near- or medium-term positive catalysts: (1) use of proceeds redeployed into growth initiatives (particularly in private alts) and share buybacks; (2) growth in fees/earnings from its alt platform; (3) execution on SG&A cost reduction to improve EBITDA; (4) change in investor narrative; and (5) the shares offer an attractive 5.9-per-cent dividend yield,” said Mr. Ho.
Tesla Inc.'s (TSLA-Q) plan to build a cathode plant in North America and its acquisition of a 10,000-acre lithium clay deposit in Nevada has brought “focus” to junior lithium companies, said Fundamental Research Sid Rajeev.
In a research note released late Wednesday, he initiated coverage of one of these companies, Noram Ventures Inc. (NRM-X), with a “buy” rating.
The Vancouver-based company is working on advancing its 100-per-cent owned Zeus property in Nevada, which is located in close proximity to Albemarle Corp.'s (ALB-N) Silver Peak mine. That facility is currently the only lithium brine producer in the U.S.
“We estimate that lithium juniors are currently trading at US$19 per tonne, while Noram is trading at just US$8,” said Mr. Rajeev. “Direct comparables Cypress Development Corp (TSXV: CYP) is at US$8, and American Lithium Corp (TSXV: LI) is at $16.”
“As the shares of most lithium players operating in Nevada declined sharply [Wednesday], we suspect that the deposit targeted by Tesla is not of any publicly traded companies. Despite the sell-off, we believe Tesla’s affinity to clay deposits in Nevada is very positive for all advanced stage deposits, including Noram, CYP and LI, as they are now prime targets of Tesla and other EV/battery manufacturers.”
The analyst sees opportunities for the three companies to consolidate, given their projects' “similarities and proximities.”
“Silver Peak is the only commercial lithium mine in North America (which accounts for approximately 2 per cent of global production),” he said. “We believe the discrepancy between production and resources in the U.S. indicates the potential for the U.S. to be a significant producer globally. The U.S. Department of Energy has categorized lithium as a critical mineral. Currently, over 25 per cent of the U.S.' lithium consumption is reliant on imports, suggesting a need for domestic producers. We believe these reasons, and the relatively lower exposure to political, geographic, and currency risks, offers companies such as Noram a significant advantage over comparable juniors focused on South America.”
Mr. Rajeev, who is currently the lone analyst on the Street covering the stock, set a fair value of 40 cents for Noram shares.
Seeing recent contract wins bringing “better model certainty,” Canaccord Genuity analyst Doug Taylor raised his rating for Kraken Robotics Inc. (PNG-X), a Mount Pearl, Newfoundland-based marine technology company, to “buy” from “speculative buy” after hosting market meetings with its management team on Wednesday
“What we heard supports our view that, as the company delivers against its sizable recent contract wins (Danish and Polish Navies) and builds a track record of growth and profitability, there remains valuation upside,” he said. “Our increased model certainty into 2021/2022 leads us to raise our target multiple and drop the SPECULATIVE qualifier.”
Mr. Taylor said the contracts support his expectations for 136-per-cent revenue growth in 2021, and he emphasized Kraken continues to have “an ample pipeline of additional contract opportunities that would serve to further bolster its backlog.”
Also touting the potential for its SeaScout system following recent trials, the analyst increased his target for Kraken shares to $1 from 75 cents. The average is $1.20.
Though he sees Precision Drilling Corp.'s (PD-T) stock “moving sideways until either global crude demand recovers more quickly or the ‘call on North American crude’ increases more rapidly than implied by today’s oil futures prices - or both,” Raymond James analyst Andrew Bradford raised his target for its shares to $1 from 90 cents (versus a $1.27 consensus on the Street) after raising his 2021 estimates.
“It’s difficult to articulate an inspiring outlook for North American drillers, at least not while the strip of WTI oil futures is stuck in the high-$30s to mid-$40s range for as long as the eye can see. Though because of its service offering, customer list, and highly variable cost structure, we believe Precision remains a viable investment option,” said Mr. Bradford, who kept a “market perform” rating.
In other analyst actions:
- JPMorgan initiated coverage of Canacol Energy Ltd. (CNE-T) with an “overweight” rating and $7 target. The average is $6.15.
- Peel Hunt initiated coverage of Wheaton Precious Metals Corp. (WPM-T) with a “buy” rating and $85 target. The average is $70.
- Maxim Group started Antibe Therapeutics Inc. (ATE-X) with a “buy” rating and $1 target. The average is $1.94.
- Cormark Securities initiated coverage of Touchstone Exploration Inc. (TXP-T) with a “buy” rating and $3.25 target. The average of the Street is currently $1.73.