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

In a research report previewing earnings season for TSX-listed airline and aerospace companies, Canaccord Genuity analyst Doug Taylor lowered his rating for CAE Inc. (CAE-T) based on valuation concerns until he sees “better visibility on the growth reacceleration to warrant further multiple expansion.”

“CAE’s shares have gained 3.8 per cent since reporting June-quarter results,” he said. “We have nudged our near-term estimates slightly lower, noting some near-term risk around the large number of pilot furloughs globally. The uncertainty around near- and medium-term utilization rates for the civil aviation training business, combined with a robust share price performance, lead us to take a more cautious stance.”

Mr. Taylor moved his recommendation for the Montreal-based company to “hold” from “buy” with a $23 target price. The current average on the Street is $24.35.

“While we believe CAE shares will appreciate in response to a COVID-19 vaccine and related improvement in aviation traffic expectations, investors looking for exposure to this event would, in our view, see more torque through Air Canada or Chorus,” he said.

In the note, Mr. Taylor said cargo freighters remain “an oasis” and expressed a preference for domestic and essential traffic over international in the near term.

“We continue to see the following general recovery order for air traffic: 1) Cargo (least impacted); 2) Essential; 3) Domestic regional; 4) Broader domestic; 5) Transborder and leisure; and 6) International and business (most impacted),” he said. “In this environment, CJT is likely to continue to outperform in terms of fundamentals, followed by EIF and CHR. With that said, once and if vaccine details begin to surface, AC will likely become an attractive source of torque to the rebound in travel and leisure.”

To reflect “expectations of continued outsized demand for dedicated cargo freighters in the near term,” Mr. Taylor hiked his target for Cargojet Inc. (CJT-T) to $240 from $200, keeping a “hold” rating. The average is $235.77.

“Cargojet shares have increased 32.8 per cent since reporting June-quarter results,” he said. “Heading into its Q3 results, we continue to view Cargojet as a premium story that has only strengthened over the duration of the pandemic. With international cargo belly capacity remaining severely depressed heading into Q4, despite some airlines converting passenger jets to handle more cargo, there remains a significant capacity gap being filled largely by dedicated freighters such as Cargojet’s Charter business. We are increasing our near-term Charter estimates slightly and target price to $240 (from $200). However, our target represents a modest gain over the company’s current trading price, resulting in a HOLD rating.”

Mr. Taylor maintained a “buy” rating and $23 target for Air Canada (AC-T). The average is $21.57.

“While domestic traffic appeared to be improving as provinces relaxed movement restrictions during Q2 and into August, the recovery appears to remain stalled,” he said. “Meanwhile, U.S. transborder activity remains largely restricted for all but essential travel (albeit with more exceptions) until at least Nov. 21. On the international front, Canada continues to require a 14-day quarantine period for all incoming travelers (for now), while European destinations appear to be further restricting travel. We have pushed out our recovery timeline slightly over our previous forecast. We see the U.S. and international exposure as the biggest vectors for a near-term recovery, and we look to Q3 results for updated cash burn and any assistance from government sources.”

Mr. Taylor also maintained a “buy” rating and $5 target for Chorus Aviation Inc. (CHR-T) and a “hold” rating and $6.75 target for Magellan Aerospace Corp. (MAL-T). The average on the Street are $4.53 and $9.92, respectively.

Elsewhere, Scotia’s Konark Gupta raised his target for Cargojet to $225 from $200 with a “sector perform” rating.


Touting a disconnect between its share price and EBITDA outlook after a third-quarter beat, Raymond James analyst Andrew Bradford upgraded Secure Energy Services Inc. (SES-T) to “strong buy” from “outperform.”

On Wednesday, Secure reported EBITDA of $28-million, after adjusting for benefits from Canadian Emergency Wage Subsidies. The Street had expected $26-million.

That led Mr. Bradford to increase his fourth-quarter projection to $32-million from $27-million and his 2021 estimate to $138-million from $106-million.

With that improved outlook, he hiked his target price for Secure shares to $3 from $2.10. The average on the Street is $2.97.

“Secure’s stock has been range-bound between approximately $1.30 and $1.50 since early September,” he said. “At $1.39 the stock is currently implying just 5.8 times 2020 EBITDA and 5.1 times 2021. It’s our view this is too low for a company with well-structured debt (3.8x trailing EBITDA), and line-of-sight to approximately $110-million of Free Cash Flow in 2021 (cash flow from operations less total capex). The implied FCF yield is 49 per cent.”

Elsewhere, seeing it demonstrate “resiliency,” Industrial Alliance Securities analyst Elias Foscolos increased his target to $2.75 from $2.50 with a “speculative buy” rating (unchanged).

“We believe improving industry fundamentals, targeted annualized cost reductions in excess of $40-million, and prudent capital allocation support continued deleveraging, with upside optionality in potential asset divestitures in 2021,” he said.


Seeing the COVID-19 pandemic “vastly” accelerate online grocery adoption at “a rate the industry didn’t expect to see for many years – even decades,” Scotia Capital George Doumet initiated coverage of Goodfood Market Corp. (FOOD-T) with a “sector outperform” rating on Thursday.

“COVID-19 increased online food demand, driving both higher frequency and size of meal kit orders,” he said. “Our findings with other industry players show that successful meal kit businesses typically break even after 4-6 years and generate significant EBITDA (margins in the teens) after 7 years. We believe COVID-19 accelerated this process by at least 2-3 years. As such, FOOD may attain its goal of generating sales of $1-billion and EBITDA margins of 10-15 per cent earlier than expected. Expectations for a (much) higher (and sustained) level of sales and profitability has triggered a rally in the shares of almost 5 times since its March low (or up 180 per cent year-to-date). Despite this, we continue to see further upside to FOOD’s shares. While ultimately HFG should trade at a premium to FOOD, given its more established track record with operations across multiple geographies, we believe that its current 50-per-cent premium vs. FOOD is simply too wide.”

Mr. Doumet thinks the Montreal-based company has benefited from a “first-mover advantage that led to early adoption and its solid execution and a well-developed nationwide network.” It has seen a rapid jump in subscribers at an 128-per-cent three-year compound annual growth rate, leading to gross revenue growth of 140 per cent from 2017.

“We view FOOD’s Canada meal kit market as growing but ‘soon-to-mature,’ characterized by the need to have a strong value proposition, consistent product quality, and economies of scale to win. FOOD is winning in the space alongside Germany-based HelloFresh, which has also displayed strong growth in Canada and globally,” he said.

The analyst thinks the company’s recently launched same-day/next-day grocery delivery service as a strategy that “has merits, given FOOD’s ability to leverage its meal kit subscriber base (so far evidenced by a 25-per-cent attachment rate) and low-cost delivery economics.”

“We highlight this strategy as more capital-intensive and carrying a higher risk profile than its more established meal kit business. That said, at current share price levels, arguably not much success is being priced into the shares,” he added.

Seeing “one tasty discount,” he set an $11.50 target. The average on the Street is $10.09.

“Our view is that COVID-19 simply accelerated adoption and, similar to HFG [HelloFresh], we will see continued EBITDA margin expansion potential for FOOD,” he said. “In that context, we believe HFG’s current 50-per-cent valuation premium (EV/revenue) is too wide and will likely narrow as FOOD continues to execute on its meal kit strategy (and in doing so, closes the margin differential between itself and HFG) and expand its online grocery offering.”


Boyd Group Services Inc. (BYD-T) is “in [a] pole position on the bumpy road to recovery,” according to Desjardins Securities analyst David Newman.

Ahead of the Nov. 11 release of its third-quarter results, he thinks a “floor has been formed” for driving activity post-pandemic, and sees Boyd shares, which have dropped almost 10 per cent over the past two weeks, having been “unduly punished,” pointing to its “despite its recession-resilient attributes and strong balance sheet.”

For the quarter, Mr. Newman is forecasting adjusted earnings before interest, taxes, deprecation and amortization of $63-million, which sits narrowly below the consensus on the Street ($65-million). He’s expecting same store sales growth to decline 17 per cent “based on the continued but slow recovery in driving activity.”

“Our analysis highlights the continued recovery of relevant industry indicators (vehicle miles travelled (VMT), gasoline sales, repairable auto claims and auto sales), but at a slower pace than in early summer,” he said. "VMT has stabilized around 11–12 per cent year-over-year lower, while gasoline sales have been steady at a 15.0–17.5-per-cent year-over-year decline. [CCC Information Services Inc.] reported an industrywide decline of 20 per cent in repairable auto claims in 3Q20, although BYD should benefit from its strong DRP relationships and ability to meet/exceed the insurers' performance-based KPIs, especially vs competitors during the COVID-19 pandemic. The weaker U.S. dollar should be a small headwind. Overall, we expect BYD’s SSSG to decline by 17 per cent year-over-year in 3Q20, lower than for many of the aftermarket parts suppliers, who are benefiting from current do-it-yourself (DIY) trends.

"We expect EBITDA margin to improve vs 2Q (but lower than last year’s 13.7 per cent), driven by (1) continued cost-control measures; (2) a milder impact from negative operating leverage (eg furloughed employees, other wages, rent, utilities, property taxes, IT and other fixed costs) as volumes increase; and (3) potentially further aid from the Canada Emergency Wage Subsidy (CEWS) (likely lower than the $4.7-million received in 2Q) to offset wages and other SG&A costs.

Mr. Newman lowered his 2020 and 2021 for the Winnipeg-based company in order to “to reflect the ‘new normal’ in driving and collision activity, which should trend sideways amid COVID-19 (especially with a resurgence in the pandemic and the potential for additional lockdowns.”

With those changes, he trimmed his target for Boyd shares to $235 from $240, keeping a “buy” rating. The average on the Street is $236.71.


Canaccord Genuity analyst Brendon Abrams views Inovalis Real Estate Investment Trust’s (INO.UN-T) decision to launch a strategic review process “positively” and is “encouraged to see the board and management motivated to enhance unitholder value by exploring all options available.”

Accordingly, in the wake of the announcement after the bell on Wednesday, he raised his rating for the Toronto-based REIT, which is focused on office properties in France and Germany, to “buy” from hold."

Mr. Abrams said he sees four potential outcomes from the review: a sale of the entire REIT, noting low interest rates in Europe could make it attractive; sale of selected assets; a substantial issuer bid or maintaining of the status quo.

“While we do not believe the REIT is likely to realize a price equal to its IFRS NAV, we believe the units should trade at our more conservative NAV estimate and believe there is limited downside risk from current levels,” the analyst said.

He raised his target to $9.25 from $8.25. The average is $8.13.


Despite Celestica Inc.'s (CLS-N, CLS-T) third-quarter results exceeding expectations on the Street, a group of equity analysts reduced their target prices for the Toronto-based electronics manufacturing services company on Thursday amid concerns about “conservative” commentary on 2021.

A day early, it reported revenue of US$1.55-billion, up 2 per cent year-over-year and above the consensus projection of US$1.49-billion. Adjusted earnings per share of 32 US cents also beat the Street’s estimate (25 US cents).

The company also reinstated its quarter guidance with improved near-term visibility, projecting fourth-quarter revenue of US$1.35-$1.4-billion and adjusted EPS of 22-28 US cents. The consensus expectations were US$1.44-billion and 22 US cents.

Despite the positive release, the company’s shares dropped 9.2 per cent on Wednesday, which RBC Dominion Securities analyst Paul Treiber attributed to “elevated expectations and reduced sentiment.”

“Management indicated that it expects JDM [Joint Design and Manufacturing] growth to moderate from the 90-per-cent growth in FY20 to more ‘regular’ rates in FY21,” he said. “Additionally, A&D [Aerospace & Defense] is likely to remain depressed and the ramp of high-margin capital equipment in the display segment is delayed to end FY21 or early FY22. These comments appear to weigh on the stock and investor sentiment.”

Though he raised his 2020 and 2021 EPS projections to 97 US cents and 98 US cents, respectively, from 86 US cents and 96 US cents, Mr. Treiber trimmed his target for Celestica shares to US$7.50 from US$8.50, maintaining a “sector perform” rating. The average on the Street is US$8.39.

Elsewhere, Citi’s Jim Suva called the results “impressive,” but emphasized “difficult” year-over-year comparisons." He moved his target to US$6.50 from US$7.50 with a “sell” recommendation.

“We rate CLS Sell as we see downside risks to consensus calendar 2020 sales forecast given Celestica’s disproportionately high exposure to networking (42 per cent of revenue) and enterprise (21 per cent of revenue) end markets,” he said.

“We acknowledge the 2019 stock underperformance has set a low bar and the company is trading at 20-per-cent FCF yield and 1.3 times price to tangible book value. However, our experience shows disengagement and program exit with top customers typically cause stock turbulence for several quarters”

CIBC World Markets' Todd Coupland cut his target to US$7 from US$9 with a “neutral” rating.


Citing its “healthy growth outlook, keen focus on profitability, and attractive valuation,” ATB Capital Markets analyst David Kideckel initiated coverage of Calgary-based cannabis retailer High Tide Inc. (HITI-CN) with a “speculative buy” rating.

“Considering HITI’s ability to sustain a meaningful market share of the Canadian cannabis retail market and the large addressable cannabis retail market size, we believe its core revenue stream will grow rapidly over the next five years,” he said. “In addition, we believe HITI’s unique approach for selling cannabis accessories and CBD in Canada and internationally improves the company’s revenue growth outlook and provides diversification benefits. HITI’s vertically integrated business model of manufacturing and selling accessories supports the company’s healthy profitability profile, which is above the industry’s average. Among publicly listed Canadian cannabis retailers, HITI has the highest adjusted gross margin and the company is the only one to report positive adjusted EBITDA over its last reported quarter. Given the efficiency of its operations and its strong balance sheet, with estimated cash of $21-million following the combination with Meta Growth (total liquidity of $33-million, including undrawn credit facilities), we believe HITI is well-positioned to execute its Canadian retail expansion strategy.”

Expecting its acquisition of Meta Growth Corp. (META-X) to be completed and consistent growth to continue, he expects the stock will re-rate.

Mr. Kideckel thinks High Tide currently trades an “attractive” fiscal 2021 enterprise value-to-revenue multiple of 0.7 times, given its above industry average revenue growth and margin profile. The analyst set a 60-cent target for High Tide shares, exceeding the 50-cent average.

“We are constructive on HITI’s long-term prospects given our view on the market size potential of the Canadian cannabis market, the optionality stemming from the company’s CBD and accessory segments, and its efficient operations,” he said. Our Speculative Buy rating is due to the risks inherent to the Canadian cannabis retail landscape, which encompass significant regulatory risk."


Believing it’s “primed for growth,” Haywood Securities analyst Neal Gilmer initiated coverage of Cresco Labs Inc. (CL-CN), a Chicago-based marijuana company, with “buy” rating.

“The company has exposure to states with material growth profiles that lead to 42 per cent quarter-over-quarter revenue growth in Q2/20 with adjusted EBTIDA margins at 17.5 per cent,” he said. “With recently completed expansions in core markets of Illinois and Pennsylvania, we believe the company is positioned to demonstrate improving operating leverage in the business. Following the company’s acquisition of Origin House in early 2020, it increased its exposure to what is already the world’s largest state cannabis market in California. While the company is vertically integrated in many of the states it operates in, Cresco’s strategy is focused on brands and distribution and is the largest wholesaler of branded cannabis products.”

Mr. Gilmer said he expects Cresco to generate “meaningful” increases in sales and positive EBITDA through “strong” growth in its core markets while also expanding to other states in 2021.

Recommending investors accumulate its shares at current levels, he set a target of $14, exceeding the $12.28 average.


Haywood Securities analyst Kerry Smith initiated coverage of Vancouver-based Elemental Royalties Corp. (ELE-X) with a “buy” rating on Thursday, seeing it undervalued relative to peers.

“Elemental is one of the newest players in the publicly listed royalty space, however during the three years as a private company they were busy assembling their current project portfolio, which consists of five producing and one development asset, and the company is generating cash flow,” he said. “We expect Elemental to grow its portfolio over time and close the valuation gap as the story becomes more familiar to investors and they continue to close on accretive royalty/stream transactions. Liquidity is less than we would like, but we expect over time as this story becomes better known, liquidity will improve.”

He set a $2.50 target, exceeding the $2.25 average.

“Elemental trades at a discount to peers on P/NAV, EV/CFPS and EV per ounce of forecast 2020 production, likely due to the fact that it is the newest player in the space and not many investors are familiar with the story – this presents a good entry point for investors looking for an undervalued name in the precious metals royalty space with plenty of upside," the analyst said.


In other analyst actions:

* Seeing recent share price depreciation bringing “attractive value" for investors, BMO Nesbitt Burns analyst Peter Sklar upgraded Maple Leaf Foods Inc. (MFI-T) to “outperform” from “market perform” with a $29 target. The average is $34.38.

“For some time, our concern has been that EBITDA losses from Maple Leaf Foods' Plant Protein Group would weigh on the stock,” he said. "Given the stock’s recent decline from $30, we believe this concern is largely reflected in the current stock price.

“Although our view continues to be that the Plant Protein Group will experience EBITDA losses for some period, we believe that the losses will prove to have peaked in Q3/20.”

* Scotia Capital analyst Paul Steep cut his target for Constellation Software Inc. (CSU-T, “sector outperform”) to $1,600 from $1,700. The average is $1,766.74.

“We believe that a successful execution of a spin-out is likely to prove out yet another means for CSU to generate additional value for shareholders,” said Mr. Steep. “Our view is that the firm’s ongoing M&A activity over the past 12 months validates the steps that Constellation took in modifying the organizational structure to support an increased acquisition pace, with the firm having delivered a material increase in both acquisition and total capital deployed over the past several years.”

* Touting its “attractive” growth outlook, CIBC World Markets analyst Paul Holden started Brookfield Business Partners LP (BBU-N, BBU-UN-T) with an “outperformer” rating and US$40 target. The average is US$40.29.

“We consider units of BBU to be a good vehicle for public market investors to obtain exposure to private equity returns,” said Mr. Holden. “We believe that the stability and resiliency of portfolio companies should enable BBU to navigate a challenging economic environment, and consider the impact of COVID-19 to be manageable overall. In addition, we see a few standout investments within BBU’s portfolio that could be meaningful drivers of unitholder value (e.g., Westinghouse).”

* RBC Dominion Securities analyst Drew McReynolds lowered his target for Cogeco Communications Inc. (CCA-T) to $114 from $119. The average is $119.06.

* RBC’s Matt Logan raised his target for FirstService Corp. (FSV-Q/FSV-T, “sector perform”) to US$135 from US$120, while Scotia’s George Doumet increased his target to US$128 from US$125 with a “sector perform” rating. The average is US$120.

* TD Securities analyst Graham Ryding raised his target for First National Service Corp. (FN-T, “buy”) to $42 from $38, while Scotia’s Phil Hardie raised his target to $38 from $34 with a “sector perform” rating. The average is $39.25.

“The quarter likely further demonstrates the strength and resilience of FN’s business model and solid management team,” said Mr. Hardie. “Once again, the quarter was characterized by strong single-family origination volumes, with management attributing the strength to not only a relative rise in activity, but industry-wide gains by the broker channel versus traditional branch banking in the current environment. The team also noted that it continued to gain share within the broker channel. Management maintains a positive outlook for the remainder of the year and into 2021, but the team did strike a bit of a cautious tone given the uncertainty surrounding the trajectory of the pandemic outbreak.”

* TD’s Jonathan Kelcher cut his target for Morguard North American Residential REIT (MRG.UN-T, “buy”) to $19 from $20. The average is $19.40.

* Scotia’s Patricia Baker raised his target for Sleep Country Canada Holdings Inc. (ZZZ-T, “sector outperform”) to $27 from $24, exceeding the $24.29 average.

“We see ZZZ emerging from the COVID-19 pandemic in an even stronger position and poised to gain incremental market share,” she said. “Subsequent to the end of the quarter, ZZZ announced another exclusive partnership agreement with Purple Innovation, adding to its growing stable of partnership agreements, which enhance ZZZ’s position as the preeminent player in the Canadian mattress market.”

* CIBC’s Hamir Patel cut his target for Acadian Timber Corp. (ADN-T, “outperformer”) to $18 from $19. The average is $16.90.

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