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

Though National Bank of Canada’s (NA-T) “solid” fourth-quarter results capped off a “solid” year, RBC Dominion Securities analyst Darko Mihelic sees less upside moving forward.

That led him to downgrade its stock to “sector perform” from “outperform.”

Before the bell on Wednesday, the bank reported earnings per share of $1.69, excluding special items, including $48-million in severance pay. That exceeded both Mr. Mihelic’s $1.59 estimate and the consensus expectation on the Street of $1.52.

“We think NA had a solid Q4/20 and performed exceptionally well this year with a lower EPS decline of 5 per cent versus a peer average decline of 17 per cent,” said Mr. Mihelic. “However, as we shift our emphasis to ‘recovery’ we think NA’s relative revenue growth and its relative valuation will probably slip a little.”

Mr. Mihelic thinks positive revenue surprises will be “relatively harder” going forward as the economic rebound from the fallout of the COVID-19 pandemic.

“As we enter an economic recovery we believe personal loans and commercial loans can rebound quickly and mortgage growth may decelerate,” he said. “We also expect capital markets and wealth revenue growth to be somewhat subdued. We see decent revenue and EPS growth for NA but peers may build more momentum next year.”

After increasing his earnings projections through 2022, Mr. Mihelic hiked his target for National Bank shares to $81 from $73. The average target on the Street is $78.15, according to Refinitiv data.

“Our core EPS estimates increased mainly reflecting lower assumed NIM [net interest margin] compression and modest releases of stage 2 reserves,” he said. “Our price target is now based on our 2022 core cash EPS estimate but we maintain our target P/E multiple of 11.0 times. While there is still good upside to our target price, we believe relative returns for NA will be lower as peers may be better positioned for revenue growth and many peers trade at rather discounted valuations as evidenced by NA’s consensus forward P/E multiple trading relatively in-line with peers versus a longer-term average discount of negative 10 per cent.”

Others raising their target prices for National Bank shares included:

* Desjardins Securities’ Doug Young to $76 from $74, keeping a “hold” rating.

“Cash EPS and PTPP [pre-provision profit] earnings beat our estimates, but this is after backing out noise driven by a writedown in intangible assets, severance and an FX loss related to Credigy’s sale of a Brazilian subsidiary. In our opinion, it was a good quarter, and management has a constructive outlook for FY21,” he said

* Scotia Capital’s Meny Grauman to $88 from $83 with a “sector outperform” rating.

* Credit Suisse’s Mike Rizvanovic to $76 from $74 with an “outperform” rating.

* Canaccord Genuity’s Scott Chan to $74.50 from $69 with a “hold” rating.

* TD Securities’ Mario Mendonca to $79 from $78 with a “hold” rating.

* BMO’s Sohrab Movahedi to $77 from $72 with a “market perform” rating.


Several analysts also adjusted their targets for shares of Royal Bank of Canada (RY-T) following Wednesday’s earnings release.

Those raising their targets included:

* Desjardins Securities’ Doug Young to $117 from $115 with a “buy” rating. The average on the Street is $110.39.

“It is worth noting that RY was able to generate a 14.2-per-cent ROE [return on equity] in FY20, despite recording $4.4-billion in PCLs [provisions for credit losses], various COVID-19-related headwinds including lower interest rates, and a CET1 ratio well above regulatory minimum targets,” said Mr. Young.

* CIBC’s Paul Holden to $128 from $127 with a “neutral” rating.

* National Bank Financial’s Gabriel Dechaine to $113 from $107 with an “outperform” rating.

* Canaccord Genuity’s Scott Chan to $113.50 from $107.59 with a “hold” rating.

Conversely, Scotia Capital’s Meny Grauman trimmed his target to $122 from $125 with a “sector outperform” rating.

“RY delivered an 11-per-cent beat to consensus to close out F2020, but despite better-than-expected credit performance, another big quarter for capital markets, and continued market share gains in domestic banking, the tone from management was certainly much more cautious than what we have heard from other banks this earnings season,” said Mr. Grauman. “At this point we believe that this cautious stance stems from conservatism and does not signal the need for a more fundamental rethinking of our view that allowance builds are behind the banks and that despite a sluggish revenue outlook, non-market related fee income in particular will recover as we move through F2021. Certainly the COVID-19 risk is still a factor for the banks, but there is enough evidence to suggest that the second wave of the pandemic will be much less economically damaging than the first wave.”


Descartes Systems Group Inc. (DSGX-Q, DSG-T) is “well positioned” for 2021, said RBC Dominion Securities analyst Paul Treiber after Wednesday’s release of better-than-anticipated third-quarter results.

The Waterloo, Ont.-based tech firm reported adjusted EBITDA of US$36.4-million, up 16 per cent year-over-year and ahead of the projections of both Mr. Treiber (US$34.3-million) and the Street (US$34.67-million). Revenue rose 5 per cent to US$87.5-million and also exceeded estimates (US$85.4-million and US$86-million, respectively).

Mr. Treiber also thinks the company’s fourth-quarter outlook “appears healthy.”

“Q4 baseline for $83.0-million revenue and $29.5-million adjusted EBITDA compares against our expectations for $84.7-million and $28.1-million,” he said. “The delta between actuals and baseline has widened over the last two quarters. Assuming the delta between actuals and baseline is similar to the last two quarters, baseline implies Q4 actuals at $90.4-million revenue (7 per cent year-over-year) and $38.4-million adj. EBITDA (19 per cent year-over-year), above consensus at $88.9-million and $36.0-million respectively.”

“Despite COVID-19 headwinds to air cargo volumes and organic growth, Descartes has delivered adj. EBITDA growth slightly above its long-term target for 10-15 per cent. Looking forward, Descartes appears well positioned to benefit from a rebound in organic growth in 2021. Additionally, M&A remains an upside catalyst, with many targets available and Descartes having access to capital (e.g. $101-million net cash + $500-million credit facility).”

After raising his financial projections in response to the results and outlook, Mr. Treiber raised his target for Descartes shares to US$68 from US$67, maintaining an “outperform” recommendation. The current average is US$61.08.

“In light of the widening gap between baseline and actuals, we estimate Descartes’ outlook implies Q4 slightly above consensus. Descartes appears well positioned to benefit from strengthening organic growth in 2021, given the improving global trade and commerce environment,” he said.

Other analysts raising their targets include:

* Laurentian Bank Securities’ Nick Agostino to US$61 from US$52 with a “hold” rating.

“Despite operating in an uncertain environment, DSG highlighted several growth opportunities which should offer notable tailwinds, we believe, starting 2021, including: 1) e-commerce where the U.S. market grew 22 per cent year-over-year, and now represents 10 per cent of DSG’s sales. We believe this is a sticky business and is an area of ongoing investment for DSG including from the recent ShipTrack acquisition; 2) U.S. policy changes which should drive new trading agreements and in our view create a less volatile trading environment; 3) vaccine distribution offering a lucrative opportunity for DSG’s customers for what is a very sensitive product (specifically regarding storage temperature), and; 4) Brexit which should result in new trading agreements for the U.K. and offer step-function growth for DSG (reflected in our multiple increase),” he said.

* Scotia Capital’s Paul Steep to US$61 from US$58 with a “sector outperform” rating.

“Our view is that Descartes Q3 results demonstrated on-going momentum inline with our estimates (beat to consensus) delivering 0.7-per-cent organic growth (in constant currency) sequentially improving from Q2, in part due to higher GLN transactions revenues and aided by trends in e-commerce,” he said.

* TD Securities’ Daniel Chan to US$68 from US$67 with a “buy” recommendation.


Ahead of inclusion on the benchmark S&P 500 index before markets open on Dec. 21, Goldman Sachs analyst Mark Delaney upgraded Tesla Inc. (TSLA-Q) to “buy” from “neutral,” noting “the shift toward battery electric vehicle adoption is accelerating and will occur faster than our prior view.”

He also pointed to swift decline in battery prices and see government regulations leading to the eventual phasing out of higher-emission vehicles.

“The energy business should also benefit from the regulatory shift toward carbon reduction and clean energy, and solar market valuations have similarly accelerated,” Mr. Delaney said.

He set a new Street-high target for Tesla shares, which are up almost 600 per cent thus far in 2020, of US$780. The current average is US$375.66.


Though he continues to see upside, Raymond James analyst Michael Glen sees the valuation disconnect for K-Bro Linen Inc. (KBL-T) narrowing, prompting him to downgraded its shares on Thursday.

“With K-Bro stock now approaching $40, we are opting to move the stock back to Outperform from Strong Buy,” he said. “From that perspective, while we still see upside in the name (and we are increasing our target price to $44)), our Strong Buy rating was heavily premised on the significant valuation disconnect we outlined in our note from May 21. We believe that at this time the valuation disconnect has narrowed, and we have move backed to a valuation more aligned with ongoing fundamentals in the business.”

Mr. Glen continues to see several “favourable” developments for K-Bro stemming from “strong” organic growth in the healthcare laundry business, opportunities through Alberta Health Services and the recovery of volumes in the hotel industry.

His target rose to $44 from $40, which is the current average.


Scotia Capital analyst Orest Wowkodaw expects Vale SA’s supply troubles to keep the iron market “tight” next year.

Accordingly, he sees “relatively compelling” investment cases for both Labrador Iron Ore Royalty Corp. (LIF-T) and Champion Iron Ltd. (CIA-T).

“The Fe [iron] market has been significantly stronger than we envisioned this year driven by impressive growth in Chinese steel demand combined with the impact of Vale’s post Brumadinho capacity constraints,” said Mr. Wowkodaw. “Year-to-date Chinese steel output is up a solid 5.6 per cent through October versus a disastrous 10.7-per-cent delcine for the rest of the world (global steel output is down a net 1.9 per cent YTD). Chinese steel prices are up 27 per cent from the April lows, suggesting that domestic demand remains robust despite higher volume. We estimate that current Chinese steel mill margins of $67 per ton (based on seaborne raw materials) are modestly above the long-term average; however margins appear very weak based on domestic coal prices.

“As we look ahead to next year, Vale issued relatively disappointing 2021 Fe production guidance of 315-335 million tons on Dec 2 (up 7 per cent year-over-year but 11 per cent below Scotia’s forecast of 367 mt), suggesting that Fe prices are likely to remain higher for longer as supply constraints continue. An eventual recovery in ex-China steel markets should serve to further firm up global Fe demand.”

Mr. Wowkodaw sees both Labrador Iron Ore and Champion Iron trading “well below” spot, pointing to “compelling” valuations for both.

“We estimate that CIA-T and LIF-T shares are currently discounting 62-per-cent Fe prices of only $78 per ton and $71 per ton, representing significant discounts to spot of 43 per cent and 48 per cent, respectively,” he said. “While Fe prices are likely to recede from current elevated levels, these discounts appear overly excessive in our view; the average 62-per-cent Fe implied price of $74 per ton is only marginally above our conservative long-term incentive price of $65 per ton.

“Among our coverage, Fe is currently the only major commodity experiencing a significant disconnect with equity prices. Although the 62-per-cent Fe price will inevitably recede at some point, we anticipate a re-expansion of the 65-per-cent Fe premium from only $12 per ton currently, which should somewhat help cushion the blow to both companies given their premium product portfolios.”

The analyst sees both companies possessing “well positioned” balance sheets featuring “strong” net cash positions.

He raised his target for Champion Iron shares to $5 from $4.50 with a “sector outperform” rating, matching the consensus on the Street.

Mr. Wowkodaw’s target for Labrador Iron Ore rose to $36 from $35 also with a “sector outperform” recommendation. The average is $32.57.

Elsewhere, believing iron ore strength could drive a 15-per-cent yield in 2021, RBC Dominion Securities analyst Sam Crittenden upgraded Labrador Iron Ore to “outperform” from “sector perform” with a $39 target, up from $38.

“Vale’s recent lower production guidance together with record steel production in China underscores the tightness in the iron ore market which we expect to continue into 2021,” said Mr. Crittenden.

“LIF provides investors with exposure to high-quality royalty income. We believe The Iron Ore Company of Canada (IOC) royalty stream provides investors with leverage to iron ore’s upside while limiting operational downside risk. We expect rising sustainable sales volumes, lower unit costs, and reduced capital expenditures at IOC to provide support to LIF’s earnings and distributions. Longer term, IOC’s quality assets and strong growth potential provide additional upside potential.”

Raymond James’ Brian MacArthur raised his target for Champion Iron to $5 from $4.50 with an “outperform” recommendation.

Mr. MacArthur said: “We believe Champion offers investors good exposure to premium iron ore through its Bloom Lake asset, which is a long-life, lower-cost asset producing high-grade iron ore concentrate (66-per-cent Fe) located in Quebec, Canada, a lower-risk jurisdiction. In addition, we believe Champion has potential for growth through its Bloom Lake Phase 2 expansion project at favourable capital costs, given the previous owners spent significant capital. Given Champion’s exposure to premium iron ore (which we believe should trade at a premium given structural changes in the iron ore industry), high-quality asset, growth potential, and low jurisdictional risk, we rate the shares Outperform.”


Canaccord Genuity analyst Anthony Petrucci raised his financial expectations for Baytex Energy Corp. (BTE-T) in reaction to the release of its 2021 budget after the bell on Wednesday.

“Production and spending expectations for the year were largely in line with our existing expectations,” he said. “The company is focused on spending to keep production in line with H2/20 levels, while generating free cash flow to strengthen the balance sheet. Cash flow expectations for the year are underpinned by a robust hedging program, which includes nearly 50 per cent of its expected oil production hedged at a floor of US$45/bbl WTI.

“Spending in 2021 will be focused largely (85 per cent) on its light oil assets, which include the Viking in Canada and the Eagle Ford in the U.S. The company production forecasts incorporate capital efficiency assumptions of 12,000 per boe/d, which represents a 30-per-cent improvement over 2020 levels. We suspect this is the result of both reduced costs and improved drilling efficiencies.”

Mr. Petrucci raised his 2021 cash flow per share estimate to 54 cents from 49 cents, leading him to bump up his target price for Baytex shares to 75 cents from 60 cents with a “hold” rating (unchanged). The average on the Street is 76 cents.

Meanwhile, Raymond James analyst Jeremy McCrea increased his target to 70 cents from 50 cents with an “underperform” rating.

“Although Baytex was making good progress on reducing debt over the last few years, the commodity price collapse has made the challenge all that more difficult. Year-to-date, BTE had generated a total of $16-million free cash flow however with 2021 guidance, the Company expects to generate approximately $75-million of free cash flow next year. While this is moving in the right direction, particularly when combined with the additional cost reduction guidance, there remains a longway to go in the context of the $1.9-billion in net debt. As such, we maintain our Underperform rating. We acknowledge the company’s termed-out debt to 2024 and encouraging well results out of the Duvernay and Clearwater (which if monetized, could help). We remain impressed with what management has done within their control; however, given the challenges, we believe there still remains much risk.”


Acumen Capital’s Nick Corcoran sees the roll-out of a COVID-19 vaccine as a “significant” catalyst for shares of MTY Food Group Inc. (MTY-T)

“While the network is under pressure from regional restrictions in the near term, MTY has continued to generate strong FCF [free cash flow] and repaid debt in a challenging operating environment,” said the analyst after discussions with the restaurant franchisor and operator prior to the Nov. 30 end of its fourth quarter.

Though the company indicated its network was “strong” in September, he said pandemic-related restrictions in both Quebec and Ontario began to have an impact in October.

That led Mr. Corcoran to cut his full-year 2020 revenue and earnings per share projections to $510.1-million and a loss of $1.66, respectively, from $513.8-million and a $1.61 loss.

However, keeping a “buy” rating for MTY shares, he raised his target to $62 from $54, exceeding the $47 consensus.

“We believe the increased target multiple is justified given the underlying strength of the business and the roll out of a vaccine will put any concerns about the balance sheet or franchisee health to rest as operations normalize,” Mr. Corcoran said.


In other analyst actions:

* CIBC World Markets analyst John Zamparo increased his target for Premium Brands Holdings Corp. (PBH-T) to $108 from $103, keeping a “neutral” rating. The average is $118.50.

* National Bank Financial analyst Michael Parkin trimmed his target for Eldorado Gold Corp. (ELD-T) to $21 from $22 with an “outperform” rating. The average is $20.37.

* TD Securities analyst Steven Green cut his target for Kirkland Lake Gold Ltd. (KL-T) to $84 from $89 with a “buy” rating. The average is $79.63.

* TD Securities’ Daniel Chan raised his target for Celestica Inc. (CLS-N, CLS-T) to US$8 from US$7.50 with a “hold” rating, while BMO Nesbitt Burns’ Thanos Moschopoulos raised his target to US$8.50 from US$7 with a “market perform” recommendation. The average is US$7.89.

“CLS believes that a higher JDM mix should drive a better multiple for its stock, over time. We agree with this notion, provided that this also translates into better corporate margins and overall earnings growth.,” said Mr. Moschopoulos.

* TD Securities’ Craig Hutchison reinstated Trevali Mining Corp. (TV-T) with a “hold” rating and 20-cent target. The average is 19 cents.

* After a meeting with CEO Brad Douville, Raymond James analyst David Quezada raised his target for shares of Greenlane Renewables Inc. (GRN-X) to $1.65 from $1.25 with a “strong buy” rating. The average is $1.48.

“We came away from [Wednesday’s] meeting with increased conviction in GRN’s competitive positioning and ability to build market share as the RNG industry expands. Equally important, we expect growth in the RNG sector will remain strong; mostly driven by demand from natural gas utilities looking to decarbonize and more recently, oil and gas players chasing net carbon neutrality goals with specific targets for RNG production. We anticipate this driving future orders in the dairy end market which oil and gas players tend to target for its low carbon intensity. Serial developers of RNG projects such as Brightmark, are also driving industry momentum and favor GRN’s ability to offer all three biogas upgrading technologies.”

* Goldman Sachs analyst Mark Delaney raised his target for Magna International Inc. (MG-T, MGA-N) to $85 from $77. The current average is $73.47.

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