Inside the Market’s roundup of some of today’s key analyst actions
Ahead of the start of first-quarter reporting season for Canadian banks next week, Canaccord Genuity analyst Scott Chan raised his earnings per share expectations by 3 per cent, citing “better credit conditions and continued tailwinds from market sensitive businesses.”
That led him to increase his target prices for shares of the Big 6 banks by an average of 3 per cent.
At the same time, Mr. Chan upgraded his rating for Royal Bank of Canada (RY-T) to “buy” from a “hold” recommendation.
He said: “We are positive on RY shares due to: (1) large proportion of NA P&C [North American personal and commercial] (particularly Canada) with solid loan growth trends (e.g. residential mortgages) supporting NII; (2) highest exposure to market-sensitive businesses benefiting Other income (e.g. Capital markets outlook solid, AM / WM positive net sales traction supported by top quartile fund performance); (3) potential credit tailwinds on future earnings from above-average reserves and coverage ratios; (4) largest scale that can potentially offer more cost efficiencies to support positive operating leverage; (5) solid excess capital position (CET 1 ratio of 12.5 per cent vs. peer avg. of 12.2 per cent); (6) improved relative valuation due to recent share price underperformance; and (7) above average EPS forecasts complemented by 11-per-cent EPS growth for both fiscal 2021 & 2022, respectively.”
Mr. Chan bumped up his target for Royal Bank to $116 from $113.50. The average target on the Street is $114.61, according to Refinitiv data.
His other target price adjustments are:
- Bank of Montreal (BMO-T, “buy”) to $106.50 from $103.50. Average: $102.32.
- Bank of Nova Scotia (BNS-T, “hold”) to $70.50 from $66.50. Average: $70.78.
- Canadian Imperial Bank of Commerce (CM-T, “buy”) to $124.50 from $112. Average: $122.06.
- National Bank of Canada (NA-T, “hold”) to $77.50 from $76. Average: $78.14.
- Toronto-Dominion Bank (TD-T, “hold”) to $77.50 from $76. Average: $75.88.
Canaccord Genuity analyst Anthony Petrucci thinks 2021 and 2022 “are poised to be material ‘comeback’ years“ for Peyto Exploration & Development Corp. (PEY-T).
Seeing an improved outlook, he raised his rating for the Calgary-based company to “buy” from a “speculative buy” recommendation, believing “a more stable balance sheet and improved commodity price outlook has enhanced the probability of the company realizing its NAV.”
On Wednesday after the bell, Peyto released its year-end reserves, announcing a pair of small “strategic” acquisitions and a significant increase to its capital budget for 2021.
“2021 is looking good,” said Mr. Petrucci. “PEY plans to spend $325-$350-million in 2021, which at the high end is a 48-per-cent increase over what the company spent in 2020. With this budget, PEY expects to add 36,000-38,000 boe/d [barrels of oil per day] of new production (after declines), putting yearend 2021 production at close to 100,000 boe/d. On our numbers, PEY’s increased production in 2021 will drive cash flow of $410-million, with FCF of $100-million.
“2022 is looking even better. Due to both increasing production and the ‘rolling off’ of negative natural gas contracts, we see PEY cash flow growing materially in 2022, increasing 28 per cent over 2021 levels by our estimates. Our expected FCF estimate of $256-million suggests a FCF yield of 29 per cent on the current market cap. On our numbers, PEY is trading at 3.0 times 2022 estimated EV/DACF [enterprise value to debt-adjusted cash flow] with a D/CF [debt to cash flow] of just 1.7 times.”
With the upgrade, Mr. Petrucci hiked his target for Peyto shares to $8 from $4. The average on the Street is $4.14.
“In the face of challenging natural gas prices, Peyto took steps to protect the balance sheet over the last four years, which included eliminating most of the dividend and materially reducing spending,” he said. “While production has been reduced from prior levels, the decline rate has also been tempered, and relative debt levels are now at much more manageable levels. Add to that some support for natural gas prices (finally), the ‘rolling off’ of negative natural gas pricing contracts in H2/20, and costs that continue to be amongst the lowest in the basin, and we believe the run in Peyto’s share price may only be getting started.”
Elsewhere, Raymond James’ Jeremy McCrea raised his target to $5.50 from $4 with a “market perform” rating.
“Overall, this is one of the better reserve reports we’ve seen this season and will likely be reflected in the company’s share price today,” said Mr. McCrea. “With the gas and NGL price outlook moving higher (and PEY capitalizing on some shorter term price spikes at hubs in the US), leverage for PEY continues to improve. Although we are increasing optimistic with PEY’s future, we would like to see some stability in gas prices first given the company’s debt position. We are increasing our target meaningfully on better economics and development plans b
Crescent Point Energy Corp.’s (CPG-T) $900-million acquisition of a suite of assets in Northern Alberta’s Duvernay region from Shell Canada “checks the right boxes for investors,” according to ATB Capital Markets analyst Patrick J. O’Rourke.
In the wake of the late Wednesday announcement of the cash and stock deal, he raised his rating for its stock to “outperform” from “sector perform,” pointing to an improve leverage and free cash flow profile.
“Overall, we view the event as a material positive for the equity,” said Mr. O’Rourke. “CPG has spent the bulk of it’s A&D activity over the past few years divesting assets and right sizing its debt structure; recently management has pivoted to signalling the potential for acquisition activity, so we believe current shareholders should have been mentally well prepared for this event. The challenge was to find an asset that fit the criteria of being on the oilier side, material in nature (both in terms of current production and inventory), and accretive to cash flow and free cash flow in the near-term.
“In our view, this acquisition meets those criteria, improving our CF, leverage metrics and PDP + Risked Upside NAV based view of intrinsic value; while also gaining the Company access to the premium Alberta condensate market. We are accordingly increasing our rating.”
He raised his target for Crescent Point shares to $5.75 from $3.65. The average is $3.68.
“We believe that Crescent Point holds a significantly undervalued asset base, with the stock currently trading at a 38-per-cent return to our PDP + Risked Upside based target of $5.75,” he said. “With the Company’s transition plan, which began in September 2018, CPG refocused its efforts on its core assets and showed a willingness and ability to dispose of non-core assets in-order to unlock unrecognized value. The Kaybob Duvernay now adds a new core area, expanding the Company’s inventory and further increasing its FCF [free cash flow] generation. We forecast CPG’s 2021 estimated total payout ratio at 76 per cent (vs peer group average 75 per cent), 2021 estimated D/CF [debt to cash flow] at 3.0 times (vs peer group average of 2.7 times), with a 2021 estimated EV/DACF [enterprise value to debt-adjusted cash flow] of 5.3 times (vs peer group average of 5.4 times).”
Others making changes include:
* Raymond James’ Chris Cox to $5 from $4 with a “market perform” rating.
“CPG’s entrance into the Duvernay may cause some initial hesitation among investors,” said Mr. Cox. “Once one of the most-hyped plays in Canada, the Duvernay has proven a tough nut to crack. That said, we believe the Company is acquiring amongst the highest-quality acreage within the play, albeit core land that has been actively developed. Key to mitigating these risks is the attractive price paid, with our estimates suggesting a robust 25-per-cent FCF yield on the acquisition at strip pricing and driving strong accretion in per share metrics. While this is due at least in part to the high debt financingcomponent of the acquisition, the robust FCF from the assets actually results in modestly lower leverage by year-end compared to our modeling pre-deal. Canadian producers have typically fared well when acquiring the assets of foreign operators retreating from the basin - we believe CPG’s acquisition could mark a continuation of this track record, especially if oil prices hold up.”
* Canaccord Genuity’s Anthony Petrucci to $5 from $4.50 with a “buy” rating,
* Stifel’s Cody Kwong to $5.25 from $4.50 with a “buy” rating.
“The scale of Shopify’s platform (#2 ecommerce, 1.7 million merchants) is a sustainable moat and increases the probability of monetizing new valued-added services,” he said. “While Shopify is trading above peers and growth may temporarily decelerate over coming quarters, Shopify’s platform has significant monetization optionality where we expect the value to increase over time.”
Before the bell on Wednesday, the Ottawa-based ecommerce firm reported revenue for the quarter of US$978-million, up 94 per cent year-over-year and above Mr. Treiber’s US$947-million projection. He noted the result exceeded the consensus projection on the Street (US$910-million) by 7.4 per cent, compared to a 15.7-per-cent beat in the third quarter and an 8-quarter average of 4.2 per cent prior to the COVID-19 pandemic.
“What’s notable about Shopify’s Q4 is that revenue exceeded our estimate by 3 per cent, despite Q4 GMV [gross merchandise volume] being in line with our estimate ($41.1-billion),” he said. “The reason is that monetization accelerated: 1) GPV rose 115 per cent year-over-year to $19.1-billion, above our estimate $18.7-billion; 2) total merchants rose to 1.7 million and MRR [monthly recurring revenue] grew 53 per cent year-over-year to $82.6-million, above our estimate for 1.4 million and $76.7 million; and 3) Plus accelerated to 10k merchants and 44-per-cent year-over-year MRR growth, up from 39 per cent last quarter.”
Emphasizing unpenetrated opportunity and its increasing scale bring a greater platform volume, Mr. Treiber added: “We estimate Shopify has a TAM [total addressable market] of $800-billion. Our current outlook calls for Shopify’s GMV to increase to $251-billion by FY23 and merchants to rise to 2.4 million by FY23, which is up 110 per cent and 49 per cent, respectively, from FY20. Shopify is still barely scratching the surface of international (just 0.2 per cent of TAM outside NA vs. 0.7 per cent of TAM in NA). Shopify’s increasing scale raises the probability of successfully monetizing new value-added services (e.g. payments, capital, SFN). For example, Shopify expanding Shop Pay to Facebook and Instagram illustrates the success that arises with scale.”
Seeing its premium valuation reflecting the optionality of its platform, the analyst hiked his target for Shopify shares to US$1,500 from US$1,290, maintaining an “outperform” recommendation. The average target on the Street is US$1,196.48.
“We acknowledge that Shopify is expensive,” he said. “At 46 times EV/S [enterprise value to sales] and 94 times EV/GP [enterprise value to gross profit], Shopify is trading above other stocks in its peer group. However, Shopify has a larger TAM and a more attractive platform monetization opportunity than most of its peers in our view. The optionality regarding new value-added services is shown in the sensitivity of Shopify’s valuation to take rate assumptions.”
Other analysts adjusting their target prices included:
* Canaccord Genuity’s David Hynes Jr. to US$1,350 from US$1,000 with a “hold” rating.
“Q4 capped what was truly an exceptional year in e-commerce and for Shopify specifically,” said Mr. Hynes. MRR growth accelerated to 53 per cent in the quarter, which highlights the record pace at which new merchants are onboarding, and GMV essentially doubled year-over-year to more than $41-billion in the quarter. In combination, this drove Shopify’s third consecutive quarter with revenue growth in the mid-90-per-cent range, and in Q4 this translated to a 20-per-cent-plus non-GAAP operating margin, up roughly 15 points compared to a year ago. There’s really no picking at the numbers here; however you want to slice it, this is a well-positioned and well-executing business.”
* CIBC World Markets’ Todd Coupland to $1,750 from $1,660 with a “neutral” rating.
* ATB Capital Markets’ Martin Toner to $2,250 from $1,810 with an “outperform” rating.
“Shopify continues to outgrow e-commerce peers, thanks to its ever-growing menu of products, and we believe Shopify continues to create a moat around its business given its comprehensive offering and diverse eco-system,” he said. “The current quarter reinforced our belief that a large number of drivers create ‘layers of growth’ that will contribute to a robust revenue compounded annual growth rate (CAGR) over the coming years.”
* Jefferies’ Samad Samana to US$1,675 from US$1,375 with a “buy” rating.
* D.A. Davidson’s Tom Forte to US$1,275 from US$1,000 with a “neutral” rating.
* National Bank Financial’s Richard Tse to US$1,650 from US$1,140 with an “outperform” rating.
* Susquehanna’s Todd Coffey to US$1,500 from US$1,300 with a “neutral” rating.
* Piper Sandler’s Brent Bracelin to US$1,500 from US$1,300 with an “overweight” rating.
* Wells Fargo’s Timothy Will to US$1,550 from US$1,000 with an “equal weight” rating.
A group of equity analysts on the Street raised their target prices for Dream Industrial REIT (DIR.UN-T) following Wednesday’s release of in-line financial results.
“Beyond the quarterly results, we remain encouraged by the REIT’s progress on several key strategic initiatives,” said Canaccord Genuity’s Brendon Abrams. “Notably, since the beginning of Q4/20, the REIT has announced or completed $467-million of acquisitions at an average cap rate of 4.75 per cent, signed leases totalling 2 million square feet at an average spread of 16 per cent, and raised $450-million of unsecured debt at an average fixed interest rate of only 0.65 per cent. Combined, we expect these initiatives will drive growth in FFO per unit in 2021 (and beyond), while also enhancing the predictability of the REIT’s cash flows.”
Mr. Abrams moved his target to $14 from $13.50 with a “buy” rating. The average is $14.06.
“We remain bullish on Dream Industrial and view it as an attractive way for investors to gain exposure to the industrial real estate sector,” he said. “The REIT features a high-quality and geographically diversified portfolio, strong balance sheet, and a management team that has executed extremely well on several major initiatives over the past several years.”
Others making changes included:
* Raymond James’ Brad Sturges to $15 from $14.50 with an “outperform” rating.
“We anticipate that DIR is well positioned to report improving NAV/unit, and AFFO/unit growth year-over-year in 2021, which could be augmented by the execution of DIR’s stated acquisition strategy and the commencement of a more formal development program,” said Mr. Sturges. “Despite an improving growth outlook, DIR trades at an attractive P/AFFO multiple discount valuation versus its North American industrial REIT peers. We believe that further portfolio quality enhancements and greater AFFO/unit growth reported could support P/AFFO multiple expansion in 2021 for DIR.”
* CIBC World Markets’ Dean Wilkinson to $14.50 from $14.25 with an “outperformer” rating.
* National Bank Financial’s Matt Kornack to $14.75 from $13.75 with an “outperform” rating.
* TD Securities’ Sam Damiani to $15 from $14.50 with a “buy” rating.
2020 marked an “inflection point” for First Quantum Minerals Ltd. (FM-T), said Canaccord Genuity’s Dalton Baretto following the release of its quarterly results on Wednesday.
“The company wrapped up a multi-year cycle of intense capital investment to build Cobre Panama, and is now poised to de-lever in a strong copper price environment,” he said. “Capital allocation formed the primary topic of discussion in the Q&A portion of the conference call, and management reiterated its capital allocation thinking: deleverage first (on both an absolute and ratio basis), and then balance dividends with capital programs.”
“Jurisdictional risk not withstanding, we believe FM could be an acquisition target, particularly for Chinese companies, in a global race for copper assets (we remind investors that Jiangxi Copper continues to maintain an 18.4-per-cent stake in the company).”
Calling the results a “mixed bag,” Mr. Baretto increased his target for First Quantum shares to $30 from $28 with a “buy” rating. The average is $27.63.
“In this environment of strong investment demand for all things “green”, FM continues to benefit as one of the world’s largest “pure play” copper producers. We note that this is despite the hedging program currently in place that will suppress the company’s realized copper price in the near term,” he said.
Other analysts making target changes include:
* Scotia Capital’s Orest Wowkodaw to $30 from $29 with a “sector outperform” rating
* National Bank Financial’s Shane Nagle to $29 from $28.50 with an “outperform” rating.
* TD Securities’ Greg Barnes to $33 from $31 with a “buy” rating.
In other analyst actions:
* BMO Nesbitt Burns analyst Étienne Ricard initiated Morneau Shepell Inc. (MSI-T) with an “outperform” rating and $37 target. The average is $36.
“Morneau Shepell offers a long-term mid-single-digit organic growth profile, downside protection in the form of highly recurring revenue streams and upside potential from opportunistic acquisitions,” he said. “We anticipate the upcoming year to be rich in financial performance improvements, with rising free cash flow generation and declining leverage.
“We believe the shares currently provide a compelling entry point with improving free cash flow conversion presenting a valuation re-rating opportunity”
* Scotia Capital analyst Konark Gupta cut his target for Andlauer Healthcare Group Inc. (AND-T) to $38.50 from $45, maintaining a “sector perform” rating. The average target on the Street is $44.75.
* TD Securities analyst Graham Ryding raised his target for Power Corporation of Canada (POW-T) to $36 from $31 with a “buy” rating. The average is $33.29.
* Alliance Global initiated coverage of Cresco Labs Inc. (CL-CN) with a “buy” rating and $25 target, exceeding the $19.94 average.