Inside the Market’s roundup of some of today’s key analyst actions
Though it reported “decent” first-quarter financial results and reiterated its 2021 guidance after the bell on Wednesday, the Street maintained its focus on Canadian Pacific Railway Ltd.’s (CP-T, CP-N) pursuit of Kansas City Southern (KSU-N) in the wake of the emergence of Canadian National Railway Co.’s (CNR-T) competing bid earlier this week.
In a conference call with analysts on Wednesday, chief executive Keith Creel said he believes CP’s lower offer has a better chance to receive regulatory approval, and he feels no need to attempt to outbid its rival.
“Ultimately, while it is difficult to assess whether CP will need to fully match CN’s offer to be considered a superior proposal, our analysis demonstrates that it would make sense for CP to do so (we derive 11-per-cent adjusted EPS accretion in 2025, in line with CN),” said Desjardins Securities analyst Benoit Poirier said in a research note released early Thursday.
“We maintain our view that CP will ultimately complete the transaction with KSU. Meanwhile, we agree with management that a CN-KSU combination would open the door for CP to consider a merger with another Class l railroad in the US at some point.”
Reiterating a “buy” rating for CP shares, Mr. Poirier raised his target to $529 from $525. The average target on the Street is currently $528.11, according to Refinitiv data.
Other analysts making target adjustments include:
* Credit Suisse’s Allison Landry to US$420 from US$423 with an “outperform” rating.
“It was clear by the end of the conference call that should KSU’s Board decide that CN’s offer is superior, CP will evaluate its options,” said Ms. Landry. “Increasing leverage appears to be a key concern, with Mr. Creel indicating that it would not be in the best interest of shareholders to put its balance sheet at risk; specifically calling into question why CN is willing to lever its balance sheet up to 4.6 times – which locks up capital that is more than likely required for investment in order to realize growth/synergies from the proposed KCS combination. To the extent that CP isn’t willing to lever up significantly more than the 3.8 times it has already announced via its secured financing, it will need to explore other avenues, which potentially includes seeking a private equity investment (which could include the issuance of preferred shares).”
“Considering that the CN bid is at a 21-per-cent premium to the CP offer, we maintain our view that CP will need to come up – even if it still falls somewhat short of CN’s $325 per share. ... We continue to think that what it will all come down to is how the KSU Board views the regulatory risk of the CN proposal relative to the CP deal; which could ultimately hinge on the shipper response to the STB. Based on what we heard from CP today, we can expect a lot of opposition in the coming couple of weeks; conversely, CN is confident that it will receive support at a magnitude similar to what the CP/KC proposal has garnered thus far. In other words, this is akin to a court of public opinion … STB style.”
* TD Securities’ Cherilyn Radbourne to $525 from $540 with a “buy” rating.
* National Bank Financial’s Cameron Doerksen to $511 from $515 with an “outperform” rating.
RBC Dominion Securities analyst Drew McReynolds sees “an attractive multi-year set-up emerging” for Rogers Communications Inc. (RCI.B-T) at current levels, emphasizing “visibility on the recovery roadmap continues to improve” after it first-quarter wireless and cable results results topped his expectations
“After two years of managing the transition to unlimited plans and COVID-19 and with a constructive CRTC wireless review decision, we believe Rogers is well positioned to benefit from re-opening tailwinds (wireless loading, roaming, Rogers Media), an improvement in wireless KPIs [key performance indicators] with the Q2/21 completion of the migration to unlimited plans, and improved digital execution,” he said on Thursday. “Over the medium-term, we expect Rogers to benefit from structural cost efficiencies on the back of improved operating leverage, with the acquisition of Shaw accelerating Rogers’ 5G deployment with additional fiber/fixed telecom infrastructure, enhancing bundling opportunities and strengthening the B2B capability. We also see attractive option value in the portfolio of non-telecom assets that could become a source of funds for strategic initiatives/debt repayment.”
Mr. McReynolds said it was another quarter that brought sequential improvement across “nearly all” KPIs, adding: “Looking ahead, management indicated that wireless activity remains healthy (boosted by pent-up demand and eventually a normalization of immigration, work visa and student levels) while financial momentum within cable is expected to continue. The company remains on track to complete the migration to unlimited plans (currently 2.6 million subscribers) by the end of Q2/21 eliminating any material subsequent overage drag, and reiterated 2021 capex intensity guidance of 12-14 per cent for wireless and 22 per cent for cable.”
Believing its “bull case on industry cost efficiencies remains intact,” Mr. McReynolds raised his target price for shares of Rogers to $75 from $74, maintaining an “outperform” rating. The average target on the Street is $70.50.
“For the third consecutive quarter, wireless network and cable EBITDA margins showed healthy year-over-year expansion,” he said. “While management expects some variable costs to return with re-opening as 2021 progresses (including retail-related costs), several structural cost efficiencies should be sustained including improved wireless equipment margins, digital self-serve/self-install (more than 90 per cent of cable installations), pro-active maintenance/customer service and lower per-unit data costs with 5G.”
Elsewhere, others making target changes included:
* Canaccord Genuity’s Aravinda Galappatthige to $71 from $72 with a “buy” rating.
“The stronger Q1 result we believe would be encouraging to investors who would have expected a more delayed rebound from Rogers,” he said. “The last several quarters have clearly highlighted Rogers’ higher relative sensitivity to pandemic-related shutdowns (say vs BCE/T) and thus expectations were for a more muted result, particularly against the backdrop of a delayed recovery in Canada. Consequently, the focus would now be on the shape of the recovery; clearly Rogers has more to gain on the upside. We believe this would be driven by an eventual rebound in international roaming and other ancillary fees (activation, reconnection, etc.) which Rogers has higher exposure to, recovery in Media (including the Jays), the absence of the drag from overage which is now nearly concluded (well ahead of its peers), and stronger volumes. On the last point, we note that the return of immigration in particular could be major boost to sub growth, especially given our belief that Rogers generally wins a majority in this category.”
* Desjardins Securities’ Jerome Dubreuil to $76 from $74 with a “buy” rating.
“RCI shares are up less than 4 per cent since the announcement of its proposed acquisition of SJR, but we see room for additional gains,” he said. “We ran a model assuming that RCI buys SJR’s cable assets on March 31, 2022 (implying a divestiture of SJR’s wireless operations). We find that such a transaction would (1) bring RCI’s leverage to 4.6 times post closing, (2) increase a DCF-based valuation of RCI by 13 per cent, and (3) generate FCFPS accretion of 27–36 per cent. Given our view that there is a 90-per-cent chance the deal will be approved, we believe these points present an attractive opportunity for investors.
“Management provided 2Q21 guidance which was mostly below the Street’s expectations, but our forecasts are nonetheless mostly higher than before the earnings announcement.”
* National Bank Financial’s Adam Shine also raised his target to $75 from $74 with an “outperform” recommendation.
Before the bell on Wednesday, the Montreal-based company reported adjusted earnings per share of 78 cents, exceeding the Street’s expectation by 2 cents on better-than-expected sales and gross margins. Food retail same-store sales growth of 5.5 per cent and a decline in pharmacy SSSG of 0.8 per cent also beat the consensus projections.
“The acceleration of both online capacity and other digital initiatives (self-checkout and electronic shelf labels) is we believe noteworthy,” said Mr. Tyghe. “In terms of online, Metro has added two additional hub stores to support increased online capacity and increased click and collect to 45 stores currently and expects to exit the year with 170 stores offering click and collect. In addition, Metro currently has 260 stores across multiple banners (but concentrated in conventional) with self checkout and expects to exit the year with 350 stores. In terns of electronic shelf labels, Metro currently has 120 stores across multiple banner (but concentrated in discount) and expects to exit the year with 210 stores with electronic shelf labels.”
The analyst raised his financial expectations for Metro from the third quarter through fiscal 2021 to reflect “current market dynamics and the attribution of growth through FY2021,” leading him to increase his target for its shares to $64 from $62 with a “sector perform” recommendation (unchanged). The average is $62.91.
“We believe our recommendation and price target are well supported given Metro’s strong brick-and-mortar footprint, partially offset by its weaker relative current positioning in online,” said Mr. Tyghe.
Others making changes include:
* BMO Nesbitt Burns’ Peter Sklar to $70 from $68 with an “outperform” rating.
“Metro continues to report strong comps and higher gross margin, while maintaining modest SG&A growth; and generated normalized EBITDA growth of 13.6 per cent,” said Mr. Sklar. “However, we expect FQ3/21 SSS will decline 5 per cent due to the cycling of extreme pantry loading from the early weeks of COVID-19.
”Metro should continue to generate solid bottom-line growth with strong execution, superioroperating leverage, and a strong share buyback program.”
* CIBC World Markets’ Mark Petrie to $61 from $60 with a “neutral” rating.
“Metro reported solid Q2 results with grocery same-store sales growth modestly below our forecast, though we chalk that up to COVID noise more than anything fundamental,” said Mr. Petrie. “Earnings were ahead of forecast, driven by excellent GM% management and disciplined cost control, again clouded by the pandemic. We continue to view Metro as best-in-class operators but see shares as fairly valued, even with sales expected to remain elevated through 2021.”
* Scotia Capital’s Patricia Baker to $68 from $67 with a “sector outperform” rating.
* National Bank Financial’s Vishal Shreedhar to $65 from $64 with a “sector perform” rating.
A group of equity analysts on the Street adjusted their target prices for Northland Power Inc. (NPI-T) after coming off research restriction following its $1.6-billion acquisition of an operating portfolio of onshore renewable projects in Spain and concurrent $990-million equity raise.
Desjardins Securities analyst Bill Cabel sees the deal as a “launchpad” in Europe, predicting “an explosion of renewables growth, not only to decarbonize generation but to move to energy independence and, potentially, a hydrogen economy.”
“An accretive acquisition of operating assets is never a bad thing, especially given the benefit of the relatively lower cost of capital following the renewables/ESG run,” he said.
Mr. Cabel trimmed his target by $1 to $60, keeping a “buy” rating. The average on the Street is $53.04.
“We expect significant growth in global offshore wind over the next decade and believe NPI is the best way for Canadian investors to play the space,” he said. “Further, we believe current levels offer an attractive entry point given the market appears to be ascribing limited growth.”
Elsewhere, CIBC World Markets analyst Mark Jarvi upgraded Northland to “outperformer” from “neutral” with a $49 target, up from $47.
“The acquisition of operating assets in Spain may not immediately wow investors (minimally accretive; no development assets acquired), but we see strategic benefits with this transaction, positioning NPI in a high-growth renewable market to complement its offshore pipeline,” he said. “Further, we believe it enhances the asset mix and credit metrics, which have positive implications for potential further asset mix optimization and NPI’s cost of capital. The share price has come back to a level where we now see more relative value (15-per-cent total return to our revised $49 target). As such, ... we raise NPI from Neutral to Outperformer and continue to have a favourable outlook, particularly around development and de-risking of its offshore wind projects.”
Others making adjustments include:
* BMO Nesbitt Burns’ Ben Pham to $48 from $49 with a “market perform” rating.
“NPI’s $1.6-billion acquisition of operating onshore renewable assets in Spain provides immediate accretion, stable cash flows, and a new attractive geography for further growth,” said Mr. Pham.
“However, NPI appears to have paid full value for the assets. We believe this deal confirms our view that near-term growth is slowing and NPI is shifting greater focus to lower return M&A.”
* ATB Capital Markets’ Nate Heywood to $55 from $53 with an “outperform” recommendation.
“Overall, we the acquisition positively as NPI has added to its stable cash flow generating assets and is further positioned for future growth in a transitioning market,” he said.
* TD Securities’ Sean Steuart to $56 from $55 with a “buy” rating.
With copper “sprinting higher to start the year,” iA Capital Markets analyst George Topping raised his forecast for the metal on Thursday, seeing it “greatly benefitted from the recovery trade and stockpiling ahead of that.”
He now expects an average price in 2021 of US$4.10 per pound, rising from US$3.70 previously, and sees a cycle top of US$5 per pound in 2023, versus a previous high of US$4.50 in 2022.
“We expect a normal summer pullback with softer seasonal demand but still see copper prices going higher in Q4/21 with increased demand from ‘green’ investment themes,” they said.
With those changes, Mr. Topping raised his target prices for precious metal producers in his coverage universe. They are:
- Copper Mountain Mining Corp. (CMMC-T, “strong buy”) to $5 from $3.80. The average on the Street is $3.78.
- First Quantum Minerals Ltd. (FM-T, “hold”) to $32.70 from $26.20. Average: $31.15.
- Hudbay Minerals Inc. (HBM-T, “buy”) to $14.75 from $14.30. Average: $12.67.
- Lundin Mining Co. (LUN-T, “buy”) to $20 from $15.70. Average: $15.39.
- Regulus Resources Inc. (REG-X, “buy”) to $2.20 from $2.75. Average: $2.60.
“Copper Mountain remains our top pick as it has the highest torque to copper,” said Mr. Topping. “Lundin is the safest pick in the sector with the best balance sheet. Peru elections seem to be weighing down Hudbay’s multiples for the time being but the recent updates to its mine plans were positive in our view. First Quantum is hedged and carries high country risk so we remain on the sidelines. Our new price deck resulted in target increases across the board.”
Desjardins Securities analyst David Newman sees Parkland Corp. (PKI-T) “revving [its] engine” in the first quarter and “ready to lay some rubber in 2021.”
Ahead of the May 3 release of its financial results, he raised his revenue and adjusted EBITDA projections for the quarter to $3.937-billion and $284-million from $3.816-billion and $276-million previously. Both represent 3-per-cent increases year-over-year.
“We view 1Q largely as a continuation of trends from last quarter, including the impact of COVID-19 on driving activity, tourism in the Caribbean and the general economy, as well as relatively stable margins and crack spreads quarter-over-quarter,” Mr. Newman said.
The analyst also emphasized the Calgary-based fuel retailing company now possesses a “trunk full of cash,” noting: “On March 26, PKI announced several measures to enhance its financial flexibility, including an amended credit facility (for an additional $200-million), issuance of 4.375-per-cent notes due 2029 of $600-million and an at-the-market equity program for up to C$250m. On April 13, PKI also completed its US$800m senior unsecured notes offering due 2029 (4.5-per-cent interest). The net proceeds from the oversubscribed offerings were used to redeem all of its 5.75-per-cent notes due 2024 of $300-million, 6.0-per-cent senior notes due 2026 of US$500-million and 5.625-per-cent notes due 2025 of C$500m-million. PKI has pushed out its first debt maturity to 2027 and lowered its effective interest rate.”
Keeping a “buy” rating for Parkland shares, Mr. Newman raised his target to $50 from $48, exceeding the $48.17 average.
Prior to the release of its first-quarter results on May 6 after the bell, Canaccord Genuity’s Yuri Lynk raised his financial expectations for Altus Group Ltd. (AIF-T) based on “solid growth prospects.”
The analyst now expects revenue and EBITDA for the Toronto-based real estate software and data solutions provider of $138-million and $18-million, respectively, rising from $134-million and $17-million and almost 8 per cent above the current consensus on the Street.
“Our Q1/2021 revenue estimate assumes 5-per-cent year-over-year growth, led by the Property Tax segment,” said Mr. Lynk. “We expect Altus Analytics’ Over Time revenue to increase 12 per cent year-over-year, aided by minimal upfront perpetual license revenue in the comparative period. Recall, in Q1/2020, Altus Analytics transitioned to a subscription model, so the comps get easier. We note the 6-per-cent year-over-year increase in the Canadian dollar vis-a-vis the U.S. dollar in Q1/2021 is a headwind given 70 per cent of software revenue is generated in the Americas. We expect Point in Time revenue to continue to lag, primarily due to the pandemic and its impact on small- and medium-sized customers’ purchasing decisions.
“In the Commercial Real Estate Consulting segment we expect 26-per-cent year-over-year EBITDA growth on 7-per-cent revenue growth. Within this segment we expect steady EBITDA from Valuation & Cost Advisory and 10-per-cent top-line and 30-per-cent EBITDA growth in Property Tax. Our Property Tax forecast is underpinned by the growing volume of appeals on hand and some catch-up on delayed appeals. The outsized EBITDA growth relative to revenue we forecast reflects an expected return to more normalized profitability (Q1/20 included higher compensation due to headcount additions to support growth).”
Also raising his full-year 2021 and 2022 projections, Mr. Lynk hiked his target for Altus shares to $70 from $59, keeping a “buy” rating. The average target on the Street is $62.72.
“With its proprietary commercial real estate (CRE) data and industry standard software, Altus boasts a wide competitive moat. Institutional ownership of CRE continues to increase, making data management, financial reporting, and portfolio benchmarking all the more important. Altus’ ARGUS Software solutions are amongst the most recognized in the industry, positioning the company for success,” he said.
In other analyst actions:
* Credit Suisse analyst Andrew Kuske downgraded Atco Ltd. (ACO.X-T) to “neutral” from “outperform” with a $46.50 target, rising from $45 previously and above the $45.06 average.
* Mr. Kuske also increased his Canadian Utilities Ltd. (CU-T) target by $1 to $37, keeping a “neutral” rating. The average is $35.53.
“On a year-to-date basis, among the core Canadian regulated utilities, ATCO Ltd. outperformed the other major stocks (given AltaGas Ltd.’s (ALA) large energy infrastructure exposure, we exclude for this purpose and note 15-per-cent return year-to-date),” he said. “Beyond that relative exposure, we highlight ACO’s absolute performance of 18 per cent, 8 per cent and 12 per cent on a year-to-date, 6 month and 12 month basis, respectively. Limited excess potential return to our revised $46.50 target price (from $45) underpins a downgrade. ... Part of ATCO’s target price change comes from fundamental improvements in the underlying Canadian Utilities Limited (CU) business along with a target price increase for that stock to $37 from the prior $36.”
* In a preview of its second-quarter results, scheduled for an April 28 release, ATB Capital Markets analyst Martin Toner lowered his Real Matters Inc. (REAL-T) target to $24 from $29, falling short of the $27.75 average.
“Home purchases and mortgage originations are seasonal in nature, as such, we expect Q2/FY21 results to come in lower than Q1/FY21, but to progressively ramp up throughout FY21,” he said.
* Scotia Capital analyst Meny Grauman raised his target for shares of Equitable Group Inc. (EQB-T) to $149 from $146 upon assuming coverage of the stock. He maintained the firm’s “sector perform” rating. The current average target is $150.25.
“This change in coverage is an acknowledgment on our part of EQB’s changed status from a niche specialty mortgage lender to a full-fledged challenger bank in the Canadian marketplace,” said Mr. Grauman. “While Equitable is far from being a threat to the Big Six banks, its increasingly diversified loan book and funding sources suggest to us that it should be more closely comped against both Laurentian Bank and Canadian Western Bank which also fall in our coverage universe, as well as to other global challenger banks.”
* Scotia’s Paul Steep increased his Constellation Software Inc. (CSU-T) target to $1,900 from $1,800 with a “sector outperform” rating. The average is $1,863.07.
* Jefferies analyst Owen Bennett raised his target for shares of Organigram Holdings Inc. (OGI-T) to $3.57 from $3.48 with a “buy” rating. The average is $3.86.
* Cormark Securities initiated coverage of Slate Office REIT (SOT.UN.T) and Dream Office REIT (D.UN-T) with “buy” ratings and targets of $5.25 and $24, respectively. The averages on the Street are $4.25 and $23.93, respectively.
* CIBC World Markets analyst Bryce Adams initiated coverage of I-80 Gold Corp. (IAU-T) with an “outperformer” rating and $4 target.
“i-80 is a newly established Nevada-focused gold producer, spun out of the Equinox-Premier merger, with a high-quality, Nevada-focused development pipeline,” he said. “At spot prices, i-80 trades at 0.6 times NPV5%, relative to small producer peers at 0.9 times, on average. In our view, current trading levels offer investors an attractive entry point considering the company’s strong management team and the high-quality, organic growth portfolio of assets, located in mining-friendly Nevada.”
* PI Financial analyst Chris Thompson initiated coverage of Josemaria Resources Inc. (JOSE-T) with a “buy” recommendation and $1.55 target, exceeding the $1.22 average.
“JOSE offers advanced-stage development upside realized through its Josemaria project which hosts a large porphyry Cu-Au-Ag deposit located in San Juan province, Argentina,” he said. “Our investment thesis captures the value offered by a +10B lb Cu in-situ resource (plus substantial precious metals upside); the development of which, we see kickstarting work on a prolific new mining camp along with Filo Mining’s (FIL-X) Filo del Sol project, located 12 km to the SW. Permitting and fiscal stability negotiations are underway, expect a construction decision within 12 to 18 months.”
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