Inside the Market’s roundup of some of today’s key analyst actions
A day after it continued the sector’s string of second-quarter earnings beats, a group of equity analysts on the Street raised their target prices for shares of Laurentian Bank of Canada (LB-T).
Before the bell on Wednesday, the bank reported cash earnings per share of $1.23, exceeding the Street’s forecast of 89 cents. The beat was driven by lower-than-anticipated provisions for credit losses.
“Laurentian Bank delivered another quarter of better than expected results that should drive earnings estimates higher, and build confidence that the early signs of a recovery that we saw late last year and into Q1 are sustainable,” said Scotia Capital analyst Meny Grauman. “We were encouraged by a step up in the margin, a continued focus on expense management, and better than expected fee income. The missing piece remains the loan book which continues to be in run-off. On that front we are encouraged by the coming post-pandemic economic boom, but the fundamental question facing investors is will Laurentian Bank be in a position to take advantage of it? For the time being the firm is not able to enjoy the fruits of the booming mortgage market, although we did hear that the bank’s initial review of its processes in the broker channel did offer up some concrete changes. We have more confidence in the firm’s ability to capitalize on budding growth in the commercial loan business, although for the time being performance there is being held back by serious supply chain disruptions in the inventory finance business.”
Mr. Grauman raised his target for Laurentian shares to $48 from $46 with a “hold” rating. The average target on the Street is $45.30, according to Refinitiv data.
“Overall, we leave the quarter more favorably disposed to this name, but still awaiting a clearer strategic direction,” he added.
Others making adjustments include:
* Desjardins Securities analyst Doug Young to $48 from $43 with a “hold” rating.
“While the strategic review is not done, we were encouraged by management’s focus on keeping the adjusted non-interest expense (NIX) ratio below 70 per cent and on addressing the underperformance in residential mortgages,” said Mr. Young . “We look forward to the release of management’s strategic review.”
* CIBC World Markets’ Paul Holden to $43 from $40 with an “underperformer” rating.
“The stock trades at a 7-per-cent discount to the Big 6 (CIBC fiscal 2022 estimates), relative to a historical 13-per-cent discount,” said Mr. Holden. “We see more upside with larger banks related to economic reopening and return of capital, and thus maintain our Underperformer rating.”
* RBC Dominion Securities’ Darko Mihelic to $51 from $49 with an “outperform” rating.
“Q2/21 results were good as NIM expanded quarter-over-quarter and credit losses were low,” Mr. Mihelic said. “LB’s balance sheet continues to shrink and this may persist as LB’s strategic review remains underway. We continue to view valuation as attractive and investors get an ‘option’ on improved performance once the strategic review ends and the bank turns its attention to growth.”
* TD Securities’ Mario Mendonca to $49 from $44 with a “hold” rating.
“LB has struggled over the past couple of years as the bank was working its way through its transformation plan,” said Mr. Mendonca. “The new management team is in the process of re-evaluating the entire transformation plan and is expected to provide its updated strategic plan by year-end. While the bank has performed better than expected over the past couple of quarters, it is difficult to be more bullish on the name in the near term, given the uncertainty around the future strategic plan and the pandemic.”
* National Bank Financial’s Gabriel Dechaine to $45 from $41 with a “sector perform” rating.
With its organic growth already accelerating ahead of expectations, RBC Dominion Securities analyst Paul Treiber sees Descartes Systems Group Inc. (DSGX-Q, DSG-T) poised to see further rewards as the global economy reopens, “benefitting from stronger structural growth and profitability as its business shifts to faster growing segments.”
On Wednesday, the Waterloo, Ont.-based tech firm reported first-quarter revenue of US$99-million, up 18 per cent year-over-year and ahead of the estimates of both Mr. Treiber and the Street (US$95-million and US$92-million, respectively). Adjusted EBITDA rose 26 per cent to US$41.5-million and also topped projections (US$39.3-million and US$37.7-million).
The beat was driven by organic growth of 11 per cent, versus Mr. Treiber’s 6-per-cent projection and the strongest result since the second quarter of fiscal 2012.
Moving forward, the company’s second-quarter baseline guidance, including US$92-million revenue and $33-million adjusted EBITDA was also higher than the analyst’s expectations.
“While Descartes is likely to see elevated organic growth this year due to rebounding global trade shipments, the company is also experiencing structurally higher organic growth as it has shifted to faster growing segments like e-commerce, trade content and freight visibility,” he said. “Descartes is also benefiting from economies of scale. The company raised its long-term margin target by 300 basis points to 38-43-per-cent adj. EBITDA margins, despite making new go-to-market investments. Following Q1, our FY22 estimates move to $407-million revenue and $167-million adj. EBITDA from $395-million and $162-million respectively.”
Maintaining an “outperform” rating for Descartes shares, Mr. Treiber raised his target to US$72 from US$70. The average on the Street is currently US$67.13.
“We see Descartes as one of the better positioned consolidators in our coverage universe to benefit from the re-opening of the economy,” he said. “We expect Descartes to continue creating shareholder wealth through balancing organic growth and accretive acquisitions. Descartes’ shares have been flat year-to-date compared to the S&P500 up 12 per cent. Descartes is trading at 29 times FTM EV/ EBITDA, below supply chain & fleet management peers (at 42.5 times).”
Other analysts making target changes include:
* Scotia Capital’s Paul Steep to US$69 from US$64 with a “sector outperform” rating.
“We view Descartes Q1 results as reflecting sustained momentum in the firm’s business beating our and consensus estimates with 9.1-per-cent organic growth (in constant currency SGM estimated) reflecting ongoing improvement due to growth in the customs business via Brexit, stronger results at recent acquisitions, and increased shipping volumes as the US economy reopens. Our view remains that the company is in a strong leadership position in the software logistics market given its proven M&A-driven growth strategy, sustained organic trends, and ongoing margin expansion. We anticipate that the firm will continue to adapt to a changing logistics market and will continue to strengthen its product offering in key markets,” said Mr. Steep.
* Canaccord Genuity’s Robert Young to US$74 from US$70 with a “buy” rating.
“Steady, predictable growth and strong execution deserve a premium multiple, in our view, particularly in the face of current macro uncertainty,” said Mr. Young.
* CIBC World Markets’ Stephanie Price to US$68.50 from US$63.50 with a “neutral” rating.
“The company is seeing a number of tailwinds as it exits the pandemic and we calculate organic growth in the low teens, with FX contributing a 3-per-cent tailwind,” she said. “Descartes also raised its adjusted F22 EBITDA margin guidance by 300 basis points, although consensus is already comfortably within the revised range. While we see an improving environment for Descartes through F22, we believe that the stock is relatively fairly valued.”
* Raymond James’ Steven Li to US$67 from US$64 with a “market perform” rating.
“Strong organic growth this 1Q and likely sustainable with more pandemic compares ahead,” said Mr. Li. “DSG remains well positioned to benefit from the dynamic global environment (Brexit), growing importance of supply chains coming out of this pandemic and economies re-opening (network volume).”
* TD Securities’ Daniel Chan to US$75 from US$70 with a “buy” rating.
“We believe that the company is well-positioned to benefit from multiple tailwinds, including higher trade volumes as economies reopen, a greater supply of air cargo, increasing CRC volume resulting from Brexit, and potential acquisitions,” said Mr. Chan.
* Barclays’ Raimo Lenschow to US$65 from US$63 with an “equalweight” rating.
* Stephens’ Justin Long to US$74 from US$72 with an “overweight” rating.
Possessing an “attractive” valuation, Nomad Royalty Company Ltd. (NSR-T) is “well-positioned for future growth,” according to Canaccord Genuity analyst Carey MacRury.
In a research report released Thursday, he initiated coverage of Montreal-based precious metals-focused company, which owns 15 royalty and stream assets globally, with a “buy” recommendation.
“We forecast Nomad earnings 24,000 gold equivalent ounces “GEOs” in 2021, up 44 per cent relative to 2020,” said Mr. MacRury. “We see GEOs increasing 72 per cent to approximately 41,000 ounces by 2025 without accounting for any new royalty acquisitions. Key to this growth is the ramp-up of the Blyvoor mine (33 per cent of 2022E GEOs). Blyvoor is Nomad’s largest asset, and as it’s operated by a private company, Blyvoor Gold, has limited disclosure. We believe production ramping up to planned levels should improve investor confidence in Nomad’s growth profile. Likewise, we believe a conclusion to the Woodlawn strategic process (currently on care and maintenance) and plans for a restart should be a key catalyst for Nomad (15 per cent of 2022E GEOs).”
“Nomad ended Q1/21 with $25-million in cash and its $50-million credit facility (with an option to increase to $75-million) undrawn. Following the recent $23-million Caserones royalty acquisition, the company has ~$77 million in available liquidity for future transactions. In our view, Nomad is well positioned to compete in the smaller end of the market (more than $100-million transaction size) as the “Big 3” (Franco-Nevada, Wheaton Precious Metals, and Royal Gold) are increasingly looking for larger transactions that can move the dial.”
Touting its experienced management team, the analysts also emphasized its key shareholders (Orion Group with a 70-per-cent interest and Yamana Gold at 7.7 per cent). Though he anticipates both will cut their stakes moving forward, he expects both “to do so in a prudent manner.”
He set a target of $15.50 for Nomad shares. The current average on the Street is $18.33.
“We expect Nomad to further grow via acquisition, further diversifying its portfolio across assets and geographically, as well as broadening its shareholder base,” he said. “Maverix’s valuation improved as it has expanded its portfolio and trading liquidity over time, and we see the potential for Nomad to follow suit.”
“We see the potential for Nomad’s valuation to re-rate higher toward its peers as Blyvoor ramps up, Woodlawn restarts, and as the company continues to grow and widen its shareholder base.”
Precision Drilling Corp.’s (PD-T) refinancing of its 2023/24 debt maturities “improves its capital structure flexibility,” said RBC Dominion Securities analyst Keith Mackey, who expects the Calgary-based company to “generate solid free cash flow while remaining well-positioned for improved activity levels over the course of the year and into 2022.”
After the bell on Wednesday, Precision announced the issuance of US$400-milliob senior unsecured notes due in 2029 with a 6.875-per-cent interest rate to refinance its US$549-million notes due 2023/24.
“The un-refinanced portion will be applied to the company’s US$500-million senior credit facility, providing increased repayment flexibility, in our minds. We expect PD’s annual interest payments to remain approximately similar after the transaction. Slightly higher average interest on the new notes should be offset by lower interest rates on the credit facility balance - which may also be reduced with FCF over time.”
Mr. Mackey also emphasized Precision’s activity levels in the second quarter are “broadly” meeting his expectations with “strong” E&P free cash flow setting the stage for a strong second half.
“Precision has averaged 22 active rigs in Canada and 37 in the U.S. quarter-to-date versus our expectations of 25 and 39, respectively,” he said. “We expect these counts to gradually increase through the balance of the year. Canadian activity has begun to ramp out of breakup, with private companies adding rigs in oil-focused regions across the WCSB. We believe PD’s asset base positions the company well for activity improvements through 2H21 driven by Clearwater heavy oil and Montney activity.”
Reaffirming his “outperform” recommendation for its shares, Mr. Mackey raised his target to $50 from $44. The average is $41.86.
“PD is on our 2Q21 Canadian Small Cap Conviction List as well as our Summer 2021 RBC CM Canadian Fundamental Equity Weighting (FEW) Portfolio,” he said.
CIBC World Markets analyst Mark Jarvi sees Capital Power Corp.’s (CPX-T) recent $288-million common share offering as an “opportunistic” move to capitalize on recent share price appreciation and helps to “firm up” its 2021 funding plan.
“In our view, CPX is well positioned to deliver on a larger-than-normal capex plan in 2021 and is comfortably within rating agency credit metrics,” he said. “We do not believe this raise is a precursor for near-term M&A, but we could very well see more growth announcements (likely renewable projects) this year. Overall, we remain constructive but see only modest upside from current levels based on our forecast and DCF-based valuation.”
Mr. Jarvi called Capital Power’s 2021 “a capex-heavy year,” noting: “The year 2021 is a notable one for the company’s capex plans (growth capex of $640-million versus $315-million in 2020), driven by Genesee repowering, two wind and two solar projects in Alberta and some early spending on U.S. solar projects. It’s possible investments increase if CPX sources additional renewable projects and/or pulls the trigger on gas-fired asset acquisitions. We don’t believe an acquisition is imminent, otherwise CPX likely would have coordinated the equity raise with a new use of proceeds. But something on the renewables side could be announced at any time—specifically, we believe CPX could announce a new renewable power project in Alberta this year (corporate PPAs likely involved). Spending on such a project could be more weighted to 2022 and beyond.”
After adjustments to his financial model, Mr. Jarvi maintained a “neutral” rating and $41 target, falling short of the $42.27 average on the Street.
Others resuming coverage on Thursday include:
* BMO Nesbitt Burns’ Ben Pham with a “market perform” rating and $41 target.
* National Bank Financial’s Patrick Kenny with an “outperform” rating and $45 target.
* TD Securities’ John Mould with a “buy” rating and $44 target.
Acumen Capital analyst Nick Corcoran expects investors to look past any near-term weaknesses in the results from MTY Food Group Inc. (MTY-T) brought on by pandemic-related regional restrictions.
In a research report released Thursday, he raised his full-year financial expectations for the fast-food chain operator following an update with its management earlier this week.
“Papa Murphy’s remains strong; however, it is starting to comp strong numbers last year,” said Mr. Corcoran. “Cold Stone had a strong May compared to last year (May and August are typically the strongest months).”
Though MTY’s digital channels “remain strong,” the analyst said reopening has been “muted” thus far in regions that relaxed restrictions due to limited dine-in options.
“The quarter was impacted by continued restrictions in Ontario, Quebec, and California,” he said. “California has remained a drag due to the proportion of fast casual/casual dining concepts (ex. Baja Fresh and The Counter). Note Baja Fresh was a top five concept prior to the pandemic.”
Despite also emphasizing the challenges brought by supply chain issues and labour shortages, Mr. Corcoran raised his target to a Street-high $70 from $63 with a “buy” rating. The average is $58.56.
“We believe the increased target multiple is justified by the strong underlying free cash flow generation of the network and the lower leverage relative to the peers,” he said.
Equity analysts at Credit Suisse revealed their “Canada Top Picks” list for June on Thursday.
It resulted in 10 stock ideas based on a 6-12 month time horizon. All currently possess “outperform” recommendations.
For financial stocks, Mike Rizvanovic selected three companies (in order of preference):
1. Element Fleet Management Corp. (EFN-T) with an $19 target
“EFN has undergone a material transformation, which has driven significantly better financial performance that has exceeded management’s original target, while also improving the company’s risk profile following the wind-down of 19th Capital,” said Mr. Rizvanovic. “We believe that EFN is a very different company today, with strong organic growth potential across its geographic footprint, which we expect will drive double-digit growth in FCF/share through 2022.”
2. Royal Bank of Canada (RY-T)
3. Sun Life Financial Inc. (SLF-T)
Among infrastructure and power equities, Andrew Kuske also pointed to three companies:
1. TransAlta Corp. (TA-T)
“Portfolio execution risks look manageable and favourable NAV Breakdown prices look to help generate margin expansion for TransAlta with the structural reality of the TransAlta Renewables business provides explicit downside support,” said Mr. Kuske.
2. AltaGas Ltd. (ALA-T)
3. Keyera Corp. (KEY-T)
For precious metals, Manav Gupta picked three equities:
1. Newmont Corp. (NGT-T)
“NEM is a top pick and we think the stock could continue to outperform as operations improve through 2021 (e.g. improving grades at Boddington and Ahafo), full potential improvements progress, significant FCF generation (with planning done at a conservative $1,200/oz gold price), industry leading dividend, lower M&A risk, and superior ESG performance,” he said.
2. Barrick Gold Corp. (ABX-T)
3. Endeavour Mining Corp. (EDV-T)
Manav Gupta selected a single company, Suncor Energy Corp. (SU-T), in the energy sector.
“We see the company setting up very well for 2021, not only to fully cover the dividend but to generate sufficient discretionary cash (FFO-capex- dividend) to pay down debt and start the buybacks,” he said. “We have SU generating FFO of $8.4-billion in 2021, assuming capex of $3.8-billion and dividend obligation of $1.28-billion, company will generate $3.3-billion in 2021 in discretionary cash, which will be used for debt repayment and buybacks.”
In the firm’s U.S. picks list, also revealed Thursday, Curt Woodworth included Teck Resources Inc. (TECK.B-T).
In other analyst actions:
* Calling its Alpha-1062 treatment for Alzheimer’s disease “a Trojan Horse,” Raymond James analyst Rahul Sarugaser initiated coverage of Vancouver’s Alpha Cognition Inc. (ACOG-X) with an “outperform” rating and $2.50 target.
“With Alpha-1062, we believe ACOG has the potential to provide clinically meaningful symptom improvements to large populations of patients with AD by increasing the tolerability and bioavailability of a known efficacious drug: an elegant, inexpensive, derisked solution to a big, challenging problem,” he said.
* After Invesque Inc. (IVQ.U-T, IVQ-T) announced Wednesday the completion of the final phase of transactions associated its move to streamline its relationship with Symphony Care Network, Canaccord Genuity analyst Mark Rothschild raised his target to US$3.40 from US$2.90 with a “hold” rating, while iA Capital Markets’ Frédéric Blondeau trimmed his target to US$3.25 from US$3.50 also with a “hold” recommendation.
“Overall, we view these transactions positively as they diversify Invesque’s tenant base and modestly reduce its leverage,” said Mr. Rothschild. “While we are optimistic that operations will improve over the course of the next year, there remains considerable uncertainty, particularly with regard to the company refinancing its convertible debentures which have principal amounts of $45-million and $50-million maturing in 2022 and 2023, respectively.”
* CIBC World Markets’ Robert Catellier raised his target for Inter Pipeline Ltd. (IPL-T) to $20.50 from $19 with a “neutral” rating following Brookfield Infrastructure Partners’ (BIP.UN-T) revised hostile takeover offer. The average on the Street is $18.25.
“We expect some response from Pembina in the coming days, likely after the BIP revised offer is filed,” he said. “While we believe the assets are a good fit with Pembina, initial accretion is modest, and we are unsure how much further it is willing to improve its offer price, if at all. If it does improve the terms, we expect it to be mainly through an enhancement to the share exchange ratio, currently at 0.5 PPL shares per IPL share, rather than through cash. Pembina’s credit rating was placed under review by one credit rating agency following its initial offer, and we know it takes its financial guardrails seriously. In this light, we believe a large cash component is unlikely.
“With all that said, the increased activity causes us to revise our price target upward to account for the possibility of a higher offer price in the fullness of time.”
* After reinstating coverage following completion of its recent secondary offering, BMO Nesbitt Burns analyst David Gagliano raised his target for Stelco Holdings Inc. (STLC-T) to $50 from $44 with an “outperform” rating to “keep pace” with the firm’s steel price forecast. The average on the Street is $43.38.
“In our view, Stelco’s longer-term EBITDA generation remains underappreciated/undervalued, with a number of current “self-help” opportunities to further improve longer-term EBITDA generation and sustainability likely to flow through results in 2021/2022,” he said.
* Following the $47.5-million acquisition of Venturion Oil Ltd. in a cash and share deal, RBC’s Luke Davis raised his Cardinal Energy Ltd. (CJ-T) target to $4 from $3.25, exceeding the $3.09 average, with a “sector perform” rating, while Stifel’s Cody Kwong raised his target to $4.75 from $4.50 with a “buy” recommendation.
“The acquisition includes 2,400 barrels of oil equivalent per day of low decline assets near Wainwright Alberta, and represents a great compliment to not only its existing assets nearby, but also the company’s growing FCF premise,” said Mr. Kwong.
* TD Securities analyst Graham Ryding raised his target for shares of Canaccord Genuity Group Inc. (CF-T) by $1 to $17, keeping a “buy” rating. The average is $17.67.
“Q4/F21 was a record quarter ($1.20 in adjusted EPS) and illustrates the strong revenue/earnings potential within Canaccord’s capital markets platform,” said Mr. Ryding. “Although we see potential for capital markets activity to normalize (as does management), commentary suggests that current activity remains healthy. We remain encouraged with the momentum behind Canaccord’s wealth management platform.”
* MKM Partners analyst William Kirk cut his Flowr Corp. (FLWR-X) target to $1 from $1.50 with a “buy” rating. The average is 68 cents.