Inside the Market’s roundup of some of today’s key analyst actions
Seeing “increased risk that news flow is potentially more negative than positive” through the remainder of 2021, BMO Nesbitt Burns analyst Jackie Przybylowski lowered her rating Lundin Mining Corp. (LUN-T) to “market perform” from “outperform” on Thursday.
“We expect that Lundin will continue to pursue growth and optimization of its existing sites,” she said. “However, we expect that these processes will not be completed until 2022 at the earliest, and we see downside risk in the near term as projects reach the challenging ‘implementation’ stage.”
In a research note reviewing second-quarter earnings season for the mining sector released before the bell, Ms. Przybylowski pointed to a trio of headwinds facing the Toronto-based company: operating “challenges” at Candelaria copper-gold complex in Chile; “execution risk” at its Neves Corvo zinc mine in Portugal and heightened geopolitical obstacles.
“Risks of higher taxes and royalties in Chile are likely to be muted through H2/21 (although market noise could persist), but we expect a higher royalty could be confirmed in 2022. Lundin’s Candelaria mine has tax stability in place until 2023, but the share price is likely to be impacted by news flow on the proposals and approval of an increased royalty scheme,” she said.
Her target for Lundin shares slid to $14.50 from $16. The average target on the Street is $14.21, according to Refinitiv data.
Concurrently, Ms. Przybylowski made a series of target adjustments to other miners;
“Second quarter earnings raised more questions than it solved about the ability of many companies to hit full-year guidance targets, the stability and predictability of capital returns to shareholders, and even the outlooks for commodity prices,” she said. “In this environment and with ongoing geopolitical risk concerns, it’s unsurprising that investors appear to be stepping back from the sector.”
She added: “Cost inflation was a pervasive topic of Q2 earnings - but should it be? There is always one subject that the market converges around: in recent past quarters this has included reserve replacement, capital returns, and COVID impacts. In this quarter the issue raised on most earnings calls was the potential for cost inflation. However, we don’t think the market should be distracted by this. No company raised its 2021 cost guidance because of inflation, and it is not yet clear if the higher costs will persist into 2022 or beyond or if they can be offset by other savings. For investors who are concerned about the potential for inflation next year we highlight Agnico Eagle as likely less exposed to inflation, given its currency hedges, and advanced procurement of consumables for Nunavut operations through mid-2022. We also highlight the royalty/ streaming business model which is naturally insulated from cost inflation - our preferred streamer is Wheaton Precious Metals.”
The analyst’s target adjustments were:
- Barrick Gold Corp. (ABX-T, “outperform”) to US$32 from US$30. The average on the Street is US$29.02.
- Ero Copper Corp. (ERO-T, “outperform”) to $34 from $23. Average: $30.05.
- Franco-Nevada Corp. (FNV-T, “outperform”) to $202 from $200. Average: $202.70.
- Iamgold Corp. (IMG-T, “market perform”) to US$3.50 from US$4. Average: US$3.35.
- Kinross Gold Corp. (K-T, “outperform”) to US$11.50 from US$11. Average: US$9.84.
- Newmont Corp. (NGT-T, “outperform”) to US$84 from US$82. Average: US$74.27.
- Royal Gold Inc. (RGLD-Q, “market perform”) to US$147 from US$145. Average: US$141.42.
- Teck Resources Ltd. (TECK.B-T, “market perform”) to $37 from $38. Average: $34.40.
- Turquoise Hill Resources Ltd. (TRQ-T, “market perform”) to $18.50 from $18. Average: $25.
- Yamana Gold Inc. (YRI-T, “outperform”) to US$9 from US$8.75. Average: US$6.65.
Pointing to only “modest” upside to his price target following recent price appreciation, CIBC World Markets analyst Mark Jarvi lowered Fortis Inc. (FTS-T) to “neutral” from “outperformer,” seeing “no clear catalyst to drive estimates or the trading multiple materially higher.”
“We still view Fortis as a relatively lower-risk name that continues to offer steady dividend growth and could deliver some modest upside to current capex and growth plans (particularly around decarbonization and transmission investments), but see no need to add to positions at the current trading level,” he said. “Further, at this point we do not see a clear path to positive estimate revisions, nor do we see a reason to take our target multiple beyond the 20 times P/E (on our 2022 EPS estimate) that we currently use.”
He maintained a $59 target, exceeding the $58.97 average.
Raymond James analyst Brad Sturges sees the COVID-19 pandemic as as an opportunity for Slate Office REIT (SOT.UN-T) to “reset the bar with investors after spending much of 2019 in the penalty box after its strategic decision to reduce its distribution rate.”
“Since then, several other Canadian commercial REITs have adjusted their respective distribution rates, leveling the playing field for SOT, in our view,” he said. “We believe SOT’s discounted value can provide above-average total return upside if SOT can improve its future operating performance. Near-term potential positive catalysts for SOT include: 1) improving leasing velocity that supports a recovery in SOT’s average occupancy rate, particularly in Atlantic Canada; and 2) a return to accretive external acquisition growth on a leverage neutral basis.”
Mr. Sturges initiated coverage of the Toronto-based company, which he calls a “discounted office landlord with an expanding global office real estate growth strategy,” with a “market perform” recommendation and $5.75 target, exceeding the $5.58 average on the Street.
The second-quarter financial results for Canadian midstream energy companies exhibited signs of continued recovery, according to Canaccord Genuity analyst John Bereznicki.
However, he warned of the emerge of “modest” headwinds which could linger for the foreseeable future, including “power cost inflation, realized risk management losses, a strengthening Canadian dollar, outsized integrity spending, extreme weather and rising LTIP costs.”
In a research note released Thursday, Mr. Bereznicki also emphasized producer cashflow is “surging, but caution remains.”
“Notwithstanding the recent (Delta-driven) pullback in global oil prices, our E&P team estimates WCSB producer cashflow outside the oil sands will increase 105 per cent on a year-over-year basis in 2021,” he said. “Analysis by our E&P colleagues also suggests that over the past seven years, domestic producers outside the oil sands have deployed an average of 100 per cent to 120 per cent of cashflow on capital spending. In 2021, we expect these same producers to spend only 70 per cent of cashflow on average (50 per cent on a weighted basis) against a much stronger fundamental backdrop.
“We believe this financial caution is reflective of: 1) a desire by producers to ‘bullet proof’ their balance sheets following the oil price collapse in 2020; 2) a recognition that investors are not rewarding producers for production growth; and 3) the continued transition of the E&P sector to a self-funded model as equity investors shun the space. We nonetheless note that through the Q2/21 earnings season several WCSB producers increased their capital budgets modestly. Should WTI remain above US$65/bbl, we believe producers will be increasingly willing to further expand their budgets in 2H21.”
Ignoring recent declines, Mr. Bereznicki noted domestic midstream equities are up thus far in 2021 by an average of 30 per cent.
He added: “As equity values recover, we believe there is generally decreasing motivation for midstream companies to devote free cashflow to NCIB activity. As midstream balance sheets strengthen, counterparty risk declines and interest rates remain low, we also believe that debt reduction will generally become less of a priority. Not surprisingly, we believe discussion of organic and inorganic growth opportunities was increasingly prevalent through the second quarter earnings season. In our view, contracted organic growth opportunities that offer rapid payback, high-quality counterparties and ESG-positive attributes are most likely to be well received by investors.”
The analyst made a series of target price adjustments to stocks in his coverage universe. They are:
- AltaGas Ltd. (ALA-T, “buy”) to $32 from $30. The average is $28.83.
- Gibson Energy Inc. (GEI-T, “buy”) to $27 from $28. Average: $24.92.
- Inter Pipeline Ltd. (IPL-T, “hold”) to $20 from $20.50. Average: $19.70.
- Tidewater Midstream and Infrastructure Ltd. (TWM-T, “buy”) to $1.70 from $1.60. Average: $1.67.
“Since late last year domestic midstream EBITDA valuation multiples have steadily recovered from a pandemic-induced double-bottom in 2020,” he said. “Over this same period, forward cashflow multiples for the domestic E&P and OFS sectors have continued to decline. In our view this relative midstream divergence is a function of at least three factors: 1) as E&P counterparty risk and midstream payout ratios have fallen, equities have transitioned from commodity plays to yield-driven investments; 2) recent energy transition infrastructure announcements may be providing investors with increased comfort in the longer-term value of midstream assets; and 3) the pending acquisition of IPL by Brookfield may be creating at least modest valuation tailwinds for the space.”
Ahead of the Aug. 31 release of its first-quarter 2022 financial results, Stifel analyst Martin Landry raised his forecast Alimentation Couche-Tard Inc. (ATD.B-T) to reflect higher-than-expected U.S. gasoline margins despite tough year-over-year comps.
“The COVID crisis contributed to Couche-Tard reporting the highest gasoline margins in its history in recent quarters in the U.S. market, contributing to record gross profits from fuel operations,” he said. “In addition, merchandise same-store-sales benefited from shifts into the convenience channel during the pandemic, for instance, tobacco in Canada, which will make for difficult comps year-over-year. Hence, absent a material acquisition, we expect Couche-Tard’s EPS to decline year-over-year for the next four quarters.”
Mr. Landry raised his earnings per share forecast for the quarter to 68 cents from 63 cents, which is currently the consensus on the Street. That represents a decline of 5 per cent from the same period of year ago.
“As mobility normalizes in the U.S, we expect U.S. fuel volumes to return near historical levels,” he said. “May and June vehicle miles traveled are up 22 per cent year-over-year, on average, according to the US Department of Transportation. We model 15-per-cent same-store fuel volume growth in the U.S., which could be conservative. Over the last four quarters, ATD has been outperforming the nationwide fuel margin average by 20-25 per cent, and we expect this to continue based on comments on the company’s fuel strategy at the investor day. We updated our U.S. fuel margin assumptions to 33 cents per gallon, up from 28 cents per gallon previously, to reflect the strong nationwide gasoline margins reported by OPIS during the quarter. This compares to 43 cents per gallon last year, creating a 16 cents per share headwind on the company’s Q1FY22 EPS.”
While he models stable merchandise same-store sales growth year-over-year south of the border, Mr. Landry is projecting a drop of 6 per cent in Canada, noting: “Last year’s difficult comp of 20-per-cent SSS growth was driven by pandemic restrictions temporarily closing competing channels for items such as cigarettes and alcohol, which is no longer the case. We also expect a recovery in fuel volumes, modeling a SSS growth of 10 per cent, which is below Parkland’s 15-per-cent SSS volume growth in Canada as Couche-Tard’s July quarter-end faces a more difficult comp than Parkland’s June quarter-end. We believe that stronger than historical fuel margin could continue in Canada and model fuel margins of 10 cents per litre, down 5 per cent from last year, but higher than the 5-year average of 8.5 cents per litre.”
With his higher estimates and “better visibility on the company’s goal to reach $6 billion of EBITDA by 2023,” Mr. Landry raised his target for Couche-Tard shares to $53 from $47, keeping a “hold” rating. The average on the Street is $55.40.
Decibel Cannabis Company Inc. (DB-X) has rapidly emerged as a “dominant” player in the premium craft market, according to Raymond James analyst Rahul Sarugaser.
“Watching our channel data during the last 12 months, DB claimed #9 market share position among all Canadian LPs by retail sales, capturing 3 per cent of all Canadian adult-use cannabis sales forcing us to ask: ‘Who the heck are these guys?!,’” he said. “Well, they’re craft cannabis pros, and we see their ability to build sought-after brands — Qwest premium family of brands, General admission mid-market brand—made up of uncompromisingly high-quality cannabis jettisoning this group to the top of the Canadian cannabis pecking order.”
In a research report released Thursday, he initiated coverage of the Calgary-based company with an “outperform” recommendation, touting its position in the fastest-growing segment in the Canadian market, which he notes “is clearly being valued at a premium by the largest players in the sector.”
“DB’s marriage of ultra-premium priced, microgrow-quality cannabis, strong-selling mid-market offerings, deep roots in cannabis culture (Canada and U.S.), and national-scale production and distribution is what makes this company so notable in our eyes,” he said. “DB is already punching well above its weight among Canadian LPs—capturing significant market share with its quick revenue ramp during the last 5 quarters — but we believe DB is on the cusp of an even more intense revenue inflection as the company realizes a more than 400-per-cent scaling of its cultivation operations by 4Q21.”
He set a target of $1 per share, exceeding the 60-cent average on the Street.
“While DB stock has certainly run during the last 12 months (up 250 per cent), we believe the stock has a lot more room to run, given the company has, historically, been so severely underappreciated,” he said. “DB remains an off-the-radar cannabis story, and the market has been very slow in giving the company credit: a significant early opportunity we identify for our clients. There’s a lot of meat left on the bone here.”
Pointing to its “strong execution” over the past two years, Citi analyst Paul Lejuez thinks Target Corp. (TGT-N) has “become increasingly relevant to more consumers and can capture significant share from weaker players across the retail sector in the coming years.”
“The bottom line is we believe sales and earnings can continue to grow from their higher base,” he added in a research note released Thursday.
On Wednesday, shares of the U.S. retail giant slid 2.8 per cent following the release of its second-quarter financial results, despite exceeding the Street’s comparable same-store sales growth expectations (8.9 per cent versus the consensus estimate of 8.68 per cent) and announcing a US$15-billion share repurchase program. Digital growth, however, slowed to 10 per cent, compared to a 195-per-cent jump a year earlier and 50 per cent in the first quarter.
“Expectations were high coming into the quarter, making the 8.9-per-cent comp increase not quite good enough,” said Mr. Lejuez. “But TGT’s comments on 2H21 were positive with second-half comp guidance of high single digits, well above low single digit consensus expectations. TGT’s ability to sustain its momentum throughout 2021 highlights the loyalty many consumers have to the retailer, particularly as it seamlessly delivered easy pick-up options throughout the pandemic.”
With increases to his second-half comp estimates, he raised his 2021 earnings per share projection to US$13.54 from US$13.04. His 2022 forecast rose to US$14.16 from US$12.45 based on higher sales and margins.
Mr. Lejuez, one of several analysts on the Street to hiked their estimates and target prices for Target shares, increased his target to US$287 from US$258 with a “buy” recommendation (unchanged). The average is currently US$275.74.
“We believe TGT is a retail winner that will capture share being put up for grabs from store closures across retail,” the analyst said. “These share gains should start a virtuous circle in which more and more brands will want to work with TGT because that’s where the customers are shopping, and then more and more customers will gravitate to TGT as their brand mix gets more appealing. We expect TGT to continue to benefit from share being put up for grabs for years to come.”
Separately, Mr. Lejuez raised his target for TJX Companies Inc. (TJX-N) to US$82 from US$75, a day after its shares jumped 5.6 per cent on better-than-expected results. The average on the Street is US$83.04.
“TJX’s strong 2Q and continued momentum in 3Q were impressive. And despite some near-term margin headwinds (which are expected to intensify in 2H) management discussed a potential moderation in pressures in F22,” said Mr. Lejuez, maintaining a “neutral” rating for the U.S. off-price department store corporation.
“Importantly, management also discussed how higher prices (select AUR increases) would become a bigger piece of the margin expansion puzzle beginning in 4Q21, which would reverse 5 years of margin declines. Similar to other retailers that are experiencing higher merch margins from a very rational competitive environment, TJX also has an opportunity to increase price (and we believe this is the right decision in the current landscape). In many ways being able to flow with the pricing tide is what the off-price model is all about, and we expect TJX to be successful at driving higher merchandise margins over the next year.”
In other analyst actions:
* RBC Dominion Securities analyst Pammi Bir and BMO’s Joanne Chen raised their Sienna Senior Living Inc. (SIA-T) targets to $16.50, or 3 cents lower than the consensus, from $16. Mr. Bir kept a “sector perform” rating and Ms. Chen maintained a “market perform” recommendation.
“Our outlook on SIA has incrementally improved, notwithstanding Q2 results that fell short of our call. Indeed, the pandemic has taught us many lessons, among them that short-term results in Canadian seniors housing can prove highly volatile in light of low visibility on government funding. Nonetheless, we’re encouraged by SIA’s operational advances on multiple fronts, including significant progress in infection prevention and control (IPAC) and rising occupancy. While we’re cognizant of the risks from new variants, we believe the framework’s in place for a multi-year recovery to unfold,” said Mr. Bir.
* Scotia Capital analyst Benoit Laprade cut his target for West Fraser Timber Co. Ltd. (WFG-T) to $139 from $141 with a “sector outperform” rating. The average is $139.60.
* Following its US$42.5-million acquisition of Ace Elastomer Inc., Cormark Securities analyst David Ocampo raised his AirBoss of American Corp. (BOS-T) target by $1 to $54 with a “buy” rating, while Stifel’s Maggie MacDougall, moved her target to $55 from $53.25 also with a “buy” recommendation. The average is $52.67.
“The transaction broadens BOS penetration in the higher-margin custom compound market, providing both cost and revenue synergy opportunities,” said Ms. MacDougall.
* CIBC’s John Zamparo cut his Alcanna Inc. (CLIQ-T) target to $7.50 from $7.75, keeping a “neutral” rating. The average on the Street is $10.42.
“Alcanna’s liquor business is demonstrating stability amid stronger average unit volumes (same-store sales up 10.6 per cent vs. Q2/19), and we have increased confidence in the liquor business for 2022,” he said. “However, despite solid results, we believe investors may be reluctant to own the stock in the near-term because of deep investments needed in the cannabis business (which should ultimately prove fruitful), the noise that the 63-per-cent stake in Nova Cannabis (NOVC) creates, and potentially limited catalysts on the horizon.”
* Cormark Securities analyst Richard Gray lowered his target for First Majestic Silver Corp. (FR-T) to $23 from $26, reiterating a “buy” rating. The average is $21.01.
* National Bank Financial analyst Patrick Kenny resumed coverage of Tidewater Midstream and Infrastructure Ltd. (TWM-T) with an “outperform” rating and $1.75 target, while Acumen Capital’s Trevor Reynolds reinstated coverage with a $2.25 target, up from $1.50, with a “buy” recommendation. The average is $1.67.
* National Bank’s Dan Payne reinstated coverage of Spartan Delta Corp. (SDE-X) with an “outperform” rating and $8 target. The average is $8.64.
* National Bank’s Tal Woolley raised his target for Northwest Healthcare Properties REIT (NWH.UN-T) to $14 from $13.50 with a “sector perform” rating. The average is $13.88.