Thursday’s analyst upgrades and downgrades

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

Touting its “competitive business fundamentals” and seeing strong rig counts and constructive gas prices setting up a “strong” winter, RBC Dominion Securities analyst Keith Mackey raised his rating for Trican Well Service Ltd. (TCW-T) to “outperform” from “sector perform” on Thursday.

“We project the company’s EBITDA to improve 50 per cent into 2022, on 23-per-cent higher revenue and stronger margins,” he said in a research report. “We believe the recent pull-back in Trican’s share price has improved the potential risk/ reward profile while our forecast financial improvements continue to be de-risked by the strength in Canadian rig counts. Trican’s financial outlook is backstopped by its debt-free balance sheet.”

Mr. Mackey thinks the Calgary-based company’s business fundamentals are “competitive across the space” and projects notable revenue growth “with exposure to increased Canadian completions activity, FCF margins, underpinned by a strong balance sheet.”

“The WCSB rig count continues to outperform 2019 levels, for both oil and gas. We expect Trican could see high relative utilization through the fall and winter. Many of Trican’s key clients appear to have back-loaded 2021 budgets and we think the company’s new Tier IV dual-fuel fleet will likely see strong utilization into the winter,” he added.

“We forecast Trican to generate a 12-per-cent free cash flow margin in 2022. This margin level compares to our broader coverage universe of 7 per cent. The company’s balance sheet also provides optionality for additional share repurchases or strategic equipment upgrades.”

While his earnings projections for 2022 and 2023 continue to sit lower than the consensus on the Street, which has already built in strong margin expectations, Mr. Mackey thinks brighter Canadian industry fundamentals and a recent pullback in its share price “have begun to de-risk the expectation of improvement.”

He maintained a $3.50 target for Trican shares, exceeding the average on the Street of $3.38, according to Refinitiv data.

“We believe Trican should trade at a premium to Canadian oilfield services peers due to strong FCF margins, growing Canadian completions activity, and strong balance sheet,” said Mr. Mackey.

The upgrade came in conjunction with an expansion to the analyst’s coverage universe.

He also initiated coverage of the following U.S. oilfield services stocks:

• Baker Hughes Co. (BKR-N) with an “outperform” rating and US$31 target. Average: US$28.60.
• Halliburton Co. (HAL-N) with an “outperform” rating and US$27 target. Average: US$26.80.
• Helmerich & Payne Inc. (HP-N) with an “outperform” rating and US$35 target. Average: US$31.23.
• Liberty Oilfield Services Inc. (LBRT-N) with a “sector perform” rating and US$13 target. Average: US$13.27.
• NOV Inc. (NOV-N) with a “sector perform” rating and US$15 target. Average: US$17.48.
• Nabors Industries Ltd. (NBR-N) with a “sector perform” rating and US$100 target. Average: US$93.78.
• Patterson-UTI Energy Inc. (PTEN-Q) with a “sector perform” rating and US$9.50 target. Average: US$9.79.
• Schlumberger Ltd. (SLB-N) with an “outperform” rating and US$37 target. Average: US$35.94.

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Seeing it providing “stable income with growth,” iA Capital Markets analyst Matthew Weekes expects “strong” free cash flow gains moving forward from Exchange Income Corp. (EIF-T) driven by the recovery in both existing business and incremental investments, leading to a return to dividend increases in the near term.

In a research report released Thursday, he initiated coverage of the Winnipeg-based diversified acquisition-oriented company with a “buy” recommendation.

“We believe that EIF’s strategy of continuously expanding and diversifying its business by acquiring profitable companies and investing in their growth has been proven successful through its history,” Mr. Weekes said. “Since its IPO, EIF has delivered excess stock returns over the TSX and grown DPS at a CAGR [compound annual growth rate] of 4.5 per cent with no reductions. Given the proven stability of EIF’s dividend, we consider the current yield attractive at 5 per cent.”

The analyst thinks Exchange Income’s “diversification and niche positioning” provides resilience in its operations, noting it has performed “well overall” despite being materially impact by the COVID-19 pandemic.

“For instance, revenues at Regional One, a leading supplier of after-market aircraft and related parts, declined 55 per cent year-over-year in 2020, reflecting headwinds in the global airline industry, but EIF’s total revenue declined only 15 per cent,” said Mr. Weekes. “While this was partially due to acquisitions within EIF’s Manufacturing segment, resilience in the Company’s existing operations was also a factor. In contrast to many large international airlines that rely on scheduled leisure passenger travel, EIF’s legacy airlines largely provide essential flight service into and out of remote and northern communities. Also within its Aerospace & Aviation business, PAL Aerospace is largely tied to government defense spending and large contracts, thus was not significantly impacted by COVID-19. EIF’s Manufacturing operations were all deemed essential businesses, and delivered stable revenues through 2020.”

“While COVID-19 temporarily put a pause on EIF’s growth, the Company was able to maintain solid FCF after maintenance payout ratio of 70 per cent in 2020 and position itself for renewed growth going forward through new contract wins, investments in the existing business, and new acquisitions. We expect these factors, along with economic and air travel recovery tailwinds, to drive a strong return to growth in the near term, as we project FCF after maintenance CAPEX per share growth year-over-year of 19 per cent in 2021 and 20 per cent in 2022. Based on today’s dividend, we project that EIF’s FCF after maintenance payout ratio will decline to 60 per cent in 2021 and 50 per cent in 2022. Based on these projections, we believe that the Company will be in a position to increase its dividend within our short-term forecast horizon (to 2022). Commentary from EIF’s most recent earnings call indicated that the dividend would likely be reviewed in the near term, but that any potential increase would not happen until after government subsidies wane.”

Also seeing its “solid” balance sheet and liquidity position allowing the possibility to pursue growth opportunities moving forward through acquisitions, Mr. Weekes set a target of $48 per share. The average on the Street is currently $49.27.

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Descartes Systems Group Inc.’s (DSGX-Q, DSG-T) “flywheel of growth is accelerating,” said RBC Dominion Securities analyst Paul Treiber following its release of better-than-expected second-quarter financial results.

After the bell on Wednesday, the Waterloo, Ont.-based tech firm reported revenue of US$105-million, up 25 per cent year-over-year and topping the expectations of both Mr. Treiber (US$102-million) and the Street (US$101-million). Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) jumped 35 per cent to US$45.9-million, also topping forecasts (US$41.7-million and US$41.9-million, respectively.)

“Q2 adj. EBITDA growth is Descartes’ highest in 10+ years and well above the company’s 10-15-per-cent long-term target,” the analyst said.

“Constant currency organic growth accelerated to 15 per cent Q2, up from 11 per cent Q1 and above our estimate for 12 per cent. The improvement reflects new customer wins, uptake of solutions to address Brexit trade compliance, and stronger momentum at recently acquired companies. Organic growth of 15 per cent is Descartes’ highest in more than 10 years. While Q2 benefits from easy year-over-year comparables, Q2 organic growth is also the highest in 10+ years on a double-stack basis (adjusts for easy year-over-year comparables).”

Mr. Treiber also noted the company’s third-quarter baselines of US$95.0-million revenue and US$35.5-million adjusted. EBITDA also topped his expectations (US$94.5-million and US$33.5-million) imply Descartes’ momentum will continue.

“Global supply chain challenges are driving strong demand for logistics software, as companies look to have better visibility and the ability to manage around constraints,” he said. “The global opportunity for logistics software is underpenetrated, particularly as e-commerce is creating the need for real-time freight visibility, IoT sensors are proliferating, and remote work is driving the need for cloud applications.”

After bumping up his revenue and earnings estimates for both 2022 and 2023, Mr. Treiber increased his target for Descartes shares to US$95 from US$85 with an “outperform” rating (unchanged). The average target on the Street is US$81.25.

“We believe Descartes has successfully balanced organic growth and complementary M&A, which has led to 18-per-cent compounded FCF/share growth over the last 10 years. Amidst stronger global demand, Descartes is seeing higher cross-selling and revenue synergies, which have the potential to increase Descartes’ IRR on acquisitions and long-term shareholder returns growth,” he said.

Other analysts making target adjustments include:

* Canaccord Genuity’s Robert Young to US$90 from US$74 with a “buy” rating.

“A broad-based tailwind across multiple elements of Descartes’ business is being driven by strong volumes and pricing environment amongst logistics customers, growth in ecommerce/last mile and extreme supply chain challenges and material shortages faced by businesses dependent upon logistics services,” said Mr. Young. “Descartes has always been a steady, predictable business that is now seeing an unusually strong demand environment for technology and information services which is creating an acceleration of organic growth (roughly 15-16 per cent year-over-year in Q2) and margin expansion. In our view, Descartes is well positioned as supply chain and logistics networks digitize over the next several years. We continue to see Descartes as an expensive, but highly predictable core technology holding, now with a more attractive (albeit temporary) growth profile with margin expansion. We reiterate our BUY rating. Based on strong calibration metrics and organic growth trend, we have increased our estimates..”

* BMO’s Thanos Moschopoulos to US$88 from US$65 with a “market perform” rating.

“We think Descartes can continue to execute successfully against its strategy of delivering consistent EBITDA growth, particularly given that its business is benefitting from significant industry tailwinds. However, on a relative basis, we prefer other consolidators in our coverage universe,” said Mr. Moschopoulos.

* Raymond James’ Steven Li to US$80 from US$67 with a “market perform” rating.

“Strong 15-per-cent organic growth this 2Q and while compares start getting tougher in upcoming quarters (a little in Q3 but more so in Q4), we believe DSGX organic growth, once normalized, is likely to still track ahead of pre-pandemic levels of 5-6 per cent given tailwinds,” said Mr. Li. “DSGX remains well positioned to benefit from economies re-opening (network volume) as well as the growing importance of supply chains coming out of this pandemic, which has been further magnified by current ongoing shortages.”

* Scotia Capital’s Paul Steep to US$84 from US$81 with a “sector outperform” rating.

“We view Descartes Q2 results as reflecting continued traction in the firm’s business beating our and consensus estimates with 13-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 demand for shipping and logistics services remains robust. 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 strengthen its product offering in key markets,” said Mr. Steep.

* TD Securities’ Daniel Chan to US$95 from US$80 with a “buy” rating.

* Barclays’ Raimo Lenschow to US$83 from US$71 with an “equalweight” rating.

* Stephens’ Justin Long to US$96 from US$74 with an “overweight” rating.

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Following a “blowout” quarter, Lululemon Athletica Inc.’s (LULU-Q) second half is “looking strong” despite overcome supply chain headwinds, according to Citi analyst Paul Lejuez.

After the bell on Wednesday, the Vancouver-based apparel maker reported second-quarter earnings per share of US$1.65, topping both Mr. Lejuez’s US$1.26 estimate and the consensus projection of US$1.19. The company’s third-quarter EPS guidance of US$1.33-$1.38 also exceeded the Street’s expectation (US$1.32).

“2Q was impressive with total sales of up 64 per cent vs. 2Q19 accelerating vs. 1Q (up 57 per cent), well ahead of expectations,” the analyst said. “The top line beat translated into strong margin expansion with EBIT up 160 basis points vs. 2Q19 (vs. down 10bps in 1Q). Mgmt guided 3Q sales above consensus to 25-28 per cent year-over-year (vs. cons 19 per cent) and up 53-56 per cent vs. 3Q19, among the best in our coverage. We note that management believes they are forced to leave some sales on the table due to the tight inventory environment brought on by supply chain constraints, making the 2Q beat and strong 3Q guidance even more impressive. While the business is firing on all cylinders, shares are indicated up 15 per cent in the pre-market and are trading at an F22 estimated EV/EBITDA multiple of 30 times, making the risk/reward fairly balanced at current (pre-market) levels.”

Maintaining a “neutral” recommendation for its shares, Mr. Lejuez hiked his target to US$435 from US$350. The current average is US$431.74.

“Comp momentum has been among the best in retail and margins have expanded almost 400 basis points since 2015. Product innovation continues to drive strong results in seemingly developed categories such as women’s pants, the men’s business is a big opportunity, and the customer has given LULU license to broaden into new categories. While Covid-19 disruptions will be a near-term headwind, there is no change to LULU’s long-term earnings power. However, with the LULU being valued as one of the most expensive specialty retail concepts ever, we believe the risk/reward is fairly balanced,” he said.

Other analysts raising their targets include:

* BTIG’s Camilo Lyon to US$473 from US$440 with a “buy” rating.

“Overall, this was another solidly consistent quarter underscoring the power of the LULU brand and the strength of execution (LULU is on pace to reach its F23 revenue targets two years ahead of schedule),” said Mr. Lyon.

* Credit Suisse’s Michael Binetti to US$465 from US$430 with an “outperform” rating.

“Despite a few minor setbacks (MIRROR dilution still down 3 to 5 per cent, but on a much higher EPS base, loyalty program on pause), LULU’s core business continues to drive the most consistent and balance upside in both revs and GMs in our coverage. Updated guidance puts LULU on track to achieve its 2023 revenue targets 2 years early, and we see multiple paths to upside continuing in 2H,” said Mr. Binetti

* Jefferies’ Randal Konik to US$395 from US$330 with a “hold” rating

* JP Morgan’s Matthew Boss to US$500 from US$450 with an “overweight” rating.

* Deutsche Bank’s Paul Trussell to US$474 from US$436 with a “buy” rating.

* Stifel’s Jim Duffy to US$500 from US$445 with a “buy” rating.

* Guggenheim’s Robert Drbul to US$475 from US$450 with a “buy” rating.

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Despite recent share price appreciation, Aecon Group Inc.’s (ARE-T) valuation remains “attractive,” according to iA Capital Markets analyst Naji Baydoun.

“We continue to like ARE’s portfolio of Construction and Concessions businesses, which includes (1) a solid and diversified Construction backlog of $6.5-billion (as at Q2/21), (2) a robust $40-billion-plus pipeline of active pursuits, (3) several long duration service contracts (15 per cent of total revenues, with significant growth potential), and (4) a diversified portfolio of Concessions that provide additional stability to the Company’s financial and risk profile,” he said.

Mr. Baydoun thinks the Calgary-based company’s “healthy” outlook is not fully priced in by investors, noting: “The overall outlook for ARE has improved in 2021, underpinned by (1) solid year-to-date operating and financial results, (2) an accelerating pace of new contract awards, reflecting the current favourable environment for infrastructure construction services (supporting future growth), and (3) a steady recovery of operations from the impacts of COVID-19 at the Bermuda airport. Although underlying consensus estimates for 2021-22 have increased to reflect the improving outlook for ARE, we continue to see further upside potential to financial forecasts from additional growth initiatives.”

The analyst sees Aecon’s valuation as “compelling” even though it has outperformed both the TSX Composite and peers year-to-date, emphasizing its shares are trading at a “significant” discount to peers.

“Given (1) the positive outlook for ARE, and (2) the current relative valuation gap with peers, we continue to see further near-term upside potential in the shares,” said Mr. Baydoun.

That view led him to increase his target to $25 from $23.50, exceeding the $23.81 average on the Street, with a “buy” rating (unchanged).

“ARE offers investors (1) stable balance sheet and cash flow fundamentals, supported by a strong backlog, (2) exposure to the Canadian construction sector, with upside potential from additional infrastructure investments, (3) an attractive dividend (3-per-cent yield, with potential growth within an 30-40-per-cent FCF payout through 2025), and (4) a discounted valuation compared with peers,” said Mr. Baydoun. “We have adjusted our DCF valuation work on ARE by reducing our equity risk premium assumption by 0.5 per cent, reflecting the positive and improving overall outlook; accordingly, we are increasing our price target.”

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Seeing it possess the potential for significant growth with a “compelling macroeconomic backdrop,” Canaccord Genuity analyst Yuri Lynk initiated coverage of Tantalus Systems Holding Inc. (GRID-T), a Burnaby, B.C.-based smart grid technology company, with a “buy” recommendation.

“Tantalus’ solutions are increasingly in demand as utilities digitize the grid,” he said. “As a result, the company boasts a steady growth profile, nearly 100-per-cent customer retention, and rising margins as its unique software and data analytics offering account for an increasingly greater proportion of revenue. We believe this growing source of high-margin, recurring revenue is underappreciated by investors.”

The analyst thinks Tantalus’ “unique position in the value chain” makes it a potential acquisition target moving forward.

“Most IOUs have made meter purchases in the last 15 years. Thus, meter OEMs may begin to look at the cooperative and public utilities as a potential growth market,” he said. “Given Tantalus is one of the largest players in this space, it might make sense for one of its partners to acquire the company to accelerate entry. Take-out multiples in the smart-grid space have averaged 2.5 times EV/Sales, which would imply $3.50 per share for Tantalus. However, until the company reaches meaningfully positive EBITDA and at least $50 million in sales, which would give it critical mass and accretion potential, we peg the likelihood of Tantalus being acquired as somewhat low.”

Also emphasizing its “significant” recurring revenues from its 99-per-cent retention rate, improving margins and “strong” balance sheet, Mr. Lynk set a target of $2.50 per share for Tantalus, which graduated from the TSX Venture Exchange in May. The average is $3.30.

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In other analyst actions:

* Coming off research restriction, BMO Nesbitt Burns analyst Devin Dodge increased his target for Brookfield Infrastructure Partners L.P. (BIP-N, BIP.UN-T) to US$63 from US$61 with an “outperform” rating. The average on the Street is US$62.30.

“Organic growth is expected to be near the upper end of its targeted range and there is upside to estimates as mature investments are sold and the capital is redeployed into higher yielding opportunities. Liquidity is at record levels and the deal pipeline is robust,” he said.

* After institutional meetings with its management team, BMO’s Ryan Thompson cut his target for Fortuna Silver Mines Inc. (FVI-T) to $9 from $9.75 with an “outperform” rating. The average on the Street is $7.60.

“Discussion topics were wide-ranging, but mostly focused on the ramp-up of Lindero, integration of Roxgold, Séguéla construction, and San Jose,” he said. “With vendor technician support now on site at Lindero, we see the increased potential to achieve stability in the HPGR-agglomeration-stacking circuit, which will be critical to achieving production expectations. We get the impression that the Roxgold integration is going well, and look forward to a Séguéla construction decision in the next month.”

* Stifel analyst Alex Terentiew initiated coverage of Pasofino Gold Ltd. (VEIN-X) with a “speculative buy” rating and $2.20 target.

“The Dugbe gold project in Liberia holds the potential to be the next, and only, large scale gold mine in what we view as an underexplored and emerging gold district with potential for new discoveries,” the analyst said. “While being a first mover does carry a potentially higher level of risk, a supportive government, experienced management, proximity to port, attractive economics, and large land package (2,559 sq km) in the Birimian green stone belt, underpins Dugbe’s investment thesis. Post Definitive Feasibility Study, as Pasofino earns 49 per cent of the economic interest in Dugbe, a potential JV agreement with Hummingbird Resources will make Pasofino a

100-per-cent owner of the project and bring in a financially stronger partner. An updated mineral resource estimate in September, ongoing exploration results and a DFS mid-2022 are the near-term catalysts.”

* TD Securities analyst Vince Valentini raised his target for Rogers Communications Inc. (RCI.B-T) to $74 from $73, keeping a “buy” rating. The average is $71.87.

* TD’s Sam Damiani hiked his Granite Real Estate Investment Trust (GRT.UN-T) target to $100 from $92, exceeding the $94.40 average, with a “buy” recommendation.

* JP Morgan initiated coverage of Westport Fuel Systems Inc. (WPRT-Q, WPRT-T) with a “neutral” rating and US$5 target. The current average is US$14.

* CIBC World Markets analyst Bryce Adams raised his Probe Metals Inc. (PRB-X) to $3.10 from $2.70, keeping an “outperformer” rating. The average is $3.26.

* National Bank Financial analyst Cameron Doerksen hiked his target for TFI International Inc. (TFII-T) to $158 from $144, topping the $134.19 average, with an “outperform” rating.

* Scotia Capital analyst Mark Neville cut his Transcontinental Inc. (TCL.A-T) by $1 to $24 with a “sector perform” rating. The average is $26.83.

* Scotia’s Robert Hope raised his target for Pembina Pipeline Corp. (PPL-T) to $42 from $39, reaffirming a “sector perform” recommendation. The average is $42.53.

* Mr. Hope also increased his Inter Pipeline Ltd. (IPL-T) target to $20 from $18, exceeding the $19.81 average, with a “sector perform” rating.