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

Celestica Inc.’s (CLS-N, CLS-T) US$306-million acquisition of Singapore-based PCI Ltd. further accelerates its multi-year transformation, according to RBC Dominion Securities analyst Paul Treiber.

Shares of the Toronto-based tech company hit a 2½-year high Wednesday, closing up over 17 per cent, after the premarket announcement of its first acquisition in three years. PCI is a fully integrated design, engineering and manufacturing solutions provider, owning five manufacturing and design facilities across Asia.

“Celestica has been on a multi-year transition away from commoditized, low-growth EMS [Electronics Manufacturing Services] segments to higher margin, higher growth segments. The acquisition of PCI is aligned with this strategy,” said Mr. Treiber. “With PCI, we estimate Celestica’s mix of [Advanced Technology Solutions] to increase to 44 per cent in FY22, up from 36 per cent in FY20, with adj. EBIT margins rising to 5.5 per cent in FY22 from 3.3 per cent in FY20. Moreover, we anticipate 7-per-cent organic growth in FY22, well above Celestica’s 10-year average of negative 1 per cent, driven through improved mix, cyclical rebound in some markets and the lack of headwinds from dis-engagements.”

“Celestica sees the ROI on PCI meeting or exceeding its WACC by FY22 or sooner. Management anticipates low double-digit ROI, similar to previous acquisitions. Possible upside includes cross-selling PCI’s differentiated design services into Celestica’s customers, Celestica better utilizing PCI’s manufacturing facilities, and supply chain synergies. Our FY22 estimates move from $6.03-billion revenue and $1.30 adj. EPS to $6.35-billion and $1.43.”

The analyst thinks the deal with Platinum Equity with PCI has the potential to change investors’ narrative around the firm.

“In the last 10 years, Celestica has deployed $938-million in capital on 6 acquisitions to expand into diversified markets,” he said. “Despite the fundamental improvement in Celestica’s composition of revenue, Celestica’s valuation has decreased from 9 times to 7 times FTM P/E [forward 12-month price-to-earnings]. The $938-million of capital deployed on acquisitions equates to 67 per cent of Celestica’s current enterprise value and 73-per-cent FCF generated over the last 10 years.”

Expecting the acquisition to be accretive to earnings per share in 2022 and the return to exceed Celestica’s weighted average cost of capital in 2023, Mr. Treiber raised his target for its shares to US$11 from US$10, maintaining a “sector perform” rating. The average target on the Street is US$9.94, according to Refinitiv data.

“While the acquisition is strategically attractive and improves the quality of Celestica’s mix, Celestica’s valuation has compressed despite similar acquisitions in the past, given sustained concerns regarding Celestica’s traditional business,” he noted.

Others making target adjustments include:

* Citi’s Jim Suva to US$8.50 from US$8 with a “sell” rating.

“We view recent demand trend favorable particularly with the JDM upside. However, our experience shows disengagement and program exit with top customers typically cause topline deleverage and stock turbulence for several quarter,” said Mr. Suva.

* Canaccord Genuity’s Robert Young to US$11.25 from US$11 with a “buy” rating.

“Celestica’s acquisition of Singapore-based PCI Limited for $306M pivots it toward higher-growth telematics, IoT and embedded systems markets and increases its exposure to diversified industries which supports the ongoing mix shift toward 60-per-cent-plus in the combined ATS and HPS businesses,” he said. “We view this as a strong positive for Celestica as its strategy to align its portfolio toward longer duration, high-margin components of the ecosystem continues to advance, offsetting the Cisco business wind-down and weakness in A&D. PCI’s specialized design business (1/3 of revenue) is also a strong complement to Celestica’s HPS (fna JDM) business as we see plenty of opportunity to cross-sell on a broader set of capabilities and end market exposure.”

* BMO Nesbitt Burns’ Thanos Moschopoulos to US$10.50 from US$10 with a “market perform” rating.

“Net, we think the deal makes sense, given that it will help further improve CLS’s revenue mix and margin profile, while providing it with exposure to new customers and complementary end markets. We remain Market Perform, but see more upside than downside to the stock, given its relative valuation,” he said.

* Scotia Capital’s Paul Steep to US$10 from US$9.25 with a “sector perform” rating.

“We anticipate that the stock will continue to remain volatile, given (1) the effect of reopening of various geographies and a normalization in material availability in the firm’s supply chain, (2) ongoing recovery in semiconductor demand leading to improved results within the capital equipment segment, and (3) new wins in ATS helping to offset pressure related to continued weakness in the Aerospace & Defense segment. Key factors we will be focused on over the next several quarters are the firm’s on-going efforts to transition to a greater weighting from its higher margin services (e.g., ATS, JDM) and integration of PCI,” said Mr. Steep.

* TD Securities’ Daniel Chan to US$11 from US$9.50 with a “hold” rating.


Though BlackBerry Ltd.’s (BB-N, BB-T) second-quarter results exceeded his expectations, CIBC World Markets analyst Todd Coupland recommends “waiting for a more attractive entry point” after it lowered its outlook for the next two quarters.

“While Q2 appears to be the low quarter for this year, the expected recovery during the second half of F2022 is expected to be modest in QNX due to automotive semiconductor shortages and Spark experiencing an extended sale cycle,” he said. “One important offset is the patent portfolio sale is now expected to be announced by November. Management indicated that negotiations had progressed to a point where a definitive agreement was highly likely. Despite that, we believe the recent rise in Blackberry’s share price due to interest from Reddit users has pushed it past its fair value given muted growth prospects.”

After the bell on Wednesday, the Canadian tech giant reported adjusted revenue of US$175-million, topping both Mr. Coupland’s US$167-million projection and the Street’s US$158-million forecast. An adjusted earnings per share loss of 6 US cents was also better than anticipated (losses of 9 US cents and 8 US cents, respectively).

“Blackberry’s disclosure is for two business units: Cybersecurity and IoT,” the analyst said. “Cybersecurity includes UEM, UES (collectively known as ‘Spark’), and emerging enterprise products. IoT includes QNX, IVY, and emerging IoT products. We expect revenue growth and related metrics are most important to creating value. Q2 should be the low point for QNX, thereafter improving in Q3 and Q4. Cybersecurity should also be up but will not likely reach its potential given the new additions to the direct sales team have yet to mature. For the second half of F2022, we expect revenue growth to be muted for this reason, in addition to the semiconductor shortage headwinds. For F2022 we expect revenue of $726-million and EPS of -$0.22 (vs. FactSet revenue at $745-million and adjusted EPS of -$0.16).”

Maintaining an “underperformer” rating, Mr. Coupland cut his target to US$10 from US$11. The average is US$8.29.

Elsewhere, TD Securities analyst Daniel Chan raised his target to US$9 from US$8.50, keeping a “reduce” recommendation.


Tourmaline Oil Corp. (TOU-T) “finds itself in the enviable position where it has complete flexibility on capital allocation,” according to Desjardins Securities analyst Justin Bouchard, pointing to “a combination of good planning and good fortune.”

On Wednesday after the bell, the Calgary-based company raised its 2021 capex guidance by $105-millionto $1.375-million and production guidance to a range of 440,000 to 445,000 barrels of oil equivalent per day. It also boosted its base quarterly dividend by a penny to 18 cents per share and announced a special dividend of 75 cents per share payable in early in the fourth quarter.

“While the special dividend clearly stole the show, TOU also bumped its base dividend, reiterated the move to lower debt levels, expressed a willingness to tactically buy back shares and increased production guidance, all with an overarching commitment to return the vast majority of FCF to shareholders,” said Mr. Bouchard.

“Over the last few years, the focus for E&P companies has shifted to FCF and capital allocation. This discussion has been largely philosophical since most producers were mired in debt coming out of 2020 and have been allocating a disproportionate share of FCF to the balance sheet. Allocating FCF is easy to talk about, but much harder to follow through on. That’s what makes [Wednesday’s] announcement so important, in our view.”

Maintaining a “buy” rating for Tourmaline shares, he hiked his target to $52 from $46, exceeding the average on the Street of $49.57.

“While many companies continue to signal what ‘might be’, TOU is actually doing it!,” he said. “If [Wednesday’s] update doesn’t wake up investors from their apathetic stance toward owning high-quality E&P companies, then nothing will. For context, at current strip prices, we see $2.3-billion of FCF in 2022 — so it’s not terribly difficult to extrapolate what’s coming down the pipe.”

Others raising their targets include:

* BMO Nesbitt Burns’ Randy Ollenberger to $50 from $41 with an “outperform” rating.

“Tourmaline is our top recommendation among the Canadian natural gas producers. The company has a strong balance sheet, a low cost structure, and an improving return-on-capital profile, while trading relatively in line with peers. We also believe that Tourmaline will continue to benefit from stronger natural gas prices going forward,” said Mr. Ollenberger.

* Raymond James’ Jeremy McCrea to $50 from $44.50 with a “strong buy” rating.

“Tourmaline continues to deliver on its promise to shareholders as it shifts focus from consolidation to FCF generation,” he said. “The special dividend and base dividend increase announced [Wednesday] should not come as a complete surprise but what was important was the narrative surrounding the shareholder friendly items. Essentially with TOU indicating it will return the ‘vast majority of FCF’ to investors annually, the commentary should stoke new interest in the name. Our Strong Buy Rating reflects our continued belief that Tourmaline is the best-in-class operator with continued operational upside which should directly translate to accelerating cash returns to shareholders. Despite the run in the stock year-to-date, valuation of the shares remains attractive with 2022 guidance pointing to a FCF yield of 18 per cent.”

* ATB Capital Markets’ Patrick O’Rourke to $55 from $50 with an “outperform” rating.

“The update provides clear guide posts for 2022 and beyond for FCF priorities with a clear focus on direct returns to shareholders,” he said. “While the TOU base dividend continues to provide a modest, but highly sustainable yield, the potential for further returns based on a prudently managed variable dividend policy provides increased appeal to yield oriented investors, without trapping the management in high dividend policy that cannot withstand commodity price pullbacks. Our updated modelling assumes nearly $6 per share in 2022e distributable cash flow to shareholders at our current (conservative relative to strip) commodity assumptions, after accounting for the increased base dividend and estimated $250-million in 2022 acquisitions. We currently forecast TOU holding a 2022 positive working capital position of $1.3-billion which compares to the peer group 2022 average D/CF of 0.9 times.”

* RBC Dominion Securities’ Michael Harvey to $46 from $44 with an “outperform” rating.

* National Bank Financial’s Dan Payne to $45 from $40 with an “outperform” rating.


Citi analyst Alexander Hacking sees Ivanhoe Mines Ltd.’s (IVN-T) Kamoa-Kakula project in the Democratic Republic of Congo as the “best new copper mine for a decade.”

However, upon initiating coverage on Thursday, he warned that its relative valuation “looks steep,” leading him to give the Vancouver-based miner a “neutral/high risk” rating.

“We see Kamoa-Kakula as one of the largest and most profitable copper mines in the world, producing 300,000 tons at $1 per pound C1 cost,” said Mr. Hacking. “IVN has significant growth optionality in a region where major miners have stepped back.”

“Citi is bullish copper seeing a multi-year demand driven cycle, with mine supply struggling to keep up.”

Though he expects Kamoa-Kakula to become “one of top-ten most profitable copper mines by 2023,” he sees Ivanhoe stock commanding a premium valuation currently and sees more value elsewhere in the sector.

“Enterprise value is US$7.5-billion and near term the company will own 130,000 tons per year of copper (40 per cent of Kamoa-Kakula Phases 1 & 2),” he said. “This is the highest EV/ton in our producing coverage and additional projects need to come through to justify the current price vs peers. NAV multiples are similar to peers, but IVN has a higher risk profile given lack of geographic diversification.”

He set a target of $9 per share. The current average on the Street is $11.50.


Freehold Royalties Ltd.’s (FRU-T) US$180-million acquisition of U.S. royalty assets in the Eagle Ford oil basin in Texas “complements the rapidly expanding U.S. royalty portfolio through a large concentrated position in the core of one of the premier light oil basins, backed by an investment-grade counterparty,” according to Desjardins Securities analyst Chris MacCulloch.

Believing the deal betters positions Freehold to “continue hiking the dividend moving into 2022,” he was one of several analysts to raise their target prices for shares of the Calgary-based company following Wednesday’s close of a $173-million equity financing associated with the acquisition.

“The transaction continues FRU’s strategy of expanding the U.S. royalty portfolio through the addition of concentrated land in the heart of the Eagle Ford basin,” said Mr. MacCulloch. “Notably, Marathon Oil is by far the largest counterparty on the newly acquired acreage and is still actively developing the assets. Production from the Eagle Ford assets is expected to average 2,500 barrels of oil equivalent per day (73-per-cent oil & liquids) in 2022, which translates into an attractive 4.9 times cash flow multiple based on US$60 per barrel WTI prices.”

“From our perspective, the company has done an excellent job constructing a top-tier U.S. royalty portfolio with diversified exposure to investment-grade counterparties, including Marathon Oil. And these high-quality counterparties excel in ESG disclosure and sustainability initiatives, particularly with respect to GHG emissions reduction targets, which should benefit FRU by extension.”

Saying he continues to see Freehold as his “favourite low-risk way to play the oil price recovery,” Mr. MacCulloch raised his target for its shares to $15 from $13.50 with a “buy” rating, seeing it “well-positioned for additional dividend increases moving into the new year.” The average target on the Street is $12.93.

“Our 2022 cash flow per share estimate increased by 14 per cent on the heels of the acquisition, which should help backstop future dividend hikes,” he said. “There is considerable scope for future dividend increases, with the 2022 strip payout moderating to the 36-per-cent level following the acquisition, which is well below the 60–80-per-cent targeted payout. Meanwhile, FRU also remains on track to extinguish net debt by year-end 2022, which provides considerable dry powder to pursue additional acquisitions.”

Others making changes include:

* CIBC World Markets’ Jamie Kubik to $14 from $13 with an “outperformer” rating

“Freehold’s acquisition in the Eagle Ford comes at attractive metrics, and will increase its U.S. exposure considerably,” said Mr. Kubik. “The Eagle Ford is now the largest piece of FRU’s portfolio, expected to contribute 18 per cent of total production to the business in 2022. We regard this transaction as appealing on a number of fronts, including an attractive acquisition metric (less than 5.0 times cash flow in 2022), exposure to a key resource play in North America, and exposure to an investment-grade operator. We consider the stock to be screening as more attractive than prior to the transaction given the relatively lean acquisition metrics.”

* BMO Nesbitt Burns’ Ray Kwan to $12 from $11 with a “market perform” rating.

“The Eagle Ford royalty acquisition, in our view, is as good as it gets: accretive, inventory rich, netback enhancing, etc., and completed at a fair price relative to Freehold’s valuation. With the favourable commodity outlook, Freehold should continue to generate a significant amount free cash flow, which we believe will be used primarily for dividend increases and additional U.S. acquisitions.,” said Mr. Kwan.

* RBC Dominion Securities’ Luke Davis to $13.50 from $12.50 with an “outperform” rating.

“Freehold’s latest acquisition positions the company as a key royalty consolidator within the U.S.. We view the deal favourably as it enhances the underlying cash generation of the broader business, exhibits meaningful per share accretion, and maintains balance sheet flexibility,” he said.

* TD Securities’ Aaron Bilkoski to $13.50 from $12.50 with a “buy” rating.


Expecting to see “strength” when it reports its third-quarter financial results in November, Stifel analyst Justin Keywood thinks it’s “time to step back in” to Knight Therapeutics Inc. (GUD-T), prompting him to raise his rating to “buy” from “hold.”

“In particular, we forecast strength in FQ3 with EBITDA of $13-million versus the street at $10-million,” he said. “Q3 will show the first full quarter contribution of Exelon (Alzheimer product) that generated $4-million of EBITDA in Q2 but only for five weeks, and we estimate a contribution of $9-million for Q3. There is also continued expected strength from Knight’s infectious disease portfolio, where certain medicines are being used to help treat COVID-19 symptoms in LATAM as other new product launches start to gain traction.

“We see downside support as well with GUD trading near a 52-week low, at 11 times 2022 EBITDA (peers at 13 times) and an active NCIB with purchases recently made at $5.15. Overall, there is a solid reward to risk trade.”

Emphasizing its “solid” balance sheet, Mr. Keywood also touted its “long-term value creation plan,” pointing to its 26-year consecutive record revenue streak.

“Knight is expected to continue to acquire and launch new products, where the streak should continue and lead to more value,” he said.

The analyst raised his target for Montreal-based company’s shares to $6.50 from $5.95. The average on the Street is $7.73.

“There is a solid reward to risk tradeoff for Knight, heading into Q3 with better-than-expected results forecasted and downside support with shares trading near a 52-week low, at 11 times EBITDA with an active NCIB near the $5 level. We see an opportunity to accumulate shares at these levels,” said Mr. Heywood.


Recent negative sentiment toward the North American cannabis industry is a “product of deferred U.S. legalization and lack of Canadian profitability,” according to CIBC World Markets analyst John Zamparo.

In a research note released Thursday, he reduced his targets for a series of stocks in his coverage universe, pointing to “elusive profitability ... modest sequential sales growth, and ongoing U.S. government gridlock, which reduces the probability of significant reform until at least 2022.”

“We believe the 25-per-cent decline as measured by sector ETFs over the past three months is the product of ongoing lack of profitability from most Canadian producers, the continued dearth of institutional investors, and the realization that U.S. legalization appears unlikely until at least next year,” he said. “We do note that the de-facto reintroduction of the SAFE Banking Act (via the National Defense Authorization Act) has a meaningful chance of passing in the U.S. Senate. This would be constructive for the space, and would represent the first meaningful legislative win for the sector. However, it would only impact sentiment. It would not permit Canadian firms to operate in the U.S. THC market, nor allow the up-listing of U.S. operators or alter onerous 280E taxation rules.”

He did, however, note valuations now appear reasonable across the sector, saying: “EV/sales valuations across our coverage are approximately two turns below median values over the past two years. We believe the achievement of profitability will begin to differentiate the sector in 2022, though among our coverage universe, we forecast only HEXO and TLRY to be profitable for the next calendar year.”

His changes include:

* Aurora Cannabis Inc. (ACB-T, “underperformer”) to $7 from $8. The average on the Street is $7.85.

* Canopy Growth Corp. (WEED-T, “neutral”) to $22 from $27. Average: $27.18.

“We have lowered our FQ2 sales and EBITDA forecasts for WEED following the CEO’s statement at a recent conference that year-over-year sales may decline in the quarter,” he said. “Since FQ2 last year, Canopy has gained $15-million-$20-million in quarterly revenue from acquisitions, implying that core revenue declined double digits year-over-year in a quarter in which stores operated unrestricted. We estimate that same-store sales were likely down 20 per cent year-over-year owing to the saturated Ontario retail environment, as well as a 3-4 percentage point decline in market share.”

* Cronos Group Inc. (CRON-Q, CRON-T, “neutral”) to US$7 from US$8.50. Average: US$6.43.

* Hexo Corp. (HEXO-T, “outperformer”) to $5 from $6. Average: $5.97.

* Organigram Holdings Inc. (OGI-T, “neutral”) to $3.50 from $4. Average: $3.84.

* Riv Capital Inc. (RIV-CN, “outperformer”) to $2.25 from $2.50. Average: $2.25.

* Tilray Inc. (TLRY-Q, TLRY-T, “neutral”) to US$14 from US$17. Average: US$16.39.


After Wednesday’s completion of its $126.7-million equity offering to fund the acquisition of two newly constructed logistics centres in Calgary, a group of analysts raised their targets for Summit Industrial Income REIT (SMU.UN-T)

They include:

* CIBC’s Dean Wilkinson target to $22.50 from 21.50 with a “neutral” rating. The current average is $22.64.

“We like SMU’s progress on executing its strategy and acknowledge the REIT’s positive growth drivers, including its development potential. However, with a current P/NAV valuation premium and an implied cap rate of 3.5 per cent, we believe these positives are largely reflected in the REIT’s stock price,” said Mr. Wilkinson.

* BMO Nesbitt Burns’ Joanne Chen to $23 from $22 with an “outperform” rating.

“Following these transactions, we expect the REIT’s leverage will improve modestly from the 33 per cent at the end of Q2/21. When combined with the REIT’s ample liquidity via its credit facilities and unencumbered asset pool, we believe SMU.UN is well positioned to continue to take advantage of further acquisition opportunities and ongoing development initiatives,” said Ms. Chen.

* Raymond James’ Brad Sturges to $23.75 from $23 with an “outperform” rating.

“Although we believe Summit’s current market valuation does reflect at least some M&A/ privatization premium, we expect Summit’s accelerating growth profile to benefit from an improved average cost of capital, improving rent growth prospects, and an expanding development pipeline focused on the GTA and Montreal, and opportunistically in Calgary,” he said.

* National Bank’s Matt Kornack to $24 from $22.50 with an “outperform” rating.

* Raymond James’ Brad Sturges to $23.75 from $23 with an “outperform” rating.


In other analyst actions:

* BMO Nesbitt Burns analyst John Gibson initiated coverage of Burlington, Ont.-based Anaergia Inc. (ANRG-T), which began trading on the Toronto Stock Exchange on June 18, with an “outperform” rating and $35 target, exceeding the $30.13 average.

“Despite its strong run, ANRG is trading at less than 3 times our 2023 EV/revenue estimate which is relatively in line with its RNG peer group,” he said.

“Given the largely booked nature of its 2022 and 2023 financial guidance, recurring revenue business model and robust project development pipeline, we believe the company’s shares hold significant upside.”

* Following its deals to acquire Achieve TMS East LLC and Achieve TMS Central LLC, Canaccord Genuity analyst Tania Gonsalves trimmed her target for shares of Toronto-based Greenbrook TMS Inc. (GTMS-T), a provider of Transcranial Magnetic Stimulation therapy, to $20 from $21.25 with a “buy” rating (unchanged). The average on the Street is $22.32.

“Traditionally, GTMS has expanded its network by organically building out new centres,” she said. “Conversely, the acquisition of Achieve TMS East and Central provides it with an already established foothold in the New England and Midwest U.S. regions, upon which it can more easily expand. For instance, the business comes with proven regional management teams, access to robust physician networks and existing contracts with key commercial payors at attractive reimbursement levels (the latter being a key barrier to geographic expansion). This significantly cuts down or eliminates the usual scale-up time before a center reaches profitability. The integration of the two companies is also expected to yield cost synergies, for instance via the sharing of certain corporate service functions. In fact, Achieve TMS East and Central are already profitable and could help accelerate GTMS’ path to FCF breakeven.”

* Canaccord Genuity analyst Joseph Vati initiated coverage of Hut 8 Mining Corp. (HUT-Q, HUT-T) with a “buy” rating and US$12 target. The average is $10.50 (Canadian).

“In our view, Hut 8 has one of the more seasoned track records across the Bitcoin mining industry, having been operating in this space since 2018,” he said. “With new management in place since December the company is now in growth mode. Given P&L valuation equivalent to peers, combined with growth catalyst of recent equity raises and access to cheap power, we like the earnings trajectory here. When also contemplating the $190MM of BTC on the balance sheet, valuation here looks attractive.”

* Seeing “strong underlying thematics and fundamentals,” Raymond James analyst Michael Glen initiated coverage of Quebec City-based H2O Innovation Inc. (HEO-X) with an “outperform” rating and $3 target. The average is $3.56.

“The business strategy for H2O can be described as going as deep as possible with each customer. From that perspective, while the WTS vertical provides a strong entry point to build and design a water treatment system with a customer, the revenue stream is lumpy and can be considered as more one-time in nature. As such, H2O is heavily focused on the aftermarket revenue streams that come post system sales which can be in the form of a service and support agreement, the sale of consumable product, and on-site operation and maintenance of the system. These adjacent / follow-on products and services offer attractive recurring revenue streams over the lifetime of the water treatment installation (i.e. 15-20 years), while also helping integrate H2O into the supply chain of each customer,” he said.

* Piper Sandler analyst Pearce Hammond cut his target for Ballard Power Systems Inc. (BLDP-Q, BLDP-T) to US$12 from US$14, maintaining a “neutral” rating. The average is US$22.87.

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