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

In response to “strong” share price performance in 2021, iA Capital Markets analyst Matthew Weekes lowered the firm’s rating for AltaGas Ltd. (ALA-T) to “buy” from “strong buy” upon assuming coverage, seeing its valuation “now more reflective of its relatively low-risk Utility/Midstream business model.”

Mr. Weekes said Wednesday’s Investor Day event highlighted the Calgary-based diversified energy infrastructure company’s “strategy of investing in long-life assets across both of its platforms to drive strong risk-adjusted returns and per share cash flow and earnings growth,” which AltaGas expects will lead to 5-7-per-cent annual dividend growth through 2026, matching Mr. Weekes’s expectation.

It is now projecting 2022 normalized earnings before interest, taxes, depreciation and amortization in a range of $1.50-1.55-billion, below both Mr. Weekes’s $1.57-billion forecast and the consensus of $1.58-billion. However, its normalized earnings per share of $1.80-1.95, exceeding expectations ($1.77 and $1.82, respectively), which he attributed to a lower expected effective tax rate.

“The normalized EBITDA guidance is essentially flat compared to our 2021 forecasts due to the sale of the U.S. Transportation and Storage business, which delivered a strong contribution of $115-million in the first quarter of 2021,” the analyst said. “Adjusting for the asset sale, 2022 normalized EBITDA guidance represents an 8-per-cent year-over-year increase over our 2021 forecast.”

Mr. Weekes called its $995-million capital budget for 2022 a “disciplined” plan “focused on Utilities, optimization of Midstream assets.”

“The Utilities spend includes the Accelerated Pipe Replacement (ARP) Programs, system optimizations, new customer connections, and various transmission projects,” he said. “The Midstream spend is focused on optimizing and improving environmental performance of existing assets. ALA expects its capital plan to be self-funded with potential debt reduction if the Company is able to monetize its interest in the Mountain Valley Pipeline (MVP).”

After adjusting his projections to increase contributions from its Utilities segment while lowering his Midstream estimate, Mr. Weekes cut the firm’s target for AltaGas shares to $29 from $30. The average on the Street is $30.37.

Others making changes include:

* Scotia Capital’s Robert Hope to $30 from $29 with a “sector outperform” rating.

“AltaGas’ first Investor Day in numerous years highlighted to us that the company is no longer a turnaround story, but is on strong financial footing and should generate strong growth,” said Mr. Hope. “Our 2022/2023 EPS estimates increase by 12 per cent/9 per cent to reflect a stronger than expected growth outlook that drives our target to $30 from $29. The rate base of its utilities is expected to grow 8-10 per cent, which would be above its peers. Also, we were previously not giving its Midstream business enough credit for the strong outlook for volumes. The 6-per-cent dividend increase announced earlier in December plus the new 5-7-per-cent dividend CAGR out to 2026 is supported by a long term stable growth outlook. We believe AltaGas’ shares are not properly reflecting the value of its utility assets.”

* BMO’s Ben Pham to $34 from $30.50 with an “outperform” rating.

“ALA delivered a series of crisp presentations at its investor day, the net of which reinforces our view that ALA is only getting better with age particularly with respect to the growth profile, balance sheet, existing asset returns and now ESG,” he said. “As this vintage gains greater appreciation by the market, we anticipate material valuation expansion (13 times P/E vs. utility at 18.5 times and pipeline at 14 times). Combined with a 35-per-cent potential total return to our new $34 target (up from $30.50), we are maintaining our Outperform rating and Top Pick Designation.”

* CIBC’s Robert Catellier to $30 from $29 with an “outperformer” rating.


Expecting a pair of headwinds to turn to tailwinds in 2022, Wells Fargo analyst Colin Langan raised Magna International Inc. (MGA-N, MG-T) to “overweight” from “equal weight” on Thursday, predicting “a multi-year margin recovery story [is] coming.”

“Firstly, 52 per cent of MGA sales are with VW, GM, Ford & Mercedes; collectively their sales are expected to be down 9 per cent in 2021 in a flat global market,” he said. “We also suspect that some of MGA’s most profitable vehicles are with these customers. Not surprisingly, MGA screens among the best of suppliers on customer, geographic & platform mix into 2022 as their key customers recover. Secondly, MGA was impacted by rising commodities, particularly in its metals-heavy BES division. However, commodities have dipped down over the last 2 months, and if sustained, could provide an upside surprise.”

Citing “higher global production in 2024-25 and positive geographic mix in 2022-23, partially offset by fx headwinds.,” Mr. Langan raised his earnings per share projections from 2022 through 2025 to US$7.25, US$9.30, US$10.10 and US$10.50, respectively, from US$6.80, US$9.05, US$9.20 and US$9.90.

That led him to increase his target for Magna shares to US$93 from US$84. The average is US$97.88.

“MGA is a solid operator historically, but adjusted EBIT margins have fallen from 8.5 per cent in 2017 to our estimate of 5.3 per cent in 2021,” said Mr. Langan. “We expect margins to recover to 8.3 per cent by 2023 and fully recover by 2024. This reflects the benefit from the global production recovery, easing commodities, and scale on BEV & ADAS investments. More importantly, we estimate MGA will generate $1.8-billion in FCF in 2022, implying an 8-per-cent FCF yield. This can be used for buybacks or value-added acquisitions.”

“Company earnings are the next potential catalyst. We also see the potential for share buybacks or value-add M&A. We also will look out for updates on BEV wins and potential new assembly customers.”

Elsewhere, Barclays’ Brian Johnson raised his target to US$80 from US$72 with an “equal weight” recommendation.


Citing recent share price weakness, iA Capital Markets analyst Elias Foscolos raised his rating for Prairiesky Royalty Ltd. (PSK-T) to “strong buy” from “buy.”

The upgrade following the closing of its $230-million equity financing with proceeds being used to help acquire $728-million in royalty production and fee simple lands from Heritage Royalty Trust, which Mr. Foscolos called “an ideal fit.”

“As this is an asset transaction, $728-million of additional tax pools will be added to PSK which will reduce future taxes,” he said. “In 2021, the Company will save $20-million in cash taxes (approximately 3 per cent of deal value immediately). This transaction will also add top-tier royalty payors and create a more contiguous block of royalty lands, which should strengthen PSK’s value proposition to oil and gas producers.”

“The acquisition has a number of positive attributes including increasing production per share, increasing oil weighting, providing a substantial increase in tax pools, and additionally adding 1.9 million acres of predominantly fee simple lands. Although the acquisition is largely financed with debt, we believe that de-leveraging will be rapid and by year-end 2022 debt/EBITDA will migrate to slightly over 1.1 times. Along with modelling the acquisition, we have lowered our commodity price forecast for 2022.”

Concurrently, Mr. Foscolos lowered his commodity price outlook for 2022 by almost 5 per cent due to weaker oil and gas prices brought on by the emergence of the Omicron variant.

However, he maintained a $19 target for PrairieSky shares, which is 2 cents below the consensus on the Street.

“Relatively conservative investors that are seeking to either maintain or increase exposure to the oil and gas sector, but that may be intimidated by the volatility seen in commodity markets over the past several years, should consider investing in PrairieSky,” said Mr. Foscolos. “Unlike conventional oil and gas producers, royalty companies, including PSK, offer diversification across multiple E&P companies and multiple plays at a much lower risk than an individual oil and gas company. Additionally, PrairieSky differentiates itself from the rest of the Canadian royalty peers by having the highest quality royalty lands, fee simple lands that have the potential to create royalty revenues in perpetuity without capital outlays.”

Others making target changes include:

* Canaccord Genuity’s Anthony Petrucci to $20 from $19 with a “buy” rating.

“The acquisition is highly accretive for PSK, increasing our CFPS [cash flow per share] estimates by 14 per cent in 2022,” Mr. Petrucci said. “The bulk of the acreage acquired (1.7 million acres) was fee simple land, bringing corporate fee simple acreage to nearly 10 million acres, with over 18 million royalty acres in total. In our view, the company’s dominant land position should continue to reward shareholders long into the future.”

* Raymond James’ Jeremy McCrea to $22.50 from $22 with an “outperform” rating.

“The acquisition of 1.9 million royalty acres (90-per-cent mineral title) from Heritage Royalty strengthens the PrairieSky business in almost all respects,” he said. “Not only is the acquisition 17-per-cent accretive to FFO per share, but it adds multiple decades of inventory that we believe has not been actively licensed over the past several years. With this acquisition we believe the risk/reward for PSK shares becomes even more compelling, especially in the context of a muted share price reaction so far and the organic production growth likely to emerge on the assets.”


Equity analysts at Wells Fargo thinks the recovery trade for North American midstream energy companies is “mostly over,” suggesting “a mix of quality and beta is more prudent from here”

“For 2021, Midstream (as measured by the AMNA) is up 27 per cent compared to 25 per cent for the S&P 500, fueled by the recovery in crude demand due to the re-opening of global economies post the COVID shutdowns,” they said in a research report released Thursday. While we expect a continued increase in global crude demand, most of the recovery is reflected in prices. So while the play for 2021 was to own crude beta over defensive, fee-based names, the outlook for 2022 is more nuanced.

“The environment for midstream is still constructive: oil prices in the $70/Bbl range, natural gas in the mid-$3′s/Mcf, volumes growing modestly. But there are risks including potential COVID variants impacting a recovery, and even a small possibility of a recession. On the flip side, it’s possible inflation and supply/demand imbalances could push crude prices higher than we model, driving upside to our forecast. Therefore, we’d re-position toward a mix of quality and risk (beta) to hedge against these unknowns. We believe the outperformers will be those companies that can deliver an above average total cash return and/or will benefit from a specific theme (e.g. LNG, NGL fundamentals, basin growth, etc). We forecast a median sector total return of 28 per cent driven by a combination of a robust yield, modest dividend growth, growing buybacks and some multiple expansion.”

With that view, analyst Praneeth Satish downgraded Keyera Corp. (KEY-T) to “equal weight” from “overweight” after reducing his earnings and free cash flow for 2021 and 2022 to reflect latest commodity price forecast. His target for Keyera shares slid to $29 from $34. The average on the Street is $34.56.

“The rating change is driven by (1) strong relative performance (KEY has delivered above average performance among Canadian midstream companies year-to-date), (2) minimal share buybacks on the horizon in the near-term (versus other Canadian peers that are starting to initiate buyback programs), and (3) a full valuation (double-digit EV/EBITDA multiple despite meaningful volume and marketing exposure),” he said.

Mr. Satish also lowered his Enbridge Inc. (ENB-T) to $54 from $57, keeping an “overweight” recommendation. The average is $55.25.


After another “challenging” quarter, Canaccord Genuity analyst Luke Hannan thinks “there are clearly more questions than answers at this point” for Freshlocal Solutions Inc. (LOCL-T), leading him to lower his recommendation to “hold” from “buy.”

“Even though the current share price does not reflect any credit for the eGMS [eGrocery Management Solution] business (we could even argue it also does not fully reflect the value of the grocery delivery business), we still view it as unlikely that the shares will respond positively until the company can demonstrate the growth and margin potential of its eGMS offering, which is taking longer than we and, evidently, management had originally anticipated,” he said. “As a result, we are downgrading our rating.”

On Wednesday, the Vancouver-based company, which provides end-to-end grocery ecommerce solutions, reported consolidated revenue for its fourth quarter of $29-million, down 9 per cent year-over-year and well bellow Mr. Hannan’s $35-million forecast. An EBITDA loss of $7.4-million also missed his forecast of a $2.5-million loss.

“Similar to Goodfood’s Q4/F21 results, customers eating at home less frequently led to fewer active customers in the eGrocery segment,” the analyst said. “Investors would be more understanding of this dynamic had spend scaled accordingly with revenue, but instead, SG&A increased by 11 percentage points year-over-year (to 51.0 per cent of consolidated revenues), with the company having invested in headcount ahead of material revenue recognition from its eGMS business. On the latter, we note management also fell short of its ‘five customers signed up before end of calendar 2021′ target.”

“While the company’s recent financing provides some breathing room, even if we include in a rough estimate for the sale proceeds of non-core assets, we estimate this buys Freshlocal 4-6 quarters before requiring additional financing. We could be proven wrong by the higher-margin eGMS revenues growing faster than our now revised expectations or by the company’s new focus on cash generation, but we’re comfortable waiting for both of these developments to play out before changing our mind.”

Mr. Hannan dropped his target for shares of Freshlocal, which announced the appointment of Simon Cairns as CEO, to 85 cents from $6.50. The current average is $4.55.


CAE Inc. (CAE-T) is “a key player in the aviation and defence sectors,” said Canaccord Genuity analyst Matthew Lee, seeing its long-term drivers remaining “largely intact.”

“In our view, CAE is in the ideal position to take advantage of long-term airline industry tailwinds given its exceptional market position, reputation in training, and international footprint,” he said upon assuming coverage of the Montreal-based company. “The company is an established leader in the sector commanding nearly 30 per cent of its addressable civil aviation training market. On the defence side, CAE is the second-largest training operator in the U.S. and has a meaningful presence across the world operating in over 40 countries.”

“CAE has substantial long-term tailwinds in both its aviation and defence sectors. On the aviation side, we believe that as international travel returns, demand for training will accelerate, augmented by early pilot retirements and increased regulations. On the defence front, CAE should benefit from increasing budgets, elevated demand for virtual simulation, and its ability to win significant contracts both in the US and internationally.”

Mr. Lee said he’s now forecasting a “conservative ramp” in both revenues and margins, noting: " Given the uncertainty around training spending in both the airline and defence segments, we have slightly moderated our revenue recovery forecasts for F23 (March 2023 year-end). In terms of profitability, we expect gradual margin expansion as civil aviation utilization improves while the defence segment’s ability to provision higher-margin contracts drives increased productivity.”

He trimmed the firm’s target for CAE shares to $36 from $40, keeping a “hold” recommendation. The current average is $40.40.

“CAE shares have fallen substantially from post-COVID highs reached early in the year,” the analyst said. “With that said, shares still trade at 13.8 times EV/NTM EBITDA, which is in line with the company’s three-year average and remains a premium to its peers. While we are quite constructive on the long-term outlook for CAE, we believe that the current valuation adequately incorporates a full recovery and may underestimate the longevity of pandemic impacts on near-medium term training programs.”


In other analyst actions:

* With its shares now trading approximately 20 per cent below its 2021 highs, Evercore ISI analyst Mark Mahaney upgraded Shopify Inc. (SHOP-N, SHOP-T) to “outperform” from “in line” with a US$1,770 target. The average on the Street is US$1,672.16.

“We are upgrading SHOP to Outperform with a $1770 PT based on four key opinions: 1) The Stock is Dislocated; 2) This is a High Quality Fundamentals Asset; 3) This is a High Quality Asset in terms of Growth Opportunities and Option Value; & 4) Evidence of Momentum in the “Arming of the Rebels,” he said.

* CIBC World Markets analyst Paul Holden downgraded Manulife Financial Corp. (MFC-T) to “underperformer” from “neutral” with a $25.50 target, down from $27 and below the $30.58 average.

“Population statistics and permanent withdrawals from the local pension scheme show that Hong Kong’s population is shrinking,” he said. “We expect lower growth from Hong Kong over the medium term, reducing the premium multiple applied to the Asia business. Our price target is lowered from $27.00 to $25.50. We are downgrading our rating from Neutral to Underperformer effective December 15as the implied return to our new revised target is below the average for our coverage universe (7 per cent vs. 15 per cent).”

* CIBC’s Robert Bek upgraded Cineplex Inc. (CGX-T) to “outperformer” from “neutral with a $19 target, up from $16 and above the $17.79 average.

“Though the Ontario Court awarded sizeable $1.24-billion damages to Cineplex we are only capturing 1/4 of that, recognizing the many unknowns yet to be seen, including the outcome of an appeal, the viability of Cineworld to pay, and the enforceability of the ultimate court decision,” he said.

“Net-net, we are upgrading our rating given our assessment of what the final outcome will be, as we expect Cineplex to positively benefit from the courtdriven transfer of wealth from Cineworld. However, we apply a big 75-per-cent haircut to the face value of court award as it currently stands. Given the myriad of potential outcomes, the stock should still be viewed as an opportunity for risk-tolerant investors at this point.”

* CIBC’s Nik Priebe initiated coverage of First National Financial Corp. (FN-T) with a “neutral” rating and $44 target, below the $47.30 average.

“We view First National as an attractive, capital-light mortgage originator, offering a leading dividend yield and a positive earnings growth outlook. Absent any multiple re-rating, we believe that the company should be capable of delivering a low double-digit total return. However, with the stock trading above long-term averages and mortgage market activity closer to a peak than a trough, we take a conservative stance,” he said.

* TD Securities analyst Sean Steuart raised Boralex Inc. (BLX-T) to “action list buy” from “buy” with a $46 target, down from $50 and below the $46.73 average.

* Truist Securities analyst Beth Reed initiated coverage of Lululemon Athletica Inc. (LULU-Q) with a “hold” rating and US$435 target. The average is US$469.34.

* Morgan Stanley analyst Josh Baer cut his target for Lightspeed Commerce Inc. (LSPD-N, LSPD-T) to US$54 from US$93 with an “equal weight” rating. The average is US$102.64.

“We think LSPD is well positioned within the complex SMB/midmarket merchant category to address a large TAM (after incorporating recent growth vectors like the Lightspeed Payments opportunity, selling additional product modules, and entering new geographies),” he said. “An intense competitive market and our significant negative model revisions in our model ... keep us equal-weight.

“The main driver of our negative estimate revisions in our model stem from more modest assumptions around GTV growth in FY23 and FY24 (tied directly to location additions), with our FY24 gross transaction volume (GTV) now $92-billion vs. $99-billion prior. More significantly, we take a more modest approach to modeling payments attach, with gross payment volume (GPV) as a percentage of GTV at 25 per cent vs. 29 per cent prior, leading to GPV of $22 billion vs. $29 billion prior in FY24. This results in FY24 revenue down 14 per cent vs. our old model. Our more modest approach to payments attach continues in our long-term model, and we also adjust our longer-term assumptions around location additions and Software ARPU lower, below the growth we expect near-term. We do have Lightspeed reaching 20-per-cent EBITDA margins at 50-per-cent payments attach now, in line with the company’s long-term target, but not until 2028/2029.”

* RBC Dominion Securities analyst Wayne Lam trimmed his target for Argonaut Gold Inc. (AR-T) to $3.50 from $4.25, keeping an “outperform” recommendation, after it raised its budget for its Magino mine property in Northern Ontario by 57 per cent. The average is $3.94.

“The capex review at Magino represents a reset in expectations amidst rising inflation being experienced industry-wide,” he said. “Given the size of the capital overrun, we estimate a funding shortfall of up to $125-million and believe the recent pullback in shares could open the door to opportunistic M&A given near-term production growth and long-term exploration upside at Magino.”

* Saying the “middle-innings economy looks good” for Brookfield Asset Management Inc. (BAM-N, BAM.A-T), Scotia Capital’s Mario Saric raised his target to US$70 from US$67 with a “sector outperform” rating. The average is US$66.71.

“Historically, we have highlighted BAM outperforms the S&P and U.S. Financials during flattening yield curves (Scotia Economics 2022 estimate = 30 basis points of it) with 58-per-cent and 100-per-cent frequency,” he said. “New analysis in this report shows BAM’s periods of highest outperformance (again vs. S&P and U.S. Financials) is during periods of Decelerating Real GDP and Core Inflation (check and check), rising nominal and real yields (check and check). Also, we show BAM’s outperformance is better at a 2-5-per-cent US10YR Treasury vs. sub-2 per cent (again, check). Bottom-line, BAM is an attractive mid-to-later cycle economic play, which we think fits 2022 nicely.”

* National Bank Financial analyst Cameron Doerksen raised his targets for Canadian National Railway Co. (CNR-T, “sector perform”) to $170 from $153 and Canadian Pacific Railway Ltd. (CP-T, “sector perform”) to $98 from $97. The averages are $159 and $103.62, respectively.

* In response to a maiden resource estimate for its Copper World deposit in Arizona, Scotia Capital analyst Orest Wowkodaw raised his Hudbay Minerals Inc. (HBM-T) target to $11.50 from $11 with a “sector outperform” rating. The average is $12.96.

“In our view, Copper World has the potential to supplant Rosemont as the company’s next major development project given the significantly easier expected permitting pathway (Copper World is solely located on private land). Overall, we view the update as positive for HBM shares,” he said.

* CIBC’s Bryce Adams lowered his target for Lundin Gold Inc. (LUG-T) to $14 from $15, keeping an “outperformer” rating. The average is $14.08.

* Canaccord Genuity’s Matthew Lee raised his target for Roots Inc. (ROOT-T) to $3.75 from $3.50 with a “hold” rating. The average is $4.58.

* In response to an asset update and 2022 guidance timeline on Wednesday, Canaccord Genuity’s Carey MacRury lowered his Nomad Royalty Company Ltd. (NSR-T) to $17 from $18, maintaining a “buy” rating, while Raymond James’ Brian MacArthur trimmed his target to $17 from $17.50 with an “outperform” rating. The average is $16.88.

“We believe royalty/streaming companies like Nomad offer equity investors exposure to precious metals prices while mitigating downside risk given limited exposure to operating and capital costs,” said Mr. MacArthur. “At the same time, upside optionality exists through exploration potential. Nomad’s royalty/ streaming portfolio offers meaningful growth over the next few years. In addition, Nomad pays an annual dividend of 20 cents per share, representing around 2-per-cent dividend yield. Given Nomad’s high margin business model, mid-term growth profile, longer-term growth optionality, dividend yield and current valuation, we rate the shares Outperform.”

* With its acquisition of two operation, maintenance and management (O&M) services firms in the U.S. Northeast, Canaccord Genuity’s Yuri Lynk increased his H2O Innovation Inc. (HEO-X) target to $3.75 from $3.25, exceeding the $3.51 average, with a “buy” rating, while Acumen Capital’s Nick Corcoran bumped up his target to $3.50 from $3.25 with a “buy” recommendation and Raymond James’ Michael Glen moved his target to $3.75 from $3.50 with an “outperform” rating.

“As a water pure-play, we believe HEO is well positioned to benefit from multiple secular growth drivers such as population growth and a large water infrastructure deficit,” said Mr. Lynk. “The U.S. Infrastructure and Jobs Act, which sets aside US$50-billion over five years for water, could drive double-digit organic growth in 2023 and beyond.”

* RBC Dominion Securities analyst Irene Nattel raised his Aritzia Inc. (ATZ-T) target to $52 from $44 with a “sector perform” rating. The average is $51.38.

* TD Securities analyst Aaron MacNeil increased his target for Greenlane Renewables Inc. (GRN-T) to $2.75 from $2.50 with a “speculative buy” recommendation. The average is $2.97.

* BMO analyst Mike Murphy raised his Parex Resources Inc. (PXT-T) target to $33 from $31 with an “outpeform” rating. The average is $34.50.

“We recently had the opportunity to host in-person investor meetings with senior management of Parex. As the company addresses previous shareholder concerns through the delivery of its new strategy (as outlined in its updated corporate presentation), we expect a positive re-rating of the shares over the medium term,” he said.

* After lowering his financial estimates due to the recent shutdown of its Burnaby refinery, BMO analyst Peter Sklar lowered his target for Parkland Corp. (PKI-T) shares to $47, below the $50.93 average, from $52 with an “outperform” rating.

* Stifel analyst Cody Kwong bumped up his Tamarack Valley Energy Ltd. (TVE-T) target to $6 from $5.75, keeping a “buy” rating, while ATB Capital Markets’ Patrick O’Rourke raised his target to $5.25 from $4.75 with an “outperform” rating and National Bank’s Dan Payne moved his target to $5.50 from $5 with an “outperform” rating. The average is $5.31.

“Tamarack Valley continues to strategically and efficiently consolidate its position in the Clearwater play, this time through the acquisition of privateco, Crestwynd Exploration, for total consideration of $184.5-million,” he said. “Not only will this add 4,500 boe/d and $90-million of operating cash flow in 2022, it also increases its high quality inventory by 209 (153.7 net) locations. Further, the Company acquires these assets at an attractive valuation of 2.1x forward operating cash flow while maintaining a clean balance sheet with the deal being executed by a 50/50 share/cash split.”

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