Inside the Market’s roundup of some of today’s key analyst actions
In reaction to recent unit price weakness, Canaccord Genuity analyst Mark Rothschild raised his recommendation for Automotive Properties Real Estate Investment Trust (APR.UN-T) to “buy” from “hold” on Thursday.
The move comes a day after the Toronto-based REIT announced it has entered into multiple agreements to purchase six automotive dealership properties in Quebec from separate third parties for an aggregate price of approximately $98.5-million.
“Though the operator is not disclosed, management indicated that the transaction will improve the REIT’s tenant diversification, implying that the REIT’s exposure to Dilawri will decline,” said Mr. Rothschild. “Though Dilawri is a strong operator with a healthy balance sheet, increased tenant diversification will likely be viewed positively. The portfolio includes four properties in the Greater Montreal Area in Laval and St. Eustache and two properties in Sorel-Tracy, roughly an hour north of Montreal. Including the transaction, APR has completed $165.7 million of acquisitions year-to-date.
“Upon closing, which is expected in January 2023, the tenants at the properties are expected to sign triple-net leases with APR, with a weighted average term to maturity of 16 years. The lease agreements will have contractual annual rent escalations in place that are linked to Quebec CPI, which was 6.8 per cent in October 2022, with a floor of 1.5 per cent.”
With interest rates continuing to rise, the analyst expects an “acceleration” in Automotive Properties’ acquisition activity in the new year.
“Given the strengthening of automotive dealership industry fundamentals over the past few years, external growth for APR has slowed as owners and operators have benefitted from the improved profitability of the industry,” said Mr. Rothschild. “However, with the rise in short-term interest rates in 2022, we expect more operators to consider divesting the real estate underlying the dealership.”
He maintained a target price of $12.50 for the REIT’s units. The average is $13.08.
“Over the past three months, APR’s unit price has returned negative 12.7 per cent, materially underperforming its retail REIT peers that returned, on average, 11.5 per cent,” the analyst said. “As a result, the REIT’s units currently trade at an implied cap rate of 7.3 per cent, or a 3.3-per-cent discount to NAV, compared to its peers that trade at a premium to NAV of 5.1 per cent.”
Elsewhere, Raymond James’ Brad Sturges trimmed his target to $13.25 from $13.75, keeping an “outperform” rating.
“We’ve seen this script before with APR in previous years (particularly before the global pandemic): a larger acquisition announced right near the end of the year,” said Mr. Sturges. “Overall, we view the pending transaction as a positive development for APR, with the REIT resuming its external acquisition growth by increasing its exposure to the GMA market, and by further diversifying its operating dealership tenant profile. As previously suggested, we believe that a rising financing cost environment for operating dealership groups and normalizing Canadian operating dealership profits as supply chain disruptions dissipate could be possible positive catalysts to drive additional external acquisition growth opportunities for APR heading into the new year.”
In a research report titled This too shall pass, Canaccord Genuity analyst George Gianarikas said investors should be patient with Tesla Inc. (TSLA-Q) and its chief executive officer Elon Musk despite the recent headline-grabbing turbulence, expecting a share price revival in the new year.
“Once again, we find ourselves at a point in time where Tesla sentiment is cosmically bad, the shareholder base is distraught, and Elon Musk is doing Elon Musk things. Some of this is Twitter-related drama, much is not,” he said. “Tesla’s near-term fundamentals remain fairly ‘meh’ — China EV sales data has stayed decidedly mixed, the company has enacted several price cuts/new incentives in multiple markets, and Elon Musk has made multiple statements on Twitter complaining about the economy (particularly the U.S.). 4Q22 deliveries are certainly uncertain. However, we have been here before and see this as a moment in time to properly discern signal from noise. While the economic backdrop could remain treacherous, we see multiple green shoots for Tesla over the next 6-12 months that should help the stock, particularly from current levels. Long term, Tesla remains the ‘sustainability behemoth’ with an improving lead in EVs and participation in several tangential markets, including solar, energy storage, vehicle autonomy, and most recently robotics — businesses that add duration and durability to the Tesla growth story.
“How bad is sentiment? This is the worst drawdown in Tesla’s history as a publicly traded company.”
Short sellers gain nearly $304-billion after tumble in U.S. stocks
Despite that grim view, Mr. Gianarikas reiterated his view of Tesla stock as “a relative value in tech.”
“We remain steadfast in our view that Tesla is not an EV company, but a tech company that makes EVs,” he said. “Despite the stock’s performance, Tesla’s innovation curve appears to be accelerating, a stark contrast to other large tech companies whose incremental product updates appear stagnant at best. With that in mind, the valuation table ... is truly extraordinary. Even with our 2023 EPS estimate adjustment, Tesla’s stock is now cheaper on a P/E basis relative to large cap tech on 2023, 2024 and 2025 estimated EPS. The projected growth CAGR in revenue and EPS from 2022-2025 is also 3 times larger.”
“To capture the uncertainty around 4Q22 deliveries and potential macroeconomic headwinds in 2023,” he lowered his estimates for the 2023 but kept his 2024 and 2025 projections intact. That led him to cut his target for Tesla shares to US$275 from US$304, reiterating a “buy” recommendation. The average target on the Street is US$253.32.
“In an ironic twist, the company most aggressively pursuing the elimination of fossil fuels has seemingly delivered a lump of coal to investors over the holidays with its recent stock performance — resulting in Exxon Mobile surpassing it in market cap,” Mr. Gianarikas said. “Remarkably, the current performance drawdown is the worst in Tesla’s stock history — even with a headspinning decade of volatility. While current fundamentals appear fairly uncertain, we look to potential green shoots in 2023 and sustained extraordinary growth beyond to help improve equity performance. We are adjusting our estimates and price target to ... but — with the current pressure and some patience — trust this holiday coal will turn into a long-term performance diamond.”
Scotia Capital analyst Orest Wowkodaw thinks Ivanhoe Electric Inc. (IE-A, IE-T) warrants a premium valuation, citing “the company’s impressive management track record, proprietary ‘Typhoon’ 3D exploration technology, and focus on U.S.-based critical minerals.”
Despite acknowledging “the relatively early- and exploration-stage nature” of the company, he initiated coverage with a “sector outperform” recommendation in a research report released Thursday.
“In our view, potential undue weakness in the shares due to a near-term expiration of initial public offering (IPO) lock-ups could represent an attractive entry point for investors,” he said.
Mr. Wowkodaw’s bullish stance was based largely on the company’s “highly aligned management team with proven track record.” He noted founder and chairman Robert Friedland, who owns a 10.1-per-cent stake, has “an exceptional track record of building shareholder value through his previous leadership in the discovery and development of several world-class mining assets, including Kamoa-Kakula in the Democratic Republic of the Congo, Oyu Tolgoi in Mongolia, Platreef in South Africa, and Voisey’s Bay in Canada.”
The analyst also emphasized Ivanhoe’s “attractive optionality” to U.S.-based critical minerals.
“IE is currently advancing two flagship mineral assets in the United States, namely the Santa Cruz Cu deposit located in central Arizona and the Tintic Cu-Au-Ag district located in central Utah near Bingham Canyon, where three large porphyry targets have been identified to date,” said Mr. Wowkodaw. “With total measured, indicated, and inferred resources of 523 Mt grading 0.92-per-cent Cu, Santa Cruz is believed to be the third-largest undeveloped Cu deposit in mainland United States. An updated Santa Cruz resource estimate and a maiden preliminary economic assessment (PEA) for an ESG-friendly, underground oxide-focused mine located on private land are anticipated to be released during 1H/23. IE’s exploration and corporate development strategy includes the utilization and leverage of its proprietary Typhoon 3D geophysical survey technology, which provides significantly deeper penetration and better resolution than conventional geophysical instrumentation.”
He set a target of US$14 per share. The current average is US$13.50.
“We estimate that IE shares are currently trading at a P/ NAV(10%) of 1.30 times and at an in situ EV/CuEq lb of resource (Santa Cruz only) of 10 cents per pound versus the Cu development peers under our coverage at 0.69 times and 12 cents per pound, respectively,” said Mr. Wowkodaw. “We anticipate IE shares to trade at a significant premium to other copper developers, given Mr. Friedland’s exceptional track record, the company’s proprietary exploration technology, and the focus on U.S.-based critical minerals. We anticipate several near-term catalysts.”
Raymond James analyst Brian MacArthur raised his financial forecast for Teck Resources Ltd. (TECK.B-T) following the sale of the assets and liabilities of the Quintette steelmaking coal mine in north-eastern British Columbia to a subsidiary of Conuma Resources Ltd..
Under the deal announced Monday, the Tumbler Ridge, B.C.-based Conuma will pay $120-million in cash in staged payments over the next 36 months, and an ongoing 25-per-cent net profits interest royalty, first payable after Conuma recovers its investment in Quintette.
With the sale and to “reflect higher coal prices given market conditions,” Mr. MacArthur bumped his fourth-quarter earnings per share estimate to $1.32 from 81 cents. His full-year 2022 and 2023 projections increased to $9.30 and $4.94, respectively, from $8.79 and $4.28 previously.
That led him to raise his target for Teck shares to $56 from $51 with an “outperform” rating (unchanged). The average on the Street is $53.74.
“We believe Teck offers good exposure to coal, copper, and zinc. We also expect significant growth in copper with the start up of QB2,” he said.
Tenaz Energy Corp.’s (TNZ-T) acquisition of a private company with offshore upstream and midstream assets in the Dutch North Sea “offers exposure to a highly desirable gas market and fits with the teams past experience while providing opportunities to expand in a region with a consistent operating environment and strong regulation,” according to Haywood Securities analyst Christopher Jones.
Shares of the Calgary-based company jumped 6 per cent on Wednesday following the announcement, which sees it gain an 8.4-per-cent working interest in nine producing offshore licenses that have net natural gas production of 5 million cubic feet per day. Tenaz has also acquired positions in five non-producing licenses that provide oil and gas “developed upside interest.”
“The acquisition fits the Company’s strategy in terms of both geography, asset type, and includes the potential for follow-on consolidation opportunities to expand the Company’s presence in the region, including additional deals that would provide an operating presence in other assets in NW Europe,” said Mr. Jones. “We also like this deal because of its structure (effectively no money out the door), as well as exposure to TTF pricing, which we think is highly desirable.”
“While the deal is small in terms of production, the asset set punches above its weight-class due to its TTF exposure. Management expects the acquired assets to generate annual fund flows of $23-million (82 cents per share), 80 per cent of which is FCF and on a pro-forma basis, European gas represents about a third of the Company’s production mix but is expected to contribute over 75 per cent of 2023 funds flow. Finally, a key piece in the attractiveness of the deal is the structure. Consideration for the acquisition will be in the form of the assumption of future decommissioning liabilities estimated at $16.9-million (undiscounted).”
After raising his cash flow projections, Mr. Jones raised his target for Tenaz shares, which are down 34.4 per cent year-to-date, to $4 from $3.25, reiterating a “buy” rating. The average is $4.50.
“With the Junior E&P model challenged with respect to capital markets relevancy, the new team has flagged its extensive track record of value creation and public market outperformance and will strive to replicate prior success in acquiring and exploiting underinvested assets with a long-term goal of creating a growing and sustainable international oil and gas Company, focused on strong returns on capital, top-tier ESG metrics, and free cash flow generation,” the analyst said. “Proceeds from the share issuance and FCF from the Company’s current operating assets in western Canada will provide management the financial flexibility to pursue a transformative acquisition where it can put its expertise to work.”
In other analyst actions:
* RBC Dominion Securities started Brookfield Asset Management Ltd. (BAM-N, BAM-T) with an “outperform” rating and US$35 target. The average is US$38.25.
* National Bank’s Michael Parkin increased his target for Iamgold Corp. (IMG-T) to $3.75 from $2.50 with a “sector perform” rating. The average on the Street is $3.22.
* TD Securities’ Aaron MacNeil raised his Nano One Materials Corp. (NANO-T) target by $1 to $6, matching the average, with a “speculative buy” rating.
* Baird’s Colin Sebastian lowered his target for Shopify Inc. (SHOP-N, SHOP-T) to US$45 from US$50, keeping an “outperform” rating. The average is US$40.84.