Inside the Market’s roundup of some of today’s key analyst actions
Canadian National Railway Co. (CNR-T) is now “too good to ignore,” according to RBC Dominion Securities analyst Walter Spracklin.
In a research report released Thursday, he upgraded his recommendation for CN shares to “outperform” from “sector perform” previously, citing its “impressive growth story (in the near, medium, and long term), solid efficiency gains, and sustainable pricing.”
“Our prior investment thesis for CN was based on the view that the strong benefits associated with the CN story were appropriately reflected in valuation,” said Mr. Spracklin. “And while the stock’s recent decline from December highs above $170 are making valuation somewhat more attractive (stock now dipping below $158), the key driver to our upgrade is based on the following key factors: 1) unparalleled growth opportunities in the near, medium, and long term harnessed under CEO Tracy Robinson’s new leadership; 2) strong operating efficiency gains under COO Ed Harris; and 3) solid pricing trends that we believe are sustainable. Moreover, we see a catalyst coming in the form of (in our view) strong Q1 results + CN’s Investor Day in early May.”
The analyst expects CN to outperform from its U.S. peers on a volume basis through the remainder of 2023, pointing to “solid” trends in bulk. He also thinks it can leverage its Prince Rupert and Halifax terminals to drive " further (notably Intermodal) volume outperformance” over the longer term, seeing upside to the Street’s expectations.”
“CNR’s performance metrics have been trending consistently very well, with freight car velocity more than 200 car miles per day 2023 year-to-date, a positive in our view, setting the stage for solid operating performance going forward,” he said. “We believe the meaningful improvement in velocity and operations during the last year has opened new capacity (at no cost) onto CN’s network, providing a platform for growth.”
Maintaining a 2023 earnings per share estimate of $8.15, Mr. Spracklin raised his 2024 forecast to $9.19 from $8.95 to reflect “an increase in our Intermodal growth rate assumptions to reflect the early stages of the meaningful growth opportunity we see out of Prince Rupert and Halifax.”
That led him to increase his target for CN shares to $184 from $161. The average target on the Street is $158.71, according to Refinitiv data.
“We upgrade CN to Outperform (from Sector Perform) today on the view that a number of key drivers to the CN story are turning out to be even better than anticipated (and in our view not fully reflected in the shares),” he concluded.
" Our target multiple increases to 20 times (from 18 times) on 2024 estimates, well ahead of U.S. peers to better reflect the aforementioned long-term organic growth opportunity as well as CN’s improved operating performance. This valuation still represents a discount to CP (on an apples-to-apples basis), which we value at (an implied) 22 times on 2024 EPS.”
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Following “mixed” fourth-quarter 2023 results, National Bank analyst John Shao warned D2L Inc. (DTOL-T) is likely to see some near-term “softness,” however he said his positive long-term of the Toronto-based cloud-based learning software has not changed, citing his growth and profitability potential as well as a “strong” balance sheet and “reasonable” valuation.
On Tuesday after the bell, D2L reported revenue for the quarter of $42.7-million, up 3 per cent year-over-year but below both Mr. Shao’s $43.6-million estimate and the consensus forecast on the Street of $43.2-million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $0.4-million beat expectations (losses of $1.7-million and $1.8-million, respectively).
“The slower growth this quarter was the result of macroeconomic uncertainties that partially slowed down its bookings last year,” the analyst said. “That said, based on the current bookings and deal activities, the Management is pointing to accelerated growth in H2. In terms of profitability, we’d note this quarter marked an important milestone of D2L returning to profitability and the breakeven point actually happened earlier than expected. The outlook of consistent profitability when coupled with a cash balance of more than $110-million would not only mean a minimum balance sheet risk but also provide lots of levers for D2L to accelerate its growth in the future. From a capital allocation perspective, we’d also note the Management’s tone on M&A has softened with a plan to augment its internal development with tuck-in acquisitions.”
Mr. Shao called the company’s return to profitability “a successful turnaround,” attributing the result largely to cost reductions. After reaching the breakeven point earlier than expected, he now sees D2L “on track to generate consistent profitability throughout F2024.”
“That view when coupled with a cash balance of more than $110-million would suggest a minimum balance sheet risk,” he added.
However, he made modest trims to his fiscal 2024 sales and EBITDA estimates after the company’s guidance fell below his expectations, leading him to trim his target for D2L shares by $1 to $9 with an “outperform” rating. The average on the Street is $10.14.
“Looking out, we expect hybrid learning to continue to drive organic growth beyond the near term and D2L is set to benefit from that trend as the education space is embracing new technology to replace the legacy ones,” said Mr. Shao.
Elsewhere, other analysts making target changes include:
* RBC’s Maxim Matushansky to $13 from $14 with an “outperform” rating.
“D2L announced new FY24E guidance that was below consensus, but maintained its FY25E guidance given its confidence in recent bookings and near-term visibility into a robust demand environment across its segments. D2L is executing on its strategy of shifting back to profitability and is on track for break-even in FY24,” said Mr. Matushansky.
* BMO’s Thanos Moschopoulos to $8.50 from $7 with a “market perform” rating.
“We remain Market Perform on D2L following Q4/23 results—which were in line on subscription revenue and a beat on EBITDA, while FY2024 guidance was light. We’ve trimmed our FY2024/25 estimates. We see limited room for further multiple compression, but think that better sales execution, and/or visibility towards a more attractive EBITDA valuation (such as if D2L remains on track relative to its FY2025 targets) will be needed in order for the stock to work,” he said.
* Raymond James’ Brian Peterson to $10 from $8 with an “outperform” rating.
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WSP Global Inc. (WSP-T) was able to expand its presence in Australia with an “attractive bolt-on” acquisition of Calibre Professional Services for $250-million, said Stifel analyst Ian Gillies.
“The acquisition strategically expands on Golder’s presence in Australia, adding talent in rail, infrastructure, rehabilitation, renewables and mining,” he said. “Moreover, we believe WSP is now the largest engineering firm in Australia post this acquisition.”
“The addition of Calibre’s 800 professionals will further expand WSP’s existing mining platform of 6,000 employees. In our view, WSP is well positioned with the expanded mining platform to seize significant opportunities in sustainability services related to mine closure and rehabilitation as well as water management. Recall, environmental service offerings typically carry the highest margin. For reference, environmental accounted for 20 per cent of revenue for APAC in 2022 and 28 per cent on a consolidated level, thus the acquisition of Calibre should allow some catch up in this sector for the region.”
The deal led Mr. Gillies to raise his 2023 revenue and EBITDA estimates by 0.9 per cent and 0.6 per cent, respectively. However, his earnings per share projection slid to $6.39 from $6.62 based on higher interest and tax costs.
Maintaining a “buy” rating, he trimmed his target to $181 from $185. The average is $191.69.
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Desjardins Securities analyst Frederic Tremblay said he views “electrification as the most significant evolution, or dare we say revolution, in decades for the transportation sector.”
“Electric vehicles (EVs) are not only a decarbonization play, they are also a fast-developing onshoring story as North America looks to be in the driver’s seat through the establishment of a local supply chain,” he said. “Growing EV adoption is expected to support significant demand for batteries and the materials they contain for years to come. So far, global demand has been fulfilled by a few countries, with China playing a large role in the midstream and downstream portions of the supply chain. But, with security of supply in mind, the U.S. and Canada are aggressively rolling out programs that contribute to an unprecedented level of domestic activity in mining, processing and manufacturing.”
In a research report Thursday titled Charged up for the road ahead, Mr. Tremblay initiated coverage of two companies that he thinks “provide investors with exposure to some of Canada’s most exciting lithium projects and, therefore, to the development of North America’s EV/battery supply chain.”
He gave a “buy-speculative” rating to Sudbury, Ont.-based Frontier Lithium Inc. (FL-X), calling it “an upcoming producer of lithium concentrate with a growing hard rock resource that boasts one of the best grades in North America.”
“FL’s 100-per-cent-owned PAK project in northwest Ontario is one of the highest-grade hard rock lithium resources in North America (M&I 1.62 per cent),” he said. “Drilling recently expanded the resource and exploration is continuing, with sights set on a 100mt exploration target. With construction of an electric powerline underway, a further derisking event would be the announcement of an all-season road, especially if it involves financial support from the government. The latter would be a win-win situation given the strategic importance of PAK for the province’s EV/critical materials strategy.”
“We believe the upcoming PFS, potential government support announcement(s) and potential offtakes/partnerships could drive a valuation re-rate.”
He set a target of $3.75 per share. The current average on the Street is $4.35.
Mr. Tremblay gave Brisbane, Australia-based Sayona Mining Ltd. (SYA-ASX) a “buy-above average risk” recommendation with a A$0.30 target.
“SYA is one of the most advanced lithium players in North America, thanks to its August 2021 purchase and March 2023 production restart of the brownfield NAL project in Quebec,” he said. “We expect emphasis over the next few years at NAL to be on ramping up production to optimize the quantities of concentrate available for third-party sales (outside of an existing offtake agreement in a price range that is below current market prices) before SYA leverages a carbonate plant that was partially completed (approximately 50 per cent) on site by prior owners. Beyond NAL, we are excited about: (1) the high-grade Moblan project becoming SYA’s second producing asset in the mid-term; (2) resource expansion upside; and (3) upcoming PFS results for Moblan and lithium carbonate at NAL.”
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Calling its open-pit Silver Sand project in Bolivia “a world-class low-cost development opportunity,” Eight Capital analyst Felix Shafigullin initiated coverage of New Pacific Metals Corp. (NUAG-T) with a “buy” recommendation on Thursday.
“Silver Sand ranks among the top undeveloped silver projects in the world,” he said. ”The company envisions Silver Sand as a conventional contractor-operated project, which would enable flexibility with regard to the mining equipment fleet size and allow NUAG to reduce initial capex. The project’s total capex requirements were estimated at a relatively low US$328-million (US$308-million in initial capex plus US$20-million in sustaining capex) in the Silver Sand Preliminary Economic Assessment (PEA) study released in January 2023. We incorporate the results of the PEA and estimate average annual silver production of 12 Moz over a 15-year mine life at an all-in sustaining cost (AISC) of approximately US$10 per ounce, which is low relative to the AISC of the comparable open-pit silver development projects in Latin America.”
Mr. Shafigullin also touted the potential of its silver-gold Carangas project, also in Bolivia, calling it “the next big thing” ahead of the release of its maiden mineral resource estimate (MRE) and preliminary economic assessment later this year.
“We see potential for Carangas to become an open-pit operation that substantially exceeds Silver Sand in scale,” he said. “Based on the drill results released to date, we estimate the near-surface silver-rich zone at Carangas to contain 140 Moz AgEq. We treat this silver zone material as an estimate of the mineral inventory at the project. This estimate does not include the mineralization within the deeper gold zone that we believe could host substantial mineral inventory upside based on the drill results at depth. Given the comments by NUAG’s management that the resource tonnage at Carangas could be more than double that at Silver Sand, we view our Carangas mineral inventory estimate as a conservative estimate of the project’s potential MRE.”
The analyst set a target of $5 for shares of the Vancouver-based company, exceeding the average on the Street by 12 cents.
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In other analyst actions:
* BMO’s Tamy Chen cut her AutoCanada Inc. (ACQ-T) target to $25 from $28, keeping a “market perform” rating. The average target on the Street is $35.97.
“Our recent survey of Ontario used dealers suggests the market has held steady, but the near-term outlook appears skewed to the downside,” said Ms. Chen. “Of respondents almost 60 per cent indicated that over the past month, more potential buyers are leaving without making a purchase, largely as a result of higher rates. Thus, the outlook for ACQ is still too cloudy for us to get more favourable. If the Bank of Canada begins signaling that rate cuts are on the horizon, we would consider a review our thesis.”
* Following reductions to the firm’s oil and natural gas price projections, Credit Suisse’s William Janela lowered his targets for Canadian Natural Resources Ltd. (CNQ-T, “neutral”) to $90 from $93, Cenovus Energy Inc. (CVE-T, “outperform”) to $31 from $33 and Suncor Energy Inc. (SU-T, “outperform”) to $56 from $60. The averages are $91.70, $32.23 and $53.44, respectively.
* Scotia Capital’s Orest Wowkodaw raised his Ero Copper Corp. (ERO-T) target to $32 from $30 with a “sector outperform” rating. The average is $24.68.
“Ero released better-than-anticipated updated five-year operating guidance for its Brazilian asset base, resulting in a net 4-PER-CENT increase to our corporate 8% NAVPS,” said Mr. Wowkodaw. “Perhaps most impressive, the company’s major growth initiatives remain on schedule and on budget, highlighted by the planned start-up of the Tucumã Cu project in H2/24. Overall, we view the update as positive for the shares.
“We rate ERO shares Sector Outperform based on valuation, a strong medium-term Cu growth profile, a low-risk balance sheet, and meaningful exploration upside.”
* BMO’s Ben Pham increased his Hydro One Ltd. (H-T) target to $42 from $40 with an “outperform” rating. The average is $38.39.
“Bottom Line: We hosted investor meetings with Hydro One’s David Lebeter (President, CEO and COO) and Chris Lopez (CFO), the net of which reaffirmed the company’s low-risk profile (99% regulated), upside potential to EPS guidance, and ability to self-fund capex. Following the investor meetings and taking note of the market’s increasing shift to defensive low-beta stocks, we are maintaining our Outperform rating and boosting our target,” said Mr. Pham.
* TD Securities’ Greg Barnes raised his Ivanhoe Mines Ltd. (IVN-T) target to $17 from $15 with a “buy” rating. The average is $14.96.
* Piper Sandler’s Charles Neivert cut his Lithium Americas Corp. (LAC-N, LAC-T) target to US$33 from US$36 with an “overweight” rating. The average is US$36.61.
* CIBC World Markets’ Mark Petrie bumped his target for North West Company Inc. (NWC-T) to $39 from $37 with a “neutral” rating. Other changes include: TD Securities’ Michael Van Aelst to $41 from $39 with a “hold” rating and BMO’s Stephen MacLeod to $41 from $40 with a “market perform” rating.. The average is $39.25.
“North West reported better-than-expected Q4/22 results but reiterated that the elimination of pandemic-related government support payments are expected to lead to Q1/23 headwinds before comps begin to ease in Q2/23,” said Mr. MacLeod. “Management remains optimistic on the medium-term outlook, in light of expected government transfer payments and infrastructure investment in Indigenous communities; however, earnings visibility remains low due to ongoing inflationary pressures, labour shortages, and supply chain disruptions. We rate the stock Market Perform but think NWC could appeal to income-oriented investors (4.1-per-cent yield).”
* BMO’s Stephen MacLeod raised his target for Roots Corp. (ROOT-T) to $3.50 from $3.25, above the $3.13 average, with a “market perform” rating.
“While Q4 results were better-than-expected, they reflected the impact of a weakening economic backdrop. DTC sales declined 10.9 per cent (above our negative 16.1-per-cent forecast), negatively impacted by lower consumer spending and increased promotional activity (also weighed on GM),” he said. “Sales trends stabilized (although remained negative) through Q4, and this has continued into Q1. Margin headwinds expected to continue through H1/23. Expect higher H1 inventory levels, but 2/3 is composed of ‘core’ categories that can be held for next season. Roots is focused on promotional discipline and investments to support growth and product innovation.”
* BMO’s Andrew Mikitchook raised his Skeena Resources Ltd. (SKE-T) target to $16, above the $15.94 average, from $15 with an “outperform” rating.
* Following a dividend cut stemming from its strategic review, Raymond James’ Brad Sturges reduced his Slate Office REIT (SOT.UN-T) target to $3.25, below the $3.89 average, from $4.25 with a “market perform” rating, while National Bank’s Matt Kornack cut his target to $2.75 from $4.25 with a “sector perform” rating.
“SOT’s distribution adjustment following its strategic review is prudent in light of more challenging financing conditions, particularly for office assets and a desire to maintain more financial flexibility while going through the process of dealing with near-term maturities,” said Mr. Kornack. “The rise in underlying government bond yields has been compounded by increasing risk premiums reflected in wider spreads. Asset pricing at the moment is not overly constructive for disposition program with buyers currently looking opportunistically at office properties and vehicles. We have taken our target down materially to reflect this reality as we are applying a larger discount on a lower NAV.”
* CIBC’s Allison Carson raised her Victoria Gold Corp. (VGCX-T) target to $10.50 from $10 with a “neutral” rating. The average is $15.88.
David Leeder