Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Benoit Poirier cut his second-quarter forecast for Canadian National Railway Co. (CNR-T) on Thursday, citing “weak volumes, crop uncertainties, lack of visibility on an intermodal rebound, a tough year-ago yield comp, external developments (strike, wildfires, interswitching law) and CN’s elevated headcount.”
Seeing “softness” in intermodal and forest products as well as the impact of the Canadian wildfires, Mr. Poirier reduced his volume expectation to a drop of 7.3 per cent from his initial forecast of a decline of 4.4. per cent. That led him to cut his revenue and adjusted fully diluted earnings per share estimates to $4.071-billion and $1.73, respectively, from $4.321-billion and $1.92.
“Following stellar 1Q results, CN increased its 2023 adjusted fully diluted EPS guidance to mid-single-digit growth (up from low single digits) vs $7.46 in 2022 (implies $7.83 assuming 5-per-cent growth),” he said. “While management was clear that the increased guidance did not provide a positive read-through for the rest of the year, freight conditions have since weakened and we believe that several external developments out of the company’s control (strike at ports, wildfires, implementation of the new Canadian interswitching law and uncertainty surrounding the grain crop) will cause CN to reduce its guidance. We now forecast $1.73 (down from $1.92) for the quarter and $7.41 for the year (from $7.81, or a 0.2-per-cent year-over-year decrease).
“Comments by several members of CN’s management team at investor conferences in May following the company’s investor day indicate that CN’s EPS guidance assumes a consumer products rebound in 2H23 (slight sequential improvement in 3Q and recovery in 4Q). We do not see any visible signs of improvement at this point and now forecast that CN will end the year with intermodal carloads down 13.4 per cent and total RTMs down 2.6 per cent. CN will be facing a very tough revenue comparison in 2H (yield was 22 per cent in 3Q22 and 15 per cent in 4Q22), as last year benefited from a surcharge boost for additional storage and services caused by supply chain disruptions (shortage of drayage capacity and lack of warehouse space at Montreal and Toronto). Combined with the softer volumes at the ports and increased truck competition, we see a tough road ahead.”
While he lowered his 2023 and 2024 estimates based on his weak volume expectation as well management’s comments, Mr. Poirier moved his valuation for CN shares to his 2025 projections, leading him to increase his target to $184 from $180 with a “buy” recommendation (unchanged). The average on the Street is $165.93, according to Refinitiv data.
“Do not let short-term weakness scare you away — we like CN and CPKC over the next four years as both offer shareholder value creation opportunities with limited downside and are beacons of safety in a volatile world,” he said. “In our view, CN’s shares now offer a slightly greater long-term return (12.3 per cent vs 12.0-per-cent four-year CAGR), but CP’s shares likely have more upside potential given the growth opportunities in Mexico.
“We derive a $256 per share target for 2028, which represents a 12.3-per-cent four-year CAGR over today’s stock price. Following the positive comments from CN management at the investor day, our increased confidence in the changes implemented by Ms Robinson, the progress in the company’s operations and the appointment of Mr. Harris as COO, we believe the company is now in the right hands.”
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A pair of equity analysts upgraded Information Services Corp. (ISV-T) following the late Wednesday announcement of an extension of its Master Service Agreement with the Province of Saskatchewan to provide registry services.
Under the new deal, the Regina-based company will maintain exclusive rights to operate the Saskatchewan registries until at least 2053. ISC will pay $150-million upfront with five annual installments of $30-million beginning in July 2024.
“This is clearly a very positive development,” said Raymond James analyst Stephen Boland, who raised his recommendation to “outperform” from “market perform” previously.
“While the current MSA wasn’t scheduled to expire until 2033, there was always uncertainty as to what would happen after that date. While no RFP was held, we suspect there would have been a number of interested buyers for this asset. That said, ISV has operated the Registry very successfully for 20+ years and there was possibly unwillingness on the Crown’s part to entrust the running of the business to another third party. Regardless, we believe the terms appear extremely fair to ISV and the stock should react very positively to this announcement.”
Mr. Boland raised his target for ISC shares to $30, above the $28.35 average on the Street, from $27.
Elsewhere, CIBC World Markets’ Scott Fletcher upgraded the company’s shares to “outperformer” from “neutral” with a $31 target, rising from $26.
“The deal tilts ISV’s revenue mix back above 50-per-cent registry, a positive development given the low-risk and high cash flow profile of the registry assets,” he said. “While M&A will be limited while leverage remains elevated in the wake of the deal, we view the transaction as an effective use of capital given the margin and cash flow accretion. Given ISV’s discounted valuation relative to historical levels and the improved operating profile that results from the deal, we are upgrading ISV.”:
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Badger Infrastructure Solutions Ltd. (BDGI-T) is poised to outperform, according to Canaccord Genuity analyst Yuri Lynk, who thinks its current valuation does not reflect its “compelling growth prospects.”
“The company is enjoying strong macro tailwinds: U.S. nonresidential construction spending is up 17 per cent year-to-date through May while ‘safe-digging’ continues to gain momentum,” he said. “Meanwhile, management is proving out its ability to capitalize on a strong market as evidenced by Q1/2023 revenue increasing 25 per cent year-over-year, EPS going to 8 cents from (15 cents) in Q1/2022. Despite this, the stock’s returns are up 6 per cent year-to-date, underperforming the 7-per-cent increase in the S&P/TSX Industrials Index. Therefore, we would be adding to positions ahead of the release of what we expect to be strong Q2/2023 results in August.”
Seeing the macroeconomic backdrop remaining “supportive,” Mr. Lynk increased his second-quarter EBITDA forecast to $39-million from $36-million, above the consensus projection of $35-million and up 51 per cent year-over-year. He’s now projecting a 20-per-cent increase in revenue, up from 11 per cent previously, believing “utilization improvements and rate increases will drive a 13-per-cent increase year-over-year in average monthly revenue per truck (RPT).”
“In our view, these favourable demand tailwinds combined with Badger’s selfhelp initiatives could imply upside to our 2024 estimates,” he said. “We expect EBITDA to increase from $100 million (17.5-per-cent margin) in 2022 to $151 million (22.0-per-cent margin) in 2023 and $178 million in 2024 (23.1-per-cent margin). Margin expansion reflects better absorption of the expanded sales force, fleet optimization efforts, and expansion into new regions and markets. We conservatively assume RPT increases only 11 per cent year-over-year in 2023 to $44,400 and remains largely flat in 2024. Thus far, the improvements in RPT have been driven by volume and utilization. We believe management is now in a better position to take price, which it discussed doing extensively on the Q1/2023 call. Higher rates could drive upside to our revenue and margin estimates, all else equal.”
Mr. Lynk raised his target for Badger shares to $44 from $40, maintaining a “buy” rating. The average target on the Street is $36.97.
“Badger trades at 13 times 2023 estimated EPS vs. its long-term average of 20 times and a loose group of comps trading at 21 times,” he said. “Our 2023 and 2024 EPS forecasts of $1.57 and $2.11 imply 197-per-cent and 34-per-cent annual growth rates, making Badger looking inexpensive on a PEG basis.”
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National Bank Financial analyst Zachary Evershed expects Mattr Infratech’s (MATR-T) recent commitment for two new facilities for its Connection Technologies segment to drive both “growth and efficiencies.”
On June 28, the Toronto-based company, previously known as Shawcor Ltd., announced plans to relocate its Shawflex business in Rexdale, Ont., to a larger site in nearby Vaughan and its DSG-Canusa business to Fairfield, Ohio from Loveland, Ohio. Capital expenditures for these changes are expected to represent approximately $35-million across 2023 and 2024.
“At efficient utilization levels and with initial equipment installations, the two facilities are expected to generate $50-million in incremental annual revenue (vs. $313.1-million from Connection Technologies in 2022 at 18.9-per-cent EBITDA margins), back-filling the remainder of the $150-million in expected revenues at the maturity of identified organic capex initiatives in concert with the $100-million expected from the two planned Composite Technologies facilities,” said Mr. Evershed. “The required capex for the two facilities is anticipated to total $35-million across 2023 and 2024. Recall that MATR has earmarked $160-180-million of total capex for 2023, with $70-million dedicated to PPS and $10-15-million for maintenance, and 2024e’s capex budget will remain elevated with another $50-70 million required to wrap up the disclosed growth projects.”
In a research report introducing his 2025 financial estimates, the analyst said he expects Mattr to “continue to hit its stride as restructurings taken over the last 36 months and new investments to be undertaken over the next 24 will set a solid foundation for the company.”
“The current management team has taken considerable measures to tidy up the business, divesting energy or oil & gas related businesses (nine pipe coating facility exits, eight divestitures and closures, with PPS under strategic review and expected to be sold imminently), all while cleaning up the balance sheet, having reduced long-term debt by $247-million and leverage from the high-3s to 0.5 times as at Q1/23,” he added.
While he cut his second-quarter 2023 earnings per share projection by almost 43 per cent (to 16 cents from 27 cents) due to share-based compensation, Mr. Evershed sees 2025 benefitting a “from the enhanced growth and efficiencies at both remaining segments, resulting in stronger FCF generation.”
“It still only captures a portion of the $150 million in annual run-rate revenues expected to be generated by the ramp up of four facilities across Composite Tech and Connection Tech, leaving ample runway ahead,” he said.
Reiterating an “outperform” recommendation for Mattr shares, he hiked his target to $24.50 from $18. The average on the Street is currently $19.29.
“We anticipate that post the 2023-2024 capex cycle, the company’s margin profile will step up as production efficiencies improve, higher margin products account for a greater proportion of sales and fixed cost absorption ratchets higher,” he said. “The combination of lower capex and higher margins allows for an enhanced conversion of EBITDA to FCF after leases and interest, and as such, we are comfortable raising the multiples used in our sum-of-parts valuation methodology as we roll forward to 2025.”
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National Bank Financial analyst Rupert Merer lowered his second-quarter forecast for TransAlta Renewables Inc. (RNW-T) after reducing his generation forecast due to “weak wind” in its Alberta, Ontario and U.S. portfolios.
“Availability issues at Windrise persisted into Q2, but should be offset partially by liquidated damages to be paid by Siemens Energy,” he added.
Mr. Merer is now estimating adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $120-million, down from $130-million and below the consensus projection of $125-billion. His full-year EBITDA and cash available for dividends (CAFD) forecasts fell to $502-million and $231-million, respectively, from $518-million and $242-million.
“RNW’s various development initiatives are mostly on track,” he said. “Construction on its Northern Goldfields project should reach completion in Q3E (was Q2E), its Mount Keith transmission expansion should be completed towards the end of the year and the Kent Hills rehabilitation project is already partially energized, with the majority of the turbines to be energized throughout the second half of the year. This growth is good but not enough to move the needle relative to the CAFD headwinds.”
“Without new growth, RNW is set to face up to $55-million more in cash taxes in 2024 vs. 2021 in Canada and Australia. Combined with a step-down in revenues from its Southern Cross facilities in 2024, our payout estimates for the year exceed 120 per cent, putting the dividend in question. Its stretched payout limits RNW’s organic growth potential and there is little visibility in the way of acquisitions or potential drop-downs from TA (TSX: TA, $14 target, “outperform” rating, Analyst: Patrick Kenny). With a challenged outlook at RNW, TA could look to a buyout of the minority interest in RNW, if it can make the numbers work (RNW and TA trade at 7.4 times and 6.0 times EV/EBITDA on 2024E, respectively).”
Maintaining his “sector perform” rating for TransAlta Renewables shares, Mr. Merer trimmed his target to $12.50 from $13. The average on the Street is $13.27.
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RBC Dominion Securities analyst Sam Crittenden warns falling base metals prices will be significant headwind to second-quarter financial results for North American producers.
“Copper and the equities remain range bound as demand concerns from slowing global growth and weak economic indicators from China are offset by hopes of stimulus and some positive signals from the physical market,” he said. “In the near term, we could be stuck in this $3.75/lb range for a few months as we await signs of improvement in China, which may not come until after the slow summer construction period (June-August), and the lagged impact of stimulus.
“This volatility can create opportunities, and we expect equity valuations to be supported the positive multi-year story for copper and M&A speculation in the sector .... North American base metals equities were down 5 per cent in Q2/2023 vs. copper down 7 per cent and valuations remain close to historical averages at 0.8 times NAVPS [net asset value per share], 6.2 times 2023 estimated EBITDA, and 8 per cent 2023 estimated FCF at spot prices. Industrial metals were down sharply in Q2 (copper down 7 per cent, zinc down 19 per cent, nickel down 14 per cent), offset somewhat by gold up 5 per cent and silver up per cent.”
In a report released Thursday in which he made reductions to his second-quarter, full-year 2023 and 2024 earnings projections, Mr. Crittenden reaffirmed First Quantum Minerals Ltd. (FM-T) as his “preferred name” in the sector.
“First Quantum remains a go-to copper name and the quality and scale of its operations could ultimately make it a takeout candidate, in our view, Ivanhoe’s Kamoa-Kakula mine is evolving into one of the world’s best copper mines, Capstone has strong growth into 2024, while we believe Champion Iron Ore can re-rate as they ramp up to 15Mtpa by August,” he said.
Mr. Crittenden did not make rating or target price adjustments. They are currently:
* Capstone Copper Corp. (CS-T) with an “outperform” rating and $8 target. The average on the Street is $7.88.
Analyst: “Capstone may have another soft quarter similar to Q1 as Mantos Blancos remains in ramp up mode, and construction continues at Mantoverde, which could put pressure on full year guidance.”
* Champion Iron Ltd. (CIA-T) with an “outperform” rating and $8 target. Average: $7.59.
Analyst: “For Champion, we expect Q2 sales to be weaker as wildfires forced a 2-week rail shutdown; however, the focus remains on the ramp up to 15Mtpa by August.”
* First Quantum Minerals Ltd. (FM-T) with an “outperform” rating and $42 target. Average: $35.20.
Analyst: “We expect a neutral quarter from First Quantum as a rebound at Cobre Panama post the shutdown in Q1 is offset by weaker production at Sentinel where heavy rain in Q1 likely had a lingering impact. We could see modest negative tweaks to guidance after a slow start to the year.”
* Freeport-McMoRan Inc. (FCX-N) with a “sector perform” rating and US$50 target. Average: US$45.76.
Analyst: “Despite lower copper prices, Freeport could have a strong quarter as Grasberg sales increase (post the accounting change in Q1) and shipments appeared strong, while robust gold and moly prices continue to benefit cash costs.”
* HudBay Minerals Inc. (HBM-T) with an “outperform” rating and $10 target. Average: $9.94.
Analyst: “Hudbay’s production should improve in Peru post the protest-related disruptions in Q1; however, the higher grades at Pampacancha aren’t expected until H2.”
* Ivanhoe Minerals Ltd. (IVN-T) with an “outperform” rating and $17 target. Average: $16.02.
Analyst: “Ivanhoe pre-released strong Q2 production that was in line with estimates, so we don’t expect much of reaction to Q2 financial results.”
* Labrador Iron Ore Royalty Corp. (LIF-T) with a “sector perform” rating and $40 target. Average: $35.29.
Analyst: “We expect a negative reaction to LIF’s Q2 earnings, which we expect to be slightly weaker q/q due to operational interruptions at IOC stemming from regional forest fires, which shut down the mine for ~2 weeks and impacted the rail line to the port.”
* Lundin Mining Corp. (LUN-T) with a “sector perform” rating and $12 target. Average: $11.19.
Analyst: “For Lundin, we expect a neutral quarter, as we don’t expect any operational surprises relative to conservative guidance. We expect a technical report with closing of the Caserones deal mid-July, which could be a slight negative if it proves more conservative than current estimates.”
* Nexa Resources SA (NEXA-N) with a “sector perform” rating and US$8 target. Average: US$6.44.
Analyst: “We could see a neutral reaction to Nexa’s Q2 results, as a challenging zinc environment is partially offset by increasing production at Aripuana. Outside of the quarter, Nexa announced that the Atacocha operation has been suspended due to local protestors blocking mine access. Given the presence of protestors, we could see other more minor impacts over Q2. Otherwise, the continued focus for Nexa is on brownfield exploration and the ongoing ramp up of Aripuana.”
* Warrior Met Coal Inc. (HCC-N) with a “sector perform” rating and US$45 target. Average: US$44.50.
Analyst: “We expect a positive reaction from Warrior shares to Q2 results as we think the return of unionized workers can drive higher production and sales, partially offsetting the relatively weaker met coal price environment. Additionally, we could also see upside to our sales estimates depending on the stockpiled inventory drawdown over the quarter, similar to Q1.”
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In other analyst actions:
* BoA’s John Murphy upgraded Magna International Inc. (MGA-N, MG-T) to “buy” from “neutral” and raised his price objective to US$85 from US$65. The average target on the Street is US$66.06.
* Ahead of the July 11 release of its first-quarter 2024 financial results, BoA’s Alice Xiao downgraded Aritzia Inc. (ATZ-T) to “underperform” from “neutral” and dropped her objective to $30 from $47, below the $48.13 average on the Street.
* UBS’ Jon Windham raised Canadian Solar Inc. (CSIQ-Q) to “buy” from “neutral” with a US$50 target, up from US$48 but below the US$50.53 average.
* With its acquisition of an additional royalty on the Tres Quebradas lithium project, Raymond James’ Brian MacArthur raised his Lithium Royalty Corp. (LIRC-T) target to $20 from $19.50 with an “outperform” rating. The average is $20.75.
“We believe royalty companies like LIRC offer equity investors diversified exposure to commodity prices while mitigating downside risk given limited exposure to operating and capital costs,” he said. “At the same time, upside optionality exists through exploration and asset expansion potential. The large projected growth in lithium demand to supply EVs is likely to require substantial new lithium supply and numerous lithium companies exist with potential projects. LIRC’s royalty portfolio is focused on lithium assets with lower jurisdictional risk, higher grade (and therefore lower costs), longer duration, and backed by some strong operators.”
* Mr. MacArthur trimmed his Champion Iron Ltd. (CIA-T) target to $8 from $8.25 with an “outperform” rating. The average is $7.59.
“We believe Champion offers investors good exposure to premium iron ore through its Bloom Lake asset, which is a long-life, lower-cost asset producing, high-grade iron ore concentrate (66-per-cent Fe) located in Quebec, a lower-risk jurisdiction,” he said. “In addition, we believe Champion has growth through its Bloom Lake Phase 2 expansion project at favourable capital costs, given the previous owners spent significant capital. Given Champion’s exposure to premium iron ore (which we believe should trade at a premium given structural changes in the iron ore industry), high-quality asset, growth potential, and low jurisdictional risk, we rate the shares Outperform.
* H.C. Wainwright’s Mike Colonnese increased his target for Hive Blockchain Technologies Ltd. (HIVE-Q, HIVE-X) to US$7 from US$5 with a “buy” rating. The average is US$5.91.
David Leeder