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

Scotia Capital analyst Konark Gupta said he came away from Canadian National Railway Co.’s (CNR-T) Investor Day “more impressed than in the past 10 years by the re-energized people, assets and strategy.”

Calling Wednesday’s event the “first opportunity for the investment community to see the ‘New CN’,” he raved about new CEO Tracy Robinson’s “endeavours,” COO Ed Harris’s “simple philosophy” and its “Chicago advantage” brought by the Elgin, Joliet and Eastern Railway (EJ&E).

He now sees CN going “back to the basics with the future in mind.”

“Management likes to call what CNR is doing as scheduled railroading, rather than precision scheduled railroad (PSR), focusing on safety, car velocity and customer service,” said Mr. Gupta. “The company is managing top-line growth and operations to drive bottom-line growth, instead of managing the operating ratio (OR). Presentations from various groups during the two-day event clearly suggest that the team is working together toward the same goal, which means that CNR is neither creating overcapacity in anticipation of volumes nor overselling capacity to win market share. The company seems to be striking the right balance as the CEO, operations, sales & marketing, finance and IT are much more in sync now than before. Mr. Harris and his colleagues, Patrick Whitehead (SVP Network Operations; 30-year experience; joined CNR in 2021) and Derek Taylor (SVP Transportation; 23-year experience; joined CNR in 2000), are focused on various KPIs around network performance and customer service.”

The analyst said management‘s new long-term outlook was “more promising” than both his expectations and the consensus forecast on the Street, leading him to increase his 2024 and 2025 earnings per share projections by 2 per cent and 3 per cent, respectively.

“Our debut 2026 EPS estimate implies a CAGR [compound annual growth rate] near the low-end of CNR’s target, but it would actually be near the mid-point if we align our 2023E EPS and FX assumptions with the company’s views,” he said.

Maintaining his “sector perform” recommendation based on a relative return basis, Mr. Gupta raised his target for CN shares to $172 from $169. The average target on the Street is $161.79, according to Refinitiv data.

“We view CNR as a solid long-term core holding. If it achieves long-term targets, we would expect upside to $200 to $235 in three years (8-13-per-cent annual return), based on the stock’s 10-year average forward P/E of 19.5 times,” he said.

“We like CNR as a long-term growth compounder with a strong competitive moat, including its unique three-coast network and exclusive access to deep-water ports on the west and east coasts of Canada with excess capacity or greenfield potential. It also offers highly defensive attributes, strongest balance sheet among peers, attractive shareholder returns, and ESG leadership. The company is regaining its footing under the renewed leadership of new CEO, COO and CMO who are aspiring to accelerate earnings growth over the next four years. However, we are neutral on the stock on a relative return basis and due to its wider-than-normal valuation premium over U.S. comps.”


After a “relatively uneventful” first-quarter, TD Securities analyst Menno Hulshof thinks Vermilion Energy Inc.’s (VET-T) operational and macro outlook has “the potential to improve dramatically into year-end.”

After the bell on Wednesday, the Calgary-based company reported quarterly production of 82,445 barrels of oil equivalent per day, down 4 per cent from the previous quarter but 1.9 per cent above the Street’s expectation of 80,900 boe/d. Funds from operations per share fell 7 per cent to $1.48, missing the consensus estimate by 3 cents.

“Although VET continues to represent deep value (2024E strip FCF yield of 27 per cent vs. peers at 14 per cent), it currently lacks the operating momentum and visibility to merit a Buy rating, in our view,” said Mr. Hulshof.

Keeping a “hold” recommendation, he cut his target for Vermilion shares to $19 from $21., remaining below the $26.88 average.

Others making changes include:

* Stifel’s Cody Kwong to $31 from $37 with a “buy” rating.

“In a quarter with numerous moving parts (Corrib acquisition closing, non-core Saskatchewan asset sale, Australia downtime, EU taxation impacts, buybacks and dividends) we are pleased to see the Vermilion deliver 1Q23 results that were inline on a cash flow basis and slightly ahead of production expectations,” said Mr. Kwong. “Outside of cyclone-impacted downtime in the Australian Wandoo field, forward guidance debt targets, and elevated return of capital plans remain intact. With that said, we can’t ignore European natural gas prices that are down 30 per cent vs levels in 1Q23 (although winter gas futures are starting to perk up nicely) and crude oil prices off nearly 15 per cent inside a month.”

* BMO’s Mike Murphy to $20 from $22 with a “market perform” rating.


While Gildan Activewear Inc. (GIL-N, GIL-T) reported “mixed” first-quarter financial results, RBC Dominion Securities analyst Sabahat Khan thinks its reiterated full-year outlook reflects improved margin trends and positive top-line growth through the second half of the year.

After the bell on Wednesday, the Montreal-based clothing manufacturer reported sales of US$702.9-millon, down 9.3 per cent year-over-year but in line with both Mr. Khan’s US$702.8-million estimate and the consensus forecast of US$707.5-million. He said the decline was “primarily driven by lower sales volumes and unfavourable mix, partially offset by higher net selling prices.” Earnings per share of 45 US cents fell short of expectations (48 US cents and 52 US cents, respectively) as lower-than-anticipated gross margins and an increase in interest expense weighed.

“Q2 is likely to reflect similar top-line performance (i.e., a decrease year-over-year); however, EBIT margin should improve by 100-150 basis points quarter-over-quarter, driven by lower cotton and manufacturing costs, benefits from pricing (as Gildan laps pricing from Q2/Q3 last year; full-year pricing benefit expecting to total low single-digits percentage), and favorable mix,” said Mr. Khan. “As it relates to mix, management noted that fleece POS at distributors was strong in Q1 (up high-single to low-double digits), and as a result the company expects its sales mix of fleece to increase through the balance of the year (which should be supportive of margins). POS in retail was down double-digits in Q1 (’now’ down ~high-single digits), while distributor POS was down low-single digits in Q1 (flat environment now). Geographically, International POS continued to be positive in Q1, while the U.S. was flat to slightly down (albeit starting to also turn positive).

“As we get into H2/23, Gildan expects the comps to get progressively easier (recall that there was significant restocking activity from Gildan’s customers in H1/22). Overall, the company reiterated its 2023 guidance, which calls for revenue growth in the low-single-digit range and an Adjusted EBIT margin of 18-20 per cent.”

While he emphasized an “uncertain macro backdrop” and trimmed his full-year 2023 and 2024 revenue and earnings forecast, Mr. Khan raised his target for Gildan shares by US$1 to US$40, maintaining an “outperform” recommendation. The average target on the Street is $37.44.

Elsewhere, others making target adjustments include:

* Citi analyst Paul Lejuez to US$43 from US$42 with a “buy” recommendation.

“Despite near-term challenges management remains confident they can achieve EBIT margins of 18-20 per cent this year,” said Mr. Lejuez. “Some of the recent pressure has been from distributors and retailers working down inventory levels below historical norms. Management believes that the destocking is largely behind us and sales should pick up to be in-line with POS. GIL’s GM should improve as they realize lower raw material costs. Trading at 7.7 times our F23 estimated EBITDA, we view GIL’s risk-reward as attractive.”

* Canaccord Genuity’s Luke Hannan to US$36 from US$37 with a “buy” rating.

“We believe GIL’s low-cost manufacturing footprint, healthy FCF generation profile, and attractive valuation creates a favourable long-term risk/reward profile for GIL shares,” he said.

* Scotia Capital’s George Doumet to US$38 from US$39 with a “sector outperform” rating.

“We were expecting weakness in both the top line and operating margins in Q1 – but results came in below our (and below consensus) expectations. 2023 Revenue/EBIT percentage and adj. EPS guidance was left unchanged,” said Mr. Doumet. “While Q1 marks the trough in operating margins (with expected improvements driven by lower cotton prices and industry restocking), the Q2 recovery is expected to be softer than initially forecasted (we are now looking for $0.60 in EPS vs. $0.75 previously). All in all, we expect a meaningful recovery in the 2H and as such believe current valuation is too punitive implying EPS declines of approximately 30-per-cent-plus on an NTM [next 12-month] basis (similar in magnitude to 2008/2009) which, in our view, overlooks many of the structural changes made to the business over the last few years.”


Dream Industrial Real Estate Investment Trust (DIR.UN-T) is “delivering Canada’s best organic growth,” according to National Bank Financial analyst Matt Kornack, who now sees “runway for more.”

On Tuesday after the bell, the Toronto-based REIT reported first-quarter funds from operations of 24 cents per unit, up 2 cents from the same period a year ago and matching the forecast of both Mr. Kornack and the Street. While committed occupancy slipped 0.3 per cent sequentially to 98.6 per cent, due to the vacancy of a 225,000 square foot property in Montreal, however same-property net operating income rose 13 per cent, led by 14.3-per-cent gain in Canada.

“Dream Industrial continued to excel operationally in Q1 with rent spreads in core Canadian markets sustaining their brisk pace while MTM potential widened,” said the analyst. “In Europe, the CPI background also propelled organic growth; albeit, that market as a result is tracking closer to underlying fundamentals, whereas domestically, the REIT is building a long runway for future outsized organic performance.

“For the quarter, FFO was in line with our forecast but the composition was favourable as NOI [net operating income] beat, whereas interest expense was an offset on greater refinancing activity (this ultimately took the weighted average interest rate closer to market rates). The benefits of fee revenue from property management on JV assets was a notable earnings boost and even in the short stint since closing the SMU transaction, the MTM spreads achieved have been substantial. This gave management confidence to reiterate their guidance with an expectation for SPNOI growth at the top-end of the earlier stated range (8-10 per cent).”

Touting its “strong” operating performance and seeing further NOI gains ahead, Mr. Kornack increased his target for Dream Industrial units to $18.50 from $18 with an “outperform” rating. The average on the Street is $17.23.

Elsewhere, others making changes include:

* Desjardins Securities’ Kyle Stanley to $18 from $17 with a “buy” rating.

“DIR remains our highest-conviction idea within our coverage universe following a review of better-than-expected 1Q23 results,” said Mr. Stanley. “We are increasing our target ... reflecting an improved NOI and FFOPU growth profile and a 4.5-per-cent increase in our NAVPU estimate. Despite achieving record organic growth, DIR trades at a approximately 100 basis points wider FFO yield spread (393 bps) relative to the prior peak achieved in April 2022, which, in our view, represents an unwarranted discount.”

* Canaccord Genuity’s Mark Rotschild to $16.60 from $16 with a “buy” rating.

“Dream Industrial REIT (Dream Industrial) reported robust quarterly results that were slightly ahead of expectations, as an acceleration in internal growth, largely attributable to wide leasing spreads, drove an increase in FFO per unit of 13 per cent,” said Mr. Rothschild. “Despite the outlook for a slight moderation in the pace of industrial market rental rate growth going forward given an influx of new supply, leasing spreads should remain robust, as management currently estimates that the gap between in-place and market rents is greater than 37 per cent. For the full-year 2023, management expects the rise in same-property NOI to be at the high end of guidance for growth of 8-10 per cent, which we believe is achievable, contributing to our outlook for near double-digit cash flow per unit growth for the full year.”

* Raymond James’ Brad Sturges to $17.75 from $16.75 with an “outperform” rating.

“Our Outperform rating for DIR reflects: 1) DIR’s above-average exposure to Canada’s strongest urban industrial growth hubs; 2) DIR’s shorter duration leases (WALT: 4.5 years) that allow the REIT to quickly realize its sizable rent mark-to-market opportunity; 3) DIR’s compelling relative NAV discount valuation; and 4) DIR benefits from its strategic optionality to possibly realize the fair market value (FMV) of its wholly-owned Canadian industrial real estate portfolio through either individual asset or portfolio contribution(s) into the Dream Summit JV Fund at a higher price psf or lower average cap rate than what DIR’s NAV discount valuation currently implies,” said Mr. Sturges.

*CIBC’s Dean Wilkinson to $18 from $17 with an “outperformer” rating.


After its first-quarter results “significantly” exceeded his expectations, Canaccord Genuity analyst Matthew Lee hiked his 2023 and 2024 financial forecast for Hammond Power Solutions Inc. (HPS.A-T), expecting “electrification tailwinds will persist over the medium term.”

The Guelph, Ont.-based manufacturer of transformers used in electrical equipment and systems reported revenue of $171.1-million, up 33.9 per cent year-over-year and well above Mr. Lee’s $146.6-million estimate and the consensus forecast of $152.4-million driven by higher sales through its U.S. distribution channel. EBITDA jumped 67 per cent to $24.1-million, also topping estimates ($18.2-million and $19-million, respectively), while earnings per share rose to $1.32 from 72 cents a year ago (versus projections of 91 cents and 92 cents(.

“Revenue in the U.S. and Mexico contributed to the beat, driven by the expanding U.S. distribution network and a favourable foreign exchange impact,” said Mr. Lee. “Even after adjusting for one-time items and foreign exchange benefits, revenue of $155-million was still above our $147-million. Volume increased by 9 per cent year-over-year excluding the deferred India shipment, which was much greater than the historical average of 3-5 per cent and suggests strong underlying demand.”

The analyst thinks Hammond’s backlog expansion points to a “robust” sales trajectory for 2023

“We were especially impressed by the 6-per-cent quarter-over-quarter backlog growth in Q1, following 13 per cent in Q4 and 15 per cent in Q3,” he said. “Despite the slowdown, we believe backlog expansion was entirely volume related, which highlights elevated order demand even in an uncertain economic environment. Management commented that the order book for the rest of 2023 is already filled and that customers have not pushed back on pricing, giving substantial visibility for the firm’s revenue trajectory into F24. We believe the volume-driven backlog will sustain our 19.8-per-cent fiscal 2023 estimated revenue growth (from 10.6 per cent) and 4.4 per cent in F24E (from 5.2 per cent).

“Additional production capacity should boost revenue but impact margins. Hammond noted that most of its factories are currently operating at full or near-full capacity, which drives higher operating margins. Last quarter, HPS announced its plan to invest $40-million in capex in F23 and F24, which management estimates will produce $250-million in additional revenue capacity over the next five years. While new machinery should alleviate some of the current capacity constraints, the expansion will likely lead to some margin dilution and added opex. We estimate that gross margins will come down from 32 per cent in Q1 to 28.5 [er cent in Q2 and stay in the 28-29-per-cent range for F23.”

Also seeing further upside potential for its U.S. distribution network and expecting a dividend increase in the next few quarters, Mr. Lee thinks Hammond’s valuation “remains attractive given growth, balance sheet, and cash flow,” prompting him to hike his target for its shares to $53 from $41.50 with a “buy” rating. The average is $48.83.

“On our revised estimates, Hammond trades at 5.6 times EV/F23 EBITDA, which we believe is still very attractive given that larger peers trade at 14 times,” he said. “We also increased our target multiple to 6.5 times (from 5.5 times) F24E EBITDA to account for the significant growth opportunities ahead, which leads us to raise our target price.”


In other analyst actions:

* Scotia Capital’s Benoit Laprade cut his target for Canfor Corp. (CFP-T) to $29 from $30 with a “sector outperform” rating, while TD Securities’ Sean Steuart lowered his target to $26 from $27 with a “buy” rating. The average is $29.83.

“Canfor’s share price has given back almost all its gains since the company announced B.C. lumber capacity cuts in late-January. We expect capital deployment to focus on asset-base growth, both organic (e.g., the DeRidder and Mobile greenfield sawmills; the Urbana modernization projects) and via acquisitions,” said Mr. Steuart.

* Mr. Laprade also reduced his Canfor Pulp Products Inc. (CFX-T) target to $3.50 from $4 with a “sector perform” rating. The average is $3.85.

* BMO’s John Gibson cut his Enerflex Ltd. (EFX-T) target to $13 from $12, below the $14.03 average, with an “outperform” rating.

* TD Securities’ Graham Ryding raised his EQB Inc. (EQB-T) target to $87 from $85 with a “buy” rating, while Raymond James’ Stephen Boland moved his target to $89 from $87 with an “outperform” rating. The average is $86.63.

“NIM continues to surprise to the upside, which is in part driving our constructive EPS growth forecast for 2023. EQB looks well-positioned from a funding and liquidity perspective. Loan growth is expected to be muted in 2023 (we are in line with guidance). Credit trends are normalizing back towards pre-pandemic levels, which is reasonable, in our view,” said Mr. Ryding.

* RBC’s Pammi Bir cut his First Capital REIT (FCR.UN-T) target to $20 from $21 with an “outperform” rating, while CIBC’s Dean Wilkinson raised his target to $21 from $20 with an “outperformer” rating. The average is $19.22.

“Post in-line underlying Q1 results, our positive view is intact,” said Mr. Bir. “We expect FCR’s defensive portfolio to ride through a soft patch in economic activity in good form, despite some anticipated tenant turnover. As well, we’re encouraged by strategic advances in the portfolio optimization plan, with further progress anticipated over the coming months. Bottom line, while macro pressures continue to weigh on the sector, we see a favourable risk/reward mix in FCR’s units.”

* CIBC’s Mark Jarvi raised his Fortis Inc. (FTS-T) target to $61 from $59 with a “neutral” rating. Other changes include: Scotia’s Robert Hope to $60 from $58 with a “sector perform” rating, TD’s Linda Ezergailis to $65 from $63 with a “buy” rating, Raymond James’ David Quezada to $65 from $58 with an “outperform” rating and IA Capital Markets’ Matthew Weekes to $61 from $58 with a “hold” rating. The average is $59.43.

“Fortis’s Q1/23 results beat our estimates and consensus by over 10 per cent, which is not a typical occurrence for a utility company,” said Mr. Hope. “While a portion of the beat will be offset in subsequent quarters, results were strong, which drives up our 2023 estimates. Regulatory risk related to the UNS rate case is lessening which is a positive. With an easy-to-execute funding plan and visible growth outlook, we believe investors looking for a defensive utility could find Fortis attractive. We move up our target price to $60.00 from $58.00 as we increase our target multiple by 0.25 times to 18.0 times to reflect the lessening regulatory risk and stronger balance sheet.”

* National Bank’s Shane Nagle increased his Franco-Nevada Corp. (FNV-T) target to $215 from $210, keeping a “sector perform” rating. The average is $213.89.

“After incorporating Q1/23 results, we maintain our Sector Perform rating, which offsets the company’s stable five-year production growth and industry-leading financial strength with its premium valuation,” said Mr. Nagle. “With support for gold prices and inflationary fears continuing to impact the outlook for operators, the royalty sector stands to benefit from both the fixed-cost nature of royalty/streaming agreements and opportunities for additional smaller-scale royalties.”

* Canaccord Genuity’s Matt Bottomley cut his Green Thumb Industries Inc. (GTII-CN) target to $24 from $26 with a “buy” rating. The average is $24.95.

“Overall, the quarter was generally in line with consensus expectations in a period that (as expected) saw an overall decline in sector-wide retail sales. Although the quarter did not require any federal tax payments under 280E, we believe GTII’s Q1/23 results were highlighted by an industry-leading ~US$75M in operational free cash flow,” he said.

* RBC’s Geoffrey Kwan lowered his target for IGM Financial Inc. (IGM-T) to $49 from $50, remaining above the $47.13 average, with a “sector perform” rating.

“IGM reported Q1/23 results that were largely in line with our forecasts and consensus,” said Mr. Kwan. “Bigger picture, with IGM’s recent entrance into the U.S. Wealth Management industry and a healthy balance sheet position, we think the company has made solid progress on its growth strategy with further opportunities to augment organic growth via M&A. We maintain our Sector Perform rating but due to slightly lower financial forecasts, we tweak our target down.”

* RBC’s Sam Crittenden moved his Ivanhoe Mines Ltd. (IVN-T) target to $17 from $15 with an “outperform” rating. The average is $15.51.

* Following its acquisition of a 3-per-cent gross overriding revenue royalty on the Das Neves Lithium Project in Brazil from Atlas Lithium for $20-million, Citi’s Patrick Cunningham increased his target for Lithium Royalty Corp. (LIRC-T) to $19.50 from $19 with a “buy” rating.

* CIBC’s Bryce Adams bumped his Lundin Mining Corp. (LUN-T) target to $10 from $9.50 with a “neutral” rating. The average is $10.83.

* RBC’s Jimmy Shan cut his Morguard Corp. (MRC-T) target to $140 from $150 with a “sector perform” rating.

“We are updating our outlook post Q1 results which came in slightly lower,” he said. “Normalized FFO/share was $4.56, up 18 per cent year-over-year vs. RBC estimate of $4.72. NOI was higher offset by higher corporate & interest expense. We expect mid-to-high single-digit NOI growth in 2023 with continued hotel recovery, accelerating CDN resi NOI, normalizing US NOI growth and retail & office flat to slightly declining. We expect continued debt paydown from op. cash flows. Stock remains highly discounted although with no obvious catalysts for NAV gap to close.”

* RBC’s Luke Davis raised his Parkland Corp. (PKI-T) target to $42 from $40 with an “outperform” rating, while JP Morgan’s John Royall cut his target to $39 from $40 with an “overweight” rating. The average is $39.54.

“Parkland posted stronger than expected Q1 results, largely driven by the International segment, which was seasonally stronger given increased tourism combined with tailwinds in the commercial business. The company continues to focus on asset integration and debt reduction, outlining explicit cost optimization and return targets which underpin the $2B EBITDA ambition,” said Mr. Davis.

* National Bank Financial’s Adam Shine raised his Spin Master Corp. (TOY-T) target to $44 from $42 with an “outperform” rating, while RBC’s Sabahat Khan increased his target to $48 from $47 with an “outperform” rating. The average is $48.44.

* Stifel’s Michael Dunn trimmed his Surge Energy Inc. (SGY-T) target by 25 cents to $11.75, below the $13.61 average, with a “buy” rating.

* Mr. Dunn also cut his Tourmaline Oil Corp. (TOU-T) target to $75 from $77 with a “buy” rating. The average is $81.29.

“A positive update overall (1Q results in line, higher special dividends for 2023, improved cash flow estimates). 1Q production and cash flow matched expectations, with more than $500-million of FCF helping to pay $762-million in dividends,” said Mr. Dunn. “The $2.00-per-share special dividend for 1Q has been followed by a higher than expected $1.50 per share for 2Q, and TOU changed its guidance on 2023 FCF returns to ‘up to all’ vs. 50-90 per cent previously, while increasing the regular dividend by 4 per cent. Our 2023/2024 estimated cash flow estimates change by 11 per cent/negative 3 per cent on a like-for-like price deck basis after updating our modeling of price realizations, market exposure, and hedges. Given recent declines in strip pricing we are nudging our target price down ... We believe TOU is well-positioned to generate significant FCF at current prices and participate in natural gas price upside looking forward.”

* Raymond James’ Daryl Swetlishoff cut his target for Western Forest Products Inc. (WEF-T) to $1.35 from $1.70 with an “outperform” rating, while Scotia’s Benoit Laprade lowered his target to $1.50 from $1.75 with a “sector perform” rating. The average is $1.39.

“Despite subdued earnings, WEF continues to boast a robust financial position with liquidity coming in at $205.4-millionand net debt levels still in negative territory at $35-million (accounting for remaining non-core asset sales),” said Mr. Swetlishoff. “Looking forward, we are encouraged by continued robust ‘big box’ R&R and better than expected homebuilder commentary, with Western heading into its seasonally strongest quarter. With lumber and log decks (more) right sized to market demand (following curtailments in late 2022), and channel checks pointing to seasonal tailwinds on improved weather, we forecast a profitability turnaround in the current quarter with earnings augmented by downward stumpage revisions on the BC Coast. We also note the company continues to execute on its asset rationalization plan with the Port Alberni working group update concluded as of last week. We highlight an asset sale to First Nations bands represents the most likely scenario, in our view, and note the company has taken up negotiation.”

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