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

Citi analyst Spiro Dounis thinks Keyera Corp. (KEY-T) “offers high-growth with low-risk.”

In a research report released Thursday before the bell titled Here For the Harvest, he initiated coverage of the Calgary-based company with a “buy” recommendation, seeing an imminent cash flow inflection point and standing to now “generate excess cash flow that can be used to enhance capital returns (buybacks, dividends) or reinvest in growth capital.”

“KEY has historically outspent cash flows to grow its asset base by over 40 per cent; the company is now in a position to harvest those efforts with the commencement of major projects like KAPS that is expected to drive a 6-7-per-cent fee-for-service EBITDA CAGR [compound annual growth rate] through ‘25,” said Mr. Dounis. “We expect this cash harvest period to equate to over 25 per cent of CFO, creating capital return options not available historically.”

“The completion of this elevated spending period now allows KEY to recommence dividend growth after several years of pause (notably, KEY did not cut the dividend during the 2020 pandemic). We estimate a 4-per-cent CAGR on KEY’s 6-per-cent yielding dividend. The DCF yield expands by over 400bps over our forecast period, which leaves KEY considerable room to grow the dividend at an accelerated rate. KEY’s dividend yield is already nearly double the TSX yield.”

While acknowledging Canadian natural gas production has faced “periods of logistics constraint” in the past, the analyst now sees several projects poised to “unleash additional Canadian oil & gas supply, which drives more volumes through KEY’s system.”

“Canada LNG at full scale creates an export market for over 20 per cent of Canadian natgas,” he said. “The TMX pipeline adds the equivalent of more than 10 per cent of supply egress to the West Coast.”

Mr. Dounis also thinks Keyera’s “lower risk profile is underappreciated.”

“First, the stock trades with lower volatility relative to U.S. peers,” he said. “Second, its EBITDA volatility ranks among the lowest across our coverage. Finally, KEY has a consistent top-quartile ROIC, which often commands a premium valuation.”

Believing Keyera’s “cash flow inflection, return to dividend growth, increasing ROCE and above average growth should drive an expansion in the valuation multiple,” Mr. Dounis set a target of $35 per share. The average on the Street is $35.83, according to Refinitiv data.


In a separate report, Mr. Dounis initiated coverage of Pembina Pipeline Corp. (PPL-T) with a “neutral” recommendation, seeing it trading at a premium that reflects its more than $5-billion backlog of “high quality and low-carbon projects.”

“PPL offers investors a unique dual track: a low-risk growing base business and one of the most holistic approaches to low-carbon growth in our coverage,” he said in a note titled Dual Track but Long Track. “PPL’s base business take-or-pay earnings profile at approximately 70 per cent bests its peers. Its growth backlog of up to $4-billion in low-carbon projects also stands out. That said, PPL already trades at a 0.5 times premium, reflecting its lower risk profile. Its energy transition projects offer new revenue streams but are in early stages and present execution risk. PPL trades at a high-single-digit FCF yield, which is in-line with peers and offers comparable forecasted growth.”

Mr. Dounis estimates Pembina’s low-carbon projects offer as much as $4 per share in value, however he thinks “some of that value may be priced-in, while the rest remains in very early stages of execution.”

“We expect PPL to generate nearly 20 per cent of its CFO annually in excess cash flow (after capex and dividend), which can be used to accelerate growth, de-lever, or return capital to shareholders,” he said. “Historically, leverage funded growth, but the paradigm has changed (for the sector as a whole). That said, PPL’s excess cash flow generation tracks peers and has a high likelihood of being reinvested vs returned to shareholders, in our view.”

Mr. Dounis set a target of $42 per share. The average on the Street is $51.18.


National Bank Financial analyst Cameron Doerksen warns grain is turning from a tailwind for Canada’s railway companies to a “modest” revenue headwind.

“Following the drought-stricken harvest in Western Canada in the 2021/22 crop year, strong growing conditions during the 2022/23 crop year led to a good harvest and higher grain volumes for the railroads over the past 12 months,” he said. “This crop year, however, dry conditions across much of Western Canada have resulted in a relatively weak harvest. Based on estimates from StatCan and the latest crop assessment from Agriculture and Agri-Food Canada (AAFC), total production of major grain crops is anticipated to be 61.9 million metric tonnes, a 17.4-per-cent year-over-year decline and well below the fiveyear average of 70.2 million metric tonnes. However, revenue for both rails will benefit from an increase in the regulated grain shipping rates this crop year (up 12.1 per cent for CN and up 5.4 per cent for CPKC).

“Grain could therefore turn into a modest revenue headwind for both CN and CPKC over the next 12 months as volume benefits from the early harvest of this year’s crop begin to slow.”

Mr. Doerksen estimates Canadian Pacific Kansas City Ltd. (CP-T) could face a 1.1-per-cent revenue headwind from grain in the current fiscal year with peer Canadian National Railway Co. (CNR-T) hurt by 0.7 per cent.

Given the associated changes to his fiscal projections and a “cautious” view of volumes in the coming quarters, he maintained his “neutral” stances on both companies and reiterated his “sector perform” recommendation for their shares.

He lowered his CN target to $168 from $171 and his CP target to $109 from $110. The averages on the Street are $161.83 and $118.71, respectively.

Elsewhere, Barclays’ Brandon Oglenski cut his targets for CN to $150 from $160 with an “equalweight” rating and CP to $115 from $120 with an “overweight” recommendation.

“3Q was the fourth consecutive period of a broad-based freight recession with incremental margin pressure for most transports coming from higher fuel prices,” he said. “However, most stocks have lagged, setting up for a better 2024 and we expect better outlooks into 4Q23 from CSX, UNP and others.”


TD Securities analyst Daniel Chan expects to see further share price declines for BlackBerry Ltd. (BB-N, BB-T) following the late Wednesday announcement of a plan to split itself in two by spinning its connected-car software business into a separate public company.

“The share price has pulled back considerably following earnings last week, which we believe was due to the view that an outright sale of the entire company was unlikely,” he said. “We believe the lack of restructuring in this strategic-review update suggests our $4.00 status-quo scenario is most relevant. However, the Board is leaving the outcome very open-ended, which we believe implies significant optionality is still on the table.”

“BlackBerry does not expect the IPO to happen until the middle of next calendar year, and expects the strategic review “objectives will continue to be pursued.” We believe the company will continue to consider options for the assets and evaluate market conditions as it works through the separation. Recently, the IoT [internet of things] segment saw some project delays impact nearterm growth, and equity valuations have been contracting.”

While he continues to see the potential for large revenue and earnings gains for its IoT segment, Mr. Chan thinks “significant work is needed” to get its cybersecurity business “ready for the spotlight.”

“If we assume IoT generates 20% EBITDA margin, that implies Cybersecurity has significant EBITDA losses,” he said. “ARR continuing to decline every quarter suggests that Cylance continues to be a drag on the segment’s performance. Given Cybersecurity’s (CS’s) declining revenue and significant losses, we continue to believe a major restructuring of the segment is required in a separation scenario, which could include the sale of some assets.”

Reiterating his “hold” rating for BlackBerry shares, Mr. Chan trimmed his target to US$4 from US$5. The average is US$5.50.

“In our view, this open-ended update to the strategic review suggests that anything could still happen,” he concluded. “The company has given itself a long timeline to execute this IPO, and could see new bids for its assets as it starts separating and restructuring them. Perhaps, price discovery during this process for the unique QNX business may lead to a more informed decision on how to proceed with it. Either way, we do not believe this is the end of BlackBerry’s transformation.”

Elsewhere, CIBC’s Todd Coupland cut his target to US$5.50 from US$6 with a “neutral” rating.

“We view this outcome as Neutral to our investment thesis which was already based on the assumption of a separation of the Cyber and IoT units. Our Neutral rating remains unchanged and is based on a price target of $5.50 (prior $6) which was lowered on a reduced multiple for Cyber of 1 times (prior 1.5 times) given no acceptable offer for the business was received during the portfolio review,” said Mr. Coupland.


RBC Capital Markets analyst Maxim Matushansky thinks Celestica Inc. (CLS-N, CLS-T) “stacks up favourably” with the rest of its electronics manufacturing services (EMS) peer group, seeing the Toronto-based company “positioned well for organic growth.”

“The EMS group has several areas of overlap in their end market exposure, including in medical technology, semiconductor capital equipment, EV chargers, and communications equipment. Celestica has been increasing its exposure to non-traditional markets, and has grown its hyperscaler revenue at a 51-per-cent CAGR [compound annual growth rate] from 2018 to Q2/23,” he said. “As compared to peers, Celestica has a larger exposure to connectivity and cloud solutions end markets, and is the most exposed to hyperscalers as a direct customer (as compared to peers that sell into OEMs). Celestica also seems to have a smaller exposure to medical devices and broader healthtech markets, suggesting a potential growth opportunity for Celestica longer-term.”

After analyzing the broader group based on a series of factors, including end market exposure, growth and margin profiles, customer concentration, cash conversion cycles, and debt levels, Mr. Matushansky emphasized Celestica’s operating margins are now at the higher end of its peers while its debt levels are near the midpoint.

“While our longer-term concerns around the electronics manufacturing industry and Celestica’s potential long-term growth rate and margins remain, we believe the secular growth in hyperscaler spending and potential for further guidance raises provide a catalyst for the valuation discount compared to peers to close, which improves the risk/reward on the stock, in our view,” he said. “Celestica has transformed itself away from traditionally low-margin end markets to non-traditional markets like industrial, aerospace & defense, healthcare, and capital equipment, and has increased its exposure to hyperscaler customers that should experience multi-year growth in data center expansion. In the nearer-term, we believe that while the risk remains of a macroeconomic slowdown impacting all of Celestica’s businesses or of a potential slowdown in hyperscaler spending, Celestica’s positive FCF and mix-shift to higher quality end markets should cause the business to be more defensive than it had been in prior slowdowns.”

Maintaining an “outperform” rating for Celestica shares, he raised his target to US$30 from US$22. The average is US$25.67.

“Even without the higher level of growth and margins from Celestica’s hyperscaler customers seen in 2023, we believe Celestica’s discount to peers is unjustified,” said Mr. Matushansky.

“Our revised $30 price target is based on 12.0 times calendar 2024 estimated P/E (vs. 8.5 times previously) given Celestica has proven to be a beneficiary of AI-driven data center buildouts, Celestica’s improved organic growth profile, and a more downturn-resistant business. Our price target multiple is justified at the peer average given Celestica’s greater exposure to the risk of hyperscaler demand slowing offsetting similar margins, similar cash conversion cycles, and higher NTM [next 12-month] EPS growth than peers.”

Elsewhere, TD Securities’ Daniel Chan increased his target to US$29 from US$23 with a “buy” rating.

“Data centre demand for Nvidia’s accelerated computing platforms suggest major cloud service providers are moving at an accelerated pace to deploy hardware necessary to support GenAI infrastructure,” said Mr. Chan. “With greater exposure to data centre cloud and AI-related spend versus its EMS peers, we believe Celestica is primed to be an early beneficiary of the GenAI tech adoption cycle. While currently experiencing strong demand for proprietary compute, we believe a pull-through effect will similarly benefit demand for networking solutions and other potential HPS platforms. As its customers’ 2024 capex plans are finalized, we believe Celestica could see upside to its 2024 EPS guidance of up 10 per cent. We reflect this potential upside with a higher target multiple range.”


National Bank Financial analyst Vishal Shreedhar expects a “tepid” macroeconomic backdrop to “constrain” Sleep Country Canada Holdings Inc. (ZZZ-T) in the near term, emphasizing the presence of “subdued” industry indicators.

“Our review of recent U.S. peers/ZZZ commentary suggests: (i) Industry trends are expected to be subdued and industry peers are cautious; ZZZ noted mattress trends in the initial six weeks of Q3/23 were soft, albeit better than Q2/23, (ii) Continued resilience in the premium segment, and (iii) Easing commodity prices sequentially,” he said.

“We note tepid Canadian industry indicators as follows: (a) Consumer confidence remains challenged; (b) StatsCan data indicates that mattress manufacturer sales continue to track below 2022 (data up to July 2023); and (c) Within the real estate industry (July-August 2023 data), residential unit sales were higher by 9 per cent year-over-year and prices were higher by 4 per cent year-over-year.”

Ahead of the Nov. 9 release of the retailer’s third-quarter financial report, Mr. Shreedhar is now expecting earnings per share to decline 18.1 per cent year-over-year, due to “negative same store sales growth and higher SG&A expenditure (advertising, warehouse occupancy, store-based costs, etc.), partially offset by LTM [last 12-month] share repurchases.” He’s projecting EPS of 73 cents, down from 89 cents during the same period a year ago and 5 cents below the consensus on the Street.

“Although the premium segment is currently holding up well, we expect incremental pressure on disposable income to more fulsomely manifest as Canadians renew their mortgage,” he said. “We estimate incremental disposable income pressure of $600+ per month for those that renew their mortgages (2024 through 2026). That said, our expectation is that easier comparisons year-over-year in 2024+ should enable EPS growth.

“ZZZ’s balance sheet is solid. We model Q3/23 net debt to EBITDA of 2.0 times, which provides flexibility for ZZZ to further execute on share repurchases and/or strategic imperatives.”

Maintaining a “sector perform” recommendation, Mr. Shreedhar cut his target for Sleep Country shares to $27 from $29. The average is $28.50.


Desjardins Securities analyst Frederic Tremblay thinks Lithium Ionic Corp. (LTH-X) “looks poised to progress efficiently and should earn a valuation re-rate in the process.”

In a report titled Potential to quickly move from ‘ionic’ to ‘iconic’, he initiated coverage of the Toronto-based company with a “buy” recommendation, calling it “the new kid on the block in an emerging district where neighbours include Sigma” and seeing its flagship Itinga project in Brazil as “compelling.”

“The maiden resource estimate of 19.43 million tons at 1.42-per-cent Li2O at Itinga provides a strong foundation for growth, in our view,” said Mr. Tremblay. “With 13 drills operating, the ongoing 50,000m drill program aims to: (1) increase the resource and upgrade its classification; and (2) define mineral resource estimates at the Salinas and Itira regional targets. A PEA is expected in the coming weeks, followed by a DFS in early 2024. Our confidence in LTH’s ability to rapidly navigate through the stages of project development at a relatively low capex is bolstered by its priority status granted by the state and the established infrastructure. We forecast first production in early 2026 (14-year minelife) and estimate an after-tax NPV (12per-cent discount rate) of $1.1-billion (IRR 83 per cent) for the Itinga project.”

“We view neighbouring projects, including Sigma Lithium’s and CBL’s producing mines, as solid proof of concept.”

Seeing it well-funded for its 2023 drilling activity and technical studies and expecting another equity raise earlier next year, he set a target of $5.25 per share. The average on the Street is $5.38.

“While the stock trades at a discount to hard rock peers, including a deep gap to Sigma, we believe that Lithium Ionic is well-positioned to deliver on several potential catalysts in the near term as part of its project development efforts, which should spark a valuation re-rate,” he said.


A pair of analysts on the Street initiated coverage of Lithium Americas Corp. (LAC-N, LAC-T) a day after its first day of trading in both New York and Toronto.

Lithium Americas is the spin-out of the legacy Lithium Americas’ North American business, focusing on the Thacker Pass Project in Nevada.

“With Thacker Pass having the potential to reach 80ktpa Lithium Carbonate Equivalent (LCE) capacity by 2030, the company has already secured an equity partnership with General Motors and is currently in the running for what we view as a strategic partner in the U.S. Department of Energy’s Loan Program Office,” said Stifel’s Cole McGill. “The new LAC offers investors a made-in-America lithium vehicle, poised to supply domestically-sourced raw material to the emerging Electric Vehicle supply hub currently being onshored in the United States.”

Seeing a strong potential for a valuation re-rating as Thacker Pass progresses towards completion, Mr. McGill set a target of US$15 per share.

“Lithium developers have seen their shares increase in value by an average of 225 per cent from construction commencement to first production, consistent with the pattern seen in the mining industry generally,” he noted.

Elsewhere, Scotia Capital’s Ben Isaacson set a “sector outperform” rating and US$20 target, seeing it “well on its way to becoming the world’s newest lithium major.”

Concurrently, both also initiated coverage of Lithium Americas (Argentina) Corp. (LAAC-N, LAAC-T), which is focused on the 44.8-per-cent-owned Caucharí-Olaroz project.

Mr. McGill gave it a “buy” rating and US$18.50 target.

“LAAC is the descendent of the legacy Lithium Americas that retains its Latin American business comprising its key assets in Argentina’s Puna region, which is quickly emerging as a major future centre of global lithium production,” he said. “LAAC’s key assets are Cauchari-Olaroz (44.8-per-cent ownership), Pastos Grandes Project (100 per cent) and adjacent Sal de la Puna (65 per cent). Cauchari-Olaroz is now ramping up production, and expansion projects giving it runway to a minimum 60ktpa LCE production. Growth comes via a consolidated Pastos Grandes/Sal de la Puna operation that we believe could add 35kt in annual LCE output. With cash soon to be flowing from Cauchari and the still-unconsolidated Puna ripe for strategic activity, we believe LAAC will be well-positioned to execute on its business strategy to grow into a major global lithium producer.”

Mr. Isaacson set a “sector perform” rating and US$10 target.

“Why we rate LAC Sector Outperform and LAAC Sector Perform – at least to start: (1) About two-thirds of Old LAC ownership is U.S. retail, which we’re confident will roll over to New LAC, but not necessarily to LAAC. In fact, we know there are some institutional and retail investors that prefer U.S. development exposure over Argentina operating exposure. That said, we also know there are quite a few Latam-focused investors that have been waiting for separation to invest in LAAC; (2) last week, we saw more noise that a new lithium tax is coming down the pipeline, as well as a requirement for 20 per cent of lithium production to remain in the country; (3) we see more near-term catalysts for LAC vs. LAAC that are independent of spot price moves; (4) on valuation, we estimate LAC is trading at 0.44 times NAV while LAAC is trading at 0.50 times NAV,” he said.


In other analyst actions:

* CIBC’s Jacob Bout increased his targets for Chemtrade Logistics Income Fund (CHE.UN-T) to $12.50 from $12 with an “outperformer” rating and Methanex Corp. (MEOH-Q, MX-T) to US$46 from US$45 with a “neutral” rating. The averages are $11.64 and US$50.91, respectively.

“The large U.S. crop, decent farmer economics and improved fertilizer affordability should support a solid fall ag-input application period. Nitrogen prices are moving higher (and should remain at elevated levels into 2024), and potash and phosphate prices have stabilized,” he said. “We are raising our estimates for NTR as the company should benefit from good fall application volumes and stronger nitrogen pricing in H2/23. In the chemicals space, we are raising our estimates for MEOH (higher oil prices supporting slightly improved methanol prices) and CHE.UN (higher caustic pricing). Our top picks are AFN (large U.S. crop volumes / growth in Brazil & India / valuation) and CHE.UN (upside to Q4/23 and 2024 estimates from recent caustic strength / valuation).”

* Coming off research restriction following Skyline Champion Corp’s 138-million investment in ECN Capital Corp. (ECN-T), BMO’s Tom MacKinnon reduced his target for ECN shares to $2.75, below the $3.11 average, from $4 with a “market perform” rating, believing it is now a “show-me story.”

“Our Market Perform rating reflects uncertainties in originations (where ECN guides to 15-per-cent growth in 2024 after a flat 2023) and in execution (given both leadership and strategy changes at Triad), and our 10 times target multiple reflects these uncertainties combined with an estimated low multiple (estimated 4-6 times) Skyline paid for its partnership/20-per-cent stake in ECN,” he said.

* Following the abrupt departure of CFO Rod Gray earlier this week, BMO’s John Gibson cut his Enerflex Ltd. (EFX-T) target to $6 from $10 with a “market perform” rating. The average is $12.47.

“The company’s shares are now down nearly 50 per cent since August, with investor confidence appearing to be shaken as it works through the integration of Exterran (acquired in 2022),” he said. “While we continue to believe the combined Enerflex/Exterran business holds solid merits, near-term uncertainty causes us to decrease our target price.”

* In response to the close of its $395-million acquisition of MacKellar Group, ATB Capital Markets’ Tim Monachello bumped his North American Construction Group Ltd. (NOA-T) target to $45 from $44 with an “outperform” rating. The average is $40.40.

“Overall, we believe NOA’s recent pullback, down 13 per cent from post-Mackellar acquisition highs, offers an attractive entry level for investors,” he said.

* In a quarterly earnings preview for North American less-than-truckload companies, Stifel’s Bruce Chan lowered his TFI International Inc. (TFII-N, TFII-T) target to US$144 from US$150 with a “buy” rating. The average is US$152.46.

“Broadly, we believe that inventory destocking bottomed around mid-year,” he said. “But that doesn’t mean volume growth has been robust, in our view: core LTL industry demand has been tepid, at best. The demise of Yellow in August offered some relief, but distribution of its 10-per-cent market share has not been uniform. We believe carriers with more overlap in pricing and footprint have benefited disproportionately, with Saia being a notable gainer among public peers. Capacity remains in check and pricing should be in the carriers’ favor next year, but given fundamental demand softness, we are focused on names with self-help opportunity and/or deep valuation discounts. We see the most opportunity in TFI International (TFII, $121.99, Buy) and ArcBest Corp. (ARCB, $98.91, Buy), though we caution that 3Q earnings may be a bit choppy, especially for companies with earnings exposure outside the LTL space.”

* CIBC’s Allison Carson reduced her Victoria Gold Corp. (VGCX-T) target to $10 from $10.50 with a “neutral” rating. The average is $15.96.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 23/02/24 4:00pm EST.

SymbolName% changeLast
Blackberry Ltd
Canadian National Railway Co.
Canadian Pacific Kansas City Ltd
Celestica Inc Sv
Chemtrade Logistics Income Fund
Ecn Capital Corp
Enerflex Ltd
Keyera Corp
Lithium Americas Corp
Lithium Americas Argentina Corp
Methanex Corp
North American Construction Group Ltd
Pembina Pipeline Corp
Sleep Country Canada Holdings Inc
Tfi International Inc
Victoria Gold Corp

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