Inside the Market’s roundup of some of today’s key analyst actions
Barclays analyst John Aiken expects credit and capital markets to drive better-than-expected second-quarter results for Canadian banks.
“Positive macro fundamentals could improve the banks’ credit loss scenarios, while record equity markets will likely buoy underwriting and trading activity,” he said in a research note. “Record home sales will likely continue to support steady mortgage and asset growth, although margins remain challenged, and weighed by the three fewer days in the quarter, we expect net interest income will moderate in Q2. In terms of valuations, the banks are trading at healthy multiples, reflecting increasing optimism on the outlook for the economy. While we do not believe that investors are necessarily pricing in exceptional growth in 2022 and beyond, we believe that the view is that consensus estimates are too conservative for 2021.”
With that view, Mr. Aiken raised his earnings expectations for the sector, leading to increased target prices for shares of these banks:
Bank of Montreal (BMO-T, “underweight”) to $112 from $107. The average on the Street is $119.67, according to Refintiv data.
Bank of Nova Scotia (BNS-T, “underweight”) to $78 from $75. Average: $81.13.
Canadian Imperial Bank of Commerce (CM-T, “overweight”) to $139 from $135. Average: $133.93.
Laurentian Bank of Canada (LB-T, “equal-weight”) to $43 from $41. Average: $40.90.
National Bank of Canada (NA-T, “equal-weight”) to $90 from $86. Average: $89.36.
Royal Bank of Canada (RY-T, “overweight”) to $133 from $129. Average: $122.21.
Toronto-Dominion Bank (TD-T, “equal-weight”) to $84 from $78. Average: $83.06.
After a “good” first quarter, Citi analyst Ashwin Shirvaikar thinks Nuvei Corp.’s (NVEI-T) “M&A-driven upside” is not yet properly reflected in the Street’s expectations.
On Monday before the bell, the Montreal-based electronic payment processing company reported revenues of US$149.9-million, up almost 80 per cent year-over-year and exceeding the estimates of both Mr. Shirvaikar (US$142-million) and the Street (US$141-million) as well as its own outlook (US$136-million to US$142-million). The beat was driven by a 134-per-cent jump in volumes, leading to better-than-expected adjusted earnings before interest, taxes, depreciation and amortization (US$65.5-million)
Concurrently, Nuvei raised its 2021 revenue guidance to a range of US$610-million to US$640-million from US$570-million to US$600-million previously. Its adjusted EBITDA forecast increased to US$264-million to US$277-million from US$252-million to US$265-million.
“Nuvei reported a solid quarter with robust volume, revenue and EBITDA growth and a good contribution from organic as well as inorganic sources,” said Mr. Shirvaikar. “ In our view the positive trajectory should continue from a volume perspective, one key thing to watch is how the two new acquisitions, not yet included in the outlook, are rolled in when they close. These are certainly in faster-growth areas (Mazooma in gaming and Simplex in crypto) and we’re looking for these to be rolled in by 2Q/3Q respectively… that upside is not yet reflected in estimates so there is clear upside bias in the estimates. Nuvei is clearly executing well, our perception of risk/reward skews to being cautious partly given the lack of track record, given the business has evolved rapidly by rolling up assets in several riskier areas (gaming, FX trading, crypto).”
With the results and guidance, Mr. Shirvaikar raised his financial expectations, leading him to increase his target for Nuvei shares to US$74 from US$68. The average target on the Street is $82.94.
“While we continue to believe in the many positives in the Nuvei story (high percentage of revenues from e-commerce; exposure to differentiated and growing revenue mix including online gaming; tech stack geared to take advantage of the revenue mix; attractive financial metrics, etc.,), we are cautious of the risks (M&A-heavy backdrop; controlled corporation dynamics, etc.,),” he said. “Moreover, given the robust appreciation of the stock in a very short period of time (current EV/EBITDA is 33x-34 times 2021 estimates and 28-29 times 2022 estimates), valuation is a concern. Taken together, we believe the risk/reward is balanced. We believe the implied forward outlook should support the stock at current levels but also that a combination of sustained follow-through on the profitability metrics and better disclosure is needed to provide a material upside catalyst.”
Elsewhere, others making target changes include:
* Scotia Capital’s Paul Steep to $106 from $101 with a “sector outperform” rating.
“Our view is that Nuvei delivered results that exceeded expectations due to sustained volume growth and expansion within existing clients as well as acquiring new customers,” said Mr. Steep. “Nuvei introduced Q2 guidance and raised its prior F2021 guidance, reflecting continued volume growth and expansion in the business. We expect Nuvei will continue to grow through a combination of organic and acquired initiatives and that the company’s primary focus will remain on expanding its client base in new and existing verticals. We believe the firm will remain active in evaluating acquisitions that further enhance its product/service capabilities.”
* Cowen and Co.’s George Mihalos to $116 from $102 with an “outperform” rating.
* Raymond James’ John Davis to $107 from $82 with a “market perform” rating.
* National Bank Financial’s Richard Tse to $120 from $100 with an “outperform” rating.
* CIBC World Markets’ Todd Coupland to $110 from $105 with an “outperformer” rating.
* Credit Suisse’s Timothy Chiodo to US$80 from US$65 with an “outperform” rating.
* BMO Nesbitt Burns’ James Fotheringham to US$67 from US$64 with a “market perform” rating.
CIBC World Markets analyst John Zamparo made a pair of rating changes to cannabis stocks in his coverage universe.
Citing its recent outperformance versus peers and seeing softer sales trends than competitors, he lowered Aurora Cannabis Inc. (ACB-T) to “underperformer” from “neutral” with a $9, down from $15. The average is $12.58.
“Since March 1, ACB’s negative 26-per-cent performance exceeds the negative 33-per-cent median among closest peers,” said Mr. Zamparo. “This is despite two observations. First, Hifyre data estimates that Aurora’s retail sales declined approximately 21 per cent in the three months ended April 30. While this data is imperfect (it has little visibility into Quebec, and retail sales are not necessarily predictive of wholesale), this decline directionally is well below most peers, as shown herein. Second, while yet another competitor— OGI—has connected with a strategic partner, ACB finds itself lacking in this regard, while also carrying the most net debt among our cannabis coverage, and we believe is moving further away from profitability. We expect until one of these attributes reverses, Aurora will underperform other cannabis stocks.”
Conversely, he raised OrganiGram Holdings Inc. (OGI-T) to “neutral” from “underperformer” with a $3.25 target, falling below the $3.87 average.
“The stock has declined 22 per cent and has reached below our price target,” he said. “As such, we upgrade OGI to Neutral, maintaining our $3.25 price target. We are encouraged by OGI’s recent spike in retail sales, but are cautious on assuming any meaningful margin expansion. Note that our rating change is not a reflection on the company’s recent CEO transition.”
Mr. Zamparo also cut his Canopy Growth Corp. (WEED-T) target to $38 from $55 with a “neutral” recommendation. The average is $39.07.
“We believe the biggest catalyst for the stock—prospects for U.S. legalization—have stalled lately. This disproportionately impacts WEED, which serves as the sector’s flagship name,” he said.
Enbridge Inc.’s (ENB-T) “base business” and project execution “both continue to hum along, underwriting the shift to a strategy that balances energy transition initiatives with the core business,” according to Citi analyst Timm Schneider.
“In a nutshell, ENB started the year on pace (if not a bit ahead of plan) with respect to FY21 guidance, with a few moving pieces on the margin (like a more concentrated turnaround season in 2Q, and strong utilization offset by continued weakness in energy services),” he said in a research note released Tuesday. “As market focus clearly centers on renewables and other low carbon technologies ENB provided a more substantive update on the opportunity set here. Meanwhile, the ‘front burner’ items making up ENB’s longer-term capital plan will modernize, optimize, and expand ENB’s Gas Transmission and Gas Utility businesses.”
Last week, alongside the release of its first-quarter results, Enbridge reaffirmed its 2021 financial outlook, which includes EBITDA of $13.9-$14.3-billion, discounted cash flow of $4.70-$5 per share and a plan to put $10-billion of projects into service.
Emphasizing Enbridge’s renewable energy portfolio continues to grow, Mr. Schneider raised his target for the company’s shares to $54 from $50 after adjusting his valuation model, keeping a “buy” rating. The average target on the Street is $51.79.
“Our positive view on the company’s lower-risk business model and earnings growth projections are primary drivers of our valuation. Enbridge’s performance since the beginning of the decade is highlighted by industry-leading returns,” he said.
BMO Nesbitt Burns analyst Peter Sklar thinks the first half of 2021 could be the trough for the Canadian restaurant industry with a “swift” recovery following that could lead 2022 sales to reach the pre-pandemic levels.
“As vaccinations continue to roll-out, we believe some regions could begin to re-open by summer 2021, especially as the weather warms up for patio season,” he said. “We also anticipate that there will be pent-up demand for dine-in restaurant experiences from lockdown fatigue (albeit with initial capacity restrictions until we reach an adequate level of immunity). As well, we will begin to cycle through weak comps through 2020 and in H1/2021, as the restaurant industry was the first to be impacted and one of the hardest hit in 2020 when news of an unknown, highly contagious and deadly virus was first reported, even weeks before jurisdictions began imposing lockdown measure
That view led Mr. Sklar to upgrade Recipe Unlimited Corp. (RECP-T) to “outperform” from a “market perform” recommendation.
In justifying his move, he pointed a large group of factors, including: pent-up demand, encouraging vaccination timelines, an “optimistic” industry forecast, easy comparables and Recipe’s network of larger restaurants, which “provide spacious dining experiences and deploying rapid tests to employees – criteria many diners may value coming out of COVID-19.”
His target jumped to $31 from $21. The average on the Street is $24.38.
“Based on Recipe’s current price, we believe this is an attractive entry point poised for a H2/2021 rebound,” said Mr. Sklar.
Shares of the Richmond, B.C.-based manufacturer of optical sensors jumped 16.7 per cent on Monday following the announcement of the all-cash transaction valued at approximately $387-million.
Calling the deal “attractive and a win for investors who have held the name since the end of the last semi cycle in late 2018 (4 times return since),” Mr. Krishnaratne moved Photon to “tender” from a “buy” recommendation, pointing to its valuation versus peers and its historical trading range.
“MKSI a logical acquirer, in our view,” he said. “MKSI has noted that PHO is poised to enhance its strategic objectives, particularly related to its ability to increase sensor sales for temperature control for etch/deposition applications. We see many natural synergies between the two given a similar customer base (top WFE equipment vendors) and the ability for PHO to expand sales and accelerate product development as a combined entity. While it is possible a higher bid may materialize from another strategic buyer or perhaps even PE, we see the likelihood as relatively low given the strong fit between PHO and MKSI. If PHO were to accept a superior offer, MKSI has the right to match ($15.5-million termination fee paid to PHO if MKSI declines). While the deal looks reasonable, we expect some may be disappointed given the momentum in PHO’s business of late, which was partly reflected in our prior target. However, given PHO is quite widely held with few large shareholders, and absent any funds taking a more active position, we see the deal likely receiving the required 66.7-per-cent vote approval and closing in 3Q.”
He moved his target to $3.60 to reflect the deal from $4 previously. The average is $3.92.
“While we were excited for the potential upside in PHO and its shares over the coming years given the strong semiconductor tailwinds, its leadership position in sensor technology, solid operating profile and potential for new areas of growth via M&A, we see the offer as reasonably fair despite being below our prior $4.00 target,” Mr. Krishnaratne said.
The Montreal-based manufacturer debuted on both the New York Stock Exchange and Toronto Stock Exchange on May 7 after the completion of a business combination with Northern Genesis Acquisition Corp., a special purpose acquisition company.
“While wide adoption of EVs now looks inevitable, we note that the competitive landscape was completely different back in 2008 when Lion was founded,” said Mr. Poirier. “Lion has delivered more than 390 vehicles with over 7 million miles driven — a competitive advantage versus many of its peers still working on prototypes.”
Seeing it sitting in a strong strategic position to capture a large portion of a “large and growing” addressable market and possessing “significant” growth potential, he initiated coverage of the stock with a “buy” rating.
“While Lion has one of the largest purpose-built electric vehicle line-ups in the industry, management has been strategic with its market positioning. The company is focused on medium- and heavy-duty vehicles specifically designed to address the needs of the mid-range urban market (sub-250 miles),” said Mr. Poirier. “The urban market is well-suited to today’s EVs (with their current battery capacity) given the relatively modest distances travelled by these vehicles before they return to their base at the end of the day for recharging. Notably, the lower battery capacity required by these vehicles helps to lower vehicle costs, which improves payloads by bypassing the need for an extensive network of charging stations along the targeted routes. Management strategically targeted the school bus market (annual TAM of 45,000 vehicles, or US$10-billion) and the medium- and heavy-duty truck segment (annual TAM of 335,000 vehicles, or US$100-billion), two markets which are less crowded han the last-mile or transit market. In addition, we note that there is significant support from governments across Lion’s key regions for the adoption of all-electric school buses, notably in Quebec (plan to electrify 65 per cent of the entire school bus fleet by 2030, representing a potential of almost 7,000 units) and the U.S. (proposal to electrify at least 20 per cent of the entire school bus fleet over the next eight years, representing more than 80,000 units).”
Mr. Poirier is forecasting Lion’s consolidated revenue to grow to US$3.6-billion in 2025 from US$23-million, a compound annual growth rate of 174 per cent, which he called “conservative” versus its SPAC forecasts.
“Meanwhile, we expect management to profitably deliver on its growth ambitions as we forecast the company should turn adjusted-EBITDA positive in 2022 with margin of 19.4 per cent in 2025,” he added.
The analyst set a target of US$26 per share.
“We recommend long-term investors buy the shares ahead of potential catalysts (eg potential orders, production ramp-up),” said Mr. Poirier. “We believe the stock could be worth more than US$40 by 2023 if Lion is able to deliver on our forecasts.”
In separate post-earnings research reports, CIBC World Markets analyst Hamir Patel made these target changes:
* Interfor Corp. (IFP-T, “outperformer”) to $56 from $50. The average on the Street is $47.67.
“Our forecast implies an average FCF yield of approximately 25 per cent over the next two years. Interfor offers investors a pure-play way to gain exposure to lumber, with an asset base predominantly in the low-cost U.S. South (where timber inventories are likely to continue to build for the next 4-5 years),” he said. “IFP’s liquidity of over $1 billion also makes the company well-positioned to consider growth opportunities in wood products across North America, while also returning excess cash to shareholders (through its buyback program and/or a potential special dividend).”
* KP Tissue Inc. (KPT-T, “neutral”) to $11 from $12. Average: $11.25.
“We remain Neutral on KP Tissue and are moderating our price target given less visibility on the extent of industry cost mitigation efforts given mixed signals by the large branded tissue producers in the U.S.,” he said. “At the same time, we continue to see more attractive investment opportunities in wood products. While we continue to believe KP will be able to pass on higher pulp costs to customers over the cycle, margins may remain challenged into Q3 as input cost inflation shows no signs of easing. This may necessitate further price/desheeting action as costs have also risen for transportation and packaging.”
* West Fraser Timber Co. Ltd. (WFG-T, “outperformer”) to $141 from $135. Average: $127.59.
“. As the largest lumber and OSB producer, WFG is well-positioned to benefit from the robust U.S. housing market we expect to persist over the next few years,” he said.
* Western Forest Products Inc. (WEF-T, “outperformer”) to $2.90 from $2.50. Average: $2.65.
“WEF should benefit from robust R&R demand across North America over the next two years. While the company’s heavy weighting to BC (93 per cent of lumber capacity) remains a concern (given labor/provincial forestry policy uncertainty), a strong balance sheet ($245-million of liquidity) should allow Western to capitalize on growth opportunities along the U.S. West Coast,” he said.
In other analyst actions:
* Raymond James analyst Craig Stanley initiated coverage of Bear Creek Mining Corp. (BCM-X) with an “outperform” rating and $4.50 target. The average is $5.19.
* Cormark Securities analyst David Ocampo increased his Air Canada (AC-T) target to $25 from $24 with a “market perform” rating. The average on the Street is $28.26.
* Scotia Capital analyst Phil Hardie raised his Power Corporation of Canada (POW-T) target to $44 from $40 with a “sector perform” rating. The average is $38.50.
“We continue to have POW on our radar given its steep discount. We expect the discount to narrow toward the teens over the next year driven by: 1) enhanced growth profile of the publicly traded subsidiaries, 2) accelerated development of its alternative platforms to drive material fee generation along with successful monetization of investments, 3) deployment of excess capital through share buybacks, and 4) enhanced shareholder communication,” he said.
* Scotia’s Himanshu Gupta increased his Storagevault Canada Inc. (SVI-X) to $5, which is 4 cents below the consensus, from $4.50, keeping a “sector outperform” rating.
“While SVI stock price is up 20 per cent from pre-pandemic levels and one of the best performing real estate stocks during this period, we continue to believe premium valuation is warranted on this name,” said Mr. Gupta.
* Scotia’s Scott Macdonald raised his Lucara Diamond Corp. (LUC-T) target to 90 cents from 70 cents with a “sector perform” rating. The average is currently 98 cents.
“LUC now has both its financing package and mining license extension in hand for the underground project; the next major catalyst is a formal investment decision which is expected in 2H/21,” said Mr. Macdonald. “Despite the positive recent progress on the project, we think most investors will take a wait-and-see approach with the stock given the expected lack of net FCF (and dividends) during the project’s long development period (5 years) and the remaining technical and financial risks.”
* Credit Suisse analyst Andrew Kuske cut his Boralex Inc. (BLX-T) target to $48 from $52 with a “neutral” rating. The average is $51.40.
“Boralex’s growth plan of 40-per-cent capacity by 2023 is reasonable even with a discounted view of the existing pipeline – largely because of the company’s current size,” said Mr. Kuske. “In our view, beyond the current broader market affinity for renewable power stocks, BLX’s ability to execute and finance the growth plans along with both absolute and relative valuation issues are key to the direction of the share price.”
* Canaccord Genuity analyst Mark Rothschild raised his target for Flagship Communities Real Estate Investment Trust (MHC.U-T) to US$19.50 from US$17.25 with a “buy” rating. The average is US$17.70.
“Fundamentals remain extremely strong for manufactured home communities, and Flagship’s strong first quarter results highlight this fact,” he said. “The REIT’s results were materially above our forecast and suggest that we were far too conservative in setting expectations. Following stronger-than-expected results, we are raising our cash flow estimates considerably, although we expect timing of acquisitions and de-leveraging will impact actual results.”
* Desjardins Securities analyst Kyle Stanley raised his Melcor Real Estate Investment Trust (MR.UN-T) target to $6.50 from $5.25 with a “hold” rating. The average is $6.17.
* Desjardins’ Michael Markidis increased his Plaza Retail Real Estate Investment Trust (PLZ.UN-T) target to $4.25, exceeding the $4.17 average, from $4 with a “hold” recommendation.
* RBC Dominion Securities analyst Drew McReynolds raised his target for Quebecor Inc. (QBR.B-T) to $41 from $39, maintaining an “outperform” rating. The average is $39.17.
“We expect Quebecor to deliver industryleading NAV growth in the near term driven by positive operating leverage within a tightly integrated wireless-wireline network, the 3500 MHz spectrum set-aside, a highly effective bundling/content strategy, penetration gains with Fizz Mobile and Fizz Internet, steady execution, and a strong balance sheet (2.7x net debt/EBITDA) — all against the backdrop of a healthy capital return program of both dividend growth and share repurchases,” he said. “While we are keeping an eye on the added risk associated with growing strategic optionality around a re-loaded balance sheet and the potential availability of wireless assets outside Quebec in the wake of the Rogers-Shaw transaction, we believe Quebecor is potentially in a good position to be opportunistic with any such wireless expansion strategy.”
* RBC’s Walter Spracklin cut his Westshore Terminals Investment Corp. (WTE-T) to a Street-high $27 from $28, exceeding the $21.60 average, with an “outperform” rating.
“We are highly encouraged by the Q1 results and follow-on conversation with management, which reaffirmed the key tenets to our thesis and supports our positioning of WTE as one of our Top 3 Ideas in Transportation (despite the more than 35-per-cent move in the stock year-to-date),” said Mr. Spracklin. “We see potentially transformational catalysts (i.e. Potash conversion) as not being priced in, together with upside from up-gauges to the Teck contract and Riversdale permitting. Any of these catalysts we view as potentially meaningful to valuation and reiterate our OP rating on WTE shares.”
* National Bank Financial analyst Matt Kornack increased his Dream Office Real Estate Investment Trust (D.UN-T) target to $23 from $22 with an “outperform” rating, while RBC Dominion Securities’ Pammi Bir bumped up his target to $15 from $14 with an “outperform” rating. The average is $24.13.
“After several years of portfolio repositioning, de-leveraging, and challenges in Western Canada, DIR has finally hit its stride,” he said. “As we look ahead, we see plenty of reasons to remain constructive, including 1) accelerating organic growth, 2) strong AFFOPU & NAVPU growth profiles, 3) a solid balance sheet, 4) an expanding development program, and 5) portfolio quality that’s notably improved. At current levels, we see an attractive risk-adjusted return.”
* Piper Sandler analyst Michael Landry reduced his Tilray Inc. (TLRY-Q) target to US$15 from US$26, keeping a “neutral” rating. The average is US$19.73.
* Cowen and Co. analyst Vivien Azer cut her Cronos Group Inc. (CRON-T) target to $9 from $14 with a “market perform” rating, while MKM Partners analyst William Kirk raised his target by $1 to $12 with a “buy” recommendation. The current average is $9.69.
* CIBC World Markets analyst Jacob Bout raised his Cervus Equipment Corp. (CERV-T) target to $18.50 from $16.50 with a “neutral” rating. The average is $20.38.
* CIBC’s John Zamparo cut his RIV Capital Inc. (RIV-T) target to $2.75 from $3.25 with an “outperformer” rating. He’s currently the lone analyst on the Street covering the company formerly known as Canopy Rivers Inc.
* ATB Capital Markets analyst Waqar Syed cut his Ensign Energy Services Inc. (ESI-T) target to $3 from $3.25, reiterating an “outperform” rating. The average is currently $1.63.
“We think ESI offers high leverage to improving global activity, and the Company is seeing encouraging signs of rates/pricing moving higher in NAM, while its EDGE automation/technology should also continue to see higher adoption and lead to positive margin impacts,” he said. “The key risk with Ensign is its higher level of debt (50 per cent at Q1/21-end), although ESI has been effective in pushing out maturities, and we think its strong projected FCF generation (cumulative of $311-million over 2021-2023) also helps offset some of this risk.”
* ATB’s William Lacey reduced his Cenovus Energy Inc. (CVE-T) target to $15.25 from $16, keeping an “outperform” rating. The average is $11.99.
“Results were positive as production and cash flow came in ahead of our expectations as well as the street’s,” said Mr. Lacey. “This was also the first quarter with the Company’s new business segments apres the close of the Husky Energy merger, and with it came a higher level of granularity that will be well received by investors. Going forward, we’ve assumed CVE will be focused on sustaining production, not necessarily growing it, and free cash flow will be directed toward reducing net debt to the $10-billion level, which we believe will be achieved by the end of 2021.”
* National Bank Financial analyst Cameron Doerksen increased his Heroux Devtek Inc. (HRX-T) target to $21 from $18.50 with an “outperform” recommendation. The average is $20.25.
* National Bank’s Adam Shine raised his TVA Group Inc. (TVA.B-T) target to $3.25 from $2.50 with a “sector perform” rating. The average is $5.63.
* National Bank’s Tal Woolley increased his Chartwell Retirement Residences (CSH.UN-T) target to $14.50 from $13.50, keeping an “outperform” rating, while BMO Nesbitt Burns’ Joanne Chen raised her target to $13.50 from $12 with an “outperform” recommendation. The average is $13.58.
“Our outlook on CSH.UN post Q1/21 results is largely unchanged,” said Ms. Chen. “Notwithstanding the potential for near-term volatility related to pandemic expenses, we continue to believe Chartwell provides long-term upside given favourable demographic.”
* Morgan Stanley analyst Ioannis Masvoulas cut his Lundin Mining Corp. (LUN-T) target to $13.30 from $13.70 with an “in-line” rating. The average is $16.05.
* Mackie Research analyst Adam Schatzker initiated coverage of Wolfden Resources Corp. (WLF-X) with a “speculative buy” rating and 45-cent target. The average is 73 cents.
“While the return to our target price is modest given the underlying risks, we see potential upside from exploration at the Pickett Mountain project in 2021” he said. “Recent exploration on the Footwall zone and the Stringer zone both indicate the potential for high grade results which may eventually result in a more robust project. Additionally, any positive developments from the rezoning and permitting processes will likely have a positive impact on the company’s share price and, potentially, our valuation of the company.”