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

Sentiment is improving for Canadian midstream energy companies, according to Canaccord Genuity analysts John Bereznicki and Dennis Fong, who called the sector's first-quarter results "generally solid" with only a "modest" impact seen from the March plummet in oil prices.

"Management teams acknowledged the looming Q2 impact of reduced volumes on their gathering and processing operations, along with headwinds to their marketing segments due to lower liquids pricing (and spreads)," they said in a research note released Tuesday morning.

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"Notwithstanding these headwinds, the recovery of front-month oil pricing off its April lows has bolstered investor sentiment and generally moved equity values upward since that time. As a result, the midstream equities in our coverage universe have now recovered by an average of 112 per cent from their March lows."

The analysts said they are “fundamentally more constructive” toward the sector than a month ago, believing domestic oil and natural gas pricing can mitigate the possibility for more broad-based shut-in activity and motivated producers to bring production back on-line.

"We also remain cognizant of longer-term headwinds to the midstream sector, as well as other factors that could support midstream cash flow and equity valuations going forward," they said.

“With recovering oil prices and narrow liquids differentials, we believe midstream companies with commodity-exposed segments could once again experience tailwinds heading into the third quarter. We highlight KEY and IPL as having the highest exposure to improving liquids pricing (and softening natural gas prices). We also believe that as motorists return to the road, KEY should benefit from recovering ISO-Octane demand while TWM experiences improving end demand at PGR. We also believe ALA should benefit from strengthening end market demand at RIPET as Asian end markets normalize.”

The analysts also emphasized that the current interest rate environment could provide further valuation support, saying: “We believe COVID-19 central bank stimulus should bolster investor yield appetite in the midstream sector while supporting lower debt costs and increased valuation metrics in the space longer term. We also believe an ultra-low interest rate environment could also have important implications for our past analysis that suggests Canadian midstream equities have historically behaved primary as yield plays with WTI above US$45 per barrel. In our view, a structurally lower interest rate environment is likely to reduce the oil price threshold at which investors are willing to hold midstream equites for yield despite their attendant commodity price risk.”

They analysts made a series of changes to their forecasts for the sector, leading to new target prices for their stocks.

Mr. Bereznicki made the following changes:

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  • Gibson Energy Inc. (GEI-T, “buy”) to $26 from $24. The average on the Street is $23.40.
  • AltaGas Ltd. (ALA-T, “buy”) to $19 from $18. Average: $18.83.
  • Keyera Corp. (KEY-T, “buy”) to $25 from $21. Average: $25.33.

Mr. Fong's changes were:

  • Inter Pipeline Ltd. (IPL-T, “buy”) to $15 from $14.50. Average: $12.65.
  • Pembina Pipeline Corp. (PPL-T, “buy”) to $40 from $31. Average: $38.

“Our midstream pecking order is PPL, GEI, ALA, KEY and IPL,” they said.


Desjardins Securities analyst Chris Li sees "encouraging" early signs of recovery for the foodservice industry following the "unprecedented demand destruction" brought on by the COVID-19 pandemic.

However, he cautions that “visibility remains limited” for Saputo Inc. (SAP-T), calling the sustainability of the rebound has “unclear” ahead of the release of its fourth-quarter results on Thursday.

Mr. Li lowered his financial expectations for the Montreal-based company to reflect near-term pressures on both its foodservice and industrial businesses. He's now projecting earnings per share for the quarter of 34 cents, matching the consensus on the Street and up 2 cents year-over-year.

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"The pandemic initially caused foodservice demand and cheese prices to plummet," he said. " As the economy starts to reopen, the industry is improving week-over-week and cheese prices have recovered from a low of US$1 per pound to more than US$2 per pound. The question is: how sustainable is the recovery? As we highlight in our note, consensus among foodservice industry observers is for an almost V-shaped recovery, with sales declining 22–23 per cent year-over-year this year and recovering 15–19 per cent year-over-year next year, essentially reaching more than 90 per cent of the 2019 sales level. If this is correct and assuming dairy prices remain stable, we believe this supports an earnings power of close to $2.00 per share next year (FY22)."

However, he lowered his forecast for full-year fiscal 2020 and 2021 to $1.73 and $1.70, respectively, from $1.79 and $1.96.

“One of the key questions is whether SAP is able to find sufficient capacity to meet the surge in retail demand,” he said. “This is because SAP’s retail plants were already running at near maximum capacity (more than 95-per-cent utilization) before the pandemic. The foodservice/industrial facilities cannot be easily converted to fulfill retail orders. SAP is streamlining the number of SKUs to minimize changeover, as well as working with its retail partners to accept SKUs manufactured for the foodservice channel. It is also converting its contracted milk supplies into longer-shelf-life products in order to minimize wastage and maximize manufacturing efficiency, while balancing against the need to manage inventory and working capital.”

Maintaining a “hold” rating, Mr. Li lowered his target to $39 from $45. The average on the Street is $41.19.

“Despite potentially significant near-term sales and cost pressures, we believe SAP should come out of this crisis even stronger, supported by its strong execution, market-leading position and solid balance sheet,” he said. “But since we are still early in the recovery and given the uncertain dairy commodity backdrop, we would wait for more clarity before becoming more positive.”


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Though he sees current economic conditions having a “material negative impact” on its revenues, Raymond James analyst Stephen Boland resumed coverage of Element Fleet Management Corp. (EFN-T) with an “outperform” rating, seeing a “second chance for investors.”

“After a change in senior management in 2018, Element is in the midst of a 2-year Transformation Plan (The Plan) to increase customer service and retention as well delivering $180-million of operating income improvements," said Mr. Boland. "Management has ensured The Plan is ahead of schedule and customer retention has increased. We believe the pandemic is having a meaningful impact to 2020 results as companies defer their fleet purchase decisions (lower net interest income) and overall driving mileage reduces Service income.

"As we have seen in past periods of economic instability, the purchase decisions are temporary. We believe 2021 will be a strong rebound year for Element with The Plan completed and a rebound in growth. We view Element as a well run market leader in its industry.”

He set a target price for Element Fleet shares of $11.50. The consensus target on the Street is 17 cents higher.

“Our $11.50 target price is derived by applying a 11.0-times multiple on our 2021 EPS estimates of $1.04,” said Mr. Boland. “The stock is trading at 9.3 times our 2021 estimates. The average of the past 5 years was 10.0 times. Finding comparables is also difficult since there are limited public fleet management companies. Based on a mix of fleet management companies and leasing comparables, EFN trades in-line on a forward basis. We believe with the strong balance sheet,market leadership and the ability to add more mega fleets to its business a premium is justified.”


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After better-than-anticipated first-quarter results that saw it see the benefits of 12 recent acquisitions, Industrial Alliance Securities analyst Neil Linsdell raised his target price for shares of Seven Aces Ltd. (ACES-X).

On Monday, the Toronto-based gaming company reported revenue of $23.8-million, up 18 per cent year-over-year exceeding Mr. Linsdell’s $23.1-million projection. Earnings per share slipped due to a a one-time charge related to the elimination of a derivative connected to the credit facility that was replaced in January.

“There has been minimal impact to the Company’s business from COVID-19 as its operations are based entirely in Georgia, and its COAMs [coin operated amusement machines] are located in gas stations and convenience stores, which are considered essential services,” he said. “Additionally, Georgia began reopening some businesses as of April 24. We had been expecting a minor slowdown at the end of March and early in April, but with coronavirus relief checks now circulating in the U.S., we are expecting a good pickup in May.”

Maintaining a “buy” rating, Mr. Linsdell increased his target to $2.40 from $2.10. The average on the Street is $2.65.


The rapid shift to remote work due to COVID-19 pandemic has provided Slack Technologies Inc. (WORK-N) an opportunity to accelerate its adoption and lift its total addressable market, according to Cowen analyst J. Derrick Wood

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Ahead of the release of its first-quarter results on Thursday, he initiated coverage of the stock with an “outperform” rating and US$45. The average on the Street is US$29.48.

Mr. Wood is projecting 26-per-cent billing growth for the quarter, exceeding the 22-per-cent consensus estimate on the Street.


With its risk-reward as evenly balanced in the wake of a 125-per-cent jump in share price since mid-March and seeing “plenty of risk in the consumer environment still ahead,” Wells Fargo analyst Ike Boruchow downgraded Lululemon Athletica Inc. (LULU-Q) to “equal weight” from “overweight.”

Calling it a “high-quality best-in-class brand,” Mr. Boruchow did note the Vancouver-based apparel maker’s fundamental story remains intact and sees several positives, including strong products, the potential for increased global expansion and digital enhancements leading to e-commerce momentum.

However, suggesting a series of recent executive departures could bring uncertainty in the business that is not reflected in its valuation, he cut his target for the stock to US$275 from US$300. The average on the Street is US$241.20.


In other analyst actions:

* After revealing details of its renewable natural gas (RNG) development partnership with Fonds de Solidarité FTQ, Raymond James analyst David Quezada raised his target for Xebec Adsorption Inc. (XBC-X) to $6 from $5 with a “strong buy” rating. The average on the Street is $4.88.

“We continue to regard XBC as sitting at the forefront of a compelling growth opportunity in the burgeoning RNG sector and anticipate the company’s partnership with FTQ positions Xebec as a first mover in Canada for RNG development/production,” he said. “While we do not yet include these potential projects in our published estimates, we are increasing .... on an increased target multiple reflecting this opportunity.”

* Ahead of the release of its first-quarter results on Wednesday after the bell, Canaccord Genuity analyst Derek Dley raised his target for shares of AutoCanada Inc. (ACQ-T) by a loonie to $9 with a “buy” rating. The average on the Street is $8.88.

“We believe the realignment of AutoCanada’s business following the implementation of the Go Forward Plan to focus on developing the higher-margin and economically resilient operating segments will reward investors with stable earnings growth,” he said. “Although we expect this to be somewhat challenged in the near term due to COVID-19, we believe the company’s relatively clean balance sheet will help navigate uncertainty moving forward.”

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