Inside the Market’s roundup of some of today’s key analyst actions
Agnico Eagle Mines Ltd. (AEM-T) is an “expanding gold producer on the cusp of truly breakout,” said Industrial Alliance Securities analyst Puneet Singh.
In a research report released Tuesday, he initiated coverage of the Toronto-based company with a “strong buy” rating, seeing a “rare chance to buy laggard shares” in a rising gold market.
“A challenging H1/20 that saw, at one point, 7 out of 8 of Agnico’s mines shuttered because of the pandemic is now in the past,” said Mr. Singh. “Gold prices are in record high territory but Agnico is still lagging peer returns over the past year, and hasn’t garnered the relative premium valuation (averaged 12 points higher price-to-cash flow in 2008-2011 and 7 points higher over the last five years) it deserves with its lower risk portfolio. This is starting to reverse as investors see recent operational challenges being overcome, expecting a much stronger H2/20 (Industrial Alliance estimate: 990,000 ounces at $990 per ounce all-in sustaining cost versus H1/20: 742Koz at $1,118/oz) and see near-term production expansions (mainly in Nunavut) take shape that will boost production to 2 million ounces or more starting next year.
“Given the extreme stimulus being issued right now, currency devaluation, lower trending yields, etc. we believe gold prices still have a multi-year runway higher ahead of them and because the gold sector is tiny, a lot of money is chasing large caps and the top tier choices available. We are strongly recommending investors buy this well-run, growing, low country risk senior gold producer now as it won’t be a laggard for long.”
Mr. Singh thinks investors will be focused on growth in a rising gold market, leading him to focus Agnico’s four main expansion projects that he expects will increase production at a more rapid than previously anticipated pace.
“The near term, the next phase of Meliadine’s ramp up, increased throughput from open pit (OP) ore feed (from satellite Amaruq) at Meadowbank, both in Nunavut, in addition to Quebec-based Malartic’s Barnat extension being fully incorporated will help take production to 2 million ounces (2020 estimate: 1.7 million ounces) next year,” he said. “Following that, further growth will come from going underground (UG) at Amaruq and a new shaft at Finland’s Kittilä mine. Long term, Agnico is testing Malartic’s UG potential (PEA expected in H1/21).”
Calling Agnico an “outperformer” in the last cycle, Mr. Singh sees its “temporary underperformance” turning around as operational issues are rectified. He now sees signals for investors to buy its stock.
“A market overhang was placed on Agnico after posting operational issues across the portfolio when it reported Q4/19 results,” he said. “While operations are on the mend and new mining plans have been instituted, government-ordered mine shutdowns due to the pandemic have kept shares from outperforming gold, as is expected from a senior producer like Agnico. Mining has since been restored at pandemic-affected operations. Agnico produced 742,000 ounces at $1,118 per ounce AISC in H1/20 but H2/20 will be a strong transition for the Company as expansion projects ramp up in a rising gold market.”
Emphasizing the prudence of its strategy of acquiring assets in safer jurisdictions, like Canada and Finland, and its “strong” free cash flow profile, Mr. Singh set a Street-high target of $135 for Agnico shares. The average is currently $105.02.
In the wake of a “significant” earnings miss from its engineering and construction (E&C) business, Laurnetian Bank Securities analyst Mona Nazir expects SNC-Lavalin Group Inc. (SNC-T) to continue to face challenges, pointing to the restructuring of its Resources segment, the execution of its lump-sum turnkey (LSTK) projects and the impact of lower profitability from the COVID-19 pandemic.
However, Ms. Nazir thinks SNC's risk-reward proposition is "favourable" and "investors should look to buy at these levels," leading her to raise her rating for its stock to "buy" from "hold."
"Following a review of options for the Resources business, management is implementing a strategy to reposition Resources as a complimentary service offering to its engineering capabilities with the focus largely on the Americas and Middle East ($47-million restructuring charge in Q2/20)," she said. "All other geographies will be wound down via closures and sales (South Africa divested last week, 1,800 employees, non-material proceeds). Resources revenue are expected to equate to 10 per cent of the mix in 2021, vs. 23 per cent in 2019; expectations are for a $15-$20-million EBIT drag in H2/20, and a turn to profitability in H2/202
"Within the Infrastructure division (LSTK projects), despite Q2/20 losses, guidance was provided for projects to be cash flow positive over the remaining project life. Following the restructuring of its Resources division and an expected halt of losses, profitability should increase throughout the coming 12-18 months. The SNCL Engineering Services performance is expected to continue to be resilient, driven by a 75-per-cent public end market weighting – positively impacting its Nuclear, EDPM (inclusive of Atkins) and Infrastructure Services segments."
Now seeing the Montreal-based firm “on stronger footing with higher profitability,” Ms. Nazir maintained a $33 target for SNC shares. The average on the Street is $33.31.
Elsewhere, Desjardins Securities analyst Benoit Poirier also remains bullish on SNC, seeing “significant” long-term value creation.
“While 2Q20 results were disappointing, they included much to support our long-term investment thesis: (1) the strong performance of SNCL Engineering Services despite the pandemic; (2) the division’s decent 2H20 outlook; (3) the strong book-to-bill ratio of 1.1 times; (4) progress on the Resources Engineering Services business; and (5) the third consecutive operating cash flow beat,” he said.
Keeping a “buy” rating and reiterating his “bullish stance on the name,” he trimmed his target for SNC shares to $36 from $37.
“While SNC still has to burn $0.2-billion of backlog related to Resources LSTK projects, we now have greater visibility on their completion (expected in 2Q21),” he said. “Beyond that, we still see significant potential for value creation as SNC focuses entirely on its Engineering Services segment.”
Though Air Canada (AC-T) is “stemming the cash bleed,” Canaccord Genuity analyst Doug Taylor emphasized “uncertainty persists” following a “very challenging” second quarter.
On Friday, the airline reported headline results that narrowly exceeded expectations on the Street.
“Consistent with its previous expectations, AC’s Q2 financing activities helped the company exit June with higher liquidity ($9.1-billion) despite a heavy cash burn in the quarter,” said Mr. Taylor. “Guidance suggests further improvement on this key metric in Q3 and beyond. With that said, management commentary, combined with industry peers, suggests a more substantive recovery is shifting further out. The company still expects a 3+ year recovery to previous revenue levels, subject to numerous variables including the broad availability of a vaccine and an ensuing economic recovery buoying leisure and corporate travel demand.
“We have pushed out and tempered our rebound expectations further as we anticipate a slower path to recovery as the company rightsizes.”
Calling the recovery in demand in the wake of COVID-19 “the elephant in the room,” Mr. TaYlor cut his 2020 earnings per share expectation to a loss of $14.10 from a $8.70 deficit previously. His 2021 estimate slid to a $1.14 loss from a profit of $1.03.
Keeping a “buy” rating for Air Canada shares, he trimmed his target by a loonie to $23. The average on the Street is $22.08.
“We reiterate our BUY rating – we believe there is substantial upside in the stock in a vaccine scenario - but have reduced our target price to $23 (from $24), noting that exceptional volatility is likely to continue to create compelling entry-points for a well capitalized mainline carrier in a rapidly evolving sector,” said Mr. Taylor.
Elsewhere, ATB Capital Markets analyst Chris Murray moved his target to $31 from $37 with an “outperform” rating
Mr. Murray said: “We had very low expectations for Q2/20 results with a focus on the outlook and thoughts around a weakening outlook for a recovery. While management maintained expectations for 2023 to return to 2019 activity levels, there is significant uncertainty on timing on a number of fronts, including when and how the Company will be able to resume operations. We continue to see the Company’s ability to raise capital and a reduction in burn rate as key to being able to bridge to a recovery.”
With the completion of a special distribution of Brookfield Renewable Corp. (BEPC-T, BEPC-N) shares to its existing unitholders, Industrial Alliance Securities analyst Naji Baydoun cut his target for Brookfield Renewable Partners L.P. (BEP.UN-T, BEP-N).
“The creation of BEPC is intended to attract incremental capital by providing investors access to the Brookfield Renewable investment through a corporation structure (compared to BEP’s partnership structure),” he said.
“The BEPC creation and distribution were completed alongside the acquisition of the remaining minority interest in TerraForm Power (TERP-Q) that is not currently owned by the Company and co-investors. The transaction was approved by TERP’s shareholders on July 29, 2020, and has now closed.”
Mr. Baydoun said the “bigger picture” for Brookfield Renewable Partners has not changed with the completion of the transaction.
“The long-term outlook for BEP remains positive, and we continue to expect the Company to deliver 12-15-per-cent average annual total shareholder returns over the long term via a combination of (1) high single-digit FFO/share growth (within the Company’s 6-11-per-cent average annual FFO/share growth target), and (2) average annual dividend growth of 5-9 per cent per year (likely closer to the lower end of the range to drive the payout ratio lower over time,” he said.
Keeping a “buy” rating, Mr. Baydoun lowered his target to $46 from $58. The average is $60.64.
“We continue to like BEP’s (1) high-quality global renewable power platform (19GW), (2) high degree of contracted cash flows (5-90 per cent-plus through 2024), (3) long-term organic and M&A-based growth strategy (1.4GW under development, and more than 13GW of prospects), and (4) attractive income characteristics (5-per-cent yield and a 5-9 per cent per year dividend growth target). We continue to see BEP as a premium brand in the sector, supported by premium value hydro assets.”
Following its “robust” second quarter, Raymond James analyst Steve Hansen expressed a “greater” confidence in the macro outlook for CanWel Building Materials Group Ltd. (CWX-T), expecting industry momentum to continue.
On July 30, the Vancouver-based company reported adjusted EBITDA of $32.8-million, up 10.0 per cent year-over-year and exceeding the projections of both Mr. Hansen and the Street ($22.8-million and $24.7-million, respectively). He attributed the beat to better-than-expected sales and margins.
“CanWel’s early/relentless focus on working capital management at the outset of the pandemic allowed the company to reduce its associated borrowings by $89.9-million quarter-over-quarter, an impressive feat given the sales momentum that ultimately materialized,” said Mr. Hansen. “Coupled with the firm’s recent move to trim its dividend, we seethe company’s balance sheet and capital structure as increasingly solid, arguably providing significantly more strategic flexibility going forward.”
After raising his 2020 and 2021 earnings expectations, Mr. Hansen increased his target for CanWel shares to $7.50 from $6.50 with an “outperform” rating. The average on the Street is $5.89.
“Management indicated that recent industry momentum remains strong, underpinned by robust housing activity and an unprecedented wave of consumer DIY projects,” he said. “Treated wood, in particular, was called out as being extraordinarily tight, with all 13 of the company’s treating plants running ‘full out’ to meet demand & sold out right through 3Q20. In terms of regional exposures, both Canada and the US were indicated as strong.After a slower start, Canadian activity has reportedly heated up in recent months and is now surpassing 2019 levels. Despite the ongoing lockdown, California activity was indicated as very robust (up 30 per cent), particularly for all of the key backyard/decking/fencing related products (redwood/cedar/etc).”
“Getting more defensive” as U.S. aerospace and defence companies report quarterly results, RBC Dominion Securities analyst Michael Eisen made a pair of rating changes on Tuesday.
“Defence exposure continues to provide a more stable fundamental back drop,” he saud. “Investor concerns regarding the outlook for defense budgets has weighed on the sector’s valuation, which we think has been overstated. The group has appreciated on average by 4 per cent over the past 3 months, vs. up 16 per cent for the S&P 500. Earnings results from the Defence contractors have all held in much better than feared, delivering headline beats for all companies with a majority of sales to the end market. Book-to-bill ratios also held above 1 times across the board, with the strongest backlog growth coming from space based programs. In contrast, the outlook for Commercial demand has turned more bleak as the spread of COVID-19 continues trend in the wrong direction. This has brought additional production rate cuts at BA and the end of the storied 747 program. We now believe that there will be longer lasting impact on the commercial supply chain than originally anticipated.”
Mr. Eisen raised California-based Aerojet Rocketdyne Holdings Inc. (AJRD-N) to “outperform” from “sector perform” with a target of US$45, rising from US$45. The average is US$55.75.
“The company’s position as the leading propulsion provider aligns the product portfolio with the defense verticals most likely to reap the benefits of sustained support in the current budget environment,” he said. “While the competitive dynamics in the space launch side of the business remain, 2Q results show that AJRD will likely remain a key supplier in the $10-billion launch market.”
At the same time, Mr. Eisen lowered Stamford, Conn.-based Hexcel Corp. (HXL-N) to “sector perform” from “outperform” and trimmed his target to US$42 from US$52, which remains higher than the US$41.92 average.
“Continued pressure on the Commercial Aerospace market is likely to have a prolonged impact on the company’s capacity utilization and growth potential over the near to mid-term,” he said.
“Longer-term HXL represents one of the most compelling ESG investments in A&D. The company should benefit from a prolonged tailwind of material conversion toward light weight, more efficient composites. However, the next few years position the company to grapple with cost management, underutilization of assets, and limited growth potential. As a result, we expect the company’s valuation premium to remain under pressure until a path to higher production rates becomes apparent.”
Expressing optimism about the long-term outlook for Canadian upstream and midstream sectors, Jefferies initiated coverage of a group of TSX-listed stocks on Tuesday.
The firm started Keyera Corp. (KEY-T) with a “buy” rating and $23 target, noting it has lagged its peers thus far in 2020 and now has one of the lowest price-to-earnings ratios in the group. The average on the Street is $25.89.
The firm also initiated coverage of a trio of stocks with a "hold" rating:
- Pembina Pipeline Corp. (PPL-T) with a $34 target. Average: $39.15.
- Inter Pipeline Ltd. (IPL-T) with a $13 target. Average: $13.31.
- Gibson Energy Inc. (GEI-T) with a $22 target. Average: $24.06.
In other analyst actions:
* Desjardins Securities analyst Kyle Stanley maintained a “buy” rating and $1.80 target for Nexus Real Estate Investment Trust (NXR.UN-X) upon assuming coverage. The average target on the Street is $1.97.
“NXR stacks up well relative to its diversified peer group as it (1) has the highest exposure to industrial assets at 48 per cent of base rent; (2) offers the highest cash distribution yield; (3) has the lowest leverage at 7.9 times, 1.5 times lower than the peer average; and (4) is trading at a significant 35-per-cent discount to NAV notwithstanding the potential 8-per-cent NAV upside pending the successful redevelopment of its sports facility in Richmond,” he said.
* Pointing to its “strong positioning and competitive advantage in a niche market,” Laurentian Bank Securities analyst Furaz Ahmad resumed coverage of K-Bro Linen Ltd. (KBL-T) with a “buy” rating and $36 target. The average on the Street is $33.50.
“K-Bro is well positioned to continue to grow both organically and through acquisitions going forward,” he said. “There are a number of opportunities and trends supporting future organic growth in both the Healthcare and Hospitability businesses in Canada and the UK. Notably, we believe there are a number of opportunities available to K-Bro due to COVID-19 including a renewed focus by healthcare and hospitality customers on ensuring stricter cleanliness and hygienic linen cleaning processes. We believe this will accelerate the trend towards outsourcing in both end-markets, albeit more so in the healthcare market, given budgetary constraints in most regions.”