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

Several equity analysts on the Street adjusted their ratings for Painted Pony Energy Ltd. (PONY-T) in response to Monday’s announcement that it has agreed to be acquired by Canadian Natural Resources Ltd. (CNQ-T).

Under the deal, announced before the bell on Monday, Painted Pony will be bought for cash proceeds of 69 cents per share, which is a 17-per-cent premium to Friday’s closing price, and the assumption of $350-million in debt.

See also: Canadian Natural Resources buys rival Painted Pony for $111-million to bolster regional position

Pointing to the “long term take or pay type transportation and facility commitments Painted Pony has,” Industrial Alliance Securities’ Michael Charlton thinks there is “limited potential for a substantially higher offer to surface.”

Accordingly, he moved his rating for Painted Pony to “hold” from “speculative buy.”

“In our view, the acquisition makes sense for CNQ as the transaction will account for less than 1 per cent of CNQ’s operations and is not material to them,” said Mr. Charlton. “To this end, we believe that given its size, CNQ will be able to utilize, sell or otherwise deal with the long-term commitments, and also easily absorb the company’s debt position, something not a lot of other potential purchasers could or would be willing to do in the current economic environment. Not to mention, who doesn’t want to buy long life reserves on the cheap.

“However, given the transaction metrics are well below the other two transactions mentioned, we feel that shareholders may not be overly supportive and want to hold onto their shares hoping for a superior offer. A shareholder vote to approve the transaction is anticipated to be held in September, so there is time for a competing offer to materialize, but given the debt coupled with sizeable future commitments, that potential has most likely been exhausted through the sale process.”

Mr. Charlton lowered his target for Painted Pony shares to 69 cents, matching the acquisition price, down from $1.25 previously.

“At current share prices, Painted Pony continues to trade at a deep discount to its base reserve valuation,” he said. “We continue to believe the company’s reserves are not being fully valued in the market, nor is the near-term upside of its Montney play. Furthermore, the growth potential from its existing land base west of the B.C. royalty line is also not reflected in its current share price providing a value opportunity for investors.”

Elsewhere, Desjardins Securities’ Chris MacCulloch moved the stock to “tender” from “hold” with a 69-cent target, up from 50 cents.

“In our view, the likelihood of a competing offer is low given PONY’s elevated debt levels and the significant break fee,” he said. “While the acquisition certainly marks a disappointing conclusion for PONY, it was probably the best potential exit for shareholders in the current market. We are moving to a Tender recommendation.”

CIBC World Markets analyst David Popowich raised raised Painted Pony to “neutral” from “underperformer” with a 69-cent target, matching the consensus, from 50 cents previously.

Mr. Popowich said: “Although the outlook for natural gas is starting to improve, we believe Painted Pony was still facing a couple quarters of near-term weakness in cash flows, which were making it increasingly difficult for the company to manage its various financial obligations. Given that Painted Pony has reportedly conducted a process to market this transaction, which includes a sizeable ($20-million) break fee, we believe the likelihood of competing bids is low. As a result, we recommend shareholders tender to the Canadian Natural offer.”


In a research report previewing third-quarter earnings season for Canadian banks, Desjardins Securities analyst Doug Young expects cash earnings per share to decline of 28 per cent year-over-year, due largely to higher provisions for credit losses and lower net interest margins.

"The focus in 2Q FY20 was the meaningful build in allowances for credit losses," he said. "And while we are still shooting in the dark, directionally we are comfortable saying PCLs should decline sequentially. PTPP [pre-provision operating profit] earnings will once again be a focus and could benefit from another quarter of strong capital markets results."

Mr. Young said credit trends continue to be the "big wild card." He's forecasting an average PCL rate of 0.77 per cent for the Big 6, a decline of 61 basis points from the previous quarter.

“We expect performing loan PCLs to decline materially vs last quarter, but to be higher versus last year,” he said. “We expect some negative credit migration and some tweaks to forward-looking indicators (FLI). That said, we expect impaired PCLs to be higher.”

The analyst made several target price changes to bank stocks. They are:

  • Royal Bank of Canada (RY-T, “hold”) to $98 from $96. Average: $100.62.
  • National Bank of Canada (NA-T, “hold”) to $66 from $59. Average: $63.40.
  • Canadian Imperial Bank of Commerce (CM-T, “hold”) to $96 from $94. Average: $93.54.
  • Bank of Montreal (BMO-T, “hold”) to $79 from $78. Average: $77.50.

He maintained his target prices for:

  • Bank of Nova Scotia (BNS-T, “buy”) at $64. Average: $62.15.
  • Toronto-Dominion Bank (TD-T, “buy”) at $66. Average: $64.46.
  • Canadian Western Bank (CWB-T, “buy”) at $26. Average: $26.05.
  • Laurentian Bank of Canada (LB-T, “hold”) at $27. Average: $27.95.

His pecking order did not change. His preferences remain: BNS, TD, CWB, RY, NA, CM, BMO, LB.

“Canadian bank stock prices increased 5.0 per cent on average during 3Q FY20, in line with the Canadian lifecos, outperforming the US bank index and the US lifeco average but underperforming the S&P/TSX,” Mr. Young said. “NA was the best performing Canadian bank (up 12.6 per cent) while LB underperformed (down 14.6 per cent).

“The Big 6 Canadian banks, with the exception of NA, are trading below their 20-year historical average P/4QF EPS multiples . However, given the unprecedented economic conditions, earnings estimates have been wide. The Canadian banks face a few headwinds in the near term: (1) a drastic reduction in BoC and U.S. fed funds rates will put pressure on the top line; (2) an increase in expected and actual credit losses due to the economic shutdown; and (3) a weaker energy sector. That said, the Canadian banks have navigated well through past periods of distress. Capital levels remain comfortable, and it appears that the banks and OSFI are on the same page to preserve that. "


In response to “impressive” second-quarter results and a “brighter” outlook, Canaccord Genuity analyst Yuri Lynk raised Hardwoods Distribution Inc. (HDI-T) to “buy” from “hold.”

“Admittedly, we have been wrong-footed by the impact COVID-19 had on HDI’s business and missed a tremendous rally in the stock as a result,” he said. “However, as we sit here today, after a quarter featuring shockingly strong margins, we see good upside potential to our new target price.”

On Monday before the bell, the Langley, B.C.-based company reported quarterly results that exceeded Mr. Lynk’s expectations due largely to “significant” margin improvements.

Revenue of $296-million was a decline of 3 per cent year-over-year but in line with Mr. Lynk’s $297-million estimate. However, adjusted earnings per share of 51 cents was a 27-per-cent improvement and topped his 34-cent forecast.

“HDI continues to see demand for its architectural grade building products improve as the economy reopens from shutdowns to contain COVID-19,” he said. “Management noted that organic sales growth in July was flat year-over-year versus down 20 per cent in April. Residential markets, which account for 50 per cent of HDI’s sales, appear strong as low interest rates and more time spent at home spur renovation demand. Some commercial and other construction end-markets (which account for the balance of HDI’s business), including healthcare and education, are expected to perform better in H2/2020, offsetting more challenged end-markets such as hospitality.”

That led Mr. Lynk to raise his third-quarter adjusted EBIDA projection to $24-million from $22-million with a “conservative” assumption of a 50 basis point contract in gross margins. His 2020 EPS estimate jumped to $1.86 from $1.53, while his 2021 estimate climbed 27 per cent to $1.89 (from $1.49).

Mr. Lynk raised his target for Hardwoods shares to $23 from $17. The average on the Street is $23.87.

“With visibility on substantial EPS growth and latent acquisition upside potential still very much intact, we take our valuation multiple to 12 times from 11 times,” he said.

Elsewhere, Acumen Capital’s Nick Corcoran raised his target to $26 from $22 with a “buy” rating (unchanged).

Mr. Corcoran said: “Despite the headwinds presented by COVID19, HDI reported a record quarter in terms of gross margin and EBITDA margin. With operations showing signs of normalizing, we have revised our estimates and target price to reflect the operational and financial momentum of HDI’s business.”


Though he cautioned that “weak visibility continues to cloud” its upside,” ATB Capital Markets analyst Tim Monachello raised his earnings estimates for Shawcor Ltd. (SCL-T) following its better-than-anticipated second-quarter results, pointing to improved cost controls.

“We believe SCL faces a highly uncertain outlook over the near-and-mid term, most notably regarding the pace and timing of a recovery in energy markets, and to a lesser degree automotive demand,” he said. “Still, SCL is making quicker than anticipated progress in right sizing its costs and streamlining its operating footprint, efforts which should continue through at least year-end. Overall, we believe SCL’s high degree of operating leverage, and relatively limited visibility could lead to significant forecast error especially over longer time horizons. Still we acknowledge that these same factors likely make SCL amongst the highest-beta investments in the energy services sector and could result in outperformance in the event a market recovery materializes more rapidly than our forecasts. That said, our formal estimates continue to suggest that SCL could test its recently amended debt covenants over the coming quarters, which adds another layer of risk for investors.”

Mr. Monachello raised his earnings before adjusted interest, taxes, depreciation, amortization, and stock-based compensation (EBITDAS) forecast for the second half of 2020 by $15-million to $32-million. For fiscal 2021 and 2022, he increased his projections by 13 per cent and 8 per cent, respectively, to $103-million and $144-million.

“While Shawcor’s diverse end market exposure helps insulate its top line from volatility in certain business segments, its heavy fixed cost structure could add meaningful volatility and unpredictability to its cash flows, especially in depressed markets when revenues fall closer to this cost base,” the analyst said. “As such, the trajectory of SCL’s cash flows are highly sensitive to the pace of demand recovery in energy markets, both in North America and globally, and to a recovery in the global economy as it relates to COVID-19, which impacts the demand for SCL’s Composites and Industrials segments. In this regard, we believe SCL’s visibility remains weak over the foreseeable future; North American upstream activity remains at trough levels, and may only improve marginally through year-end with ultimate 2021 demand subject to significant uncertainty. International and offshore pipe coating has a more visible long-term outlook, but unsanctioned projects are facing 12-15 month delays which adds unpredictability to the upside in SCL’s mid-to-long term pipe coating opportunity set. While SCL’s Automotive and Industrials business continues to recover from the worst of COVID-19 related disruptions, the ultimate upside will continue to face uncertainties until there is better visibility to a full reopening of Western economies, in our view.”

Maintaining a “sector perform” rating due to " high beta exposure and persistently weak visibility toward a recovery in energy markets,” Mr. Monachello raised his target for Shawcor shares to $3.50 from $3.25. The average on the Street is $3.36.


Teranga Gold Corp.’s (TGZ-T) portfolio positioning has prepared it to “capitalize on the present opportunity,” according to RBC Dominion Securities analyst Wayne Lam.

“Over the last five years, Teranga has executed on a growth strategy that has resulted in opportunistic M&A and advancement of projects that are now ready to bear fruit, coinciding with the turn in gold cycle,” he said. “This includes the acquisition of Gryphon Minerals in mid-2016 and subsequent construction of Wahgnion in Q3/19, along with the acquisition of Massawa in late 2019 with first ore anticipated to be delivered in Q3/20.”

“These growth initiatives have set the stage for another step change in production heading into 2021, as outlined with the recent release of the Integrated PFS [prelminary feasbility study] on the Sabodala-Massawa complex and the LOM [live-of-mine] update at Wahgnion. With mining of first ore from Massawa under way, outperformance from Wahgnion since start-up last year, and Golden Hill quickly advancing through the pipeline, we estimate that the company is poised to deliver 35-per-cent production growth at 20-per-cent lower AISC [all-in sustaining costs] into 2021 and we forecast consolidated output of 527 koz [thousand ounces] gold at AISC of $750 per ounce. Through 2025, we anticipate consolidated free cash flow averaging $335-million annually, up from $155-million forecast this year.”

Mr. Lam raised his financial expectations for following the company’s PFS for its Sabodala-Massawa gold complex in Senegal, which showed “stronger” upfront production and lower costs, led by a greater proportion of higher-grade ore from the Massawa deposit.

He now thinks the complex appears to be “among the top-producing gold mines globally on production and costs” and called it a “robust, low-cost flagship asset.”

With an “outperform” rating (unchanged), Mr. Lam hiked his target for Teranga shares to $20 from $13. The average on the Street is $19.19.

“We highlight Teranga’s strong beta to gold relative to other producers, offering levered exposure within a robust gold price environment amidst strengthening underlying fundamentals,” the analyst said. “This comes alongside a valuation that remains attractive, sitting at a 25-per-cent discount to peers on both spot P/NAV and EV/EBITDA. We anticipate this gap to close as growth objectives are executed and accelerated free cash flow is delivered.”


Calling Canopy Growth Corp.‘s (WEED-T) better-than-anticipated first-quarter 2021 financial results, reported Monday before the bell, “a step in the right direction,” Canaccord Genuity analyst Matt Bottomley raised his financial expectations for the remainder of the fiscal year.

“On the back of better than anticipated quarter on the top line as the company reduced its free-cash burn by more than 40 per cent from only a quarter ago, we have updated our model to account for a slightly faster path to break-even (profitability),” he said.

Keeping a “hold” rating, Mr. Bottomley increased his target by a loonie to $22. The average on the Street is $22.94

“As we believe Canopy’s EV of more than US$7-billion is still lofty in relation to the current size of the Canadian market and the company’s pathway to profitability which is still greater than 12 months out,” he said.

Meanwhile, seeing a "murky outlook due to pricing compression industry-wide," Desjardins Securities' John Chu cut his target to $22 from $29 with a "hold" rating (unchanged).

Mr. Chu said: “Despite a solid 1Q beat and some potential tailwinds (more stores, value brand relaunch, 2.0 sales momentum, improving order fulfillment rates), WEED has a muted near-term outlook for both sales and margins. We factored this muted outlook into our forecast, which also impacted our estimates for FY22 and FY23. This, along with a cut in our higher-margin international revenue outlook (growth remains weak), reduces our margin forecast.”


Raymond James analyst Michael Glen raised his financial expectations for Magna International Inc. (MGA-N, MG-T) in response to its guidance for the second half of the year, acknowledging his previous forecast was “significantly more conservative.”

"While we maintain our Market Perform rating on Magna, we believe the company remains extremely well-positioned to work its way through the balance of the COVID pandemic, while exiting in an increasingly important position with its large OEM customers," he said. "Where we continue to have some pause with the stock is related to valuation, which we acknowledge is not necessarily the most substantial gating factor for investors looking at the outlook over coming quarters.

"From that perspective, as we continue to see: 1. improving sales volumes in the U.S. (i.e., July SAAR coming in at 14.5 million versus 13.1 million in June); 2. low inventory levels (per Wards July 2020 U.S. inventory levels were at 2.61 million units - flat from the end of June 2020 - and 29 per cent lower than July 2019 levels); and, 3. a continued positive mix skew towards truck/CUV/SUV (i.e., 76 per cent of July sales) versus passenger car, we see a favourable backdrop for Magna through 2H20. That said, we would continue to recommend investors remain patient for a more opportunistic entry point on the name."

Mr. Glen hiked his 2020 earnings per share forecast to US$1.93 from 32 US cents. His 2020 estimate rose to US$5.35 from US$4.73.

Keeping a “market perform” rating, he increased his target for NYSE-listed Magna shares to US$52 from US$48. The average is US$56.78.


In a research note titled “What’s More Impressive Than Gold? A Compelling Investment Case for Iron Ore Equities,” Scotia Capital analyst Orest Wowkodaw highlight a trio of stocks to capitalize on the “remarkable breakout” in iron ore prices - Champion Iron Ltd. (CIA-T), Labrador Iron Ore Royalty Corp. (LIF-T) and Vale SA (VALE-N).

“The seaborne market is materially tighter today than we envisioned (including a stronger year-to-date performance) due to the impressive increase in steel demand in China over the past few years and

Vale’s production capacity constraints,” said Mr. Wowkodaw. “Post a very weak Q1 driven by COVID-19 related

shutdowns, Chinese steel production achieved new monthly record high levels in both May and June. Moreover, year-to-datr Chinese steel output is actually up 2.2 per cent in H1/20 which compares to a disastrous decline of 14.2 per cent for the rest of the world (global steel output is down a net down 5.5 per cent in H1/20). Additionally, Chinese steel prices are up 20 per cent from the April lows, suggesting that domestic demand remains robust despite higher volume. We estimate relatively healthy current Chinese steel mill margins of $51 per ton (based on seaborne raw materials) are in-line with the long-term average; however margins appear weak based on domestic raw materials.

“In our view, an eventual recovery in ex-China steel markets should serve to further firm up global iron demand.”

Seeing “compelling” valuations and free cash flow yields, he maintained “sector outperform” ratings for the three stocks. His targets are:

  • Champion Iron at $3.75. The average on the Street is $3.56.
  • Labrador Iron Ore at $32. Average: $28.75.
  • Vale at US$15. Average: US$14.20.


In other analyst actions:

  • RBC Dominion Securities analyst Mark Mihaljevic raised Sabina Gold and Silver Corp. (SBB-T) to “outperform” from “sector perform” with a target of $3.25, up from $2.75. The average is $3.27.
  • National Bank Financial analyst Rupert Merer upgraded Pinnacle Renewable Energy Inc. (PL-T) to “outperform” from “sector perform” with an $8 target, exceeding the $6.83 average.

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