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

The COVID-19-fuelled macro environment continues to be “extremely supportive” for independent power producers, according to Desjardins Securities analyst Bill Cabel.

Even though IPPs in his coverage universe have outperformed the broader S&P/TSX by 54 per cent thus far in 2020, he continues to see a “runway for further outperformance,” noting cash flows and growth have seen little impact from the pandemic.

“The likelihood of significant future growth through a combination of increasing demand for new renewable power sources and the ability to recontract existing assets has created a backdrop where few, if any, investors question the ability of these players to continue to grow at historic highs, or to even surpass these levels,” said Mr. Cabel in a research report previewing earnings season. “We believe the macro environment has never been more supportive of long-term growth for our coverage companies, specifically NPI and BLX.”

“We believe investors should be most concerned about eventual rising rates, although we do not see them increasing anytime soon. With that said, we believe an elevated inflation rate would be a leading indicator of eventual rate increases; keep an eye out for sustained inflation levels above 2 per cent.”

After adjusting his valuations to account for a “significant” drop in rates during the pandemic and " the continuous re-evaluation of risk in relation to future grow," Mr. Cabel raised his target prices for all the stocks in his coverage universe.

“We are lowering our cost of equity assumptions across the sector by 50 basis points to reflect the decline in rates as well as the ramp-up and continued escalation in demand for IPP stocks,” he said. “Additionally, on a company-specific basis, we are reducing the valuation ‘risking’ related to certain project/growth strategies as a proxy for our view that the availability and likelihood of future growth opportunities have increased significantly. Our preferred names remain NPI and BLX, and while AQN has been a laggard year-todate as it works through some relatively small COVID-19 impacts, we still believe it should be a core holding for long-term investors given its significant growth pipeline and expected annual dividend increases.”

His changes were:

* Algonquin Power & Utilities Corp. (AQN-N/AQN-T, “buy”) to US$18 from US$17.50. The average on the Street is US$15.75.

“We believe AQN should be able to deliver strong, sector-leading returns, and it remains one of our preferred names in the sector. In the long term, stable operations combined with significant growth and a strong likelihood of another 10-per-cent annual dividend increase in 2021 should fuel further share price appreciation,” he said.

* Brookfield Renewable Partners LP (BEP.UN-T, “hold”) to $72 from $58. Average: $64.48.

“We believe that BEP, which arguably has the strongest asset portfolio (primarily high-quality, long-life hydro assets) in our coverage universe, offers investors long-term and growing cash flows, as well as a unit price that should benefit from continued steady distribution growth. However, we believe the current valuation remains rich at 22.4 times EV/EBITDA (2021 estimates), which keeps us on the sidelines,” he said.

* Boralex Inc. (BLX-T, “buy”) to $45 from $38. Average: $39.94.

“Given its positioning in France (where it is the #1 IPP) and the country’s aggressive onshore wind growth targets as well as its recent very successful expansion into New York, we believe the growth outlook for BLX is positive. We continue to believe that BLX will be successful in the onshore wind auctions in France given its history and relationships there, and believe that it could continue to win projects from the New York auctions,” he said.

* Innergex Renewable Energy Inc. (INE-T, “hold”) to $26.50 from $22.50. Average: $24.64.

“INE boasts a high-quality portfolio weighted toward much sought after long-life hydro assets. We believe the recent strategic alliance with Hydro-Québec and the expansions in the U.S. are positive developments. However, we also believe that valuation remains fair at current levels and the company’s less transparent growth pipeline keeps us on the sidelines,” he said.

* Northland Power Inc. (NPI-T, “buy”) to $48 from $39. Average: $41.82.

“We expect significant global offshore wind growth over the next decade and believe NPI is the best way for Canadian investors to play the space. Furthermore, we believe there is valuation upside potential from the offshore wind assets. Coupled with what we see as an unwarranted discounted valuation (given its significant growth pipeline), we believe the current share price continues to offer an attractive buying opportunity. NPI therefore remains one of our preferred names,” he said.

* TransAlta Renewables Inc. (RNW-T, “hold”) to $18 from $16.50. Average: $16.75.

“At this point, given the relatively lower visibility into its long-term growth vs peers, we are cautious on the story and remain on the sidelines,” he said.


RBC Dominion Securities analyst Paul Quinn expects wood products producers to post “very strong (if not record)” third-quarter results driven by healthy demand and “a record pricing environment.”

Conversely, in a research note previewing earnings seasons for Paper, Packaging & Forest Products companies, he thinks pulp markets “continue to overpromised and under deliver.”

“The highlights of Q3 included the record wood product pricing in North America, strong demand conditions in the U.S. housing market, and the surprising resilience of North American containerboard demand (which appears set to result in the first price increase since 2018),” he said. "Although there is some hope that seasonally stronger winter demand will support pulp markets, we see continued weakness due to elevated global inventory levels. Key questions looking ahead include: 1) how quickly could wood product pricing fall, and to what level; 2) how will the incoming containerboard capacity impact operating rates; and, 3) will more graphic paper producers exit the market through closures or conversions to packaging grades.

“In Canada, our favorite names include West Fraser, Norbord, and Interfor. In the United States, our favorite names include Louisiana-Pacific and Weyerhaeuser.”

Mr. Quinn feels wood producers, including lumber, oriented strand board (OSB) and plywood, are best positioned for strength heading into earnings season.

“For lumber and OSB producers in particular, we expect that record (or near record) results will lead to reduced leverage and increased return of capital to shareholders through share repurchases and special dividends,” he said. "We believe a key risk to results would be if realizations were to substantially lag reported prices during the quarter, which would push results below forecasts. If this were to occur, we expect that more of the uplift would come through during Q4, so the net effect would be minimal.

Conversely, he feels pulp producers “can’t seem to catch a break.”

“Despite seasonal weakness over the summer, September was supposed to be the turning point for global pulp markets, with back-to-school (and some offices) demand supposed to spur additional demand in addition to seasonal improvements in tissue consumption,” he said. “Furthermore, a heavy fall maintenance schedule was supposed to reduce supplies. This prompted NBSK producers to announce a slurry of price increases for October deliveries; so far, it looks as though those price increases are only partially taking (if at all). In our view, inventories are still too high, demand is still too low, and hardwood prices remain stubbornly low. These factors have combined to leave pulp prices at a low level and discounting to become more aggressive.”

“While global pulp inventories have fallen from the record levels experienced in summer 2019, they still remain above historical levels.”

Pointing to its current valuation, Mr. Quinn downgraded KP Tissue Inc. (KPT-T) to “sector perform” from “outperform.” His target remains $14, which falls 8 cents short of the consensus on the Street.

“We believe that KP Tissue should trade above the typical Canadian Paper & Forest Products trading range (5.0 times to 7.0 times), reflecting its market-leading position and the noncyclical nature of the tissue business,” he said.

Citing the “strong U.S. housing market and improved free cash flow generation,” Mr. Quinn raised Rayonier Advanced Materials Inc. (RYAM-N) to “outperform” from “sector perform” with a US$5.50 target, up from US$3.50. The average is US$5.63.

“With lumber prices setting record levels during Q3, we expect that the business will generate improved free cash flow which can be used to reduce leverage,” the analyst said. “As the debt overhang clears up, we expect that more investors could become attracted to the Rayonier Advanced story. In addition, Georgia-Pacific’s specialty cellulose line at its Foley Plant in Florida remains down, which should help with contract negotiations this fall. These factors combine to bring us back to an Outperform rating.”

Mr. Quinn also made the following target price changes:

  • Acadian Timber Corp. (ADN-T, “sector perform”) to $16 from $15. Average: $17.10.
  • Canfor Corp. (CFP-T, “outperform”) to $27 from $26. Average: $23.92.
  • CanWel Building Materials Group Ltd. (CWX-T, “outperform”) to $8 from $7.50. Average: $7.14.
  • Conifex Timber Inc. (CFF-T, “outperform”) to $2 from $1.50. Average: $1.78.
  • Clearwater Paper Corp. (CLW-N, “outperform”) to US$50 from US$48. Average: US$51.50.
  • Domtar Corp. (UFS-N/UFS-T, “sector perform”) to US$27 from US$26. Average: US$31.45.
  • International Paper Co. (IP-N, “sector perform”) to US$41 from US$36. Average: US$42.77.
  • Resolute Forest Products Inc. (RFP-N/RFP-T, “outperform”) to US$7.50 from US$5.50. Average: US$5.63.


Carebook Technologies Inc. (CRBK-X) is “rewriting the book on digital health applications,” said Canaccord Genuity analyst Doug Taylor, seeing a large market “ripe for disruptions.”

With the digital health industry expected to grow annually by 28.5 per cent through 2026, creating what he deems a US$639-billion opportunity, Mr. Taylor initiated coverage of the Montreal-based company, which began trading on the TSX Venture Exchange on Oct. 6, with a “speculative buy” rating.

“Carebook’s digital health platform integrates disparate systems to provide userfriendly yet powerful portals to connect organizations with their customers,” he said. “Carebook’s multi-year cornerstone contract with Rexall Pharmacy is foundational as the company develops and proves out its platform in the pharmacy vertical. We understand the company is in advanced discussions with a major potential insurance client that would similarly serve as a beachhead in that market. Lastly, the company hopes that regulatory approval of its My Vitals / COVID-19 smartphone app will precede multiple contracts in that segment within the Canadian market and globally.”

Mr. Taylor said the company’s financial performance through the end of this year is powered largely by a contract with McKesson Canada. He projects revenue of $4-million and an EBITDA loss of $2.5-million for 2020.

“Based on in-contract growth of this key customer win, leveraging its platform to secure two additional pharmacy customers in 2021, and closing an initial agreement with its first insurance industry customer in late 2020/2021, we model 211-per-cent revenue growth in 2021 (to $12.5-million) and the company crossing the EBITDA breakeven threshold,” he said. “Following the recent $21-million financing, the company has adequate cash to see them through this threshold assuming they are successful in securing new contract wins over the next 6 – 9 months. The company remains majority (54.7 per cent) owned by private equity firms led by the company’s Executive Chairman, Dr. Sheldon Elman.”

Currently the lone analyst on the Street covering the stock, he set a target of $2.50 for Carebrook shares.

“The company aims to leverage foundational contracts with large pharmacy, insurance and health assessment customers to develop a scalable technology portfolio. Success in this pursuit has the potential to drive substantial organic growth and share performance. This sizable, yet unproven, opportunity set leads us to a rating of SPECULATIVE BUY; upside from current levels is dependent on the company delivering sizable contract wins in the next 6-9 months,” he said.


Elemental Royalties Corp. (ELE-X) is “cash-up and offering investors ground-floor leverage to growth,” said Canaccord Genuity analyst Carey MacRury.

In a research report released Tuesday, he initiated coverage of the Vancouver-based company, which began trading on the TSX Venture Exchange in late July, with a “buy” rating, emphasizing its “high-quality royalty portfolio composed primarily of precious metal producing assets run by solid operators.”

“Since its first acquisition in 2017, Elemental has acquired five royalties on producing assets: Kwale, Amancaya, Wahgnion, Mount Pleasant and Mercedes (although the royalty is not expected to be payable to Elemental until July 2022),” said Mr. MacRury. “The company also has a royalty on a development project, Panton Sill. Approximately 97 per cent of our operating NAV [net asset value] is composed of producing assets, with the remaining 3 per cent from development and 98 per cent derived from precious metals, including 94 per cent from gold. The company’s royalties are also uncapped, providing leverage to potential exploration success.”

“We forecast Elemental generating 2020 pro forma royalty revenue of $5.3 million, more than double the company’s 2019 revenue of $2.4 million and up from just $0.4 million in 2017. Elemental expects 2020 revenue’s commodity exposure to be composed primarily of gold (85 per cent), with the remaining from mineral sands (11 per cent) and silver (4 per cent). By 2023, we expect the company’s existing portfolio to be generating $6 million in revenue. We attribute the growth to the Mercedes royalty, which is expected to kick in from midJune 2022 and should offset the end of royalty revenue from Kwale.”

Noting its “significant” insider ownership with 24 per cent of outstanding shares held by management and directors, he set a target of $2.25.

“The royalty business model provides lower-risk exposure to gold, with potential upside from resource growth and mine expansions without exposure to mining capital or operating costs,” sad Mr. MacRury. “With no sustaining capital, operating cash flow for a royalty company is free cash flow that can be used to acquire new royalties or paid to shareholders. The royalty companies have also demonstrated that it is easier to grow over time by acquiring new royalties as compared with the time and effort needed to discover, construct, and operate mines ... The precious metals royalty/streaming companies have significantly outperformed their mine peers over the past 12 years.”


Canadian auto suppliers are likely to see the benefits in a recovering in production when they release third-quarter results early next month, said RBC Dominion Securities analyst Steve Arthur.

“Q3 auto production was up 1 per cent year-over-year in North America and down 8 per cent in Europe, a solid bounce from Q2 lockdown levels as OEMs work to replenish depleted dealer inventories,” he said. “We see volumes recovering into 2021 (North American production up 22 per cent year-over-year, EU up 14 per cent, still below 2019 levels), though we remain somewhat cautious amidst growing second-wave concerns and related economic implications. We have made upward revisions to our 2020 estimates and outlook and price targets for each of the Canadian auto suppliers.”

“Our focus remains: 1) Regional production outlook heading into Q4 and 2021E; 2) status of cost-saving/efficiency initiatives and margin trajectory; 3) scope of program delays and cancellations; 4) balance sheet position to capitalize on potential opportunities; and 5) share price opportunities through the recovery as valuations revert toward industry averages.”

Mr. Arthur made the following target price changes:

* Magna International Inc. (MGA-N/MG-T, “outperform”) to US$65 from US$60. The average on the Street is US$59.39.

“We forecast revenue down 4 per cent year-over-year, relatively in line with Q3 production considering MGA’s geographic mix. With its balance sheet in a solid position (estimated 2.6 times peak leverage by year-end) and much of the restructuring completed, focus turns to the deployment of capital (including resuming the NCIB) and potential growth opportunities into 2021. While the valuation gap to peers has narrowed recently, MGA shares still trade at 5.5 times 2021 estimated EBITDA, an unwarranted discount in our view.”

* Linamar Corp. (LNR-T, “sector perform”) to $52 from $48. The average is $48.67.

“Linamar provided a Q3 market update in early October, noting improved retail farm equipment sales and a much slower recovery in the access market. We forecast Q3 Transportation revenues down 1 per cent year-over-year and Industrial down 34 per cent, once again weighed down by SkyJack (estimated to be down 45 per cent year-over-year Q3). We look for more colour around capital deployment (i.e., resumption of NCIB, capex, takeover business opportunities) as volumes recover and LNR’s balance sheet remains at comfortable levels.”

He kept a $16 target for Martinrea International Inc. (MRE-T, “outperform”), which exceeds the average of $15.21.

“We expect production revenue up 3 per cent in Q3, slightly ahead of quarterly volumes,” said Mr. Arthur. “Following a slower integration effort in Q2, we look for an update on the progress with the Metalsa acquisition. With the bulk of cost-saving/efficiency initiatives completed Q2, we also watch for management’s outlook on margin trajectory. MRE shares now trade at 3.4 times 2021 estimated EBITDA, which we view as too wide of a discount (2.5 times) to peers in the context of MRE’s operating performance and growth initiatives.”


Brookfield Renewable Partners LP (BEP.UN-T) is a “best-in-class developer of long-dated renewable power and a savvy purchaser of distressed assets,” said Credit Suisse analyst Andrew Kuske.

He reinstated coverage following a research restriction with a “neutral” rating on Tuesday.

“On Oct. 5, Brookfield Asset Management (BAM) announced the sale of 4 million Brookfield Renewable Corporation (BEPC) shares (4.6 million including the over-allotment) via a bought deal at $80.20 per share,” the analyst said. "That price represented a 5.5-per-cent discount to the BEPC price on that date and is now trading at $89.48. With the sale, BAM’s BEPC ownership declined from roughly 51 per cent to 35 per cent. This sale did not impact BAM’s position in BEP either via unit ownership or being general partner. Additionally, the sale does not impact our BEP views, but a clear yield delta exists between the two renewable entities (LP and corporate) that does not look reasonably justifiable, in our view.

“With BEPC’s stock surge, yield and dollar spreads of 60 basis points and $19.06 (US$14.35), respectively, give us much more conviction in BEP. Accordingly, we have an upward bias towards BEP – although the sheer market cap delta creates a situation akin to the ‘tail wagging the dog’, in our view.”

Mr. Kuske raised the firm’s target for Brookfield Renewable to $70 from $60. The average is $64.48.

“We continue to believe that BEP is well positioned for ongoing growth in the renewable industry,” he said. “Beyond that favourable positioning, the Brookfield Group is typically focused on the positioning for downturns and dislocated markets. Brookfield’s longer-term track record for value creation in renewables is well regarded; however, we favour (like they do) selected unique value situations in the sector like TransAlta.”


Morgan Stanley reduced its targets for a group of TSX-listed energy stocks on Tuesday

Its changes were:

  • Canadian Natural Resources Ltd. (CNQ-T) to $31 from $36. The average on the Street is $32.17.
  • Cenovus Energy Inc. (CVE-T) to $6 from $8. Average: $7.57.
  • Husky Energy Inc. (HSE-T) to $4 from $6. Average: $4.18.
  • Imperial Oil Ltd. (IMO-T) to $19 from $27. Average: $21.43.
  • MEG Energy Corp. (MEG-T) to $3 from $4.74. Average: $4.27.
  • Suncor Energy Inc. (SU-T) to $22 from $31. Average: $29.


Ahead of the Oct. 29 release of its third-quarter results, * Scotia Capital analyst Patricia Baker raised her target for Gildan Activewear Inc. (GIL-N/GIL-T, “sector outperform”) to US$23 from US$19.50. The average is US$18.83.

“We forecast EPS of $0.04 (consensus $0.06) down 92.5 per cent year-over-year, and EBITDA of $60-million (consensus $63.5-million), down 63.0 per cent year-over-year,” she said. “The declines should be driven by a significant deceleration in demand, particularly in the Imprintables segment, due to actions taken by companies and governments to limit the spread of COVID-19. While the majority of GIL’s manufacturing was idle or operating at low capacity in Q2, in Q3, GIL resumed production, in line with improving demand trends and was operating at 70-per-cent capacity four weeks into the quarter. The C/C will likely provide an update on production levels, inventory, and demand. We also look for an update on liquidity and GIL’s capital allocation strategy in the context of a prolonged business disruption. We believe GIL has the wherewithal to manage its way through this pandemic, and there is likely to be market share opportunities for GIL as weaker players retreat post-pandemic. Additionally, GIL’s position as a low-cost producer is a competitive advantage post-COVID, and the inevitable global recession to follow should favour GIL’s ‘Back to Basics’ strategy.”


In an earnings preview for Canadian trucking companies, Scotia Capital’s Konark Gupta increased his target for TFI International Inc. (TFII-T, “sector outperform”) to $78 from $65. The average is $66.94.

Mr. Gupta also raised his target for Mullen Group Ltd. (MTL-T, “sector outperform”) to $12 from $10.50 and above the $10.68 average.

“We remain positive with SO ratings on both stocks heading into the results despite their outperformance vs. U.S. trucks and indices over the past six months,” he said. “We expect both companies to beat expectations while management tones could be more positive due to the recent M&A flurry and signs of organic recovery. Further, both MTL and TFII remain attractively valued vs. U.S. trucks and offer stronger FCF yields. We are raising our target for MTL to $12 from $10.50 and for TFII to $78 from $65, driven by higher estimates (reflecting latest M&As) and valuation roll-forward to 2022E. There could be further upside risk to our estimates from more potential M&A down the road and/or stronger-than-expected organic recovery. At current levels, our targets imply relatively more upside in MTL than TFII but we expect TFII to deliver stronger growth through 2021. The key risk to our thesis could be another COVID-19 lockdown or uncertainty resulting from the U.S. election.”


In other analyst actions:

* Scotia Capital analyst Cameron Bean initiated coverage of Spartan Delta Corp. (SDE-X) with a “sector outperform” rating and $5 target, falling 12 cents below the consensus.

“The company is advancing a consolidation-driven growth strategy focused on acquiring and optimizing undervalued assets,” he said. “We believe Spartan Delta is well positioned to pursue its strategy and create value for investors. Our thesis and recommendation are based on Spartan Delta’s (1) proven management team and timely strategy; (2) high-quality asset base and free cash flow (FCF) platform; (3) superior rate-of-change potential; (4) potential to take advantage of an acquisition and disposition environment that favours buyers; (5) AECO exposure, which is the purest in our coverage group; and (6) attractive valuation, with ample upside to our target price, which is based on a 50/50 weighting of 5.0 times our blended 2021 and 2022 debt-adjusted cash flow (DACF) estimates and our scenario sum-of-the-assets (SOA) net asset value (NAV) estimate.”

* TD Securities analyst Sean Steuart raised Interfor Corp. (IFP-T) to “action list buy” from “buy” with a $23.50 target, exceeding the $23.08 average.

* TD’s Greg Barnes raised Franco-Nevada Corp. (FNV-T/FNV-N) to “buy” from “hold” with a $190 target, up from $180. The average is $208.02.

* TD’s Craig Hutchison upgraded First Majestic Silver Corp. (FR-T) to “buy” from “hold” with a $20 target. The average is $17.72.

* National Bank Financial analyst Zachary Evershed downgraded Boyd Group Services Inc. (BYD-T) to “sector perform” from “outperform” with a $230 target, down from $235. The average is $237.50.

* CIBC World Markets analyst Jacob Bout raised his target for Methanex Corp. (MEOH-Q/MX-T, “neutral”) to US$28 from US$19. The average is US$25.85.

* CIBC’s Robert Catellier moved his target for Inter Pipeline Ltd. (IPL-T, “neutral”) to $14 from $13.50. The average is $14.86.

* CIBC’s Mark Jarvi raised his target for Hydro One Ltd. (H-T, “outperformer”) to $31 from $30. The current average is $29.14.

* RBC’s Walter Spracklin raised his target for Air Canada (AC-T, “outperform”) to $23 from $22, which exceeds the $21.57 average.

* Mr. Spracklin cut his target for Bombardier Inc. (BBD.B-T, “sector perform”) to 40 cents from 50 cents. The average is 53 cents.

* Mackie Research analyst Bill Newman initiated coverage of FansUnite Entertainment Inc. (FANS-CN) with a “speculative buy” rating and 55-cent target.

“We believe FansUnite has the technology, team, and experience to become a global leader in the iGaming industry,” he said.

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