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

Seeing its relative valuation as “attractive,” RBC Dominion Securities analyst Darko Mihelic upgraded Bank of Nova Scotia (BNS-T, BNS-N) to “outperform” from “sector perform” after raising his earnings expectations.

“We believe valuations have room for improvement,” he said. “On a consensus forward P/E [price-to-earnings] basis, BNS is trading 7 per cent below its historical average premium relative to peers. On a P/B [price-to-book value] basis, BNS is trading 19 per cent below its historical average premium relative to peers.

“As the global economy shifts into recovery mode, we believe there is room for BNS’s target multiple to improve and we increase our target P/E multiple by half a turn.”

In a research note released Tuesday, Mr. Mihelic increased his Capital Markets earnings projections for Scotiabank to be “more inline with our expectations for the other large Canadian banks.” His core cash earnings per share rose to $6.54 (from $6.41) in 2021 and to $7.33 (from $7.14) in 2022.

“We believe there is also upside to our estimates should International Banking bounce back more sharply than assumed,” he said. “We currently assume total revenues to decline 4 per cent in 2021 largely driven by a decline in International Banking and Capital Markets revenues, and higher Corporate losses.

“For International Banking, revenues sharply declined 15 per cent in 2020 and we assume a continued decline in revenues of 3 per cent in 2021 mainly reflecting lower average loan balances and modest NIM compression. However, a large proportion of this segment is related to credit cards and other retail lending that we believe could bounce back quickly in a strong recovery. We believe it is possible that the International segment’s earnings may improve more sharply than our estimates in 2021 or 2022.”

With those changes, Mr. Mihelic raised his target for Scotia shares to $77 from $71. The average target on the Street is $69.30, according to Refinitiv data.

“Our $77 price target for BNS implies the second highest total return of the large Canadian banks under our coverage of 20 per cent over the next 12 months,” he said.


People Corp.’s (PEO-X) change in its stance on M&A is “noteworthy,” according to Desjardins Securities analyst Gary Ho.

Pointing to the Winnipeg-based management consulting company’s “comfort” with the current macro environment and expecting M&A activity to resume “after a pause” since February, he raised his rating for its stock to “buy” from “hold.”

“While the stock has performed well since our downgrade in April, up 45 per cent, it has underperformed vs our coverage universe, up 83 per cent over the same timeframe,” he said. “We believe as PEO moves from a defensive stance to more offence, particularly around M&A, the share price should benefit. We view the dip [Monday] following mixed 4Q results and softer-than-expected organic growth as an attractive buying opportunity.”

For the quarter, People reported adjusted EBITDA of $13.4-million, excluding the benefits of the Canada Emergency Wage Subsidy. That fell short of the estimates of both Mr. Ho ($15.9-million) and the consensus on the Street ($14.4-million) with organic growth of 5.1 per cent at the low end of the company’s 5-10-per-cent medium-term target.

“After speaking with management, we are comfortable that the 5.1-per-cent organic growth in 4Q FY20 could represent a trough and that growth will likely rebound in FY21 as healthcare claim volumes revert to pre-COVID-19 levels (drug claims activity is already back to previous levels while dental remains down slightly) and continued enterprise wins should bolster near-term growth (some mandate wins will be onboarded in 1H FY21),” he said.

“With three announced acquisitions, of ASEQ, ENCOMPASS and Watermark, management has resumed its focus on M&A. We believe further M&A activity is likely in the near term as management looks to capitalize on a robust acquisition pipeline. PEO’s platform and acquisition structure make it an attractive partner of choice. Management has $50–60-million of financial flexibility for M&A.”

Mr. Ho sees People as a “prime” takeover candidate over the medium term, emphasizing “the attractiveness of the group benefits brokerage, consulting and TPA businesses warrant future consolidation.”

“PEO could be a candidate for larger international players, Canadian group insurance firms looking to expand distribution or private equity firms, in our view,” he added.

After raising his 2021 financial expectations, he increased his target for its shares to $13 from $10.25. The average is $13.29.

Elsewhere, Canaccord’s Scott Chan hiked his target to $12.75 from $11.50 with a “buy” rating.


PHX Energy Services Corp. (PHX-T) is likely to see higher-than-expected activity levels into the new year, according to ATB Capital Markets analyst Tim Monachello, raising his financial forecast for the Calgary-based oilfield services company.

“PHX continues to see strong activity levels in Q4/20, and the outlook for 2021 appears to be strengthening on the margin, particularly in its U.S. Operations,” he said. “Currently, we understand PHX is running roughly 13-14 jobs in Canada up from an average of 8 in Q3/20. In the U.S., PHX is running roughly 28 jobs currently, though this level of activity is likely to normalize lower toward the 20-25 rig range over the near-term as a number of short-term programs have caused a recent spike in activity. Still, we now estimate U.S. jobs could average roughly 23 in Q4/20 (20 previously), and activity is likely to improve sequentially through 2021.”

On Monday, PHX announced the approval of a preliminary 2021 capital expenditure program of $15-million and its intention of paying a quarterly dividend for the first time since early 2016. It is set to pay 2.5 cents per share each quarter.

“We believe PHX is likely to maintain a modest dividend payout ratio that it views as sustainable under normal industry cyclicality and is likely to continue to prioritize growth capital spending, opportunistic share repurchases and balance sheet preservation over dividend growth,” said Mr. Monachello. “That said, we believe in the context of more buoyant macro conditions PHX could pursue a modest dividend growth strategy. At its current price, PHX shares now offer investors a 4.27-per-cent dividend yield.”

Pointing to both that increased activity and the expectation for fleet additions in the new calendar year, he raised his fourth-quarter EBITDA estimate by $1.5-million to $8.1-million and increased his 2021 and 2022 projections by 10 per cent and 8 per cent, respectively, to $31.6-million and $43.8-million.

Maintaining an “outperform” rating, he increased his target for PHX shares to $2.75 from $2.50. The average is $2.40.

“While the upside to our price target has diminished following the 60-per-cent run-up in PHX shares since we upgraded the stock to Outperform on Nov. 4, we remain constructive given PHX’s continued strength in U.S. activity levels and market share expansion, its pristine balance sheet, and its balanced approach to capital allocation between funding growth, returning cash to shareholders, and balance sheet preservation,” said Mr. Monachello. “Overall, we continue to view PHX as a well-managed, defensively-positioned company with a premium technology offering and exposure to a cyclical rebound in North American drilling and completions activity.”


Calling it “a next-generation oil and gas royalty company,” Canaccord Genuity analyst Anthony Petrucci initiated coverage of Topaz Energy Corp. (TPZ-T) with a “buy” recommendation on Tuesday.

“With its IPO in October of this year, Topaz is the newest entrant into the oil and gas royalty market in Canada. As a subsector, we believe the Canadian O&G royalty names are a compelling way to gain responsible exposure to domestic commodity prices, given the inherently reduced risk profile relative to traditional E&P companies,” he said.

“We believe Topaz itself presents a unique opportunity within the space, given its relationship with Tourmaline (one of the few producers in the space forecast to grow production), its concentration on natural gas assets, and its investment in infrastructure, which augments its royalty revenue stream.”

Mr. Petrucci thinks Topaz’s organic growth is a “key differentiator,” noting: “Tourmaline’s 5-year plan gives Topaz clarity on its counterparty’s spending plans and production targets. Currently, TOU’s forecasts include organic growth of 3.7 per cent per year over the next five years, which should translate to a similar growth rate for TPZ royalty production.”

Seeing it as “play on natural gas,” the analyst set a target of $18.50 per share. The current average is $17.30.

“Topaz is the only significant royalty player in Canada where the bulk of its revenues are derived from natural gas,” said Mr. Petrucci. “Inclusive of its infrastructure ownership in natural gas plants, we forecast 2021 revenue is 80-per-cent weighted to natural gas. While a warm spell in North America has weighed on gas pricing recently, the continued increase in demand for the commodity, coupled with reduced production levels, suggests the potential for favourable pricing moving forward.”


RBC Dominion Securities analyst Kate Fitzsimons raised her earnings expectations for Lululemon Athletica Inc.’s (LULU-Q) next two quarters, citing “strong” online traffic trends coming out of the “key Black Friday/Cyber Monday period.”

Ahead of the release of its third-quarter results on Thursday, she now expects digital growth of 90 per cent year-over-year for both the third and fourth quarters, versus her previous estimate of 75-per-cent increases. That led her to increase her revenue estimates for the third and fourth quarter to US$1.04-billion and US$1.6-billion, respectively, up 13 per cent and 16 per cent from the previous year.

“Broad based trends .... clearly show the lift in digital traffic we have heard about since the onset of the pandemic,” said Ms. Fitzsimons. “In 3Q20, data shows LULU web traffic growing 51 per cent year-over-year. In the fourth quarter to date (traffic up 62 per cent), trends over the Black Friday/Cyber Monday period were strong – with web traffic growing 52 per cent year-over-year over the period spanning Monday 11/23 – Monday 11/30. On Black Friday and Cyber Monday specifically, LULU saw web traffic growth of 58 per cent/37 per cent.”

Though she raised her 2020 and 2021 earnings per share estimates to US$4.34 and US$6.20, respectively, from US$4.20 and US$6, she kept an “outperform” rating and US$435 target for Lululemon shares. The average is US$380.10.

“With the stock essentially trading at pre-2Q levels and up 30 per cent since its September bottom, expectations on LULU have been building as we approach the holiday season,” she said. “To that effect, we note LULU’s historic tendency to guide conservatively, particularly given the backdrop. Our model looks for 16-per-cent sales growth in 4Q, and we’d expect management to guide to a low-to mid-teens 4Q sales growth level (prior high single digit to low double digits). On expenses, with the 2H SG&A outlook for 20-25-per-cent dollar growth including fulfillment costs, with Direct outperformance the theme this holiday, SG&A is likely to remain elevated with our 3Q/4Q 24 per cent/26 per cent dollar outlook.”

“We remain buyers of LULU given stronger near term digital growth, confidence in growth levers multi-year including ecommerce, international, men’s, and now MIRROR.”

Elsewhere, Credit Suisse analyst Michael Binetti to US$425 from US$350 with an “outperform” recommendation.


GURU Organic Energy Corp. (GURU-T) is “a high growth player in the competitive energy drink industry,” said Laurentian Bank Securities analyst Furaz Ahmad.

However expressing concern that its valuation is “stretched,” he initiated coverage of the Montreal-based company, which began trading on the Toronto Stock Exchange on Nov. 2, with a “hold” rating.

“While we certainly believe that GURU has strong growth tailwinds supporting it in the near and long-term, we are taking a cautious approach with the company’s valuation, given the strong price action seen in the company since it completed its RTO,” Mr. Ahmad said.

Currently the lone analyst on the Street covering the stock, he set a $15 target.

“Our $15 price target is based on a target valuation multiple of approximately 10.5 times 2022 EV/Sales, which is at a premium to the overall peer group, but essentially in-line with Celsius Holdings,” the analyst said. “It is our view that while the company certainly merits a premium valuation vs. lower growth peers, we don’t believe it merits a best in class valuation, given the company’s limited track record expanding outside of Quebec, and the high degree of competition in the energy drink industry from better capitalized peers.”


In other analyst actions:

* Goldman Sachs analyst Emily Chieng upgraded First Quantum Minerals Ltd. (FM-T) to “buy” from “neutral” with a $25 target, up from $19 and above the consensus on the Street of $20.21.

* JP Morgan analyst Arun Jayaram downgraded Vermilion Energy Inc. (VET-T, VET-N) to “underweight” from “neutral”

* National Bank Financial analyst Travis Wood cut MEG Energy Corp. (MEG-T) to “sector perform” from “outperform” with a $4.25 target, up from $3, while TD Securities’ Menno Hulshof raised his target to $4.50 from $3 with a “hold” rating. The average is $4.08.

* TD Securities analyst Aaron MacNeil lowered North American Construction Group Ltd. (NOA-T) to “hold” from “buy” while raising his target to $16 from $14.50, which is the current consensus.

* Mr. MacNeil upgraded Dexterra Group Inc. (DXT-T) to “buy” from “hold” with an $8 target, up from $6. The average is $5.84.

* BMO Nesbitt Burns analyst Ray Kwan initiated coverage of Headwater Exploration Inc. (HWX-T) with an “outperform” rating and $3 target. The average is $2.56.

“We believe Headwater provides investors with an opportunity to participate in a pure-play Clearwater producer in what we believe is among the most economic plays in Western Canada,” said Mr. Kwan.

“The management team at Headwater is also well known as technically competent with experience in successfully acquiring and developing assets. We believe Headwater is unique in its ability to show above-average ROIC, while growing production at more than 50 per cent per year.”

* CIBC World Markets analyst Scott Fromson raised his target for Ritchie Bros. Auctioneers Inc. (RBA-N, RBA-T) to US$79 from US$72 with a “neutral” rating. The average on the Street is US$77.71.

* RBC Dominion Securities analyst Drew McReynolds increased his target for Transcontinental Inc. (TCL.A-T) to $22 from $19 with an “outperform” rating, exceeding the $20.56 consensus.

* Scotia Capital analyst Mark Neville increased his target for ATS Automation Tooling Systems Inc. (ATA-T) to $30 from $28 with a “sector perform” rating. The average is $26.67.

* Scotia’s Phil Hardie raised his target for Intact Financial Corp. (IFC-T) to $175 from $166, maintaining a “sector outperform” recommendation. The average is $173.64.

* Canaccord Genuity analyst Aravinda Galappatthige raised his target for AcuityAds Holdings Inc. (AT-T) to $9.50 from $7.50 with a “buy” rating. The average is $9.03.

* After integrating three acquisitions from the past two months into his financial model, Canaccord’s Yuri Lynk increased his target for Stantec Inc. (STN-T) to $50 from $49 with a “buy” recommendation. The average is $46.

“We like Stantec for its class-leading FCF and resilient earnings profile,” said Mr. Lynk. “Additionally, we view management as proven acquirers and note Stantec is well positioned to move on tuck-in opportunities with a global network of offices and a common ERP already in place”

* Raymond James analyst Stephen Boland raised his target for Dye & Durham Ltd. (DND-T) shares to $35.50 from $26 with an “outperform” rating after the $87-million acquisition of SAI Global’s Property division in Australia brought a “material” increase his financial estimates. The average target on the Street is $34.75.

“SAI Global is a private company owned by a Hong Kong based private equity firm so there were limited details in the press release,” he said. “The private equity firm was in process of selling off the division and this deal is the culmination of the same. This is a geography that we expected DND to enter since it has focused on commonwealth nations that have similar legal requirements. We have assumed DND deploys nearly the entire recent equity raise at similar multiples of past transactions.”

* Raymond James analyst Steven Li increased his target for Converge Technology Solutions Corp. (CTS-X) by a loonie to $4.75 with an “outperform” rating. The average is $4.35.

“With balance sheet concerns all but gone and ROIC starting to break-out, we believe Converge is just getting started and its current discounted valuation spells opportunity,” he said.

* Canaccord’s Brendon Abrams raised his target for Mainstreet Equity Corp. (MEQ-T) to $93 from $91 with a “buy” rating, while TD Securities’ Jonathan Kelcher increased his target to $88 from $86 with a “hold” recommendation. Laurentian Bank Securities’ Yashwant Sankpal raised his target to $93 from $90 with a “buy” rating. The current average is $91.20.

“Mainstreet reported Q4/20 results that were slightly ahead of our estimates,” said Mr. Abrams. “Nonetheless, the pandemic has caused internal growth to slow (SPNOI declined 3 per cent during the quarter) and average vacancy within the portfolio remains elevated (8.0 per cent in Q4/20 vs. 5.7 per cent in Q4/19). Until there is a rebound in the economy and/or a return to more normalized immigration levels, we expect rental fundamentals in the company’s core markets of Alberta and Saskatchewan to remain under pressure.

“However, in our view, the bigger picture as it relates to Mainstreet is the deployment of its ample liquidity. Through a combination of cash on hand, pool of clear title assets, and refinancing of near-term mortgage maturities, the company will have approximately $240 million in liquidity over the next 12 months. With long-term interest rates at historical lows (10-year fixed rate CMHC debt is 1.6 per cent), we expect the company will be successful in sourcing attractive acquisitions that will both grow cash flow per share and diversify its portfolio geographically.”

* Canaccord Genuity analyst Tom Gallo lowered Belo Sun Mining Corp. (BSX-T) to “hold” from “speculative buy” with a $1 target, up from 90 cents. The average is 88 cents.

* Canaccord’s Kevin MacKenzie downgraded Pure Gold Mining Inc. (PGM-X) to “hold” from “speculative buy” with a $2.25 target, rising from $1.75. The average is $2.12.

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