Inside the Market’s roundup of some of today’s key analyst actions
The current macro-economic environment will remain “supportive” for further investments in the Power and Infrastructure sectors in 2021, according to Industrial Alliance Securities’ Naji Baydoun.
In a research report released Tuesday, the analyst said the outlook for the sector remains “strong” and expects “fundamentals to come back into focus” this year.
“2020 performance was ahead of expectations,” said Mr. Baydoun. “Share price performance has exceeded our expectations in 2020, driven by strong valuation multiple expansion, particularly for pure-play renewable IPP companies. Despite the onset of the COVID-19 pandemic, companies across our coverage universe delivered an 52-per-cent average total shareholder return (TSR) in 2020, well ahead of the 6-per-cent TSR for the S&P/TSX Composite Index.”
“Companies across our coverage universe continue to exhibit strong underlying fundamentals, and we continue to see the potential for sustainable high single- digit cash flow growth over the medium term from most companies under coverage … but we expect fundamentals to come back into focus. Following significant share price increases over the past 12 months across our coverage universe (particularly for renewable IPPs), relative valuations are now at elevated levels. We do not rule out the potential for relative valuations to remain elevated, but we believe that investor focus could shift back to fundamentals, which would drive more pronounced return dispersions in 2021 and beyond.”
Mr. Baydoun named Northland Power Inc. (NPI-T) and Brookfield Infrastructure Partners LP (BIP-N, BIP.UN-T) his top picks for 2021, believing they “offer the best risk-adjusted return opportunities for investors in 2021” and upgrading both to “strong buy” recommendations from “buy” previously.
He raised his target price for shares of Northland to $53 from $51 previously. The average target on the Street is $47.71.
“We view NPI as the best investment vehicle for investors to gain exposure to the offshore wind investment theme,” the analyst said. “NPI offers investors an attractive mix of (1) stable cash flows from contracted power assets (more than 2GW net in operation, 10-year weighted average contract term), (2) healthy FCF/share growth (4-7 per cent per year, CAGR [compound annual growth rate] 2019-24, excluding the Taiwan offshore wind projects), (3) longer-term potential upside from organic development activity and accretive M&A, and (4) an attractive dividend profile (2.5-per-cent yield, 50-70-per-cent FCF payout through 2024). We believe that NPI’s competitive positioning in the offshore wind market will help the Company successfully source and execute on new large-scale development projects over time, which could drive substantial long-term growth. We expect further updates from NPI at its upcoming Investor Day in early 2021, which could provide investors with greater visibility on the outlook. Overall, we see further growth catalysts on the horizon for NPI, as well as the potential for valuation multiple expansion over time; therefore, we are upgrading the shares.”
He hiked his target for Brookfield to US$60 from US$52. The average is US$53.85.
“BIP remains a well-diversified vehicle for investors to play the broader infrastructure investment theme, with (1) access to a global infrastructure platform (ownership in more than US$30B of assets), (2) defensive regulated/contracted cash flows (95 per cent of FFO), (3) visible cash flow growth (6-9 per cent per year, CAGR 2019-24E), and (4) attractive income (3.5-per-cent yield, 60-70-per-cent FFO payout, and a 5-9 per cent per year dividend growth target),” Mr. Baydoun said. “We expect 2021 financial performance to be materially stronger year-over-year, driven by (1) dissipating macro headwinds that impacted 2020 results (e.g., FX headwinds, COVID-19-related impacts), and (2) greater than US$1-billion of recently completed external growth initiatives. Furthermore, we see the potential for BIP’s growth to accelerate as capital recycling initiatives and M&A activity return to more normal levels in 2021. We continue to see BIP as a standout growth vehicle for long-term shareholders in the current macro-economic context. Although BIP’s shares have performed well relative to peers in 2020, we see the potential for further relative valuation multiple expansion as (1) the Company’s operational and financial performance rebounds year-over-year in 2021, and (2) investment activity picks up following a slower-than-usual 2020. Given the significant potential upside to our revised price target, we are upgrading BIP.”
Mr. Baydoun also made these ratings changes:
* Boralex Inc. (BLX-T) to “hold” from “strong buy,” a decline of two levels, with a $55 target, up from $28. The average is $48.38.
“Since upgrading BLX to Strong Buy in late November 2020, the shares have outperformed our expectations,” he said. “Given the recent share price appreciation and the more limited potential upside to our revised price target, we are revising BLX to Hold (from Strong Buy). We believe that the current growth outlook has now been largely priced into the shares and would wait for a better entry point or further strategic developments before accumulating the shares.”
“We continue to like BEP’s (1) high-quality global renewable power platform (approximately 19GW), (2) high degree of contracted cash flows (70-90 per cent through 2024), (3) long-term organic and M&A-based growth strategy (2.7GW under construction, 1.1GW under development, and more than 18GW of prospects), and (4) attractive income characteristics (2.5-per-cent yield and a 5-9 per cent per year dividend growth target),” he said. “Given the potential upside to our revised price target, we are upgrading BEP.”
* Capital Power Corp. (CPX-T) to “buy” from “strong buy” with a $40 target, up from $38 and above the $36.27 average.
“CPX offers investors (1) a mix of contracted (more than 60 per cent) and merchant cash flows, (2) longer-term leverage to market recovery in Alberta, (3) healthy growth (mid-single-digit FCF/share growth through 2024), (4) an attractive income profile (5.5-per-cent yield, 7 per cent per year dividend growth through 2021, 5 per cent per year thereafter, with a 45-55-per-cent payout), and (5) a discounted relative valuation versus IPP peers,” he said. “As CPX continues to execute on its diversified growth strategy, we see the potential for the shares to experience valuation multiple expansion over time, closing some of the relative valuation discount versus IPP peers. However, given the recent share price appreciation, we are revising CPX to Buy.”
* Innergex Renewable Energy Inc. (INE-T) to “hold” from “buy” with a $30 target, up from $25. The average is $28.19.
“We continue to like INE’s (1) high-quality, low-risk asset portfolio (2.7GW net in operation, 15-year weighted average contract term), (2) FCF/share growth (6-8 per cent per year, CAGR 2019-24E), (3) healthy dividend (3-per-cent yield, albeit with a more than 80-per-cent payout over our forecast period), (4) potential longer-term upside from organic development ( 7GW in Canada, France, the US, and Chile), and (5) the support of the Hydro-Québec strategic alliance,” he said. “However, given the recent share price appreciation and the more limited potential upside to our revised price target, we are revising INE to Hold (from Buy). We believe that the current growth outlook has now been largely priced into the shares, and would wait for a better entry point or further strategic developments before accumulating the shares.”
* TransAlta Corp. (TA-T) to “buy” from “hold” with a $12.50 target, rising from $9.50. The average is $11.50.
“TA offers investors (1) a balanced mix of contracted and merchant power exposure, (2) improving balance sheet and cash flow fundamentals, (3) long-term upside to rising Alberta power prices, and (4) a discounted relative valuation versus IPP peers,” Mr. Baydoun said. “The fundamental outlook for TA remains healthy, and with Brookfield’s strategic investment agreement we believe that TA will be able to surface additional value for shareholders over time. Although we remain conservative in our forecasts for market variables (e.g., Alberta power prices), we believe that RNW’s recent share price appreciation has not yet been reflected in TA’s share price/valuation (TA has an 60-per-cent ownership stake in RNW). Given the potential upside to our revised price target, we are upgrading TA”
His target changes included:
- Algonquin Power & Utilities Corp. (AQN-T/AQN-N, “buy”) to $23 from $22. Average: $21.93.
- H20 Innovation Inc. (HEO-X, “buy”) to $3.50 from $2.75. Average: $2.75.
- TransAlta Renewables Inc. (RNW-T, “hold” to $22 from $16.50. Average: $19.54.
CIBC World Markets analyst Dave Popowich initiated coverage of a trio of TSX-listed energy services stocks on Tuesday.
* Enerflex Ltd. (EFX-T) with a “neutral” rating and $8.50 target. The average on the Street is $9.69.
“We see Enerflex as a unique opportunity within our Canadian energy coverage universe,” he said. “The company is a true global leader in its niche, has historically delivered top-quartile returns on capital, and maintains a relatively good balance sheet that should position it to thrive as upstream spending ramps back up. However, with North American oil and gas production tracking well below pre-COVID highs, we believe investment in infrastructure capacity will likely be one of the last sub-sectors of the oilfield services industry to benefit from an expected normalization of field activity over the next two years. At the time of Q3/20 results, Enerflex reported equipment bookings that were down 80 per cent year-over-year. This is obviously reflected in the performance of the stock, which continues to trade well off its pre-COVID highs. While our estimates show modest revenue and EBITDA growth from 2021 into 2022, we believe it may take several quarters for upstream spending growth to materialize in bookings, which would strengthen our conviction in this outlook.”
* Secure Energy Services Inc. (SES-T) with an “outperformer” rating and $4 target. Average: $3.42.
“In our view, oilfield waste management is a compelling niche within the broader Canadian oilfield services sector. Waste management companies should benefit from a number of secular tailwinds over next one-two years, including: 1) a normalization of field activity, which supports demand for drilling & completion services, 2) increased crude oil production, arising from both the conclusion of government-mandated curtailments and a resumption in drilling activity, which drive demand for fluid management business, and 3) site remediation subsidies from the Canadian government, which are expected to support a wide variety of project and environmental services.
“With a free cash flow yield of 22 per cent (2021 estimates) and a relatively sound balance sheet (2022 estimated Net Debt/EBITDA of 2.4 times), we believe shares in Secure Energy Services will continue to be a primary recipient of funds flows back into the oilfield services sector. Although debt reduction remains the primary call on free cash flow through at least H1/21, the company should be well positioned to capitalize on growth initiatives that may emerge if industry conditions normalize as expected toward the end of 2021.”
* Tervita Corp. (TEV-T) with a “neutral” and $4 target. Average: $4.30.
“Like many of its peers in the Canadian oilfield services industry, the investment thesis for Tervita hinges to a large degree on a resumption of drilling activity in the upstream oil & gas sector,” he said. “Although we acknowledge Tervita’s efforts to diversify its reach into a variety of new business lines outside the sector, we believe it is difficult to replicate the company’s industry-leading position within the WCSB. If the current recovery in oil prices is able to drive a durable resumption of field activity into 2022 and beyond, Tervita should have strong financial and operating leverage to improving industry conditions. However, if the recovery remains as choppy as the one we have experienced over the last five years, we believe Tervita’s financial leverage will likely limit the stock’s ability to gain traction with a wide audience of investors.”
Separately, CIBC’s Jamie Kubik initiated coverage of a pair of drilling stocks on Tuesday.
“With the immense earnings volatility of recent years, investing in the energy services sector has not been for the faint of heart, and the economic environment in which we find ourselves is a test of resiliency for these businesses,” he said. “Earnings volatility in the drillers can be likened to the ‘bullwhip’ effect, as the higher one moves up a supply chain, the more volatile the supply/demand swings can become. 2020 was a demonstration of this, as global crude oil and liquids demand dropped by an estimated 9 per cent, leading to a 50-per-cent contraction in annual North American rig counts.
“We expect the contraction in rig activity will continue to gradually reverse itself through 2021 and 2022, translating into increased EBITDA generation for contract drillers. We expect this environment will favor larger contractors that have diversification across key basins and carry technically advanced rig fleets that can help operators optimize capital efficiencies. We believe Ensign Energy Services and Precision Drilling both showcase the right characteristics to maintain or grow market share in North America. Due to a more attractive valuation on our forecasts, we favor Precision over Ensign, but acknowledge both of these stocks carry high earnings and share price torque towards improving fundamentals in the energy space.”
Mr. Kubik started Precision Drilling Corp. (PD-T) an “outperformer” recommendation and $45 target, versus the $30.52 average.
“We see Precision’s high-spec fleet, enhanced technology offering, and variable cost structure pushing for the company to maintain healthy EBITDA margins, and drive greater earnings power in an ascending activity environment,” he said. “Precision’s deleveraging initiatives are well under way ($550-million of $800-million in debt reduction is complete), and we believe a continued improvement in the company’s capital structure will serve to benefit the shares moving forward. We also see Precision as having ample financial flexibility over the near term, with laddered note maturities beginning in 2023.”
He gave Ensign Energy Services Inc. (ESI-T) a “neutral” rating and $1.40 target. The average is $1.12.
“We expect Ensign will look to leverage its technology offering through a shift towards performance-based contracts in key areas, which could see the company receive market share wins in the coming years,” said Mr. Kubik. “Ensign has taken numerous steps to improve its balance sheet over the last year, but our current estimates see net debt/EBITDA ratios at 6.2 times for 2021 and 4.8 times in 2022. We also regard the current valuation as relatively full compared to our forecasts, and we believe a lower expected return profile combined with added leverage warrants a neutral stance at the current time.”
In reaction to a 47-per-cent surge in its share price thus far in 2021, Canaccord Genuity analyst Yuri Lynk lowered H2O Innovation Inc. (HEO-X) to “hold” from “buy” on Tuesday.
“As a water pure-play, H2O boasts a favourable long-term macro backdrop as the world’s water purification and wastewater treatment needs continue to grow,” he said. “Through self-help initiatives, robust demand for its products, and acquisitions, H2O is now much better positioned to play a larger role in the water value chain that at any time since going public in 2001. The company boasts strong underlying organic growth, improving FCF per share trends, and excellent financial flexibility.
“So what’s changed? In short, just the stock price. When we launched on HEO on Dec. 7, 2020, we noted the stock was attractively valued at 12 times EV/EBITDA (calendar 2021 estimates) versus the peers at 13 times despite its favourable market positioning. Now HEO trades at 17 times EV/EBITDA (CY2021E) and at a premium to the peers at 15 times. While HEO has issued two positive press releases this month, neither represents upside to our estimates, yet they have helped propel the stock higher. Thus, we feel it is a good time to move to the sidelines.”
On Monday, the Quebec City-based company announced it was awarded an engineering contract by Tesla Inc. (TSLA-Q) as well as four new municipal and industrial capital equipment projects. It estimates they are worth $3.2-million.
“These awards are consistent with our expectation that H2O will prioritise wastewater and industrial opportunities over municipal as the former carry higher gross profit margins,” said Mr. Lynk. “The fact one of these awards is with Tesla demonstrates H2O’s market-leading technology offering. The Tesla contract will be for the design of two reverse osmosis (RO) trains of 2,200 m3/day each for one of the company’s electric vehicle manufacturing plants in Texas. Management noted successful completion of the work should be followed by a purchase order for equipment. The other four awards were scattered throughout the U.S.”
With his estimates remaining above the consensus on the Street, Mr. Lynk increased his target for H2O shares to $3 from $2.60, exceeding the $2.75 average.
Elsewhere, Desjardins Securities’ Frederic Tremblay raised his target to $3.25 from $3 with a “buy” rating.
“After hosting meetings with HEO’s President and CEO Frédéric Dugré last week, we believe the organic and acquisitive opportunities are significant. Solid execution of the recently introduced three-year strategic plan can lead to further shareholder value creation, in our view,” he said.
After releasing a 2021 budget after the bell on Monday that fell short of his expectations on both production and capital spending, ATB Capital analyst Patrick O’Rourke downgraded Vermilion Energy Inc. (VET-T) to “sector perform” from “outperform.”
“The Company continues with its turnaround strategy, and attempts to reset the production base to a more appropriate level given the nature of assets (increasing relative capital spend to international asset base, which is generally more mature), and a focus on increasing liquidity through nominal debt reduction,” he said. “While we believe that management is fully capable of turning around the story over time, we have reduced our rating by one notch .... to reflect the slower pace of forecasted development reducing our NAV in the near-term.”
Mr. O’Rourke lowered his target by a loonie to $8.50. The average is $7.06.
“Commodity diversification, low declines and free cash flow generation are central to our thesis in Vermilion,” he said. “Investors are exposed to a bundle of commodities that are generally not otherwise available to the Canadian large cap producer investor, with a demonstrated track record of about half the volatility (and risk) in the revenue line per boe [barrel of oil equivalent] relative to its Canadian peers.”
Elsewhere, National Bank’s Travis Wood lowered his target to $6.50 from $7 with a “sector perform” rating, while TD Securities’ Menno Hulshof lowered his target to $6.50 from $7 with a “hold” recommendation.
In response to its aborted US$20-billion takeover of French grocer Carrefour SA, a series of equity analysts adjusted their target prices for shares of Alimentation Couche-Tard Inc. (ATD.B-T) on Tuesday.
“ATD revealed that it began looking at adjacent retail business opportunities (focus on food and fuel if it is complementary) about three years ago,” said Desjardins Securities’ Chris Li. “These include grocery, dollar stores, travel retail, QSR, etc. It has narrowed the target segments down to grocery and one other (not disclosed). ATD remains committed to growing the fuel/c-store business as evident by its attempt to acquire Ampol in Australia and Speedway in the US, as well as investments in electric charging, food, new store growth, B2B fuel in the U.S., etc. While we share investor concerns around achieving attractive returns from a new channel and the implications for ATD’s core business, we remain confident that ATD will maintain its financial discipline. Looking at other retail segments with synergies with its core business should lead to many interesting M&A opportunities and help diversify away from fuel.”
Keeping a “buy” rating, Mr. Li lowered his target to $45 from $51. The average target on the Street is $49.31.
“We expect ATD shares to remain range bound in the near term as investors try to better understand and get comfortable with its new growth strategy. We believe the recent valuation compression largely reflects this risk,” he said.
Elsewhere, BMO Nesbitt Burns’ Peter Sklar cut the stock to “market perform” from “outperform” with a $43 target, down from $51.
“Alain Bouchard, the founder and Executive Chairman, characterized the pursuit of Carrefour as consistent with previous ‘bold moves’by Couche-Tard and specifically referenced the acquisitions of Circle K and Statoil, which he stated demonstrated the entrepreneurial spirit of the company,” said Mr. Sklar. “We believe this type of commentary indicates a high level of continued commitment to explore retail channels outside Couche-Tard’s core c-store business.
“We believe this revelation will cause many investors to reassess their perspective on Couche-Tard, as any such acquisitions would raise the operational and integration risks of the company.”
Others lowering their targets included:
* TD Securities’ Michael Aelst to $45 from $49, keeping a “hold” recommendation
* National Bank Financial’s Vishal Shreehar to $49 from $55 with an “outperform” rating.
Conversely, Barclays’ Karen Short raised her target (ATD.B-T) to $42 from $37 with a “equal-weight” recommendation.
“Ballard is the leading global developer of proton-exchange membrane fuel cell systems for commercial vehicles, and is set for rapid long-term growth, as the Weichai JV in China and the European heavy-duty truck markets scale up,” he said.
“We note a number of near-term uncertainties and in consideration for the recent rise in valuation, initiate monitoring for a favourable entry point.”
Ahead of fourth-quarter earnings season for Canadian lifecos, Desjardins Securities analyst Doug Young thinks “an improved 2021 macro outlook bodes well for the sector.”
He is projecting a 1-per-cent year-over-year increase in core earnings per share on average, however he cautioned that “EPS remains less of a focus right now. Lower sales, interest rates and a weaker U.S. dollar could pressure core results (vs 4Q19).”
Instead, he thinks investors will be watching for 2021 outlooks, particularly for North American markets.
“As we look out to 2021, several drivers are behind our core EPS growth expectations: (1) SLF — margin expansion at its U.S. group insurance operations, momentum in Asia, expense actions in Canada, higher contribution from SLC Management and, potentially, capital deployment (although we have not built any in); (2) MFC — momentum in Asia, in wealth management and expense efficiencies; (3) IAG — integration of acquisitions, organic growth, profit improvement from all businesses and leveraging improved distribution capabilities domestically; and (4) GWO — expense savings in the U.S. and Canada, growth in Europe and the inclusion of MassMutual’s U.S. retirement business,” he said.
After increasingly his quarterly EPS expectations “slightly” to account for higher equity markets and interest rates, Mr. Young raised his target prices for companies in his coverage universe. In order of his pecking order, his changes were :
- Sun Life Financial Inc. (SLF-T, “buy”) to $67 from $66. The average on the Street is $65.75.
- Manulife Financial Corp. (MFC-T, “buy”) to $27 from $26. Average: $26.15.
- IA Financial Co. Inc. (IAG-T, “buy”) to $64 from $62. Average: $65.33.
- Great-West Lifeco Inc. (GWO-T, “hold”) to $32 from $29. Average: $32.67.
“Three of the four lifecos are trading below historical price-to-book averages,” he said. “Given MFC’s lower ROE outlook compared with pre-crisis levels (partially a function of hedging costs), we believe a lower multiple is warranted. GWO also merits a lower multiple, in our view, due to issues at Putnam and its exposure to uncertainty in the UK. We believe SLF warrants a multiple above the historical average given (1) its lower risk profile (ie sale of its U.S. annuity operations); (2) a larger portion of earnings coming from MFS; (3) its strengthened and stable Canadian operations; (4) a clearer strategy; and (5) a strong financial position.”
In anticipation of the release of its 2021-2025 strategic plan along with its fourth-quarter 2020 financial results on Feb. 2, Citi analyst Shawn Collins opened a 30-day catalyst watch for Harley-Davidson Inc. (HOG-N).
“We expect investors will receive greater clarity on priority markets that Harley plans to focus on, overall strategic direction, and most importantly financial goals,” he said.
Ahead of the launch of its 2021 motorcycle line-up on Tuesday, Mr. Collins said he expects “a reduced product portfolio (less SKUs), updates to existing models, and an increased emphasis on general merchandise.”
Keeping a “buy” rating, he increased his target to US$47 from US$39, exceeding the US$40.40 consensus on the Street.
“We think Harley-Davidson offers a compelling turnaround opportunity. Harley is an iconic American brand but even before COVID the company faced headwinds in the US market (65 per cent of sales), including five years of declining sales driven by demographic headwinds and increased competition,” said Mr. Collins. “The recent stock price collapse reflects a likely further near-term collapse in volumes and margins but gives no credit for the significant turnaround potential under a new CEO. The new CEO, Jochen Zeitz’s track record and marketing acumen as CEO of PUMA sporting goods (Germany) augur well.”
In other analyst actions:
* Morgan Stanley analyst John Glass downgraded Restaurant Brands International Inc. (QSR-N, QSR-T) to “equal-weight” from “overweight,” while Credit Suisse’s Lauren Silberman raised her target to US$69 from US$63 with an “outperform” rating. The average on the Street is US$65.79.
* Stifel analyst W. Andrew Carter cut his target for Aphria Inc. (APHA-T) to $15.50 from $9.80 with a “hold” rating. The average is $14.33.
* Canaccord Genuity analyst Dalton Baretto downgraded Trevali Mining Corp. (TV-T) to “sell” from “home” with a 15-cent target, down from 25 cents, which is the current consensus.
* Mr. Baretto trimmed his target for Turquoise Hill Resources Ltd. (TRQ-T) to $14 from $16.50 with a “hold” rating. The average is $18.85.
* Canaccord’s Robert Young raised his target for Enthusiast Gaming Holdings Inc. (EGLX-T) to $7.50 from $4 with a “buy” rating. The average is $5.83.
“Over the last two months, we have witnessed steady ongoing progress at Enthusiast Gaming, including a strong Q3/20 print and guide and large direct sales wins with the Biden-Harris campaign in Q4 and now with Samsung [Monday],” he said. “Recent strong Comscore rankings support the company’s large audience tied to a younger demographic and strong exposure to video game and esports culture. EGLX is a unique asset with a horizontal spectrum of video gaming lifestyle channels spanning websites, influencers, owned and UGC internet video, esports and events. We believe that there is a flywheel at play where strong brands, like Samsung, are attracted to the platform, which in turn attracts leading content creators, which attracts leading brands. Samsung provides greater confidence in our outlook leading us to update our valuation methodology.”
* National Bank Financial analyst Don DeMarco cut his target to Pretium Resources Inc. (PVG-T) to $17 from $19 with a “sector perform” rating. The average is $18.51.
* Raymond James analyst Andrew Bradford bumped up his target for Mullen Group Ltd. (MTL-T) to $12.25, matching the current consensus, from $11.25, maintaining an “outperform” rating.