Inside the Market’s roundup of some of today’s key analyst actions
Seeing an “unusually high” discount versus their North American land driller peers, ATB Capital Markets analyst Waqar Syed sees upside potential for investors in both Ensign Energy Services Inc. (ESI-T) and Precision Drilling Corp. (PD-T).
In a research report released Tuesday, he raised his rating for Ensign to “outperform,” matching his recommendation for Precision Drilling, from “sector perform” previously.
“At their current stock prices, a sizeable valuation gap has opened up between HP/NBR/PTEN and ESI-T/PD-T, a gap that has historically not existed,” he said in a research note. “Although ESI-T and PD-T have higher debt loads than PTEN or HP, their debt position is better than that of NBR. The FCF yield of ESI-T and PD-T relative to their EV and market capitalization is significantly higher than that of HP, NBR, and PTEN. Geographically, while ESI-T and PD-T have higher exposure to Canada, it is not necessarily a negative, owing to their strong competitive position in Canada and our view that Canada is a structurally improving market.”
Given the “high level” of free cash flow they are expecting to generate, Mr. Syed thinks both companies have “an opportunity to further pay down debt by a sizeable amount relative to their current market capitalization, and this should lead to value transfer from debt holders to equity holders in 2021.”
“The EV/EBITDA discount at which ESI-T and PD-T are trading is a recent phenomenon, and historically, ESI-T and PD-T have typically traded in-line with PTEN and NBR, and have even traded at a premium as well in recent times,” the analyst said. “However, HP has always traded at a premium owing to its dividend program, ownership of the largest fleet of Super Spec rigs, strong balance sheet, and market leadership.”
Mr. Syed also raised his rating for Oklahoma-based Helmerich & Payne Inc. (HP-N) to “outperform” from “sector perform,” seeing 25-per-cent upside to his revised target price.
Expecting few surprises from its first-quarter results, Mr. Syed raised his targets for the five companies in his coverage universe. The changes are:
* Ensign Energy (ESI-T) to $3.25 from $1.50. The average on the Street is $1.55.
“The key reason for the upgrade to Outperform for ESI-T is the new price target of $3.25 per share (previously $1.50 per share) resulting from change in valuation methodology now leads to 180-per-cent upside for ESI-T, which is the highest in its peer group,” he said. “We expect narrowing of the stock’s valuation discount as the Company’s high FCF yield (44.9 per cent in 2021e on market capitalization) leads to debt repayment. One of the key risks with ESI-T was its higher level of debt (net debt to capital ratio of 49 per cent at Q4/20-end) with maturities looming, however, we think that the Company has been showing strong execution in removing this key risk.”
* Precision Drilling (PD-T) to $69 from $48. Average: $37.74.
“PD-T remains a top pick for the land drillers under ATB coverage,” he said.
“The key underlying story for PD-T remains debt reduction through FCF. The Company has a debt reduction target of $100-C$125-million for 2021, with a two -year total goal (2021/2022) of $250-million. This cumulative $250-million in debt reduction equals a $18.68 per share transfer of value from debt to equity holders, or 65 per cent of the current stock price. We view this goal as very achievable and project that PD-T will generate FCF of $115-million in 2021 and $166-million in 2022.”
* Helmerich & Payne (HP-N) to US$32.50 from US$26. Average: US$25.44.
* Nabors Industries Ltd. (NBR-N, “underperform”) to US$84 from US$59. Average: US$78.90.
* Patterson-UTI Energy Inc. (PTEN-Q, “sector perform”) to US$7.50 from US$5.25. Average: US$6.94.
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BoA Securities analyst Lawson Winder handed Hudbay Minerals Inc. (HBM-T) a double upgrade to “buy” from “underperform,” pointing a “greatly improved” outlook for its copper business.
“2022-23 copper production guidance was better than expected while copper, gold and silver reserves were more than replaced,” he said.
Mr. Winder’s target for Hudbay shares rose to $12.20 from $10.60. The average on the Street is $12.50.
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Raymond James analyst Brian MacArthur and Farooq Hamed made adjustments to their near-term commodity forecasts for base metals, iron ore and uranium on Tuesday, leading to a series of rating and target price changes for stocks in their coverage universe.
“The increases to base metals prices in 2021 reflect 1Q21 pricing as well as an expectation for increased demand from potential stimulus packages,” they said. “In copper, we have increased our near-term estimates to reflect continued tightness in the concentrate market and persistently low inventories which is offset by some noted slowing in Chinese demand after significant re-stocking over the past 12 months. In the medium term, our outlook for demand improves on the follow through of infrastructure projects coming from stimulus spending and growth in ‘green’ electrification initiatives.
“In premium iron ore, we have once again increased our price forecasts reflecting good demand and as well as higher premiums given ongoing interest from the steel industry to reduce GHGs. In uranium, we have decreased our 2021 price marginally to reflect 1Q21 pricing but remain positive on the outlook given midterm uncovered demand, supply constraints, producer buying and increased ESG interest.”
Citing implied returns stemming from recent share price performance, they upgraded a trio of companies to “outperform” recommendations from “market perform” previously. They are:
- Freeport-McMoRan Inc. (FCX-N) with a US$41 target, up from US$36. Average: US$37.24.
- First Quantum Minerals Ltd. (FM-T) with a $37 target, up from $35. Average: $30.64.
- Hudbay Minerals Inc. (HBM-T) with a $13 target, up from $12.50. Average: $12.50.
Conversely, Mr. MacArthur downgraded Labrador Iron Ore Royalty Corp. (LIF-T) to “market perform” from “outperform” given the potential for lower output following the recent fire at reclaimer no. 2 at its Sept-Îles port facilities. His target fell from $39, the current consensus, to $38.
The analysts also made these target changes:
- Altius Minerals Corp. (ALS-T, “outperform”) to $18 from $17.50. Average: $18.42.
- Ero Copper Corp. (ERO-T, “outperform”) to $27 from $26. Average: $25.06.
- Lundin Mining Corp. (LUN-T, “market perform”) to $15 from $14. Average: $15.01.
- Teck Resources Ltd. (TECK.B-T, “outperform”) to $31.50 from $29. Average: $31.02.
- Trevali Mining Corp. (TV-T, “market perform”) to 30 cents from 25 cents. Average: 28 cents.
- Cameco Corp. (CCO-T, “outperform”) to $22 from $21. Average: $21.11.
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In a separate note, Mr. MacArthur and Mr. Hamed trimmed their gold price forecasts for 2021 and 2022 by 7 per cent and 4 per cent, respectively.
“Our revised 2021 gold price forecast includes weaker prices in 1H21 followed by a rebound in 2H reflecting our expectation that rising interest rates in the short term could act as a headwind for gold in 1H21; however, pending inflation from global ‘re-openings’ and expected enhanced government stimulus programs could drive investment spending for gold in mid-2021 and going forward,” they said.
“For silver, we have revised our gold silver ratio to 67 times for 2021, more in-line with current levels and down from our previous ratio of 71 times. For 2022 and onwards our gold silver ratio remains 75 times.”
With that view, the analysts made these target price adjustments:
- Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “outperform”) to US$74 from US$78. Average: US$84.12.
- Barrick Gold Corp. (GOLD-N/ABX-T, “outperform”) to US$29 from US$31.50. Average: US$30.66.
- Centerra Gold Inc. (CG-T, “market perform”) to $16.50 from $17.50. Average: $18.78.
- Coeur Mining Inc. (CDE-N, “market perform”) to US$10 from US$11. Average: US$11.16.
- Franco-Nevada Corp. (FNV-N/FNV-T, “outperform”) to US$159 from US$171. Average: US$167.18.
- IAMGOLD Corp. (IAG-N/IMG-T, “market perform”) to US$4 from US$4.50. Average: US$4.55.
- Kinross Gold Corp. (KGC-N/K-T, “outperform”) to US$10.50 from US$11. Average: US$11.56.
- Maverix Metals Inc. (MMX-T, “outperform”) to $8 from $8.25. Average: US$6.25.
- Newmont Corp. (NEM-N/NGT-T, “outperform”) to US$78 from US$86. Average: US$73.25.
- Nomad Royalty Company Ltd. (NSR-T, “outperform”) to $1.70 from $1.80. Average: $2.03.
- Osisko Gold Royalties Ltd. (OR-T, “outperform”) to $21.50 from $23.50. Average: $23
- Royal Gold Inc. (RGLD-Q, “outperform”) to US$138 from US$150. Average: US$138.08.
- Sandstorm Gold Ltd. (SAND-N/SSL-T, “market perform”) to US$9.50 from US$10. Average: US$10.55.
- Wheaton Precious Metals Corp. (WPM-N/WPM-T, “outperform”) to US$57 from US$62. Average: US$59.93.
- MAG Silver Corp. (MAG-T, “outperform”) to $26.50 from $27. Average: $27.89.
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Citing the “lingering” impacts of the COVID-19 pandemic, Haywood Securities analyst Neal Gilmer lowered his expectations for Aphria Inc.’s (APHA-T) third quarter of fiscal 2021 on Tuesday ahead of a April 12 release.
“While Q3/F21 will benefit from the inclusion of a full quarter of Sweetwater, the lockdowns in various locations likely impacted the business,” he said. “We also believe cannabis revenue growth was negatively impacted with retail closures, particularly in Ontario. In addition, Q2/F21 benefited from higher international cannabis shipments than what can be assumed on a quarterly basis.”
Mr. Gilmer is now projected revenue of $169.4-milion for the quarter, up 5 per cent sequentially due largely to Sweetwater contributions and in line with the Street’s forecast of $170.2-millon. He’s estimated adjusted EBITDA of $15.7-million, narrowly higher than the consensus of $14.9-million. Previously, he was forecasting revenue of $181.3-million and EBITDA of $20.1-million.
Despite those declines, Mr. Gilmer raised his target for Aphria shares to $26 from $14 to “reflect the multiple expansion across the sector given the prospect of U.S. cannabis reform.” The current average on the Street is $16.63.
He kept a “hold” rating.
“We continue to view Aphria as a leader in the Canadian LP landscape with exposure in the U.S. through the SweetWater acquisition as well as international operations. Our Hold recommendation is reflective of the relative valuation to its U.S. peers and strong share price performance year-to-date,” he said. “Investors allocated significant capital into Canadian cannabis companies in Q1/21 on the prospect of federal reform in the U.S. The momentum has tempered as of late, and we highlight the potential for volatility depending on the visibility of the U.S. opportunity. We view the combination with Tilray positively which is expected to close in Q2/21.”
Elsewhere, Stifel analyst W. Andrew Carter hiked his target to $22 from $15.50, keeping a “hold” recommendation.
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IBI Group Inc.’s (IBG-T) March 24 Investor Day event highlighted its “evolution from a technology-driven design firm to a design-driven technology company,” according to Raymond James analyst Frederic Bastien, who said it’s now enjoying its “long-awaited moment in the sun.”
“We remain impressed with the business’ resilience amid a dragging pandemic and are confident that a record order backlog, recent acquisitions and the Intelligence practice’s momentum will underpin healthy earnings growth over our forecast horizon,” he said. “That IBI’s valuation multiples remain well off its peers’ despite the stock’s recent gains only adds to our conviction.”
Mr. Bastien thinks the time has passed when design firms award IBI sub-consultant work on larger projects. Instead, he thinks the Toronto-based company can now assume the role of architect and engineer of record, pointing to Ford’s global design hub in Michigan, Tel Aviv’s Red Line transit system and the Broadway subway in Vancouver.
“When it comes to transportation infrastructure, IBI no longer has anything to envy the likes of WSP Global and Stantec,” he said.
“We like where things are going. In particular, IBI’s return to the acquisition trail illustrates its growth aspirations in sustainable infrastructure. The addition of the 180-person Southern Ontario-based firm Cole Engineering promises to expand IBI’s expertise in water and wastewater infrastructure and facilities design, for one, and provides an opportunity to enhance the proprietary BlueIQ water operations optimization solution. The acquisition of Alberta-based Peters Energy Solutions, meanwhile, complements IBI’s existing energy management business and augments the firm’s work in sustainable community development. With 1,000 megawatts of new solar power projects under contract in Alberta, we believe Peters can play a key role in the province’s energy transition.”
Reiterating an “outperform” recommendation, he raised his target to $14 from $11. The average is currently $12.29.
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Whitecap Resources Inc.’s (WCP-T) “top-tier consolidation” in the Montney Formation in British Columbia is continuing with its $300-million acquisition of Kicking Horse Oil & Gas Ltd., said iA Capital Markets analyst Michael Charlton.
“Wasting no time after lifting guidance last week following the seamless integration of the last two acquisitions, Whitecap is at it again, with a third acquisition adding top-tier Montney acreage, production, and reserves with a view to pumping as much Free Cash Flow as possible to the benefit of shareholders,” he said. “Similarly to the first two acquisitions, we anticipate Whitecap will be able to optimize operations as management presently intends to bring these assets up from 8,000 barrels of oil equivalent per day to 18,000-19,000 boe/d in the coming 12-15 months to maximize Free Cash Flow generation, which looks to be in the range of $72-million annually at relatively conservative commodity price assumptions.
“In our view, Whitecap continues to have ample financial liquidity given its relatively undrawn credit line of $2.0-billion, expandable to $3.4-billion, without lender consent. Management reiterated its desire to repay debt to the tune of $200M-million in 2021 while it continues to pay a sustainable, potentially increasing dividend from its significant FCF with our current 2022 FCF estimate looking to exceed $400-million.”
Keeping a “buy” recommendation for Whitecap shares, Mr. Charlton raised his target to $8 from $7.50 in response to its guidance, current commodity price and expected accretion from the acquisition. The average on the Street is $7.53.
Other analysts making target adjustments include:
* Desjardins Securities’ Chris MacCulloch to $8.25 from $8 with a “buy” rating.
“Beyond the accretive impact to cash flow, we like the enhanced diversification provided by additional exposure to Montney condensate-rich natural gas targets. We also still believe that the company is well positioned for a modest dividend hike in 2H21,” said Mr. MacCulloch.
* Canaccord Genuity’s Anthony Petrucci raised his target to $8 from $7.50 with a “buy” rating.
“We view the acquisition of Kicking Horse as positive, given (1) it is accretive to cash flow per share in both 2021 and 2022; (2) the Kakwa Montney has extremely attractive drilling economics; and (3) the company’s expanded Montney position gives it a platform from which it can continue to grow,” said Mr. Petrucci.
* Raymond James’ Jeremy McCrea to $8.50 from $8.25 with a “strong buy” rating.
“On a headline basis, we heard from a number of investors that theybelieved the deal looked ‘expensive’ based on the provided production and reserve figures. But it’s important to distinguish this transaction from others in which this deal was more for ‘land’ upside value than just typical production,” said Mr. McCrea.
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Raymond James analyst Rahul Sarugaser said his “conviction” in Toronto-based Perimeter Medical Imaging AI Inc.’s (PINK-X) story has “grown,” seeing a “high probability” its AI-enabled Optical Coherence Tomography Imaging System (OCTIS) will gain clearance from the United States Food and Drug Administration in 2022 with marketing of the device following in 2023.
“We believe these augmented capabilities (and enhanced accessibility for non-specialist surgeons) will drive a material market share increase, to 3 per cent and 6 per cent in 2023 and 2024, respectively, and extending this penetration to 20 per cent through 2030,” he said.
Maintaining an “outperform” rating for its shares, Mr. Sarugaser hiked his target to $6.50 from $3, exceeding the $6.42 average on the Street.
“PINK’s ATLAS AI Project seeks to couple OCTIS’ super high-resolution, subsurface tissue image capture technology with its proprietary image analysis algorithm (”ImgAssist”) to help surgeons identify, in real-time, if cancer is present at the tumor margin: a powerful tool to help surgeons make decisions that improve patient outcomes while saving time and expense,” he said.
“Ultimately, PINK endeavors to develop an automatic “look here” feature as part of the OCTIS visual interface, pointing surgeons toward regions of their patient’s recently excised tumor that have the potential to contain cancer at the margin (a ‘positive’ margin). This feature has the potential to drastically reduce the time doctors spend flipping through the hundreds of CT images captured to visually verify tumor margin status, and, more important, it has the potential to drastically improve surgeons’ accuracy in identifying positive tumor margins, saving patients from second surgeries and poor health outcomes.”
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In other analyst actions:
* Scotia Capital analyst Michael Doumet upgraded Toromont Industries Ltd. (TIH-T) to “sector outperform” from “sector perform” with a target of $115, rising from $100 and exceeding the $101.22 average on the Street.
* Evercore ISI analyst Mark Mahaney assumed coverage Shopify Inc. (SHOP-N, SHOP-T) with an “in line” rating and US$1,360 target. The current average is US$1,440.80.
* CIBC World Markets analyst Krista Friesen raised the firm’s target for AutoCanada Inc. (ACQ-T) to $37 from $34, keeping a “neutral” rating, after assuming coverage. The average is $38.03.
“AutoCanada has been on a road to recovery since 2018. We are encouraged by the strategic initiatives outlined by the new management team and look for it to continue to execute on its strategy and build a solid foundation for the company,” she said.
* CIBC’s Jamie Kubik increased his Advantage Oil & Gas Ltd. (AAV-T) target to $3.75 from $3.25 with an “outperformer” recommendation, while BMO’s Ray Kwan raised his target to $3.75 from $3.50 with an “outperform” recommendation. The average is currently $4.
“We expect the stock to garner wider interest given ESG option value through its carbon capture potential with Entropy, along with operational momentum in the company’s base business,” said Mr. Kubik.
* BMO Nesbitt Burns analyst Andrew Mikitchook initiated coverage of Great Bear Resources Ltd. (GBR-X) with an “outperform” rating and $23 target, falling short of the $27.41 average.
“Great Bear has made one of the few new gold discoveries of scale in recent years, significantly distinguishing it from its peers by delivering both scale and grade,” he said. “This unique combination and in a Canadian jurisdiction, in our opinion, will fast-track this discovery to construction whether it is by Great Bear or an acquirer.”
Editor’s note: An earlier version of this article incorrectly said Perimeter Medical Imaging AI Inc.'s Optical Coherence Tomography Imaging System (OCTIS) has not yet received clearance from the FDA. In fact, it is now seeking approval for an artificial intelligence-driven version.
David Leeder