Inside the Market’s roundup of some of today’s key analyst actions
Seeing the benefits of “lumber’s unrelenting climb,” CanWel Building Materials Group Ltd.’s (CWX-T) preliminary first-quarter financial results were “remarkably strong,” according to Canccord Genuity analyst Yuri Lynk.
After hiking his projections for the Vancouver-based company, he raised his rating for its shares to “buy” from “hold.”
Before the bell on Monday, CanWel announced it expects earnings before interest, taxes, depreciation and amortization of $60-million for the quarter, a big jump from $17-million during the same period a year ago and well ahead of Mr. Lynk’s $36-million forecast. Revenue is projected to jump 59 per cent year-over-year to $520-million based on “continued demand strength and tight supply chains.”
“We were surprised the stock increased only 8 per cent [on Monday] in response and view this as an opportunity to add to positions,” the analyst said. “First, residential construction spending continues to surge. In the U.S., it is up 22 per cent year-over-year year-to-date through February. Second, SPF benchmark lumber prices continue to set records and have increased over 50 per cent year-to-date to more than US$1,325/mmfbm. Rising lumber prices inflate CanWel’s revenue and gross margin, allowing more dollars to drop to the bottom line. As we are only now entering the seasonally strong building season in North America, we see pricing staying strong through H2/2021 and perhaps into 2022. Third, the FCF windfall we see this year should transform CanWel’s balance sheet, providing the company with numerous capital allocation options and improving the outlook for dividend sustainability.”
Ahead of the May 7 release of its full first-quarter results, Mr. Lynk raised his revenue and EBITDA estimates to $520-million and $60-million, respectively, from $392-million and $36-million previously. His full-year projections rose to $2.182-billion and $228.7-million from $1.758-billion and $146.7-million.
His target for CanWel shares jumped to $12 from $9. The average target on the Street is $11.04, according to Refinitiv data.
“All told, CanWel boasts great financial flexibility that allows it to execute tuck-in acquisitions, invest in organic growth initiatives, and maintain its 12 cent per share quarterly dividend,” said Mr. Lynk.
Elsewhere, pointing to “this outsized performance and sustained macro tailwinds persisting through 2Q21,” Raymond James analyst Steve Hansen raised CanWel to “outperform” from “market perform” with a $12.25 target, up from $10.50.
“While 1Q21 benefited from an exceptional macro backdrop, initial data suggest 2Q21 is shaping up to be even more robust,” he said. “Specifically, we point to sustained housing activity on both sides of the border (new construction & DIY) and LBM prices that continue to push new all-time highs on the back of ultra-low interest rates, torrid construction activity, and the broader economic recovery.
“CWX’s balance sheet is poised to rapidly improve through F2021/22 in conjunction with the outsized earnings lift expected, a pattern that stands to materially improve the company’s strategic flexibility, in our view.”
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Trican Well Service Ltd.’s (TCW-T) agreement with Tourmaline Oil Corp. (TOU-T) to upgrade its existing pumping equipment to provide a reduction in emissions and lower fuel costs is “an economic win for shareholders,” according to Raymond James analyst Andrew Bradford.
After Monday’s announcement, which will see changes to its CAT Tier 4 dynamic gas blending engines that will cost $18-million to $20-million, he raised his rating for Trican shares to “strong buy” from “outperform.”
“We highly doubt TCW would have undertaken this investment without a corresponding price increase that would provide a return of capital over a reasonably short timeframe,” Mr. Bradford said. “We say this because our survey of North American oilfield services companies indicated fracturing companies were overwhelmingly against reactivating equipment without a corresponding price increase.”
“Trican is pressing its advantage against its indebted Canadian fracking peers to grow market share at, what we suspect, is a higher price - producing meaningful and enduring EBITDA and FCF growth.”
He raised his target for Trican shares to $3.05 from $2.70. The average is currently $2.49.
Meanwhile, ATB Capital Markets analyst Waqar Syed increased his target to $2.50 from $2.25, maintaining an “outperform” rating.
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With an “extremely conservative payout ratio of only 30 per cent,” iA Capital Markets analyst Michael Charlton thinks PrairieSky Royalty Ltd.’s (PSK-T) “increasing optionality” should allow it to repay its debts from its Deep Basin acquisition by the third quarter of this year and support both further deals and share repurchases.
“We note last year’s NCIB saw more than $90-million in share repurchases and with a forecasted payout ratio of almost 30 per cent, pending capital requirements for acquisitions, we could also see an increase to its dividend to be more in line with the guided 60-80-per-cent payout range with the continued and relatively strong commodity pricing outlook,” said Mr. Charlton.
After the bell on Monday, PrairieSky reported first-quarter financial and operation results that largely fell in line with the analyst’s expectations. Production of 19,380 barrels of oil equivalent per day just missed his 19,561 boed forecast, while cash flow per share of 22 cents met his estimate.
“As demand for oil returns to pre-pandemic levels and prices rise, so too shall PrairieSky’s production as E&Ps get back on the bit fighting in search of free cash flow for investors,” he said. “Since the depths of last year, we have continued to watch PrairieSky rebound as its payors return to drilling, further propelled by rising prices, allowing this resilient company to really leverage its high-margin business with year-over-year cash flow per shareS estimated to grow 47 per cent this year.”
Pointing to the release and “the continued reasonably strong outlook for commodity prices,” Mr. Charlton raised his target for PrairieSky shares to $15.50 from $14, keeping a “buy” rating. The average is $15.15.
“Investors looking to either maintain or increase exposure to the oil and gas sector, but that may be intimidated by the volatility seen in commodity markets over the past several years, should consider investing in PrairieSky Royalty,” he said. “It offers dividends and exposure to multiple E&P companies and multiple plays at relatively low risk compared to investing in a single player. Since the Royalty Company has a structural FCF advantage with no operating costs to cover, it will remain profitable at WTI prices far lower than an E&P could possibly withstand.”
Elsewhere, RBC Dominion Securities analyst Luke Davis downgraded PrairieSky to “sector perform” from “outperform” with a $15 target.
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In a research note previewing first-quarter earnings season for TSX-listed energy infrastructure companies, CIBC World Markets analyst Robert Catellier and Mark Jarvi made a series of target price changes to the stocks in their coverage universes on Tuesday.
“Through Q1, operating trends, share price performance and valuations have evolved,” they said. “Stronger commodity prices are generally positive for Midstreamers, and they may allow for stronger hedging. In turn, producer hedging could encourage more drilling activity, which is already starting to show up in gas plant throughput. With this backdrop, Midstreamers provided the best share price performance in Q1 and we believe the valuation expansion we’ve seen in recent months can continue, assuming trends persist or show further improvement. That said, on average we are slightly below consensus for Q1. For the IPPs, particularly the renewable stocks, share prices and valuations have come back down in recent months. The growth outlook remains strong for the renewable stocks, but we expected muted Q1 results (generally below consensus), so investors may continue to get an opportunity in the short term to add to positions. For the regulated utilities, with bond yields no longer rising like they did for the better part of Q1, share prices and valuations have drifted higher in the last month or so, and now sit above the midpoints of recent ranges for the last year. We expect subdued Q1 results and therefore see no obvious reason that the utility stocks in general will break out of their recent ranges.”
Mr. Catellier’s changes were:
- AtlaGas Ltd. (ALA-T, “outperformer”) to $25 from $24. The average on the Street is $23.
- Gibson Energy Inc. (GEI-T, “neutral”) to $22 from $23. Average: $24.18.
- Keyera Corp. (KEY-T, “outperformer”) to $30 from $29. Average: $28.64.
Mr. Jarvi made these adjustments:
- Atco Ltd. (ACO.X-T, “outperformer”) to $47 from $46. Average: $44.06.
- Boralex Inc. (BLX-T, “outperformer”) to $48 from $47. Average: $53.30.
- Capital Power Corp. (CPX-T, “neutral”) to $40 from $39. Average: $39.46.
- Emera Inc. (EMA-T, “neutral”) to $58 from $57. Average: $58.79.
- TransAlta Corp. (TA-T, “outperformer”) to $13.50 from $13. Average: $13.40.
- TransAlta Renewables Inc. (RNW-T, “neutral”) to $20 from $19.50. Average: $20.50.
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Though Citi analyst Paul Lejuez continues to “believe in” Nike Inc.’s (NKE-N) “long-term growth and margin expansion story,” he expects to see near-term pressure on sales and margin from a slowdown in demand in China, leading him to downgrade its stock to “buy” from “neutral”
That decline stems from the company’s decision to follow H&M’s lead in condemning labour practices by cotton factories in the Xinjiang region.
“While we do not believe NKE is seeing the same degree of social media backlash as H&M, the NKE app (an important driver of NKE’s direct to consumer business in China) was removed from the Android phone app store in China,” said Mr. Lejuez. “Does the Chinese consumer really care? We think so. Based on a survey of Chinese consumers we conducted in early to mid-April ... results show a clear favoring of Chinese athletic brands over western athletic brands (including NKE).”
“We do not believe a slowing China business was contemplated in NKE’s 4Q21 guidance (quarter ends May 2021), which could present both sales and gross margin risk near term. But this issue also comes at a time when management is finalizing its F22 plans, and may influence how they plan and guide their business next year.”
In a research note released Tuesday, Mr. Lejuez details 10 reasons why he’s downgrade Nike, many related to the issues in China, including the potential for higher markdowns and elevated inventories.
“Additionally, we believe a big step up in SG&A investments in F22 will drive lower margins relative to consensus. While we expect these pressures to be near-term in nature, we believe NKE is one of the few companies in our coverage that is facing potential pressures (as most others are likely to see sales/EPS upside over the next 12 months),” he said.
After lowering his earnings expectations through 2023, the analyst cut his target for Nike shares to US$140 from US$160. The average on the Street is US$164.62.
“With shares trading at a significant premium to historical averages, we believe the risk/reward is fairly balanced at current levels,” said Mr. Lejuez.
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Altius Minerals Corp. (ALS-T) is “riding commodity price tailwinds into 2021,” said Canaccord Genuity analyst Carey MacRury.
On Monday before the bell, the St. John’s-based company reported preliminary first-quarter revenue of $17.7-million, falling in line with Mr. MacRury’s $17.6-million estimate.
“The company notes that base metal revenue (primarily copper) was positively impacted by improving commodity prices but partially offset by the unplanned production interruption at Chapada in Q4/20, which impacted Q1/21 streaming sales due to the delivery lag,” the analyst said. “The company also received a nominal payment from Gunnison representing recovered copper sales during start-up operations to mark first royalty revenue from the asset.”
Ahead of the May 11 release of its full results, the analyst raised his earnings per share projections for both 2021 and 2022 to 53 cents and 76 cents, respectively, from 52 cents and 71 cents. His net debt expectations declined for both years.
Keeping a “buy” rating for Altius shares, he hiked his target to $19 from $17.50. The average on the Street is $18.63.
“Our BUY rating reflects the company’s low-risk royalty exposure to base metal and bulk commodities, high-quality royalty portfolio with long life assets, and proven management team,” said Mr. MacRury.
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In other analyst actions:
* National Bank Financial analyst Cameron Doerksen upgraded CAE Inc. (CAE-T) to “outperform” from “sector perform” with a $43 target, rising from $41. The average target on the Street is $42.67.
* BMO Nesbitt Burns analyst Jackie Przybylowski raised her Franco-Nevada Corp. (FNV-T) target to $195 from $193 with an “outperform” recommendation, while TD Securities’ Greg Barnes raised his target to US$170 from US$165 with a “buy” recommendation. The average is $200.60.
* Ms. Przybylowski also raised her Turquoise Hill Resources Ltd. (TRQ-T) target to $20 from $18 with a “market perform” rating. The average is $25.84.
* Jefferies analyst Stephanie Wissink increased her Spin Master Corp. (TOY-T) target to $47 from $46, keeping a “buy” recommendation. The current average is $41.73.
* Cormark Securities analyst David Ocampo raised his target for Mullen Group Ltd. (MTL-T) to $15.50 from $14.25, maintaining a “buy” rating. The average is $13.35.
* Cormark’s initiated coverage of Boat Rocker Media Inc. (BRMI-T) with a “buy” rating and $13 target.
* Credit Suisse analyst Andrew Kuske raised his target for Boralex Inc. (BLX-T) by $1 to $52, which falls short of the $53.30 average, with a “neutral” rating.
* Raymond James analyst Steven Li bumped his target for Open Text Corp. (OTEX-Q, OTEX-T) to US$59 from US$55 with an “outperform” rating. The average is US$57.05.
“IBM Software turn was noteworthy after 4 quarters of negative organic decline at cc,” he said. “Directionally, OTEX organic growth at constant currency has tracked similarly to IBM’s. Given OTEX management has recently amped up the narrative around getting back to positive organic growth (most recently at their Investor Day, which was held two weeks before quarter end), it is quite possible OTEX is similarly seeing an improvement in their outlook. We think there is room for upside for their F3Q21 (reports May 6). With shares having underperformed for much of the pandemic (flat for 1+ year), there is a lot of catching up to do especially with a positive organic growth reboot.”
* TD Securities analyst Mario Mendonca raised his Element Fleet Management Corp. (EFN-T) target to $16 from $15.50 with a “buy” rating. The average is $16.18.
* JP Morgan analyst Arun Jayaram raised his Vermilion Energy Inc. (VET-T) target to $9 from $5. The average is $9.79.
* National Bank Financial analyst Shane Nagle resumed coverage of Josemaria Resources Inc. (JOSE-T) with a “sector perform” rating and $1.30 target, exceeding the $1.22 average.
* After Monday’s announcement of its US$110-million acquisition of Nature’s Remedy of Massachusetts, Echelon Partners analyst Andrew Semple raised his target for Jushi Holdings Inc. (JUSH-CN), a Florida-based cannabis company, to $12 from $11 with a “specualtive buy” rating. The average is $12.60.
“We previously estimated Jushi had $120-million of excess cash (above what is needed for organic growth) to pursue M&A,” he said. “Given the terms of the transaction, expected closing date, and expectations of positive FCF contribution from Nature’s Remedy, we now estimate Jushi maintains an excess cash balance of $90-milliom. This provides Jushi with plenty of spare cash to continue pursuing accretive acquisitions. We believe Jushi will remain active with M&A this year and expect future M&A to be a tailwind to valuation.”
* Eight Capital initiated coverage of Leaf Mobile Inc. (LEAF-T) with a “buy” rating and $1 target, topping the 75-cent average.
David Leeder